8
Business Model Analysis

Short Description

A business model has been defined as the "core logic by which a firm creates customer value." Organizations that take leadership positions in their industries succeed by having an outstanding business model and executing it masterfully.

Business model analysis (BMA) provides the tools to quantify the relative strength of an organization's business model to generate economic rents from a product or service. It acts as the link between the social domain, where economic rents are generated, and the creative domain, where products and services are conceptualized. With a detailed examination of the components of the business model, the analyst can determine what in particular makes one business model superior to another, thus creating an effective understanding of the linkage between rents and the raw product or service. However, a business model cannot exist in isolation and must be viewed thorough the lens of competition; it is in this analysis that the superiority of one model over another may be established.

The elements of the business model for companies to consider are the following:

• The value proposition in the positions it adopts.
• The market segments it chooses to serve or avoid.
• Its value chain and the resulting costs from the activities it performs or the resources it employs.
• Its revenue model (or models) and the resulting profit potential.
• Its position and strength in the larger upstream and downstream value network, including competitors and complementors.
• Its competitive strategy and how it seeks to gain a sustainable competitive advantage.

Understanding the elements of a model at a detailed level allows a firm to change it to potentially generate larger economic rents, disrupt competitors, or to use it to competitive advantage.

This analysis integrates the concepts of the value proposition, market segments, value and extended value chains, revenue models, value migration, disruptive innovation, competitive strategy, and economic value.

Background

Business models have existed since humans first traded goods in barter and have evolved to provide the means to deliver and capture superior customer value. The oldest model still used today is the shopkeeper model. It involves setting up shop where customers are likely to be and displaying a good or service for sale.

Business models evolved from the "single-celled" shopkeeper model to more readily deliver customer value and capture revenue. Such "multi-celled organisms" can be observed with tied products, such as the razor and blades model attributed to King C. Gillette, where the razor is sold at a low price and the blade is sold at a significant premium. This model is used today to sell not only razors and blades, but also items such as ink jet printers/cartridges and cell phones/air time. Other models leverage consumer density to deliver value—the telephone is an example of a network efficiency model where the value provided to customers increases with the number of subscribers. Other well-known models include a subscription business model, trade associations, co-operatives, and franchises, which all may be classified as "collective" business models.

The old style auction has embraced technology and is now conducted online with providers like eBay, resulting in an immense increase in the number of potential buyers.

But these models, if carefully considered, describe more how a firm will generate revenue—there is no market segmentation inherent in them.

Other examples of recent business model innovations are: McDonald's in the 1950s with their "Speedee Service System" for hamburgers; Toyota with its introduction of a sub compact, the Datsun, to the North American market at a time when American cars were big; and Wal-Mart in the 1960s, which provided branded high-quality products at discount prices in small towns. The 1970s saw new models from Toys "R" Us, which disrupted existing toy departments and discount department stores. The 1980s saw Dell and Intel introduce their business models, and in the 1990s, we had eBay and Amazon.

New business models are being introduced with great frequency, such as the technology of voice over Internet protocol (VOIP or voice over IP), which delivers telephone calls using the Internet, and threatens traditional telephone companies and their associated business models. Numerous carriers are competing for VOIP business offering to carry voice calls across the Internet for a fraction of the cost of the traditional switched networks. However, as magical as this technology seems, its widespread implementation will only succeed when a firm leveraging this technology as a disruptive force adopts a viable model. These introductions represent more than just the emergence of new competitors—the new concepts and new technologies embodied in these models will disrupt existing business.

The examples discussed previously represent only a small sample of well-known business models and represent a fraction of those in use today. Each successful new model has found a way to deliver greater value to customers and, equally importantly, successfully capture that value for the firm. Business models are not static constructs but undergo frequent changes in response to competition, the macro environment, and the introduction of new models.

The end of the twentieth century saw the rise of business models that leveraged technology offered by the Internet. These dot-coms were virtual companies, many existing only in cyberspace. Others followed what was known as a "bricks and clicks" model. Companies that used the bricks and clicks model had a physical location but looked to the Internet as another channel to generate sales.

The twenty-first century ushered in the "dot-com bust," where thousands of companies that described their business model as being "Internet-based" simply ceased to exist, in turn losing billions of dollars in venture capital. The pundits and the media told us that the old rules did not apply to these dot-coms. Stock valuations with price to earnings multiples that were unheard of 10 years previously were okay because of the rules of the "new economy." Critical examination of the models of "Internet" companies was often poor, with attempts at separating the "model" from "strategy." In fact, there was no alchemical transmutation to change the laws of business. The pundits were wrong! Until the dot-com bust of 2000/2001, the term "business model" was poorly understood and poorly applied.

