1.        Introduction to Business Modelling

Looking back over the last 3 decades of my career, the first time I encountered Business Modelling was when I was working on
a project in Barcelona. Our challenge at the time was to better understand the impact of a new product on the market and as a
company how we could supply it. The market we were operating in was very competitive and lacking innovation. Our R&D labs
(clever lot they were too!) came up with a true innovation that we hoped would shake up the market and significantly increase our
market share. Our Brand President asked us to create some scenarios based on variable retailer adoption and consumer usage rates.
A colleague of mine was the financial analyst for the brand and created the first true business model I have seen. I am sure that others
had invented the method earlier, but it felt like we were breaking new ground. The model developed and evolved as we used it, starting initially with a set of sales scenarios based on varying levels of advertising. Subsequently, we added all the operational variables as well, focussing in on how much investment would be needed to support the expected sales volumes and what it would mean for the supply chain. Just to keep you interested in this “true story”, I will share the end results with you at the end of this series of articles, plus there are 3 individuals I would like to credit for triggering my own interest in building Business Models.

So, what is business modelling?

The short answer is a sophisticated spreadsheet (any flavour will do) that can accept a set of variable values to assess a set of outcomes. The longer answer is coming in this and the next 2 articles, and I hope to shed some light on how to build a model, how to use it and understand it’s limitations. A model that is thoughtfully designed and used correctly, can be a powerful tool for the decision making within a business. I will add the caveat that no matter how good the model, the actual results obtained will differ to a larger or lesser extent. The model produces a forecast, and the accuracy of that forecast will depend on many parameters, but it is worth the time and effort to create a good Business Model.

Where to start when considering a Business Model?

In the real-world example above, our biggest concern was not only how our new innovative product would take market share from our main competitors, but also what would be the impact on our own range of existing products (cannibalisation rates), therefore the model had to factor in both the new and existing products. I would describe the model we used as a Demand and Supply model that started with modelling sales volumes across the market at differing rates of adoption. The FMCG market we were operating in was controlled mainly by the large European supermarkets who only allowed new products onto shelf at certain times of the year and were driven by introductory offers, and this had to be factored in. On the supply side, the product was quite complex and required custom tooling and a custom-built assembly line. The time required to increase production volumes was quite significant, so accuracy of forecast was essential. Our model considered all these factors, and we were able to create several scenarios and report back the outcomes to the Brand President. That was a meeting I won’t forget, as the meeting’s outcome was not what I expected. Read on….

Business models can also be used for different scenarios, such as acquisitions / divestments, remodelling a complex supply chain or entering a new market. Whatever the requirements, the method to build the model will be similar and the best starting point is with the primary stakeholders. Complex decisions that involve significant levels of investment require a senior team and ultimately a decision maker. Preparing for a complex decision, should in my opinion include the availability of a Business Model to assist the decision maker. So that is where the Business Model is conceived; Business Analyst and Decision Maker discuss the requirements for the model, what assumptions can be made and what the output should look like. The discussion permits the analyst to invest time to create and develop the model within the timeline agreed. Complex models will take time to create – I have personally spent around 400-600 hours on the models I have built, depending on available starting points.

How to achieve a good outcome?

Roughly, once the model is built, it needs to be filled with relevant data. This requires a team of people with the relevant knowledge to load their best data and forecasts into the model. Often the data must be researched and it’s better to take the time to get good data. Once the data is loaded, the model needs to be tested and validated. The analyst will probably engage a reviewer to ensure that the expected outcomes are achieved. Finally, the model is presented to the decision maker running through the set of scenarios to find an optimal outcome at a level of acceptable risk to the business. Be aware that the model will be challenged and it’s better to be prepared for those challenges to avoid having to start again.

In the next article, I will cover the more detailed steps taken to build the model.