XX.VIII. Business Model

The 8th system architecture pattern: General architecture of all businesses
Dr. Albert Künstler

et us now explore the architecture that is basically universal for all businesses. Big or small, they all have the same similar processes that follow the patterns we previously covered.

Research landscape of a business

All businesses sell something to their customers, so they usually have four main processes in common: the Customer acquisition and retention funnel, the Service cycle, the Production and supply chain, and the Assetmanagement cycle. These processes are governed by the Business Genotype, and result in the Economy of the business.

Business Genotype

Genotype is the long list of problem-solution pairs that the business is designed to address. A good, profitable business provides the right solutions to existing problems at a reasonable price. A struggling business tries to solve insignificant problems of the wrong customer segments at an appropriate price. Thus, having the right genotype and the right list of problems and solutions is key for business survival and success.

The problems come either from customer needs or from business requirements. For example customers need to be served on time, employees need to get trained and paid, buildings need to be maintained, etc.

For each need and requirement, a business decides how exactly they will be solved. Some needs may have great solutions and are perfectly satisfied. That sets this business apart and makes it competitive. Other solutions may be underdeveloped or ad hoc. Finally, some of the needs may be intentionally left without solution. That is a strategic decision, not developing a solution for a particular need at all. By deliberately refusing to satisfy certain needs the business abstains from a part of the market and non-target customers for whom that need is a priority. However, this decision frees up resources for better servicing those needs that are important for the target customer segment.

The art of deciding what to do and what not to do, what customers to go after, what needs to be addressed first, and what processes to develop and improve — is the main strategic skill for all business leaders.

Product genotypes (product-specific problem-solution pairs) are included into a larger business genotype, so when a business decides to expand, it may introduce more products and thus cover more customer segments with different customer genotypes.

Similarly to biological life, in which DNA defines the constitution of an organism and the functional processes of organs, in economical evolution business genotype defines the constitution and the operational functions of organization and its products by defining the architecture and maturity of business processes. The four main groups of processes will be discussed next.

6 elements of a Business Model: 1) Business Genotype, 2) Customer Acquisition and Retention Funnel, 3) Service Cycle, 4) Production and Supply Chain, 5) Asset Management Cycle, and 6) Economy

Customer acquisition and retention funnel

Customer acquisition and retention is a group of processes aimed at identifying and attracting more clients. All processes here are built to support the customer acquisition funnel and include marketing, sales, and auxiliary activities. When designing and optimizing this funnel, it is recommended to look at this process from the visitor point of view that we discussed in the Funnel guide and create a detailed view of the customer journey. Some important activities will support the funnel, including the marketing cycle discussed in the Demand guide.

From a financial standpoint, this funnel is a source of sales and marketing expenses. Per new user, it gives the customer acquisition cost.

Customer acquisition and retention is a fundamental process for every business, so we will explore it in further detail in the next chapter.

Example: A design and improvement of the customer acquisition funnel of a restaurant includes exploration of demand and competitors to pick the right place for the restaurant, creating attractive exterior and interior design of the premises, improving the searchability with street signs and online catalogs, offering happy hour promotions, and stimulating the spread of word of mouth in communities. A customer acquisition of an enterprise software includes demand exploration, online marketing, direct sales, partnerships and channel management, content and influencer marketing, etc.

Service cycle

Once new customers decide to buy what a business offers, they move on from the customer acquisition funnel into the service cycle. This cycle describes the user experience, which consists of the steps of how the customer interacts with the product or with the business while being served.

This is the main cycle that generates revenues for a business. Some businesses are transaction-based, so they make money continuously every time a customer is being served. Other businesses make money once a product is purchased, and then a customer can use the product multiple times until it is fully consumed. In both of these models, loyal customers will buy the product or service again, giving thanks and financial reinforcement to the business that best met their needs.

From the demand side, the Service cycle receives new clients through the Customer acquisition funnel, and from the supply side it receives packaged products from the Production and supply chain.

