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Stathis Gould  | 

The business model is a pivotal component of Integrated Reporting (IR). An increasing number of organizations are recognizing this and finding innovative ways to integrate the business model into their reporting and disclosure.

Business Model→ Integrated Report

The first challenge is to understand what a business model is, particularly in the context of (IR). The Business Model, Background Paper for (IR) established a definition of “business model” that was adopted in the <IR> Framework (December 2013):

An organization’s business model is its system of transforming inputs, through its business activities, into outputs and outcomes that aim to fulfil the organization’s strategic purposes and create value over the short, medium and long term.

This definition may at first glance seem sterile, but a growing number of examples demonstrate how it is being used to succinctly communicate those capitals (or resources) that the organization draws on as inputs to its business activities, and how these are converted to outputs (products, services, by-products, and waste), which ultimately lead to outcomes in terms of effects on the capitals and stakeholders.

The ultimate goal is to provide users with insight on the ability of the business to adapt to changes, for example, in the availability, quality, and affordability of inputs, and how these changes can affect the organization’s longer-term viability.

The potential for the business model to enhance narrative reporting is now being recognized by regulators, as evidenced by new requirements in various jurisdictions. For example, in the UK, Blacksun’s research, The Concise Strategic Report Paradox: Longer But More Insightful, tracks the reporting trends of the first 20 companies in the FTSE 350 that have been required to issue a Strategic Report under the new Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. This research shows an upsurge in business model reporting with 60% of companies providing either new or significantly developed business model disclosures.

The Australian Securities and Investments Commission has also included the business model in two of its Regulatory Guides: 247, Effective Disclosure in an Operating and Financial Review, and 228, Prospectuses: Effective Disclosure for Retail Investors.

What Does Good Business Model Reporting Look Like?

Although business model reporting is on the increase, it is a long way off from being a mature practice. We are now in an experimental phase with organizations trying different approaches (see examples below). The (IR) Framework provides a way to help make business reporting more consistent in its overall approach across organizations, and more connected with the other elements of integrated and narrative reporting.

The Association of Chartered Certified Accountants (ACCA): Global professional body of 590,000 members and students  

2012/3 Annual (Integrated) Report (online)

  • The business model diagram follows the (IR) Framework with some useful customization. It clearly illustrates how ACCA delivers its focus on developing a global supply of professionally qualified accountants, and the outcomes it seeks to achieve.
  • Key resources are set in the context of societal inputs and considerations.
  • Value-adding activities are linked to specific outputs and outcomes, which are then linked to a wider societal benefit.
  • The business model narrative is closely intertwined with the strategy and funding model, and the measurement of ACCA’s 12 strategic outcomes.

ENI: A major energy company active in more than 90 countries with around 78,000 employees

2012 Annual (Integrated) Report (see Business model)

  • The business model diagram and narrative provides an overview of the main elements of a complex integrated energy company that focuses on strategic assets and drivers along the entire value chain, and highlights the company’s principles for delivering sustainable value.
  • The approach shows how the company effectively operates as a whole before drilling down into different organizational parts.
  • The business model discussion is closely associated with the narrative on the strategy and the integrated risk management model, as well as challenges in the competitive environment. There is also a clear explanation of how governance structure supports creation of long-term value.

(Additional analysis available in Strategic Finance,Redefining Corporate Accountability Through Integrated Reporting,” August 2013)

Coco Cola Hellenic Bottling Company (HBC) S.A: The world's second-largest Coca-Cola anchor bottler

2012 Integrated Report (see HBC AG Business Model, p. 10)

  • The business model diagram and narrative shows:
    • HBC’s capitals, the resource dependencies for its product portfolio, how value is created within bottling and distribution, the key statistics relating to its distribution, sales and customers, and the value shared with consumers, society and shareholders; and
    • The part of the value chain over which Coca-Cola Hellenic has direct control and how it extends at either end where HBC has less influence, but has the ability to share the value created.
  • The business model provides the basis for a review of strategic performance that includes a chief executive’s review, a discussion of the organization’s strategic framework and related financial and non-financial key performance indicators, and market context.

Potash: World’s largest fertilizer company by capacity

2012 Integrated Report (online)

  • Potash uses an interactive business model diagram to highlight its five goals and strategies covering financial health, supplier of choice, community engagement, engaged employees, and no harm to people and environment (which can be loosely related to the capitals or resources upon which the company depends)
  • The graphic explains each of these goals and links are provided to the key aspects of performance that are measured against each goal.

Transnet: Wholly owned by the Government of the Republic of South Africa and is the custodian of the country’s freight railway, ports, and pipelines infrastructure

2013 Integrated Report (see pages 8-11)

  • Transnet brings together its business model with a narrative on how it creates value for various stakeholders.
  • Using the six capitals approach in the (IR) Framework, Transnet relates how investments in these capitals have led to various economic, social, and environmental dividends.
  • The narrative on how Transnet creates value is concise and supported by a graphical representation that leads to a description of the business model, which is a breakdown of the operating divisions that drive sustainable value.