Since then, academics and researchers have worked to understand, analyze, and clarify the definition of business models and study their respective components.

Strategic Rationale and Implications

The dynamism of the business world must be translated to the model for a firm to remain in a leadership position. Technology disrupts existing businesses, markets, and the macro environment. New business models are a source of disruption as well. These disruptions can be harmful not only to existing firms, but to entire industries and even nations. The model a firm uses must adapt to meet the challenge of competition and the opportunities and threats posed. It must also provide the means for a firm to act on opportunities and leverage strengths. A superior business model will allow the firm to maintain or gain a leadership position in its industry, while an inferior model can spell disaster—hence, it is imperative to understand the relative strengths and weaknesses of the firm's own business model through the lens of competition.

This analysis allows the firm to determine its value proposition, targeted market segments, value chain, relative position in the value network, and revenue model and place it in a superior position to deliver value to the customer. The firm can determine if it has a temporary or sustainable competitive advantage with its model and if the model lends itself to delivering factors critical to the firm's success. Moreover, the same analysis applied to a competitor's model will provide a broad understanding of the competition's strengths that can be neutralized and weaknesses that can be leveraged.

The Business Model

Definitions of business models range from "an organization's core logic for creating value" to "a story that explains how an enterprise works." Some researchers consider how the pieces of a business fit together, but these approaches typically lack the critical aspects of strategy, which considers competition. Others view the business model as the missing link between strategy and business processes. Alan Afuah¹ provides a more complete definition of a business model, as follows:

"A business model is the set of which activities a firm performs, how it performs them, and when it performs them, as it uses its resources to perform activities, given its industry to create superior customer value and put itself in a position to appropriate that value."

There is, however, no real consensus of what a business model and its components are. The purpose of every business is to satisfy a customer's need. This can only be done by looking at the business from the outside—from the point of view of the customer and the market.

Chesborough and Rosenbloom² proposed the definition of a business model as a link between products, services, and economic rents earned by the firm utilizing the model. They propose that a business model incorporates the following six elements:

1. Value proposition—The value of the product or service from the customer's perspective and how the product addresses customer's needs.
2. Market segment—With the recognition that consumers in different segments have diverse needs and will value the product or service in distinct ways, the value may only be unlocked if the right segment is targeted.
3. Value chain and cost models—This is the structure required to create and distribute the product or service and the resulting cost models from performing activities and utilizing resources to deliver its value proposition to its target market.
4. Revenue models—The revenue model and resulting profit potential.
5. Value network—This is the firm's position in the chain linking upstream and downstream activities to the final consumer of the product. It should include suppliers, competitors, complementors, and other downstream activities.
6. Competitive strategy—How the firm seeks to gain a sustainable competitive advantage.

Figure 8.1 defines the various elements of a business model and how they fit together. It considers competition, or the relative ability and activities of the firm to create and deliver superior value in satisfying a customer need or want, and it should justify the financial capital needed to realize the model.

Figure 8.1 The Business model
Source: Adapted from Chesborough and Rosenbloom. "The role of the business model in capturing value from innovation: evidence from Xerox Corporation's technology spin-off companies," Industrial and Corporate Change, Volume 11, Number 3, pp. 529–555.

Chesborough and Rosenbloom contrast the business model to strategy and suggest that there are three distinctions, as follows:

1. A business model's focus is on creating and capturing value. It seeks to define how that value will be created and the structure and method by which it will be captured. The strategic layer goes further by attempting to define how a firm seeks to generate a competitive advantage.
2. A business model is a construct for converting the product or service into economic value, but it does not consider how to deliver that value to the shareholders that must be considered by the strategic layer.
3. Strategy depends on knowledge of the wider environment the firm is to operate in. The business model does not require such knowledge and requires only a limited understanding of its surroundings. From a practical perspective, the business model needs to understand its target market and the web that makes up its value network.

Classification of Business Models

Business models occur in an inestimable variety of shapes and sizes: One small disparity between two models—for example, with the target market and the value proposition—and they become substantially different. Extensive research has been directed at classifying the vast array of existing business models. With the boom of the Internet economy, one focus has been classifying models that use the Internet; another has attempted to determine if one business model sharing a set of common characteristics is superior to another.

