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A best practice business model for annual reports

Many business models miss the mark, as the FRC Financial Reporting Lab confirms. James Houston suggests how to develop useful models.

A good business model is critical as it contextualises the rest of the information about a company. The FRCs 2016 research found that investors use business model information in their initial investment appraisal process. Investors were unanimous that business model information is fundamental to their analysis and understanding of a company and its prospects.

In their updated Implementation study in October 2018, the FRC revealed that whilst disclosure had progressed, there is still significant room for improvement. Some companies are not understanding the importance of communicating their business model with representations ranging from very high level to quite detailed, and covering different information sets. 

Risk of poor business model articulation
Either unwillingness or inability of the board and management to clearly articulate their business model raises concerns for investors, to the extent that some will not invest, while others may choose to limit the capital they invest. Investors will often compare business models and form views on the quality and sustainability of the business model.

Challenge of wider disclosure
UK Corporate Governance code revisions, wider disclosure of non-financial information, and greater demand for wider sustainability reporting are creating pressure to cover the interests of all relevant stakeholders, which has resulted in some rather generic models that show too much high-level information and fail to cover the information that is most significant.

Is there a process that can help companies to improve their business model disclosures?
With more information to be considered as relevant for disclosure in the business model, articulating this important section of the annual report well is becoming more challenging.

With different expectations of content within business model reporting, different stakeholder perspectives of value generation and with each company having a unique response to address the demands of its marketplace, is it possible to use a systematic approach to consider and develop the disclosure of a business model? 

Jones and Palmer have developed a framework of tools that aims to provide a greater clarity of what disclosure is significant and relevant for a business model to capture. We focus on four steps to help capture the appropriate components in which to start the visual articulation:

  • What are the key resources and capabilities of the company and which of these provide sustainable competitive advantage?
  • What are the activities and supporting elements of the business that use these resources and capabilities and how can they be captured to provide a thorough and detailed assessment?
  • What value is created by the business, and for whom, using these resources and capabilities? 
  • How are the disclosures best represented for your audience?

These steps involve exploring a number of different models, the outputs of which provide:

  • The resources and capabilities that provide sustainable competitive advantage;
  • The relationships between these advantages and the elements that support them;
  • Whether the relationships are closer to a  ‘pipes’ or ‘platforms’-based business model; and
  • The most significant stakeholders groups affected in the value creation process and how they are positively or negatively impacted

This information then provides a functional input to the creative process with your agency and a set of criteria to help to judge the outputs. Too often the creative process of assembling the elements of the business model is started prior to the rigour of clarifying the information that is most significant. 

Summary
Although the outputs of the articulation of the business model will be unique to the way each entity addresses their marketplace, the approach to deciding what is relevant and of importance to support the investment proposition can be systemised. 

If you would like help in developing a better approach to articulating your business model in order to make your business understandable, we’d be delighted to assist.  

James Houston is managing director at Jones and Palmer.

Published 11 January, 2019