What is a Dynamic Business Model?
Dynamic business models - DBMs for short - are working, quantified simulations
... for any business or functional ongoing plan, or
... for any challenge or initiative that arises.
We also call them "living business models" because they mimic the behaviour of the real-world situation - with uncanny realism!
OTHER 'BUSINESS MODELS' The phrase "business model" is very widely used. Executives talk about "how our business model works". Consultants tell managers "You need to change your business model!" Investors demand "What's the business model?" for a new venture. But in these cases "business model" generally means little more than a verbal description of how a business works, maybe with a few key numbers.
DBMs ARE DIFFERENT ! First, a DBM is fully quantified - every element is a real-world item with values that can be measured or estimated. A DBM shows how those elements depend on each other, so if you know the value of A and B, you can calculate or estimate the value of C - spreadsheets do this of course, but in a DBM you can see those connections. Lastly, a DBM shows how everything changes over time - so you can watch the model play out the behaviour of the entire plan or issue over whatever time-scale you choose.
This model shows how the balance on a credit card changes over 24 months. The balance is increased by each month's new spending plus interest charges, and is reduced by monthly repayments. You can see the model here (opens in new tab), and try changing things like the spending and repayment rates.
HOW DBMs RELATE TO SPREADSHEETS. Think of a DBM like this ...
- Each object is like a column in a spreadsheet, with its name in the top cell, and its values for each period running down the cells below. So cell A1 might be 'new spending', cell A2 = 43, A3 = 47 and so on.
- The link-arrows are like cell-references between columns. So if column A is 'new spending', column B is 'interest charged' and column C is 'add to card balance', then column-C values need to use the values in columns A and the values in column B.
- Each object contains a Formula. Just like each cell in the spreadsheet has a formula. The Formula tells the object how to calculate its values from the items it depends on ... but in a DBM, the Formula is not, for example, 'A2 + B2' but is in natural language...
add to card balance = 'new spending' + 'interest charge'
The link-arrows and natural-language Formulae make it hard to create the 'cell-reference errors' that plague most spreadsheet models.
- The special 'Stock and Flow' structure at the top of the diagram simply depicts how a quantity of something (technically known as a 'Stock') fills up and drains away over time. The relationship between balance sheet and cash-flow is a universal example of this pairing, but there are other examples, like customers won and lost or staff hired and fired. Unlike other objects, Stocks are not calculated directly from other items. Instead, their value at any point in time is the value at the BI point in time, plus anything added during the latest period, minus anything lost in that period. So ...
Card balance $ (start of month 2) = Card balance $ (start of month 1)
+ 'add to card balance' (during month 1) - 'repayments' (during month 1)
In the spreadsheet, if 'add to card balance' is column C, 'repayments' is column D and 'Card balance $' is column E, then E3 = E2 + C2 - D2; E4 = E3 + C3 - D3, and so on.
Now take those same principles and apply them to other business resources. This 3-year model of a small IT-support company works out the balance between customers and staff and calculates revenue and profit.
In the blue scenario, it took on many new clients, but failed to hire enough staff for the higher demand. Its service quality fell, and it lost as many clients as it had won. Revenue and profit grew - then fell.
In the purple scenario, it would have hired a little faster. Service quality then stayed OK and it kept most of the new clients. Revenue stayed high, although the extra staff cost reduced profits a little.
Dashed lines show actual case data. In reality, the model was built around month-24 to figure out how to slow the collapse and turn the business around.
You can explore this model here. (Model opens in new tab.)
Serious DBMs, of course, can be much bigger and more complex than this example, but all DBMs have these basic principles at their core.
