Defining and communicating your business model

The UK Corporate Governance Code is the only reporting requirement to use the terminology of business model, yet it probably reflects the growing trend in reporting guidance to simplify communications of an increasingly complex business landscape. As such it is nothing more than many companies have already been reporting.

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In a practical sense it adds the requirement for Main Market Primary Listings to be a little more explicit, but best practice will probably dictate that all publicly quoted companies should make business model disclosure the norm.

Why is there a requirement?

Like most reporting requirements there is a pretty solid and understandable rationale for business models to now be explicit. In essence investors need to get to the core of where the money comes from and how that is likely to develop. This is distinct from tactical strategic narrative and important when revenue streams in many companies flow from seemingly unrelated activities. The traditional make-sell model is more frequently being joined by the aggregate-distribute, integrate-replace, partner-license or indeed hundreds of other combinations. As they say there is nothing new in the world, but the scale of implementation and innovative combination of value creation ideas is trending upward.

What is a business model?

The UK Corporate Governance Code describes it as the ‘basis on which the company generates or preserves value over the long term’. Christopher Zott and Raphael Amit describe it as ‘a system of interdependent activities that transcends the focal firm and spans its boundaries. The activity system enables a firm, in concert with its partners, to create value and also to appropriate a share of that value’. David J Teece suggests ‘The essence of a business model is in defining the manner by which the enterprise delivers value to customers, entices customers to pay for value and converts those payments to profit’. A business model is then the story or explanation of three core areas, ‘value creation’, ‘delivery’ and ‘value capture’, followed by answering the million dollar question of 'is it in demand and scalable.' It's essentially:

  • how do you generate value and who is the consumer of that value.
  • how is that value delivered.
  • and perhaps most importantly who is the customer, what benefit do they get and how do you make a profit from that?

The real trick with business models however is to make them simple to understand. To this end as Professor Charles Baden Fuller articulately puts forward that the use of a story with similies and metaphors may well be a useful technique. You are essentially communicating with an audience who is looking to assess the validity of the value capture concept, not get detailed information about implementation, for that they can read your strategic plans. If comparing your business or idea with Facebook, Apple or Bentley helps then it’s likely to make it easier to grasp. The real point is that Google doesn't make its money from search, McDonalds doesn’t make its money from making burgers, Apple’s revenue from books, music and apps was the same as desktop computers last year (probably capturing more value) and who knows where Facebook is going to make its money. These examples may seem extreme but in reality many companies have much to explain to investors.

Our advice

In order to meet this demand for clear articulation and ease of understanding the company should make good use of plain English, great structure, clear diagrams. Depending on the size or the company or perhaps more importantly whether the business is in fact a conglomerate the need for taking either a high-level view or hierarchical narrative becomes apparent. But most important . . . keep it simple.