From a financial standpoint, this cycle is a source of revenue. Per cycle, it gives the average revenue per unit sold or average revenue per session or transaction depending on the business model. In the long run, it is important to measure the lifetime value of the customer indicating how many cycles an average customer will be ready to stay with the company and what profit they can generate per customer.

In further detail, we will discuss the Service cycle in one of our next chapters.

Examples: In a restaurant, service cycle includes all steps of experience: how the clients park their car, how they enter the restaurant, how they are being seated and taken care of by a waiter, how they order a meal, how they are being entertained while waiting, how they are being served a meal, how they enjoy the meal, how they are being offered and served deserts, how they pay, and how they leave the restaurant. With enterprise software, the service cycle includes the user experience of logging on, the main menu navigation to active orders, completing forms, creating new orders, competing transactions, and so on.

Production and supply chain

So that the customer can enjoy their desired user experience, this product or service must be delivered to the Service cycle, which is done through the Production and supply chain. This assembly chain defines how the material goods have been assembled, packaged, and delivered, and how the intangible service activities have been prepared so as to provide the end user experience.

This chain may have hundreds of converging branches and require other products and services, components, and subcontracting tasks provided by suppliers. These manufacturing chains are implemented as a result of the R&D in which new versions of products are designed and put into production. R&D upgrades the product genotype and thus upgrades the solutions to the customer needs identified as the Customer genotype.

If the end customers are spread across different physical locations, the Production and supply chain will also include the distribution chain which we have also covered in one of our guides.

From a financial standpoint, this chain is a source of variable costs associated with assembling and delivery of products (cost of goods sold or cost of sales). Per unit delivered, it gives the cost per unit sold or cost per session or transaction depending on the business model. R&D expensesmay be also attributed to this chain.

In more detail, we will discuss the Production and supply chain in one of our next chapters.

Examples: In a restaurant, the R&D part includes development of the menu and defining what dishes of what flavor, color, and texture will reflect the local demand (customer genotype — needs), defining recipes, finding reliable suppliers, and calibrating the menu price versus cost of ingredients and labor (product genotype — recipes). After the menu is defined, production and supply includes execution of the defined processes, such as the procurement of ingredients and cooking according to the menu recipes.

Asset management cycle

Last but not least, this group contains processes that are not directly involved in production and delivery of products, but are required for sustainable operations. We will call this group Asset management cycle because it is a combination of repeating cycles, it requires management of operations, and is applied to tangible assets, such as equipment or buildings, as well as intangible assets, such as human capital or financial resources.

The complex mechanism here is the combination of long and short cycles:

  • Life cycles describing the long-term processes of asset acquisition, onboarding, development, operation, maintenance, upgrade, and disposal.
  • Strategic management cycles with analysis of the current and future performance, opportunities and threats, definition of objectives and priorities, and investment decisions.
  • Operational cycles with coordination of how assets should be allocated for mid-term efficiency in accordance with strategic priorities.
  • Execution cycles when the allocated assets are used on a daily basis to support the business functions.
  • Response to unforeseen and emergency situations that disturb business as usual.

These cycles should be synchronized and arranged as we discussed in the Cycle guide.

From a financial standpoint, this cycle is a source of fixed costs associated with general and administrative expenses, depreciation and amortization of equipment, and other operating expenses that are not attributed to the sales funnel or production chain.

In more detail, we will discuss the Asset management cycle in an upcoming chapter.

Examples: In a restaurant chain, the assets are the buildings and decorated locations, cooking equipment, refrigerators, cars, delivery scooters, and human and financial resources. Strategic cycles include planning and launching new restaurants in new locations and closing unprofitable outlets. Operational cycles include allocation of human resources and equipment between outlets. Execution cycles include day-to-day scheduling, operations, and making sure that everything goes as planned.


The financial model of a business gives a simplified but measurable understanding of what makes the current business model profitable or futile. It operates with averaged metrics but can give an approximation of how increasing or decreasing certain activities will influence business. When populated with actual numbers from financial statements, it can give a de-facto understanding of what was good or wrong in the previous period.

