This is an explanatory pack explaining how business modelling is different to the commonly held beliefs that it is either a financial forecast or a commercial forecast.
Why business modelling is different to just forecasting or financial projections
1. How it differs and informs
commercial forecasting,
fi
nancial
projections and strategy making
BUSINESS
MODELLING
2. There is some confusion around the term “business modelling”.
Some people think that a
fi
nancial projection is a model or a commercial
forecast is a model. These are often static extrapolations of the status
quo.
A dynamic business model seeks to explore the mathematical
relationships at the heart of the business model itself; allowing scenarios
to be explored and a greater understanding of how the business works
and responds to change, helping inform the static projections normally
found in a business.
WHY DOES BUSINESS
MODELLING REQUIRE
CLARIFICATION?
3. 3
MODELLING AS
A DISCIPLINE
Without modelling,
functional forecasts and
projections exist without
suf
fi
cient cross
functional challenge
Commercial forecast Operational planning
Financial projection
Corporate strategy Business modelling
Externally focussed
Competition/Market driven
Unconstrained
Blue Sky/Ocean
Directional
5-10 years
Aspirational
Vision driven
Strategy Driven
Product driven
Market driven
Competitor driven
Statistical
Seasonal
Promotional
Customer driven
Aspirational
Uncertain
Constrained
Governable
Negotiated
Aspirational
Linear
Responsive
Cost driven
Constrained
Lagging
Chaotic
Dictated
Physical
Mathematical
Statistical
Relational
Derived
Unconstrained
Creative
Problem solving
Instructional
Directional
Shaping
Educational
Iterative
Aligning
Negociable
Complex
Business modelling informs the business planning
process and increases accuracy or organisational response
Business modelling
Generally, functions tend to develop strategy within their functional silos with limited reference to other silo constraints. This results in unintentional
barriers to implementation in the future which lead to delays in strategy execution and huge costs.
Costs of this sort of behaviour are rarely seen as avoidable and due to the long time frames between initiation and realisation, many of the original actors
have left the business, contributing further to the lack of connection between strategy development, modelling, scenario planning and the current crisis.
Unless the behavioural patterns are broken and good practice installed the organisation will continue to make large costly mistakes.
5. WHAT DOES MODELLING DELIVER?
5
1
RELATIONSHIPS
Modelling
fi
nds the hidden relationships in
a business. The non-linear or potential
black swan events in data and operations.
2
DIRECTION
It allows multiple scenarios to be considered by
the business and to understand the bene
fi
ts and
constraints of each leading to better decision
making.
3
CONTRAINTS
It identi
fi
es the operational and
fi
nancial
constraints that would prevent strategy
from being implemented in the future.
4
ACCURACY
Through challenge and data cross-reference and
scenario consideration, it increases the accuracy
of the organisational response leading to more
pro
fi
table outcomes.
5
INCONSISTENCIES
It challenges functional assumptions and
inconsistencies within cross functional
maths that effect strategy and
implementation.
6
COHERENCY
Understanding, challenge, consideration of
alternatives, better analysis, all lead to more
organisational coherence at a strategic and
operational level.
6. BUT WHY
DOESN’T MY
CURRENT
APPROACH DO
ALL OF THIS?
