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Using a Fractal Enterprise Model for Business Model Innovation

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In their previous work, the authors have developed a new kind of enterprise model, called fractal enterprise model, that connects enterprise processes via assets used for running these processes. One of the possible usages of this model is facilitating innovation, more exactly, changing or extending a business model used in the enterprise. This research-in-progress paper presents the idea of how such facilitation could be arranged, and lists the problems that need to be solved in order to convert the idea into a practical methodology. The discussion is based on a hypothetical example.
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Using a Fractal Enterprise Model for Business Model
Innovation
Ilia Bider and Erik Perjons
DSV - Stockholm University, Stockholm, Sweden
[ilia|perjons]@dsv.su.se
Abstract. In their previous work, the authors have developed a new kind of en-
terprise model, called fractal enterprise model, that connects enterprise processes
via assets used for running these processes. One of the possible usages of this
model is facilitating innovation, more exactly, changing or extending a business
model used in the enterprise. This research-in-progress paper presents the idea of
how such facilitation could be arranged, and lists the problems that need to be
solved in order to convert the idea into a practical methodology. The discussion
is based on a hypothetical example.
Keywords: process architecture, enterprise model, business model, innovation,
business transformation
1 Introduction
In our previous work [1], we have introduced a Fractal Enterprise Model (FEM) which
has a form of a directed graph with two types of nodes Processes and Assets, where the
arrows (edges) from assets to processes show which assets are utilized by which pro-
cesses and arrows from processes to assets show which processes help to have specific
assets in healthy and working order, see Fig. 1, 2 and 3 (in Section 2). The arrows are
labeled with meta-tags that show in what way a given asset is utilized, e.g., as work-
force, reputation, infrastructure, etc., or in what way a given process helps to have the
given assets “in order”, i.e., acquire, maintain or retire the assets. Building a FEM is
supported by a set of archetypes that show what kinds of assets are needed for particular
process types and which assets they can help to acquire, maintain and retire. An arche-
type can be generic – applicable to all processes, or specific for some class of processes,
e.g., acquiring stakeholders. Areas of applicability of FEM include, but are not limited
to:
1. Finding “invisible” processes that exist/should exist in the enterprise or are related
to a particular asset or process.
2. Arranging existing process documentation for better reusability, see [2]
3. Understanding interconnectedness of various parts of the enterprise, in particular,
the multipurposeness of some assets and processes, see [3].
4. Assessing a proposed organizational change by pinpointing assets and processes that
will be affected during intervention and showing how these are interconnected.
5. Preventing "organizational cancer" [4] when a supporting process starts behaving as
though it were a primary one, disturbing the balance of the organizational structure.
6. Planning business model transformation, e.g., moving up in the value chain, as sug-
gested in [5].
The objective of this paper is to present our current efforts for goal 6using FEM to
support business model transformation/innovation. The topic of business model inno-
vation became popular with the appearing of the business model canvas [6]. However,
the canvas helps only in developing/depicting an existing or new model, but does not
support the process of transforming an existing model into a new one that should sub-
stitute the existing model or be a complement to it. Such transformation is done in an
ad-hoc manner based on intuition. With such an ad-hoc type of transformation, there is
a risk that a new model has no relation to the old one and does not take into considera-
tion the capabilities and assets that already exist in the organization in question. As a
result, a new model could be difficult, if ever possible, to implement.
The approach to business model transformation/innovation suggested in this paper
consists of two steps: (1) generating hypotheses, and (2) assessing promising hypothe-
ses. The first step is based on analyzing which asset(s) should be used in a new business
activity. The second step consists of comparing a FEM for a new business activity with
the FEM for already existing one, and assessing the differences. The paper presents the
ideas of how these steps could be completed via using an artificial example in Section
2, which is followed by a discussion of current directions of our research in Section 3.
2 An Example
Consider an example, inspired by Amazon, of an enterprise the primary business of
which is selling books over the internet. The business goes quite well, and the company
decides on expanding its operations, but in another area. They need to generate hypoth-
eses on what strategic direction to take, analyze them, assess the size of a change to be
introduced, and create an implementation plan. In essence, the task of management is
to develop and implement a new business model in addition to the already existing one,
using as much of the existing organizational assets (capabilities) as possible.
Generating hypotheses can be started with creating a limited part of a FEM model,
e.g., its upper level, to identify assets/capabilities that could potentially be used for de-
veloping a new business model. An example of such FEM is presented in Fig. 1 that
shows a part of the topmost level of FEM with a book sales process as the root and four
assets supporting the process. Note, however, that this is not the full set of assets needed
for the primary process, if needed, others, e.g., a stock of books, could be added.
