What is a business model? A business model is an enterprise’s core framework, plan, or scheme for generating value and making a profit.
Even a small roadside fruit vendor in Fujairah, United Arab Emirates, has one. It can be something like “buy fruits wholesale and sell them retail to commuters, who are on their way home after work.” Selling from a truck will minimize expenses and enhance mobility, while the 80% markup will ensure a minimum of 40% profit, even with spoilage.
An ERP advisory is pointless if a company is unclear about its business model. After all, before you can improve anything, you must first understand how it works.
Business models do just that for businesses. They show how companies work, specifically how they provide value to customers and generate (or, for new enterprises, plan to generate) a profit.
Business Model Types
There are many types of business models. They include retailing, manufacturing, fee-for-service, franchising, pay-as-you-go, marketplace provision, subscription, licensing, and brokerage.
The business model example cited earlier, the one about the roadside fruit seller, pertains to retailing. A company that offers healthy packed lunches for a fixed monthly fee is a subscription business, while Starbucks has a licensing (not franchising) model.
In truth, there can be as many types of business models as there are businesses. Companies have the liberty to build their systems and processes the way they see fit to best serve their interests.
How Business Modeling Can Help Your UAE Company
Why is business modeling important? The following are the ways by which business modeling can help your company.
1. Attract Investors or Get Loan Approval.
Startups need growth capital when it’s time to scale operations or expand into new territories. As such, they may pitch their idea to venture capitalists or apply for a loan from a financial institution.
Investors and lenders will never make an investment or lending decision without conducting a thorough company valuation — and they may use the business model as a basis for this valuation process.
Specifically, investors and lenders (or their third-party consultants) will look at the business model to understand how a company does business. This is particularly helpful for newly established businesses (they don’t have past performance data) and those with an uncommon or non-standard framework.
A company’s business blueprint includes the revenue model, indicating the company’s revenue streams (i.e., how the company makes money). It also depicts the company’s cost structure or the entirety of the company’s expenses (i.e., how the company spends its money). Knowing this will inform investors and lenders about the company’s cash flow and, thus, its ability to sustain operations, grow, and fulfill its financial obligations.
Finally, it can help investors and lenders accurately identify the risks and the company’s competitors. It should also help them understand (and evaluate) the company leadership’s assumptions.
2. Attract and Retain Talent.
In the 2021 North America Talent attraction and Retention Survey, 73% of employers reported difficulty recruiting people or attracting talent, and 61% said they found it hard to keep their employees.
A company can alleviate these problems by revamping its systems, processes, policies, and procedures to make them more attractive to employees. For instance, a company can incorporate an employee experience strategy into its business model. It can design the employee experience so that employees will find the company a great place to work. Such a strategy can include measures like alternative work scheduling and permanent work-from-home.
A business can also revise its production or service delivery model to align it with values that employees (and target employees) deem important. Data from The future of work: A journey to 2022 show that 65% of employees want to work for a company with a social conscience.
Thus, a manufacturing company can change to sustainable suppliers, transition to green technologies, reduce its carbon footprint, and institute a circular production model. Changes like these can induce an employee to work for a company.
3. Carry Out Business Process Re-Engineering.
Business process re-engineering (BPR) is a concept introduced by Michael Hammer in a Harvard Business Review article. At its core, it is reimagining and redesigning how a company does business to remove flaws and improve business results.
Business modeling is an essential component of business process re-engineering. First, BPR analysts will draw up an “as is” model, depicting the current state of the business, particularly its systems, procedures, processes, and policies. Next, they will create a conceptual model of how these systems, procedures, processes, and policies should be — the “to be” business model.
The analysts will then compare the two business models. Their analysis will reveal any gaps between the current and ideal business states. This will support their decision on whether to recommend business process re-engineering.
4. Implement Enterprise Resource Planning.
Business modeling is also a precursor for implementing ERP.
An ERP system integrates a business’s processes. Doing this will centralize data, automate data updating, break down data silos, minimize duplication of data (and data entry), and enhance business reporting, among other things. Ultimately, an ERP system can significantly boost efficiency, improve decision-making, and drive business growth.
ERP systems typically consist of key modules for different applications (human resources, inventory, sales, marketing, procurement, and finance). How should a company decide which modules to implement?
The answer lies in the company’s business framework. A fee-for-service model will not require manufacturing process automation. Meanwhile, a manufacturing company will significantly benefit from automating its supply chain and inventory processes.
Business Modeling Benefits
An enterprise’s business model can play a role in obtaining funding and attracting and retaining talent. Business modeling is also a necessary precursor of business process re-engineering and implementing ERP.
We are a business consulting company that provides comprehensive advisory services. We can help you with business modeling, business process re-engineering, and implementing ERP. Contact us.