The article presents one possible definition and a brief description of business engineering as a new approach to strategic business management and its advantages compared to more ‘traditional’ strategic business management methodologies based on author’s experience in investment banking and strategic management consulting.

Formal Definition of Business Engineering

The terms ‘business engineering’ and ‘re-engineering’ have been used quite extensively for at least a decade. The basic idea behind these terms is quite simple and intuitive – they originated from a firm belief (based upon extensive research conducted by Hammer, Davenport, Champy and others that a business enterprise can – and should – be engineered almost like a factory (production plant).

The key word in this belief is ‘almost’, because, unlike its completely pre-determined counterpart in production or operations management, business does – and will! – always possess a certain degree of inevitable ‘chaos’ without which a business simply can not adapt to a rapidly changing external environment and, therefore, simply can not exist.

Therefore, the most appropriate definition for business engineering (BE) seems to be the process and methodology of formal and comprehensive definition and detailed description of interconnected and interrelated business processes & structures – with the necessary degree of flexibility to accommodate for the optimal degree of ‘business chaos’ (external and internal) and to ensure the achievement of fundamental business objectives regardless of changes in the external environment.

It is very important that BE should allow for truly comprehensive definition and description of all fundamental business objects (and not just business processes!) to make them all visible (as only what is seen can be effectively and efficiently managed) as well as all fundamental interactions between these objects and processes to make sure that business is managed and adapted to the rapidly changing external environment in a systematic, cohesive and comprehensive fashion.

Consequently, the most appropriate definition for business re-engineering (BRE) seems to be the process and methodology of formal and comprehensive re-definition and detailed re-description of interconnected and interrelated business processes & structures – with the necessary degree of flexibility to accommodate for the optimal degree of ‘business chaos’ (external and internal) and to ensure the achievement of fundamental business objectives regardless of changes in the external environment.

Need for Formal Business Engineering

Need for formal business engineering is based on two powerful driving forces behind the evolution (which might very well turn into a revolution) in business management methodologies – (1) relentless (and sometimes nearly explosive) acceleration of the pace of changes in the external business environment and (2) rapid establishment, structuring and growth of the global electronic business community.

The first driving force requires business to develop structures and procedures capable of rapidly accommodating the business enterprise as a whole (because external changes typically affect all functional areas of a business enterprise) to changes in the external environment.

And this can be done (given the more and more challenging time constraints) only when all business structures and their interrelations are visible (i.e. are properly defined and described) as it is impossible to make changes to something that is invisible and to coordinate these changes when interrelations between them are also invisible.

The second driving force requires objects and procedures of separate business enterprise to be structurally compatible (otherwise modern e-business technologies will simply not work) which requires a formal and detailed description of interfaces between these structures. Which, in turn, requires a formal and detailed description of internal business structures and their interactions.

Therefore, development and implementation of a formal business engineering methodology becomes a necessity and a priority in strategic business management.

Business Engineering Process

It is obvious that the success of a particular BE methodology is determined by the efficiency of proper business segmentation (establishment of the most fundamental and comprehensive – individually and collectively - categories of business objects, their interactions/interrelations and specific business objects within each category and across categories).

Business segmentation (or business model) presented in this article has been developed by the author based upon extensive experience of the author in investment banking (mergers & acquisitions, raising capital and other areas of corporate finance) and in strategic management consulting.

According to this segmentation, business engineering process consists of the following stages:

· Defining fundamental business objectives

· Defining and describing internal and external business constraints & opportunities

· Defining and describing key business stakeholders

· Defining and describing fundamental business structures

· Defining and describing business activities

· Defining and describing performance measurements and their values

· Defining and describing business personnel

· Defining and describing business knowledge

It is important that business engineering (and re-engineering) is a process and not a sequence. In other words, it means that the BE stages listed above are in many cases executed concurrently and sometimes even iteratively (going back one or more stages after completing the next stage).

This business model have been successfully used in a number of strategic management consulting project and (in the humble opinion of its author) can be shared it with others - investors, managers, educators and consultants – both providers and users of strategic management methodologies, tools and techniques.