Generating and deliberating hypotheses based on Fig. 1 could be done in the follow-
ing manner:
1. Focus on the asset Private customers. Question: Can we sell something else to the
same customers over internet using the same software and deployment platform?
Using a Fractal Enterprise Model for Business Model Innovation 21
The answer depends on the size and saturation of the market for particular products.
It might be too difficult to get a market share if the competition is hard.
2. Focus on the asset Packing and delivering staff. One possibility is to provide stock
management, packing and delivering services for a bigger book-seller. However, it
could be difficult to combine this with the company’s own book selling business.
3. Focus on the asset Webshop software. The Webshop software could be licensed to
other book sellers, but it would result in helping the competitors.
4. Focus on the asset IT platform for Webshop deployment. The platform could be pro-
vided as a general IT deployment platform. The market for such services is on the
rise, and there is no direct risk of helping competitors in the book-selling business.
Fig. 1. The upper part of FEM
After considering four alternatives above, one or more could be chosen for further anal-
ysis. Assume, for example, that the last alternative has been chosen, then the IT platform
asset is moved as a node in a hypothetical new FEM tree and is expanded upwards and
downwards, as shown in Fig. 2. Expanding up consists of adding a root of a new FEM
tree which is IT platform for deployment as a service, where an asset IT deployment
platform becomes an infrastructure asset to the new service process. Note that this asset
is not exactly the same as in Fig. 1. In Fig. 1, the deployment platform is specific for
the webshop software, while in Fig. 2, this is a general platform for deploying custom-
ers’ software. Normally, such platform includes a virtual server, an operating system,
one or more DBMS's, one or more webserver software, etc.
Expanding down means adding more assets to the root, and continuing the expansion
of the assets by adding process nodes aimed and managing these assets. In particular, a
beneficiary is added as an asset to the root, and processes aimed at managing asset IT
platform for customer deployment are added to this node as well. The processes’ nodes
are further expanded by adding the asset Platform specialists as Workforce supporting
these processes (see Fig. 2).
At the next step, we need to compare the assets and processes in the old FEM tree
(Fig. 1) with the ones in the new FEM tree (Fig. 2), expanding these trees as required.
The comparison is presented in Fig. 3 where both FEM trees are presented and links
between similar assets and processes are drawn. The figure helps to discuss how much
22 Using a Fractal Enterprise Model for Business Model Innovation
of the existing processes and assets can be (re)used in a new business activity and how
much needs to be built from scratch.
Fig. 2. Building a new FEM tree
The differences between components of the existing and new FEMs are presented in
Fig. 3 as green dashed “horizontal” arrows. The green dashed “horizontal” arrows have
labels that explain the differences. More explanations are presented below:
Beneficiary (customer) asset. As we can see from Fig. 3, the customers for a new
business (on the right) are not the same as the customers for the existing business
(on the left). The former are enterprises/organizations that rent an IT platform to run
their own applications, while the latter are private customers who like reading books.
Thus a new set of processes to manage the new sort of customers is to be built,
starting with sales and marketing processes to acquire new customers. However,
some help for acquiring new customers could be obtain if we assume that decision
makers in an organization are often book readers, and may have used the webshop
in the past. As the webshop is user friendly and fast, there is a Reputation asset that
supports the Customer retention process in the existing FEM. For those decision
makers who have experience of buying books via the webshop, this reputation can
be of value when deciding to use the general IT platform service. Therefore, reputa-
tion Excellent technical platform based on customer experience could be moved
Using a Fractal Enterprise Model for Business Model Innovation 23
from the left hand side of Fig. 3 to become an asset to the Sales and Marketing of
the new FEM, on the right side of Fig. 3.
Infrastructure asset related to the deployment platform. As has already been men-
tioned, the platform for delivery as a service has a more general nature than for de-
ployment of webshop. Some components need to be added and some deleted. In
addition, for the webshop it is enough to have one platform which has enough power.
In the new business, each customer gets its own platform, and the power can vary
from platform to platform.
Processes that manage the asset IT platform for customer deployment (i.e. the pro-
cesses acquire, maintain and retire) have different nature than the ones that manage
asset IT platform for Webshop deployment. For example, there is a need to create a
new platform very quickly, as well as dismantle it quickly.
The difference can happen on the next levels of FEM tree as well. For example, the
new business activity may require more Platform specialists, thus the Hiring process
may need to recruit more personal each year than the existing process.
3 Research directions
The example from the previous section shows that FEM can be used for generating
hypothesis and assessing them already today. However, the process is rather cumber-
some with many manual steps and ad-hoc decisions. To ensure adoption of the approach
by practice, the approach should be converted to a structured methodology with tool
support. This, in turn, will require extension of FEM and building a computerized tool.