Two general approaches to model classification can be found. The first approach attempts to group like models based on a set of shared characteristics. The resulting structure is most often a two-dimensional construct: with position in the value chain, source of revenue, core profit-making activities, pricing policy, value integration, degree of economic control, and others being considered along x and y axes. Following are two examples of such schemes.

Timmer's³ 11 e-business models use the degree of innovation and the degree of integration as the characterizing dimensions, describing architecture for the product, service, and information flows.

Linder and Cantrell⁴ propose a classification scheme based on a model's core profit-making activity and its relative position on the value chain. Linder and Cantrell's scheme is broader in scope and does not limit itself to e-models.

In determining the superiority of one business model concept over another, Linder and Cantrell concluded there is "no silver bullet," and one model in their classification system was not superior to another. Researchers from MIT classified models based on the type of asset and the rights to the asset being sold. Their classification and analysis of the 1000 largest U.S. firms along those dimensions state, "some business models do indeed perform better than others." The results from researchers are mixed; however, we do know some firms consistently produce better results than others in the same industry—for example, Southwest in the airline industry and Bristol Meyers Squibb in the pharmaceutical industry. In general, the profitability of a firm is determined by both firm- and industry-specific factors.

Figure 8.2 E-business models
Source: Adapted from Timmer's Classification Scheme (1998).

Figure 8.3 Operating model framework
Source: Adapted from Linder, J., and S. Cantrell (2000), "Changing Business Models: Surveying the Landscape," Accenture Institute for Strategic Change.

BMA provides a means for bridging the gap between a firm's prosperity and its products and services. For some firms, familiar business models cannot be applied, and new models must be devised. Adapting the models themselves serves to change the economic value of the products or service. In fact, changing any one of the elements of a model serves to change the economic rent derived from the good or service. Take, for example, the segment served in the airline industry—the business traveler versus the tourist. Consider the activities in that value chain and the costs and the revenue-generation models. Continental and Southwest have different structures in their value chain, yet they basically start with the same raw material. Their revenue generation models differ. They occupy the same location in the value chain. The various parts of the value net have differing ability to generate economic rents; for example, suppliers of aircraft based on the forces at work in that segment of the value net capture a differing level of economic rent from air travel than the airlines themselves. In order to generate superior rents, the organization must create superior value and avoid commoditization of its supply chain and distribution network to prevent value migration. Finally, competitive strategy determines how a firm creates a competitive strategic advantage over rivals. A superior business model will also ensure the value the firm appropriates from the customer is greater than the costs of the activities undertaken, resources employed, and positions adopted in delivering that value.

BMA provides a holistic framework to combine all the activities of the firm in the pursuit of competitive advantage and to maximize the value delivered to the targeted customer. It then becomes possible to deliver superior value propositions to the target market and receive higher prices for the product or service delivered.

The Dow Jones Industrial Average (DJIA) was introduced in 1896 to create an index from the leading firms of the day. Only one firm has survived to this day—General Electric. The mortality of firms is well understood, estimates for first-year failure is an astonishing 70–80%; however, more interesting is the fall-out rate from the S&P 500 and the Fortune 500, which is estimated to be between 2–6%. This effectively means that between 10 and 30 companies depart their leadership positions every year. Innovative business model introductions have caused the disruption of established firms. Kmart, whose business models sustained it for 103 years, filed for Chapter 11 bankruptcy protection early in 2002. Railroads, which were the basis of the Dow prior to the turn of the twentieth century, are minor players today. They saw their value migrate to other forms of transportation and their value proposition diminish along with their leadership positions.

In 1994, Japan had 149 corporations listed in the Global 500 with $3.8 trillion in total revenue; this fell to 82 corporations with $2.2 trillion in total revenue in 2004. This indicated that the business models they employed no longer allowed them to occupy leadership positions. In the same timeframe, 1994 to 2004, the total revenue generated by the Global 500 increased from $10.3 trillion to $14.9 trillion. The inability to adapt business models to changing competitive and macro-economic conditions can spell disaster for firms, industries, and nations.

As a result of this history, there are two subtly distinct philosophical directions regarding business models. Christensen and Raynor⁵ focus on technological evolution disrupting business models. Mitchell and Coles⁶ suggest, "Improved business models will replace technology as the most frequent and most powerful source of business disruptions." This is a powerful proposition—where the business model itself becomes a competitive weapon. It stands to reason that the ability to modify or construct a business model to disrupt competitors and avoid disruption can provide a significant advantage to a firm.