Naturally, the business model presented in this article is by no means a ‘universal solution’ to all business problems (as the same or similar results can be achieved using different approaches and different methodologies and it is the very variety of models, tools and techniques available on the market today that allows for rapid economic growth in the developed and developing nations).

It does have its limitations (as any other methodology), but still it is believed that at least some of the aspects of this model can and will be useful to management consultants and educators and to the entrepreneurs, investors and managers of businesses and will make their models, methods, tools, solutions, products, practices, decisions and actions more effective and efficient.

Defining Fundamental Business Objectives

A business can have no clients (trading for one’s own account) and no employees (if it is a sole proprietorship where its owner is also its one and only employee), but it has to have its owners – shareholders. Where there are no owners – there is no business. Therefore, the most fundamental business objectives are those of its owners – shareholders (investors).

Shareholders own the business for two reasons. One is to satisfy their financial objectives (in other words, to create and realize financial value). The other is to satisfy their emotional objectives (in other words, to create and realize emotional value).

Therefore, the first step in business engineering is the detailed and unambiguous definition and description of both financial and emotional objectives of business owners (shareholders) which is typically accomplished through in-depth interviewing.

In a closely-held company with a relatively small number of shareholders such interviewing is a rather straightforward process; in a public company with a large number of shareholders the process gets more complicated. Typically, in the latter case it is sufficient to interview the key shareholders of the company (in most cases, a small number of investment or pension funds) that provide the key shareholders’ influence on strategic business objectives, priorities and activities.

In order to define financial objectives of shareholders, it should be noted that, to put it simply, shareholders own business to make money. ‘Making money’ means creating financial value (in other words, shareholders’ value) and realizing this value by turning it into cash through either dividends or capital gains (selling shares to other investors or back to the company) or both.

Therefore, the three fundamental financial objectives of shareholders are (1) the amount of financial value to be created; (2) time period, during which this value has to be created and (3) the method of realizing this value (converting the intangible number into tangible cash in the bank account).

Fundamental financial objectives of the shareholders can be represented by a Financial Value Function (FVF) – stream (flow) of dividends, discounted at the appropriate discount rate (typically at the weighted-average cost of capital - WACC) plus capital gains – proceeds from an initial public offering (IPO), subsequent public offerings of company shares and/or sale of company shares to a strategic investor (in a M&A deal). Naturally, FVF is simply a part of business valuation model which, therefore, becomes a foundation of business management system.

Emotional objectives of shareholders are satisfied not only by achieving financial objectives (which by itself produces a strong and positive emotional impact on business owners, especially entrepreneurs), but also by formal establishment and implementation of fundamental moral and ethical values, beliefs and principles of business owners in a company (business entity).

These values, beliefs and principles form the foundation of corporate culture of the company (formal and informal) and are typically formally presented in a ‘corporate constitution’, ‘corporate code’ or similar documents. These documents, together with business valuation model, represent two cornerstones of business management system (one being responsible for the achievement of financial objectives, the other – emotional objectives of shareholders).

Defining Internal and External Constraints & Opportunities

In reality, however, the definition of the most fundamental business objectives is an iterative process and it typically takes several (sometimes quite a few) iterations to define optimal fundamental objectives – both financial and emotional. It happens because these objectives have to take into consideration the inevitable and quite real internal and external constraints and opportunities which also have to be properly defined.

It is important, that, unlike “traditional” approach to business analysis, BE defines the parameters of both external and internal business environment not as ‘opportunities and threats’ and ‘strengths and weaknesses’ but rather as ‘constraints and opportunities’.

This is done intentionally to unleash the full power of positive thinking which is one of most potent driving forces and key success factors of any business reengineering project. Threats and weaknesses are not ignored; they are just considered and treated as either inevitable constraints which has to be taken into account or opportunities for increasing the effectiveness and efficiency of business through creative thinking and other techniques.

