Include “Business Model Review” as a New Year Resolution
Forget the Profit & Loss Statement (P&L) and Cash Flows – for just 30 minutes. Assess the key drivers of your business model that make you stronger or weaker than your competitors at creating, delivering and capturing value. In this article, we will present a tool to simplify your task – it’s been refined for 15 years by senior managers with responsibility for brands and P&Ls in both startups and multinationals.
Written by Tony Singarayar & John Aceti, Founding Partner & Vice President, Analogy Partners
We’ve been studying business model innovation seriously from 1997. For the first several years, even though we were convinced this topic had fundamental importance to innovation and growth, it was hard to get much attention. Then, in 2007, a landmark IBM Global CEO Study changed that with this statement: “Business model innovation matters. Competitive pressures have pushed business model innovation much higher than expected on CEOs’ priority lists.” The truth is that even today, many companies worry too much about commoditized products and worry too little about commoditized business models. They invest too much in product innovation that delivers notoriously unreliable results, and too little on business model innovation that can deliver compelling gains for relatively small investments – so they use almost identical business models as their competitors, which guarantees that they will struggle to find new growth paths, struggle to increase prices, and struggle to improve profits. Over the years, we have gathered convincing evidence that business model innovation delivers better Returns on Investment than product innovations alone.
Having weakness in these 6 “Cornerstones” is like having a house built on a shaky foundation.
To deliver reliably superior performance than the competition, you must be better at some of the 6 Cornerstones of your business model (Cornerstone: The chief foundation on which something is constructed or developed. Something that is essential, indispensable, or basic. Source: Dictionary.com viewed Dec 4, 2012) . We isolated these 6 as the key causes of success or failure in hundreds of business models for over 15 years. Having weakness in these 6 “Cornerstones” is like having a house built on a shaky foundation. It may look good initially, but won’t stand up for long.
What makes your business model better or worse at creating, delivering and capturing value, is whether you have superiority in:
- Your Value Proposition (which is driven by 2 Cornerstones – your Product/service, and Revenue/Pricing/Profit Model),
- Your ability to Generate Demand for your Product/Service (which is driven by 2 Cornerstones – your Brand/ Customer relationships, and your Professional/other Influencer relationships),
- Your ability to reliably Serve the Demand (which is driven by 2 Cornerstones – your Manufacturing or other Sourcing, and your Distribution Channels).
Figure 1 is an illustration of the strengths and weaknesses a business model using the Cornerstone Assessment in this article. It shows 3 Cornerstones (in green) that are much stronger than the competition – Brand and Customer relationships, Revenue and Pricing/Profit Model, and Manufacturing and Sourcing. One cornerstone, Distribution Channel (in red) is significantly weaker than competition and two, Product/Service and Professional or other Influencer Relationships (both in yellow) are about as good as competition.
Figure 1: Depiction of the strengths and weaknesses of a business model relative to competition.
The Cornerstone Assessment below will give you grades for the strength/weakness of each of the 6 Cornerstones of your business model (as in Figure 1). The grades will give you penetrating insights. We’ve been told it’s like having 20:20 hindsight, now.
How to use this business model assessment tool
The process is straightforward.The questions in Step 1 will help you decide whether to proceed to Step 2, which defines how to score (see Figure 2 below). Then, complete the Cornerstone Assessment (see Figure 3) for one or more competitors. Finally, reflect on the scores – they will tell you, very clearly, where you need to act.
How to get make this tool work even harder for you
For a much more interesting and useful result, have other senior managers do the Cornerstone Assessment and discuss their results. They will probably be surprised by the diversity of their scores. If some scores are alarmingly low, don’t worry. Low scores can be improved by implementing Value Accelerators that will strengthen your cornerstones. A “Value AcceleratorTM”is a strategy, tactic, asset or resource that sharply improves performance (analogy has assembled a database of thousands of market-tested Value AcceleratorsTM over a period of 15 years ). We will address them in our next article.
Step 1: Answer these questions
These questions will help you decide whether you should proceed to assess the strengths and weaknesses of your business model. If your business performance is weaker than your competition’s performance, or if you don’t have a clear plan to improve your performance, you probably would benefit from using the tool.
- Who are your top two competitors?
- Are your revenues and profits growing faster than these competitors?
- Do you know how to make your sales and profits grow faster than the competition’s sales and profits?
- If either answer is “no” to either question 2 or 3 above, proceed to the next steps
Step 2: Review the scoring guide
This scoring guide is designed to assess the strengths and weaknesses of each Cornerstone in your business model. The best score possible is a 10. The weakest score is a 1. Consider what each score means before you start the scoring exercise.
Figure 2: use this guide to assign a score for each of the 31 questions
Step 3 : Assess the strengths and weaknesses of the 6 elements (the Cornerstones) that comprise your business model
The next activity is to choose a score between 1 and 10 (using the scoring guide above) for each of the 31 questions in the assessment tool.
Figure 3: A review of the 6 “cornerstone elements” that give build business model strength
How to interpret your scores
There are six subtotals in your scorecard. The first is your Product /service superiority, which can have a maximum possible score of 50 points (5 questions X 10 points each). How many points did you earn for your ability to compete with competitor 1 and competitor 2 based on Product/Service? Similarly, add the points you earned for each of the six cornerstones.
The result of this Cornerstone Assessment provides two valuable insights about your business model
The first is a penetrating view of where you are weak and strong versus key competitors:
- To make this really simple, we use a grade school approach – 90%+ is great, below 50% is an “F” – for the TOTAL Scores of each of the 6 Cornerstones.
- If a cornerstone is weak (i.e. a “D” or “F” grade) it needs help fast, especially if it is critical to your business success. In Figure 1, the Distribution Channel is in the Red zone.
- If a cornerstone gets a “B” or “C” grade, it is in the yellow zone. It is not giving you any sharp advantage vs. competition and you may need to improve it.
- If a Cornerstone gets an “A” grade, it is a key competitive asset. Think about whether you are using it to optimally in your business strategy.
The second insight is the ability to look at the collective power of all 6 cornerstones – i.e. your business model’s overall strength relative to key competitors. To be competitive your business model must be at least as good as your competition in cornerstones that are critically important to your strategy. To be able to deliver superior revenue and profit results, your business model must get “A” grades in one or more of the cornerstones that are critical to your business strategy.
We hope this assessment reveals interesting views of your business model’s strengths and weaknesses.
By Tony Singarayar and John Aceti
About the authors
Tony Singarayar is Founding Partner of analogy. He spent 20 years at Johnson & Johnson, where he developed the business model innovation methodology now used by Analogy.
John Aceti is a Vice President at analogy. He is an entrepreneur and has served in leadership roles for Bio Medical Devices at 3 US National Labs. He holds 26 patents.
About Analogy Partners
Analogy Partners specializes in Business Model design – we have expertise in designing business model innovations to sharply accelerate revenue and profit growth. For over 15 years, we have refined our proprietary toolkit and substantial database of business model innovations. And we have established a strong record of success – we’ve served US and global clients, ranging from startups to Fortune 50 companies, by helping them enter new markets, revamp legacy brands for the digital age, and accelerate revenue and profit growth. We can help you develop an actionable plan to grow your business.