Some processes, especially in a fast-evolving business environment, are processes with lagged effects. For example, marketing or R&D expenditures that were spent in the previous months may not immediately show up in the top line revenues. Thus a good financial model can operate with leading indicators that help to forecast future revenues given the current signals.

A good model can also find a good balance between aggregated and disaggregated indicators. Sometimes, average numbers are too undescriptive and can not guide the right business decisions. Breaking down these numbers can help determine ideas on how to optimize.

Example: In a restaurant, business revenues are driven by the number of served clients while costs are associated with the cost of premises, ingredients, and labor of cooks and waiters. When the model includes aggregate revenues per restaurant per month, that gives you an idea of which location has better traffic and lets you know how you may optimize on that level. When the model includes revenues per restaurant per day and even per hour, you may discover seasonality patterns and find that on weekends, traffic is much higher than on other weekdays, just as with peaks during lunchtime and dinnertime. This level of detail gives you more ways to optimize labor scheduling, promotion activities, and even pricing that was not possible when the numbers were aggregated on the level of months.

A financial model operates with the metrics we highlighted above: revenues, fixed and variable costs, revenues and costs per unit, etc. Depending on the business model, it can help identify products that have a good fit with the demand, thus adjusting the genotypes and relocating financial resources on the most profitable lines of business.

In further detail, we will discuss the Economy in an upcoming chapter.

Problem analysis

The main problem with business models comes when they are not sustainable. When this occurs, the company loses money and has no clear strategy or tactics to change the situation. That may be a result of several following factors.

  • Rising cost of customers. Existing marketing and sales channels degrade due to competition or saturation, and customer acquisition costs rise while sales prices are under pressure and can not be increased.
  • Rising cost of supplies. Supply costs rise because of inflation or shortages, while sales prices are under pressure. But you can not accordingly increase the price because of tough competition.
  • Overhead. Fixed costs are too high because of too much overhead that doesn’t give competitive advantage.
  • Disruptive technologies. New technologies enter the market, radically decreasing the production and supply costs that give advantage to competitors who adopted these technologies as they can decrease prices while being profitable.
  • Too early. The endeavor of adopting new technologies is premature. The customers are not yet ready to buy, while the company is not mature enough to support all the necessary new processes. There is no mass market for this new type of product yet.
  • Too easy. New technologies democratize the market, radically simplify the processes, and destroy margins for everyone.
  • Too hard. The endeavor of adopting new technologies requires too much re-engineering of the current processes that do not payback within a reasonable period of time.
  • Too late. The company decides to adopt new technologies when it is too late and the new market is already filled with strong competitors who were nimble and lucky enough to complete their re-engineering at the right time when demand showed that the masses were ready to adopt a new generation of products.
  • Bad execution. The model is good, but the execution is bad. However, someone else can adopt the model and make it the right way.

Basically, different businesses may be on very different stages of development. While the architecture of the model is the same on the high level, the complexity of the processes and challenges will be also different. The main principle however is the same: competitive businesses must find markets where they offer more value for less price. So the concern is always to identify the needs to bring more value and optimize the costs to keep prices competitive. That is why many businesses, large and small, spend a lot of resources nowadays in their quest for value innovation. Your quest may also be part of this movement.

Value innovation is a discovered ability to satisfy the customer needs better, faster, and at the same time cheaper. Value goes up, costs go down. To make it real innovation, the change must be significant — not just 5% better or 5% cheaper, but 10 times faster or 80% cheaper.

Such changes require a considerable change of the Genotype (problem-solution pairs). You need to identify a new emerging need or significantly change the solution to an existing problem. A significant change of a solution implicates the significant reengineering of existing processes, getting rid of whole chains of the process that were important in the past, but now can be replaced with a simpler and cheaper sequence of steps with improved tools.