Internal constraints and opportunities generally fall into one of the five categories:

· Key competencies (what company does better than anything else)

· Strategic competitive advantages (what company does better than anybody else)

· Key corporate technologies (managerial, information, operational, etc)

· Key resources (capital, personnel and knowledge)

· Existing corporate culture (formal and informal)

External constraints and (both domestic and international) opportunities generally fall into one of the five categories:

· Political

· Economic

· Technological

· Social & Cultural

· Other factors

Every internal and external constraint and opportunity is described through a system of attributes structured into a table and supported by textual and visual (pictures, charts, motion video, etc.) comments linked to the corresponding attributes via hyperlinks – a now-standard integration tool in Microsoft Office and related technologies and products.

Defining Business Stakeholders

It is obvious that in order to achieve its fundamental objectives (given the existing constraints and opportunities), business has to satisfy the (often rapidly changing) needs and wants – functional and emotional – of all of its stakeholders (and not just clients) – shareholders, customers, suppliers, business partners, stock market participants (exchanges, investors, analysts, brokers, etc.), business community as a whole, government entities (federal, regional and local), mass-media, non-government organizations and the community in general.

Each category of stakeholders forms a portfolio of stakeholders that needs to be managed as an investment portfolio. Naturally, all stakeholders taken collectively (i.e. across categories) form a comprehensive investment portfolio of all business stakeholders.

In order to satisfy wants and needs of business stakeholders (and thus to achieve the fundamental business objectives) it is necessary to first identify and properly define these needs and wants (and then to closely monitor them).

After these needs and wants are defined, one must formally define products – tangible and intangible – to be developed and produced to satisfy these needs and wants, including functional and emotional value created by the consumption of these products by business stakeholders. Naturally, definition of business products includes definition of product attributes and value – emotional, functional and financial – created for product users by consuming these products.

It is common knowledge that, in general, the whole idea of business is creating and sharing value – functional (by satisfying functional needs, such as food, shelter, transportation, entertainment, etc.), emotional (by satisfying emotional needs) and financial (by satisfying financial needs).

In return for value created for them, business stakeholders (consumers of business products) create value for product vendors – emotional, functional and financial. It is important to note that from the point of both vendors and consumers of business products both emotional and functional value can be expressed in financial terms (i.e. in terms of estimated financial value created by the consumption of these business products) with the degree of accuracy sufficient for efficient management of these business products as investment projects. In other words, from business management perspective any kind of value is ultimately a financial value.

Therefore, in addition to formal definition of product attributes and estimation of value created for consumers of these products (business stakeholders) it is necessary to define and estimate value – functional, emotional and financial – created for the business (supplier of these products) to make sure that creating and ‘selling’ of these products is a financially profitable and worthwhile activity (using standard project evaluation criteria – IRR, NPV, etc.).

Again, every business stakeholder and every business product is described through a system of attributes structured into a table (or several related tables) and supported by textual and visual (pictures, charts, motion video, etc.) comments linked to the corresponding attributes via hyperlinks – a now-standard integration tool in Microsoft Office and related technologies and products.

In addition, for every key stakeholder it is necessary to develop and implement stakeholder management plans – financial and operational (sequence of steps – jobs, activities, tasks – intended to satisfy needs and wants if stakeholders and to achieve financial objectives defined in financial plans). Naturally, financial plans must demonstrate (in the form of acceptable performance measurements such as NPV, IRR, etc.) financial profitability of relationships with each and every key stakeholder.

Naturally, the predominant tool for development and management of financial plans is ‘good old’ Microsoft Excel, and for operational plan – project management software (usually Microsoft Project).

Defining Fundamental Business Structures

After defining and describing key business shareholders, their wants and needs and defining and estimating value created by these products for its vendor (business under consideration) and consumers (business stakeholders), it becomes necessary to define fundamental business structures to support proper management of these products.

It should be noted that in reality BE is not a linear (sequential), but rather iterative and often parallel process. Therefore, in practice definition of business stakeholders, their wants and needs, products (to be more precise, general description of products and their attributes) is done somewhat in parallel with definition of fundamental business structures.

