Why business models are important
03 November 2016
One of the most frequently, and hotly debated, aspects of company reporting surrounds the business model. Just last week the FRC Reporting Lab published a paper on this very topic. But why should this be? Surely every company knows what they do and how they operate?
One reason is that the world in which companies operate is increasingly complicated. The days of factories with simple supply chains have long disappeared. Today, companies are virtual, global, highly collaborative and complex. How on earth do you represent such complexity on paper (or digitally)? We also recognise that companies face the unique challenge that, unlike other aspects of reporting, no one individual in a company ‘owns’ the definition of the business model.
The result is many companies continue to grapple with how they report on their business model. But should they worry?
Why is business model reporting important?
No one can doubt that the success of today’s companies is in part determined by their interaction with, and their impact on, a growing number of stakeholders, who all expect more from them. And if you add to this a rapidly changing business environment, driven by new technology, smaller and more agile competitors and environmental factors, the need for investors to better understand a company’s business model has never been greater.
Put simply, companies need to clearly demonstrate how they create value, their resilience to change, and the quality and sustainability of the business and its performance. This should be captured and clearly articulated through a company’s business model.
Companies have risen to this challenge, making great strides in creating business models that clearly communicate how they operate, what they rely upon, and the value they create.
Yet for every business model that achieves this, there are many more that don’t. We’ve seen business models that make it all but impossible to identify the sector in which the company operates and what it actually does. This is as good as useless.
Should companies need further persuading that the reporting of the business model is important, they would do well to heed the words of BlackRock CEO Larry Fink.
In a letter earlier this year to the CEOs of large companies listed in the US and UK, he said “One reason for investors’ short-term horizons is that companies have not sufficiently educated them about the ecosystems they are operating in, what their competitive threats are and how technology and other innovations are impacting their businesses”.
He is calling for clearer and more detailed reporting of business models.
And he’s not alone. In July this year, following the UK EU referendum the FRC (Financial Reporting Council) said “We encourage clear disclosure of a company’s business model as part of the strategic report, including a description of the main markets in which the company operates and its value chain”. The guidance published last week echoes the same and reflects the views of companies, investors and investment and analyst organisations who are calling for more detail on the business model than is currently provided by most companies, and better natural linkage of business model information to other sections of the Strategic Report.
What do we see in practice?
We first examined the reporting of business models in 2013. Back then, we said that very few business models thriving in 2015 will be around in the same form in 2020. We stand by that statement.
Three years on, we felt that now was the right time to revisit business model reporting, and to look again at how companies have responded to those challenges and what the future of reporting might hold.
Our report – Reporting your business model: Emerging practices and future trends – explores these themes further, offering practical guidance for companies.
Companies will, for example, have to explain how:
- business models are flexing to respond to market trends
- strategy supports the key components of the business model and what drives value
- management consider the risks and opportunities across their business model
- money is made and value is generated and/or (re)distributed
- KPIs reflect the key components of the business model
- the impact on key resources and relationships are measured.
Our report includes practical guidance for companies, what we consider the building blocks for effective business models, and good examples from current reporting.
The report can be found here, and you can join in the discussion on social media using the hashtag #beyondboilerplate.