Your job is to find these rudimentary steps and discover why that inefficient way had become habitual in the past. Of course there was a reason for that, but now there could be a better way. That means you should analyze how needs and requirements have changed since then, and through that challenge the old chains. These changes may be anywhere: in the user experience (Service cycle) in new markets or sales channels (Customer acquisition funnel), in manufacturing sequence (Production and supply chain), or even in cost of operations (Asset management cycle).

Let us be more specific about the different stages of business maturity.

Early-stage startups

Startups usually have a single main product which has not yet achieved a product-market fit. Quite frequently they try to take advantage of a technology shift or a rapidly growing demand in a particular niche. Technological innovation can open new ways to do an old job in a new way. If this new way is significantly cheaper and faster per transaction this makes a value innovation possible.

If your quest is focused on a startup, your sponsor is most likely the CEO and founder, whose main challenge is to find product market fit and sales channels and to establish business-processes that do not yet exist. If you are aligned on these goals and help disaggregate and resolve bottlenecks of the business, you will be best friends forever.

The advantages of startups are their flexibility. They have small overheads, fast product release cycle, no obligations to support old products, freedom to choose any process architecture they like because they have no standards yet. Startups are basically able to choose any Business Model they like and rapidly change it as they go.

The disadvantages are that they have no customer base and non-existent sales channels, thus very limited information about the customer needs and limited ability to test their product hypotheses with real customers. As long as they make no money they also have very short distance and severe time-to-market deadlines before their investors and sponsors are able to support the endeavor.

Mid-size companies

A mid-size company may already have several successful products that had driven previous growth. They already have an established Business Model, i.e. an established Customer acquisition funnel, an established Service cycle, an established Production and supply chain, a somewhat mature Asset management cycle, and the Economy of this business should be more or less in order. These companies usually have three alternatives — to improve efficiency by upgrading existing products, to expand to new markets with the existing products, or to introduce new products as if it was a startup (or a spin-off).

Quite frequently changes are driven at the owner or CEO level, and these people are likely to be the sponsors of your quest. If you are able to disaggregate a particular part of the Business Model that the CEO wants to improve and explore the bottlenecks and solutions, you’ll gain the full support of your questgiver.

The advantage of mid-size companies is that they are more sustainable than startups and already have customers, which gives them more resources for gradual improvements. They still have a small market share, which is not bad, as they have quite a lot of space for expansion, and not overly complex processes, so usually it will be still possible to reengineer the chains especially if the CEO of the company understands the importance of these changes.

The disadvantages of mid-size companies is that their current business does not generate enough profits to sponsor radical changes. If a startup can take risks and spend a year or two of focused efforts of their best people on solving a narrow problem for the entire market, in a mid-sized company key people are already busy with operations and profits are not enough to create fundamental technologies. Thus, mid-size companies usually do not create but adopt new technologies. That makes them dependent on other sources of innovations and does not allow them to protect new business models because they do not own the intellectual property. However if they become early followers of a new tech they are able to temporarily take advantage of their niche and grow their market share.

Large companies

Large companies usually have a huge customer base, a number of product lines, and market share. They have research labs and resources to create their own IP in their narrow specialization that makes them globally competitive. They have innovation departments that are responsible for adopting third party technologies. However, they are too large to coordinate all these efforts efficiently. There can be a lot of duplication, disagreement of functions, and responsibilities.

If you are doing research for a large organization, your quest giver is usually the head of R&D for a particular group of products, someone from the innovation department, or an owner of a particular function. If you are in R&D, then your job is somewhat similar to a startup work — you need to understand customer needs, find a solution, or build a product and optimize it. You have spectacular access to customers and traffic, but you may not change any processes outside of your area of responsibility, which can be blocking a lot of great ideas. Be ready to face the situation that all credit for success will go to business people, not product people.

If your sponsor is in innovations then usually you have a declared permission to revision the existing processes, because this is their responsibility — to find how processes may be reengineered, but there will be a lot of back and forth communication with the owners of these processes and most likely your great ideas will never be implemented even after a successful pilot if the owner of the process has not approved the solutions and tools you offered. Usually you need to find a really substantial improvement to convince all stakeholders.