Fundamental business structures generally fall into one of the following categories (each category forming a portfolio of business structures that needs to be managed as an investment portfolio):

· Target markets (including definition of social, demographic, industrial & other parameters)

· Brands (with constantly shrinking product life cycles brands, and not products, form the foundation of value-creating capacity for each and every business)

· Products (tangible and intangible)

· Product lines (product groups)

· Business units

· Regional branches

· Competition (for each business unit, regional branch, target market and product, including comparison tables and definition of key competitive advantages and disadvantages)

· Corporate technologies (desired technologies as existing technologies have already been defined in the ‘constraints and opportunities’ section)

· Company as a whole

Naturally, all fundamental business structures taken collectively (i.e. across categories) form a comprehensive investment portfolio of all business structures.

Description of each fundamental business structure consists of the following key components:

· ‘Passport’ of the business structure (detailed description of all attributes of the business structure)

· Financial plan of the development and management of the business structure (as the financial plan for each business structure includes estimation of financial value created by the corresponding structure, it is often called a valuation model of the business structure)

· Operational plan of the development and management of the business structure (sequence of steps intended to achieve financial objectives defined in financial plans)

Description of passports of fundamental business structures is structured into a table (or several related tables) and supported by textual and visual (pictures, charts, motion video, etc.) comments linked to the corresponding attributes via hyperlinks – a now-standard integration tool in Microsoft Office and related technologies and products.

Defining Business Activities – Projects and Processes

After defining fundamental business structures, it becomes necessary to define business activities (more precisely, systems of business activities) that will implement these structures and achieve objectives set forth in financial and operational plans.

Systems of business activities fall into two broad categories – projects (that have a finite life span, being a one-time undertaking) and processes that involve infinite and uninterruptible system of related activities (sometimes strictly sequential but usually somewhat parallel).

One will immediately notice the absence of third category – ‘plans’. This has been done intentionally as history of business management had proved beyond the reasonable doubt that the most effective and efficient management of corporate plans is achieved when these plans are structured as either projects of processes (as for both categories formal management and optimization methodologies have been developed).

Business Projects

According to now-standard project management methodology, description of corporate projects consists of the following key components:

· Project objectives (in terms of value creation – financial and non-financial, quantitative and qualitative)

· Project tasks (jobs, activities, steps) which also have their objectives (similar in nature to activities of the project as a whole) as well as specific attributes – duration, date of start/finish, predecessors (‘linked’ or ‘related’ tasks)

· Project resources required for successful completion of project tasks (personnel, materials, etc.), each with its own set of attributes

· Project costs in financial terms

It must be remembered that each project is an investment project and thus has to be considered, analyzed and valuated based primarily on fundamental financial criteria – NPV, IRR and others. Naturally, all business projects taken collectively form a comprehensive investment portfolio of business projects.

Each project is described and managed using two project models – financial model usually developed using Microsoft Excel or similar electronic tools and operational model, usually developed using Microsoft Project or similar project management software (the latter including a number of tables and charts such as Gantt chart, PERT chart and others).

Business Processes

According to the most common business processes management methodology – IDEF0 (which has been recently included into the ISO 2000 set of business description standards) - , description of corporate projects consists of the following key components:

Activities (processes, sub-processes and individual tasks)
Objectives (in terms of value creation – financial and non-financial, quantitative and qualitative) – for the process as a whole, its sub-processes and individual tasks
Outputs (products of an activity or a business process as a whole)
Inputs (materials, information, etc, processed inside the activity to produce outputs - products)
Personnel (employees, suppliers, etc. that perform the business activity)
Mechanisms (production and warehousing equipment, computers, etc. that are necessary for performing the business activity)
Controls (guidelines for performing the business activity, such as instructions, directions, legislation, etc.)

Description and management of business processes is a more complicated undertaking than description of business projects as business processes are much more tightly interconnected and include all business activities (unlike business project which are much more autonomous and local in nature).