Unilever: A multinational consumer goods company

Annual Report and Accounts 2012 (see business model, p.9)

  • Unilever’s narrative on its business model is rooted in its business strategy document, “the Compass,” which sets out a strategy and business model for the achievement of sustainable growth.
  • The business model is described in the context of how its key inputs, brands, people, and operations, lead to an ultimate goal of sustainable living. The business model is therefore clearly linked to its “Sustainable Living Plan,” which highlights how it intends to create “a virtuous circle of growth” in terms of profitable volume growth, cost leverage and efficiency, and innovation and marketing investment.
  • A simple graphic connects these elements together. The key elements of the Sustainable Living Plan are then set out including the goals and targets it has set in various key areas of performance.
Five Things to Consider in Your Business Model Reporting

1. Show you understand your business model and what’s needed for resilience—Business model reporting needs to go beyond a simple organization profile (in the (IR) Framework, organizational overview is a distinct content element). The usefulness of business model reporting resides in the interconnections between the capitals (or resources), and how the organization’s business model creates sustainable value. Business model reporting is an opportunity to demonstrate an understanding of the business model(s), its dependencies, and how it might need to adapt in the future.

2. Demonstrate value though interconnections and links to other (IR) content elements— Business model reporting is enhanced if given in the context of the holistic value creation process (see p. 13 of [IR] Framework). This requires presentation and structuring of the narrative that highlights critical connections and linkages. In particular, business model disclosures require close linkages between the external environment in which the organization operates, its governance, strategy, mission and vision, and opportunities and risks. Specific disclosure relating to the business model alone may be insufficient in addressing all material factors in the value creation story.

3. Understand and identify trade-offs—Describing how capitals or resources interrelate and where trade-offs lay is not easy. Focus on material factors that influence value creation over time using quantification where possible supported by a narrative.

A trade-off can be between capitals or between components of a capital. For example, creating employment increases human capital and helps local economies, but this might be achieved through an activity that negatively affects the environment and therefore decreases environmental performance and natural capital (such as coal-based energy production).  Supplementary disclosure approaches can also be useful in communicating impacts, and risks and opportunities for sustainable value creation. For example PUMA’s environmental profit and loss account, which quantifies and values a range of environmental impacts, helps to indicate how the company is reducing these impacts through the product and process innovation in which it has invested.

4. Determine which business models need to be highlighted—Larger diversified organizations need to be clear on what level they describe the business model. A narrative might be needed on both the business model of the organization as a whole, and how value is created at the aggregate level, as well as on the different business models for various parts of the organization. A distinct consideration of each material business model can be enhanced by a commentary on the extent of connectivity between the various business models.

5. Ask yourself critical questions to help frame a useful business model narrative—To ensure effective business model reporting, break down the business model narrative into its constituent parts and consider questions like:

  • What are the impacts of key external factors upon the organization?
  • What is the organization’s positioning in the value chain and the markets in which it operates? Do we need to report multiple business models?
  • What does the organization rely on in terms of the capitals? Business models create value through the conversion of these capitals, resources, and capabilities.
  • What does the organization do to create value for customers and other stakeholders, and thereby for providers of financial capital? It can also be useful to highlight initiatives influencing the effectiveness and efficiency of business activities such as process improvements, innovation, or employee training.
  • What are the organization’s desired outcomes, and how do they link to value creation? Outcomes can include external impacts that flow beyond the organization and its customers, and can be economic (e.g., taxes paid, employment created), social (e.g., reducing poverty), and environmental (e.g., emissions). Some organizations focus on how they their contributions in these dimensions are net positive (see my earlier Viewpoint, “Innovative Organizations: Becoming Net Positive”).
Stathis Gould

Director, Member Engagement and PAIB

Stathis Gould is responsible for IFAC member engagement and leads IFAC’s advocacy for professional accountants working in business (PAIB) and the public sector. A key element of his work is developing thought leadership and guidance in support of enhancing the recognition of and confidence in professional accountants as CFOs, business leaders, and value partners in the context of sustainability/ESG, data and digital transformation, and other emerging business trends and issues.

Before joining IFAC, Stathis worked at the Chartered Institute of Management Accountants (CIMA), where he was responsible for planning and overseeing a program of policy and research that promoted and developed management accountancy. Prior to serving the accountancy profession, he worked in various roles in the private and public sectors in the UK. There, Stathis delivered financial and performance management in the National Health Service and worked for a technology company responsible for delivering the localization of software and content across the globe.

Stathis holds a BA in European Business Studies, an MBA (with distinction), and a postgraduate certificate in Environmental Management, Economics, and Policy. He is a member of the Institute of Management Accountants.