11.01 Business Model Assessment

It is essential that we evaluate our business model regularly – to check the company’s health and that everything is working as expected. The business model assessment allows us to find out when something needs to be adjusted, reducing the risks and improving the chances for a good future.

Why assess your business model?

A good business model at the beginning does not mean that it will work out and remain sustainable forever. The business world is full of companies that started from a great idea but failed along the way.

Leaders must perform assessments to: [Know the business strengths and weaknesses] [Evaluate the team performance] [Establish new goals] [Delegate tasks and responsibilities to the team members assertively] [Increase the market share and cash flow] [Create a plan of action for every weakness or challenge perceived].

It is crucial to define an effective tool to validate business models and analyze, monitor, and improve them continuously.

What Makes Strong Business Models?

1. Desirability: Do your customers want your product/service? You need to test assumptions around customers’ pain, and the solution developed.
2. Feasibility: Can you build and implement the solution? You may check the sustainability and reduce its risks by testing the tech and resources available and the predicted activities and potential partners, thus reducing risks.
3. Viability: Can you earn money? Try to predict the financial aspects of the solution (prices, costs, profits, etc.) to reduce the potential risks and disclose possible opportunities.

There must be tools/metrics to evaluate and assess your business model.

Methodologies for Assessing Your Business Model

Business Model Canvas and SWOT Analysis

Nine building blocks of business model canvas: Customer Segments, Value Propositions, Channels, Customer Relationships, Revenue Streams, Key Partners, Key Activities, Key Resources, and Cost Structure. A SWOT analysis may be used in conjunction with the BMC to provide the basis for marketing strategy and decision-making.

Analyzing Particularly

To analyze the strengths and weaknesses, as well as the opportunities and threats of each block, you must: [Map the business model using BMC] [Score each block from 1 to 10 ‘1 for very weak and 10 for very strong’] [Score each block again from 1 to 10 ‘1 for threat level and 10 for opportunity level’] [Those blocks classified between 1-5 are weaknesses/threats, and those above five are potential strengths/opportunities]

Analyzing the Bigger Picture

The nine blocks of BMC are related and connected, it is imperative that you also assess the BMC as a whole, considering overall SWOT, thus filling out an extra SWOT framework. SWOT analysis helps put everyone in your team on the same page, making everybody understand the business model better, resulting in more effective conversions and better strategic outcomes.

Evaluation Criteria

1. Company’s competitive advantage, which is the result of a company’s unique competencies.
2. Value Network, partners, suppliers, alliances, and trade associations, among others
3. Value Proposition, it defines how the solution delivers value to the customers
4. Set of internal rules and processes that keep the company functioning daily
5. Cost elements represent the cost for the company during the product life cycle
6. The company’s strategy, with its actionable plans and priorities for the future
7. Revenue and pricing considerations

Nice Framework (aims at e-businesses)

1. Novelty: it is how the company keeps renewing, including everything the company can do as a new and never-employed-before approach in the industry.
2. Lock-in: also called switching costs, it is the ability to build a loyal relationship with customers and partners that can not be dissolved in favor of the competition.
3. Complementarities: it is when the company has several product lines, and they complement each other in a way that if the customer buys one, they will want to buy a second one, making a more meaningful purchase.
4. Efficiency: it refers to cost optimization – the bigger the of the transaction, the less cost incurred per transaction.

Four Performance Indicators

1. Efficiency: it refers to the company’s ability to deliver the value proposition to the target market.
2. Uniqueness: describes how novel and unique the premise of the company’s existence is.
3. Fit: how the building blocks connect and complement each other.
4. Profit Boosters: how much the company employs ‘profit boosters’ may increase its returns over the industry average.

Seven Questions

1. How difficult/expensive for your customer to switch to the competition? [Switching costs represent the time/energy/money your customers need to spend if they want to switch from your product or service to another similar one. The higher those costs are, the smaller the chance that the customer may switch to another.] [Examples: Apple/iPod/Nespresso/Razor Blades/Printers and catridges] [Call to Action: can you increase the switching costs without annoying your customer?]
2. How rapidly/easily can you scale your business model? [Scalability defines how easy and quick to grow your business model without increasing the cost base. Software and web-based businesses are naturally more scalable.] [Examples: Facebook, Skype, Uber, WhatsApp, Franchising] [Call to Action: how can you make your business model more scalable?]
3. Can your business model produce recurring revenue? [Recurring revenues have two significant advantages: the cost of sales is only once, and the revenues are repetitive. You can predict how much you will earn in the future.] [Examples: Microsoft, Amazon Prime, SaaS, Printer & Catridges] [Call to Action: how can you increase recurring revenues?]
4. Do you earn before you spend? [The more revenues the company can generate before incurring the costs of producing and delivering value, the better.] [Examples: Dell, Vistaprint, Nike, Warby Parker] [Call to Action: could you earn more before spending?]
5. How much do you get customers to do the work (for free)? [Nothing can be more powerful than getting others to do the work while you earn money.] [Examples: IKEA, Twitter, Facebook, Instagram, LinkedIn] [Call to Action: how can you get others to do more work for you?]
6. How much does your business model protect you from the competition? [A great business model can provide longer-term protection from competition.] [Example: Apple, Amazon Prime Services] [Call to Action: can you redesign your business model that creates built-in protection?]
7. Is your cost structure better than your competitors? [Cutting costs is a widespread practice in the business game, it is more gainful to create value based on your cost structure.] [Examples: Skype, Nike’s Flyknit Shoes, Redhat] [Call to Action: can you transform your cost structure rather than simply trimming it?]