Consequently, management of business processes requires utilization of more comprehensive and sophisticated models:

Visual (graphic) model developed using standard IDEF0 methodology
Textual description (comments linked to components of the visual model)
Cost management model (usually developed using Activity-Based Costing – ABC - methodology)
Value estimation model (model used to estimate value created by business process, usually by comparing combined costs of running a business process with ‘outsourcing alternative’)

Defining Performance Measurements & Their Values

Actually, defining performance measurements & their values occurs during each and every step in BE – during definition and description of all business constructs. However, in order to come up with truly integrated, coherent and cohesive business management system performance indicators, it is necessary to integrate these indicators into a coherent, cohesive system of business performance indicators.

This integration can be accomplished through BSC (Balanced ScoreCard) cards or other similar instruments. It should be remembered, however, that ‘degrees of freedom’ in choosing performance measurements and their combination into the system of cards are significantly limited by the BE components and their attributes and, therefore, need to be discovered rather then invented (and are objective rather then subjective).

The fundamental guideline for defining performance management indicators is very simple. As the whole idea of business management is about managing value – financial, functional and emotional – created by the business enterprise for its stakeholders, performance management indicators should be based, first and foremost, on key shareholders’ value factors (those 20% of factors influencing 80% of the shareholders’ value created by the business enterprise) - KSVF.

These KSVF can further be broken down into key financial value factors (KFiVF), key functional value factors (KFuVF) and key emotional value factors (KEVF).

Each key value factor (KVF) falls into one of the three broad categories:

Quantitative financial
Quantitative non-financial
Qualitative

Defining Business Personnel

After definition of key business constructs (objectives, constraints, shareholders, activities, performance measurements, etc.) it becomes necessary to divide them into “areas of responsibility” and to distribute these areas of responsibility between corporate personnel (which forms ‘human capital’ or ‘intellectual capital’ of business enterprise).

This is typically accomplished in two steps. First, areas of responsibility are ‘coagulated’ into roles (‘positions’) which are then distributed among employees; and one employee (especially in smaller companies) can ‘play several roles’ (‘wear several hats’). As the result, company will have not one, but two organizational chart – one of ‘roles’ necessary for accomplishing business objectives and performing business activities and another of actual personnel (with every company employee playing one or several roles).

Description of corporate personnel is divided into two categories: general components and individual employee descriptions.

General components include the following:

Organizational chart - roles
Organizational chart – employees
Corporate culture
Corporate code (‘corporate constitution’, ‘internal corporate legislation’)
Basic compensation principles

Individual employee descriptions include the following components:

Areas of responsibility (business constructs, business activities, key value factors)
Individual plans (including individual objectives, ‘products’ to be produced and delivered, activities, and performance measurements)
Vertical and horizontal interactions
Individual compensation plan
Professional requirements (knowledge, experience, abilities, etc. required for successful carrying out one’s responsibilities)
Personal requirements (abilities, character traits, etc. required for successful carrying out one’s responsibilities)
Professional profile (education, abilities, experience, accomplished projects, career history and aspirations, professional evaluations, etc.)
Personal profile (personal qualities and interests, abilities, character traits, etc.)
Professional development program (education, training, career development, etc.)
Personal development program

Defining Business Knowledge & Information System

Data, information and Knowledge

Today’s business is rapidly becoming more and more knowledge-intensive. It means that business knowledge is becoming more and more important financial value factor. Therefore, proper management of business knowledge becomes a matter of strategic importance for prosperity and often even the survivability of business enterprise.

Naturally, effective and efficient management of business knowledge requires proper definition of both the concept of business knowledge and its substance – knowledge proper.

The first step in defining and describing business knowledge is the proper definition of the concept of business knowledge which, in turn, requires a proper distinction between data, information and knowledge.

Data is the elementary piece (‘atom’) of information, such as the last or first name of an employee, zip code, etc. Information is a structured collection of data that has a distinct meaning, such as employee or transaction record. Knowledge is information that allows to make decision and/or perform action which creates additional value – functional, financial and emotional – compared to decisions and actions possible without this knowledge.