3.1 Extending FEM
The hypotheses generation step could be facilitated by a set of transformational arche-
types. Such an archetype shows how to use an asset(s) further down in the existing FEM
tree to create a new FEM tree based on that asset. As an example, the last two hypoth-
eses considered in Section 2 can be considered as belonging to the archetype "Using an
infrastructural asset for building a service of providing this asset to external customers".
In this case, a "supporting" asset becomes the main one on which the new business
activity rests. This transformational archetype is visualized in Fig. 4.
Other examples of transformational archetypes could be as follows:
From manufacturer to designer: instead of manufacturing and selling own products,
the company designs products for others. The new model can substitute the old one,
but can also be used as a complement.
From designer to manufacture: having a good design capability and an idea of a new
innovative product results in starting manufacturing and selling the product. Note
that this transformational archetype is a reverse to the previous one.
24 Using a Fractal Enterprise Model for Business Model Innovation
Fig. 3. Comparing Two FEM trees
Using a Fractal Enterprise Model for Business Model Innovation 25
From educator to consultant: an education activity in a business/technical topic can
be transformed to a consultant activity in the topic. This transformation is based on
the asset of the type Workforce. Instead or in addition to being teachers, the workers
become consultants.
From consultant to educator: a reverse archetype to the previous one.
Fig. 4. An archetype for becoming an infrastructure provider (generalization of Fig. 3).
Our plans regarding transformational archetypes include creating a list of possible
transformational archetypes, formalizing them and finding historical examples where
each archetype has been successfully implemented.
The hypotheses assessment step could be facilitated by extending FEM with quali-
tative and quantitative characteristics of its nodes, so that it would be easier to compare
nodes in the existing and new FEM. Both processes and assets nodes could be quanti-
fied and qualified. For example, processes nodes could be quantified with:
Number of process instances completed per a time unit (year, month, or day) – max,
min, average.
The average life length of the process instance.
Number of process instances that run in parallel – max, min, average.
It might be more difficult to quantify assets nodes. The measures for these nodes could
depend on the asset type. For example:
Assets of type stakeholder, e.g., beneficiary (customer), workforce, etc. can be meas-
ured as the number of stakeholders
26 Using a Fractal Enterprise Model for Business Model Innovation
Assets of type stock, can be measured in stock units, e.g., a number of products of a
certain type
Assets of type infrastructure can be measured in the number of units, the total power,
production capacity, etc., dependent on the type of assets.
Assets of type reputation can be measured on a fixed scale, like week, medium,
strong.
Besides quantitative parameters, both processes and assets could be characterized with
qualitative parameters for which the comparison operators, like ">" and "<", are not
applicable. For example, a process can be characterized by its level of flexibility, e.g.
according to the classification introduced in [7]: loose, guided, restricted, and stringent.
Assets of the type workforce could be characterized by its level of qualification.
3.2 Providing tool support
Manual drawing of FEM diagrams and linking them together is a tedious work that
could be facilitated by developing a computerized tool support. Such support would
include at least the following components:
1. Support for building a FEM based on the generic and specific archetypes suggested
in [1].
2. Support for transforming an existing FEM into a new one based on the transforma-
tional archetypes discussed in Section 3.1
3. Support for calculating the differences between the nodes of two FEMs based on
quantitative and qualitative parameters discussed in Section 3.1
As our suggestions are aimed at facilitating hypotheses generation and analysis, it is of
utmost importance for the tool to have user interface suitable for team work. A team
working with a large screen should be able to instantly make changes in the model, add
notes, save work for further consideration, compare two hypothesis, etc. Currently we
are testing ADOxx environment [8] for building tool support. Fig. 5 shows implemen-
tation of item 1 on the list above when an archetype is applied to a primary process.
Fig. 5. The result of applying an archetype to a process (ADOxx based test)
Using a Fractal Enterprise Model for Business Model Innovation 27
4 Areas of application
To discuss the area of application of the ideas presented in this paper, we will consider
five levels of strategy work introduced in [9]:
1. Doctrine or policy, which defines who we are.
2. Infrastructure/capability, which defines what infrastructure/technology we should
use in our business, and what capabilities we need to develop.
3. Grand strategy, which defines in which sector to operate and with whom to make
alliances.
4. Strategy, which defines our structural coupling with the external world, e.g. compet-
itors, collaborators, market. The questions to decide here are whether we are part of
a heard, a heard leader, an independent, etc.