If your main sponsor is an owner of a particular function, that gives you more chances to see your developments implemented in a real process. However, operational people’s goal is not to improve one particular step of the process. They care about the overall effectiveness and are too busy with hundreds of different operational things. Given that, you will almost never be able to suggest a radical change. In fact, you are expected to come up with a patch which will fix a certain problem, ideally with zero influence on any other process as it can be only possible. It should be a “black box” that requires no attention, no changes, no resources. It just fixes a local problem.

The advantages of large companies are quite numerous. The expertise they have in specific customer needs give them all possible advantages in creating products customers want and sell these products through very well established sales channels. They have almost infinite resources and the best experts in the world. The maturity of their Business Models is an undoubtful strength, but it is also a weakness.

The disadvantage is that the processes are usually too complex and are beyond understanding. The responsibility for different parts of processes is very much distributed among branches and divisions. The processes are too hard to change and serious reengineering requires years of well-coordinated effort. However this is rarely possible because the ownership of certain subsystems will change faster. Outstanding managers who could drive radical changes in particular functions or processes are more likely to be promoted before the changes they initiated are completed. Thus, for a large company it may be easier to acquire a smaller firm which developed a new successful Business model, than to systematically upgrade their current model from within. After the merger, the acquired company co-exists inside the parent company. They spend some time trying to align their processes, get rid of duplicating functions, and evolve to a new sustainable Business model. That is exactly how processes become too complex and beyond understanding. Nobody remembers why that exact rule or procedure emerged, but it is easier to obey the rule than to find out the reason.

Leveling guide — Business model

If you are working with a startup and need help building a new business from scratch:

Analyze the customers, pick the right customer segment, and collect information about their customer genotype. Make a rough estimation on the Economy of your business. Will you be able to satisfy selected customer needs at the same price tag as your competitors? Do you have an idea how to reduce costs by means of new technologies or know how? Explore the main channels where the customers could be acquired from.

Improve all the main processes so they work and customers start to actually buy your products or services more than once.

If you work with an already established business, skip the 1st and 2nd steps.

Target discovery: Analyze the chains and identify possible areas of improvement: if you decide to introduce a new product — work closer with the Genotype. If you want to improve retention — analyze the current user experience in the Service Cycle. If you decide to bring more sales — improve the Customer acquisition funnel. If you want to reduce costs per product — find out if the Production and supply chain can be reengineered. If you decide to improve scalability and optimize fixed costs — take a close look at the Asset management cycle. Identify the bottleneck and implement experimental improvements.

Once you have re-engineered one of the chains in the previous phase that will bring imbalances to the business model, for example new products will need sales effort to find customers, new customers will require more assets and resources, a reengineered supply chain may require more infrastructure etc. So develop a new financial model for the new Economythat will help you track imbalances and performance of the newly engineered business model. Get the other elements aligned with these changes and scale the operations.

If you work with the large, mature business skip the previous steps

Target discovery: Depending on who your quest sponsor is, understand which processes can and can not be changed given the needs, responsibility, and power of your sponsor. As long as any change in a large organization entails a lot of dependencies and require a lot of time, do not try to find “the best” and most optimal solution unless you have support from both the highest managers and the local managers which is very rare. In a more frequent situation you’ll need to find a patch which fixes a local problem with the minimal possible influence on the other processes.

At a very large scale, business models may be changed by mergers and acquisitions. Quite frequently the company that owns a large market share and a dominating sales funnel will acquire a product company that was lucky to invent a product that perfectly serves a newly emerged customer need. Another frequent situation is the acquisition of one of local market leaders by a multinational company to expand to new geographies and get access to local customers or local supply. After the merger a lot of efforts are required to standardize and streamline the processes between two pieces of a new organization. If done correctly, that will establish a new optimized process for years to come.