Assessing the Business Model Space

Besides assessing your business model design, you must evaluate your business model space: the whole environment, with its Market Forces, Key Trends, Industry Forces, and Macroeconomic Forces.

Only by mapping out markets/trends/customer needs/competitors, will you be able to prepare your business for innovations, such as new associations, new patterns and patterns, and ultimately new business model ideas.

Industry Forces

Competitors – to identify your competitors and their strengths, ask yourself: Who are my competitors? Who are the dominant players in my sector? What are their advantages/disadvantages? Which customer segments are they focusing on? What is their cost structure? How much influence do they exert on my customer segments, revenue streams, and margins?

New Entrants – to identify new insurgent players and check if they compete with your business model, ask yourself: Who are the new entrants in my market? How are they different? What competitive advantages/disadvantages do they have? Which barriers must they overcome? What are their value propositions? Which customer segments are they focused on? What is their cost structure? To what extent do they influence my customer segments, revenue streams, and margins?

Substitute Products and Services: to identify potential substitutes for your offers, ask yourself: Which products/services could replace mine? How much do they cost compared to mine? How easy is it for customers to switch to these substitutes? What business model traditions do these substitute products stem from?

Stakeholders: to identify which actors may influence your organization and business model, ask yourself: Which stakeholders might influence my business model? How influential are shareholders? workers? the government? lobbyists?

Suppliers and other Value Chain Actors – to identify essential partners for your business and how dependent you are on them, ask yourself: who are the key players in my industry value chain? To what extent does my business model depend on other players? Are peripheral players emerging? Which are most profitable?

Market Forces

Market Issues – to identify critical issues driving and transforming your market from customer and offer perspectives, ask yourself: What are the crucial issues affecting the customer landscape? Which shifts are underway? Where is the marketing heading?

Market Segment – to identify the major market segments, and their attractiveness, and to spot new segments, ask yourself: What are the essential customer segments? Where is the most significant growth potential? Which segments are declining? Which peripheral segments deserve attention?

Needs & Demands – to identify market needs and how well they are served, ask yourself: What do customers need? Where are the most significant unsatisfied customer needs? What do customers want to get done? Where is demand increasing and declining?

Switching Costs – to identify the elements related to customers switching business to competitors, ask yourself: What binds customers to a company and its offer? What switching costs prevent customers from defecting to competitors? Is it easy for customers to find purchase similar offers? How important is the brand?

Revenue Attractiveness – to identify elements related to revenue attractiveness and pricing power, ask yourself: What are customers willing to pay for? Where can the most significant margins be achieved? Can customers easily find the purchase cheaper products and services?

Key Trends

Technology Trends – to identify tech trends that could threaten/improve your business model, ask yourself: What are the major tech trends both inside/outside my market? Which tech represents significant opportunities or disruptive threats? Which emerging technologies are peripheral customers adopting?

Regulatory Trends – to identify regulations and regulatory trends that influence your business model, ask yourself: Which regulatory trends influence my market? What rules may affect my business model? Which regulations and taxes affect customer demand?

Socioeconomic Trends – to identify major socioeconomic trends that are relevant to your business model, ask yourself: What are the key demographic trends? How would I characterize income and wealth distribution in my market? How high are disposable incomes? What are the spending patterns in my market (housing/healthcare, entertainment, etc.)? What portion of the population lives in urban areas as opposed to rural settings?

Societal and Cultural Trends – to identify major societal trends that may influence your business model, ask yourself: Which shifts in cultural/societal values affect my business model? Which trends might influence buyer behavior?

Marco-Economic Forces

Global Market Conditions – to identify current overall conditions from a macroeconomic perspective, ask yourself: Is the economy in a boom or bust phase? How is general market sentiment? What is the GDP growth rate? How high is the unemployment rate?

Capital Markets – to identify current capital market conditions and relate to your capital needs, ask yourself: What is the state of the capital markets? How easy is it to obtain funding in my particular market? Is seed capital/venture capital/public funding/market capital or credit readily available? How costly is it to procure funds?

Commodities and Other Resources – to identify current prices and price trends for resources required for your business model, ask yourself: What is the current status of markets for commodities and other resources essential to my business? How easy is it to obtain the resources needed to execute my business model? How costly they are? Where are prices headed?

Economic Infrastructure – to identify the economic infrastructure of the market in which your business operates, ask yourself: how good is the public infrastructure in my market? How would I characterize transportation/trade/school quality, and access to suppliers and customers? How high are individual and corporate taxes? How good are public services for organizations? How would I rate the quality of life?