5. Tactics, which defines operational levels procedures.
The work presented in this paper, in the first hand, is aimed at supporting the strategic
work on the level of doctrine/policy by providing assistance in generating and assessing
the hypothesis of extending or radically changing the doctrine/policy (who we are). In
the example discussed in Section 2, the policy has been extended from being a book
seller over internet to a platform provider. The suggested approach can also be useful
for moving from doctrine/policy changes to infrastructure/capability level, as it helps
to determine which capabilities are already in place and which needs to be developed.
It is doubtful that the approach could assist to work on a grand-strategy level. However,
a FEM model of an enterprise might be helpful on the strategy level as well, as the
choice of strategy depends on the qualitative and quantitative characteristics of various
processes and assets already in place or to be developed. Explicating the connection
between FEM and strategy level patterns as defined by [9] is included in our plans for
the future.
In the example discussed in Section 2, a new business model is developed as an
addition to the existing one. Though such case is possible, we believe that a change in
the business model, and hence our work, is more important in a situation when a com-
pany's current model becomes outdated, and needs to be substituted with a new one in
order for the company to survive. In this case, the Boyd's idea of destruction and crea-
tion from [10] needs to be applied. This is done by decomposing the current company
into interconnected set of capabilities, i.e. processes and assets (analysis), and compos-
ing them in a different manner while applying some twisting to get them fit in a new
scheme of things (synthesis).
5 Concluding remarks
In the previous sections, we have demonstrated how FEM could be used for business
model innovation/transformation, and what needs to be developed to convert the idea
into a practically feasible methodology with tool support. Due to the space limitations
28 Using a Fractal Enterprise Model for Business Model Innovation
we are not able to provide any additional details of our research. It is worthwhile to
mention, however, that our research follows the design science approach. Therefore,
besides working on the issues highlighted in Section 3, we are putting efforts to dis-
seminating the ideas among management consultants working with the issues of busi-
ness transformation. An example presented in Section 2 has been developed as part of
the dissemination efforts, and it showed to be helpful for this end, when demonstrated
as a story in InsightMaker [11], see http://bit.ly/2qakWJR. Also, the current text has
been used as a means for transferring the message to the expert in the field to get the
ideas validated.
Acknowledgements. The authors are grateful to Patrick Hoverstadt for valuable com-
ments on the draft of this paper.
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Using a Fractal Enterprise Model for Business Model Innovation 29
... The idea of using FEM for business model transformation was first presented in [12], but without any technical details on the transformational procedure and transformational patterns. A more recent publication [13] sets a research agenda for converting the idea from [12] into a practically useful procedure. The agenda consists of several items, including defining transformational patterns (archetypes), and providing computerized tools support. ...
... 1. A fragment of a FEM from [13] Note that the same asset can be used in two different processes playing the same or different roles in them, which is reflected by labels on the corresponding arrows. It is also possible that the same asset can be used for more than one role in the same process; in this case, there can be more than one arrow between the asset and the process, but with different labels. ...
... In this section we will use an example from [13] to demonstrate our approach for analyzing examples/cases. The example corresponds to the transformation completed by Amazon when it created a new business -Amazon Web Services (AWS) -in 2006. ...
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Full-text available
The pace of changes in the business environment in which a modern enterprise operates requires the enterprise to constantly review its business models in order to survive and prosper in the dynamic world. This exploratory study investigates how to help the enterprise to innovate their business models based on the concepts of fractal enterprise model and transformational patterns. The paper suggests an approach to Business Model Innovation (BMI) where the focus is on transformational patterns. It discusses the structure of such patterns, and based on examples, it presents an approach on how such patterns can be derived from cases of completed business transformations.
... A fragment of a FEM, adapted from[7], drawn with the help of Insight maker. ...
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Patterns of Strategy is a revolutionary approach to developing business strategy that shows how the strategic fit between organisations drives their strategic direction. It is essential reading for those who wish to understand how to manoeuvre their organisation to change its strategic fit and play it to their advantage. Although traditional approaches to strategy have required organisations to assess the environment around them, they have ignored the dynamic nature of this relationship. Patrick Hoverstadt and Lucy Loh describe strategy as an emergent process that influences and is influenced by the wider system to which an organisation belongs. It is a systemic approach to strategy that focuses on the relationship between organisations, rather than just the organisation in its own right. As well as a new language of strategy and an explanation of what drives emergent strategy, the authors offer 80 'patterns’ of strategy which organizations can use to understand the relationship that their business and their strategy have to the actors around it. These patterns provide a toolkit for designing different ways to collaborate, and also offer alternative types and approaches of competition. A practical and authoritative guide, this book can be used to plan and navigate your way to the future.
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