In other words, information and knowledge management system of a business enterprise has to be structured along the following line (sequence of steps):

Data ® Information ® Knowledge ® Decision/Action ® Additional Value

Naturally, design (engineering) of knowledge/information system has to follow exactly the opposite direction – first, one needs to determine decisions and actions required for accomplishment of business objectives, then – knowledge required to make these decisions and perform these actions, then – information required for obtaining this knowledge and, finally, data that constitute the required information.

Classification of Business Knowledge

Business knowledge can be either internal (describing internal business environment) or external (describing external business environment). From another important standpoint, business knowledge can be classified as either tangible (printed or electronic documents residing in the business information system) or intangible (residing “in the heads” of employees).

Description of the intangible knowledge was addressed in the previous section of this article and the description of tangible knowledge includes the following key components:

Users (consumers) of business knowledge, both internal (employees) and external (business stakeholders)
“Metaknowledge” (contents) – description of each ‘knowledge item’ required to perform business activities and to achieve business objectives
Documents – structured (typically into tables or similar structures) and unstructured – that contain business knowledge
Structured data – data stores (repositories), data banks, databases and database tables that contain information and data required to produce and manage documents containing business knowledge
Procedures for generating, collecting, structuring, storing, evaluating, disseminating, etc. of data, information, knowledge and documents
Platforms and technologies – corporate standards for hardware, software and information management
Software – electronic tools using for processing data, information and knowledge
Hardware – computer tools using for processing data, information and knowledge
Individual workstations – detailed description of each individual electronic workstation of each employee, including required knowledge, processing tools, documents, etc.

Four Stages in the Business Engineering Process

Due to the complexity of business engineering system, it is quite obvious that business engineering can be successfully accomplished only by using modern electronic (hardware and software) tools. At the same time, it is important to provide users of BE products – management and employees – with easy-to-use models and other ‘deliverables’ of business engineering in the shortest possible period of time to ensure rapid creation of value – functional, emotional and financial and a high return on investment into BE project.

Therefore, the most effective and efficient method of conducting business engineering is to break the whole project into four stages, the distinction between which being mostly in the degree of integration between BE components (this method can be rightfully called Rapid Business Engineering Technology - RBET).

At the first stage, different business components are engineered and used separately using mostly standard Microsoft Office components – Word, Excel, PowerPoint, Project, Visio, Outlook, Exchange, etc. as well as tools of Enterprise Resources Planning (ERP) and related systems with little or no integration between these components (more precisely, between models of these components).

At the second stage, separate business components are integrated using standard Microsoft Office integration tools – hyperlinks – without developing a separate integrating tool (portal).

At the third stage, business engineering team (see next section) creates a separate system – Business Engineering Portal (BEP) which provides a much more efficient and convenient facility for integrating business components than simply using hyperlinks of Microsoft Office and compatible systems.

At the fourth stage, business engineering team creates a software tool – Business Engineering Toolbox – used to maintain and enhance BEP and make necessary changes in the whole system of BE products to adapt business to changes in the external environment of business.

Business Engineering Committee & Team

As external business environment constantly changes (in today’s business environment there is nothing permanent except change), business has to be able to keep pace with these changes in order to achieve its fundamental objectives regardless of changes in the external environment. Hence, business needs not only to be engineered once, but permanently re-engineered.

Which automatically calls for the establishment of business engineering (or re-engineering which in this context is essentially one and the same thing) infrastructure. And, naturally, the most important part of BE infrastructure is personnel structured into two groups – Business Engineering Committee and Business Engineering Team.

Business Engineering Committee is responsible for setting the most fundamental objectives, methodologies and guidelines for business engineering and re-engineering. It consists of top managers of the company and reports directly to the Board of Directors of the corporation.

Business Engineering Team consists of business engineering professionals (either internal staff or outside consultants) typically having their principal professional experience in investment banking (corporate finance) and/or strategic management consulting (as only these two professional occupations require the professional to develop an integrated approach to business analysis and design) and ‘functional specialists’ – in marketing, finance, operations, etc. brought in to help in engineering of corresponding business elements.