FUNCTIONAL
MOTIVATIONS
CORPORATE
NEED
OVERRIDING BU
REQUIREMENTS
INCENTIVES
FIRE
FIGHTING
INACCURACY
LACK OF
PROCESS
AMBITION
6
LACK OF
SKILLS
LACK OF
TIME
7. WHERE MODELLING REALLY HELPS
7
Corporate
transformation
Modular
transformation
Incremental
adjustment
Fine tuning
• Corporate wide
• Radical shift in strategy
• Revolutionary change
• Major realignment of divisions
and departments
• Radical change at sub-part level
• Incremental adjustments to the
changing environment
• Modi
fi
cation in strategy,
structure and process
• Change to “best
fi
t”
• Incremental change to process,
systems and behaviours
• Reformed organisation mission &
core values
• Altered power and status
affecting the distribution of
power in the organisation
• Reorganisation - major changes
in structures, systems &
procedures across the
organisation
• Revised interaction patterns, new
procedures, work-
fl
ows,
communication networks and
decision making patterns across
the company
• New executives, external to the
company in key management
positions
• Major restructuring of
particular departments and
divisions
• Changes in key managerial
posts in these areas
• Productivity push reducing
headcount
• Reformed department/
divisional goals and objectives
• Introduction of signi
fi
cantly
new process technologies
affecting key departments or
divisions
• Expanding sales territory
• Shifting the emphasis among
products
• Improved production process
technology
• Articulating a modi
fi
ed
statement of mission to
employees
• Adjustments to organisational
structures within or across
divisional boundaries
• Re
fi
ning policies, methods and
procedures
• Creating specialist units and
linking mechanisms to permit
increased volume and
increased attention to unit
quality and cost
• Developing personnel to suit
strategy
• Fostering group commitment to
company mission and
departmental goals
• Promoting con
fi
dence in
accepted norms, beliefs and
myths
• Clarifying established roles
MODELLING SUPPORTS CHANGE
8. WHY MODELLING REALLY HELPS
8
Dif
fi
culties
! Tend to be smaller in scale
! Are less serious in their implications
! Can be considered in relative isolation from their
organisational context
! Have clear priorities as to what might need to be
done
! Generally have quanti
fi
able objectives and
performance indicators
! Have a systems/technical orientation
! Generally involve relatively few people
! Have facts which are known and which contribute to
the solution
! Have agreement from people as to what the problem
is
! Tend to have a range of solutions
! Have known time scales
! Are ‘bounded’ in that they can be considered
separately from the wider organisational context and
have minimal interactions with the environment
Messes
! Tend to be larger in scale
! Have serious and worrying implications for all concerned
! Are an interrelated complex of problems which cannot be
separated from their context
! Have many parties, agendas, persuasions, points of view
involved in the problem
! Have subjective and at best semi-quanti
fi
able objectives
! Have an absence of knowledge of factors and an
uncertainty as to what needs to be known
! Have little agreement on what constitutes the problem ,
let alone what the solution might be
! Have usually been around for some time and may not be
fi
xable - Improvement may be the best that can be hoped
for.
! Have fuzzy time scales
! Are ‘unbounded’ and endemic to the organisation and
sometimes beyond
Corporate
transformation
Modular
transformation
Incremental
adjustment
Fine tuning
Modelling
9. WHY IS IT
SEPARATE FROM
WHAT I DO NOW?
Most of us deal with the day to day of running our businesses, we deal with “real” numbers and “real” events in real-time.
Modelling deals with the future based on the maths of your organisation. It often redetermines the maths of a business
model and forecasts events as scenarios based on a changed version of reality.
Modelling is
fl
uid and can manoeuvre through many realities or scenarios with ever changing assumptions.
Generally if you are not used to moving in evolutionary conceptual space from a business planning process, all of this can
seem very intangible and frustrating and “airy fairy” compared to the daily business you are used to.
To model like this requires a great deal of operational change experience
across multiple business models, industries, scale and complexity.
Knowing when to leave an option open and unresolved versus closing and
consolidating a course of action requires experience and insight.
Modelling is not a full time job in an organisation so therefore does not
normally need a full-time function.
It is for this reason that advanced business modelling skills tend not to reside
in your organisation and you need to invite them in to help you from time to
time.
10. ANDREW WILSON MBA
You might like to consider outsourcing your forecasting
or projections or seek support on operational planning
and modelling of future scenarios. If so I would be
delighted to talk it through with you.
IF YOU WOULD LIKE
TO KNOW MORE
Contact Andrew Wilson (Chief modelling Elf)
www.opstratchek.info
andrew_wilson@opstratchek.info