BMA will determine the viability of any business model for any type of concern, including those organizations using multiple business models. Those organizations that do engage multiple models will benefit by understanding which part of their business is driving revenue and which models need improvement. Additionally, conducting a BMA will allow a firm to understand its weaknesses and extend its advantages. BMA may also be used to disaggregate a competitor's position and understand where it is most vulnerable.

Strengths and Advantages

Comprehensive

BMA verifies the relationship of the firm's model—that is, its strategy, positions, activities, and resources—to the larger macro-environment, the industry, and its competitors. The value delivery mechanisms of the firm and their interaction with the customer and the environment are made evident with this analysis. BMA provides a comprehensive approach beyond strategic and operational effectiveness in describing why a firm is profitable or unprofitable.

Detailed Understanding

BMA allows a detailed understanding of the advantages and disadvantages of the firm's value delivery systems. This understanding makes it possible to modify part or all of a business model to create a competitive advantage. Those firms employing multiple models in multiple industries can quantify their relative strengths.

As a corollary, it is possible to examine the relative position of competitors by using BMA and to use the insights from this analysis to disrupt their business models.

Integration of Value Delivery Mechanism

BMA delivers the ability to integrate the value delivery mechanism of the model and charge superior prices for the value delivered. This in turn will lead to maximizing revenue generation and consequently increased profitability for the firm being analyzed.

Innovation

BMA can provide an impetus to innovate within the organization, either with the model itself, the services and products that the firm provides to customers, or along any dimension of the value delivery mechanisms of the firm. Identification of advantages at the target firm or identification of competitor weaknesses could enhance the innovation process.

Weaknesses and Limitations

Disruption from Outside the Industry

Firms may become blind to rivals offering innovative solutions or to those companies that are not considered direct competitors—this is a position detailed by Christensen and Raynor⁷ as the primary means of business disruption. Firms must then consider not only direct competitors, as emphasized in this analysis, but must also avoid being blindsided by firms and industries that are not considered direct rivals.

Innovation

Although this technique may be used to correct business model inconsistencies, it does not necessarily provide the means to innovate and consequently to provide additional value to customers. If a firm defines its leadership position too closely with that of current rivals, it may become a follower by adopting models that are easily duplicated.

Market Orientation

This technique will only be useful to a firm that has a market orientation. It is irrelevant for a firm that is producing a product and trying to sell it by targeting a heterogeneous market with a homogeneous marketing strategy.

Process for Applying the Technique

Step 1: Articulate the Value Proposition

Value is determined by the customer—the firm needs to define the product or service it will provide and the forms in which a customer may use it. The value proposition will change depending on the target market specified, and there may be an iterative process between Steps 1 and 2, with a different proposition specified for each target segment.

The firm, through its value proposition, may choose to position its products or services as low cost, differentiated, or niche-focused.

Low-cost provider strategies work best in cases where:

• Price competition is especially vigorous.
• Competitive products are essentially identical.
• There are few ways to achieve product differentiation that are meaningful to buyers.
• Buyers incur low switching costs.
• Buyers are large and have significant power to bargain down prices.

Differentiation allows a firm to command a premium price for its product and/or increase unit sales. A firm can employ several differentiation themes; these can be based on product features, although they are the easiest for competitors to copy. Differentiation themes that are difficult for competitors to copy can provide a sustainable competitive advantage. Bases for differentiation that are more difficult to imitate include the following:

• Brand name or reputation. Coke, for example, is the best-known brand in the world.
• Where the good or service is available. An extensive and well-configured distribution network makes the product widely available to customers.
• Extreme positioning in levels of quality or delivery—a six-sigma or beyond level of quality may be difficult to imitate.

The situation may be complicated by the fact that a firm supplies multiple products or services, and the question is whether the firm is operating multiple models or a single model.

Consider the case of a bicycle shop: The basic business of this shop is to retail bicycles, accessories such as clothing, and bicycle parts, and to service bicycles. Bicycle service may account for 35–50% of revenue. Should this bicycle shop be considered two distinct businesses, a service business, and a retail business? Or is it a single business model with a sustainable competitive advantage in service over an online retailer who sells bicycles and accessories? What about General Electric, which is in the business of supplying power systems as well as aircraft engines? The technology in these two industries may well be transferable, partially answering the question: "Why are we one business?" However, the question of disaggregating a business model is best answered from a customer's perspective. A customer for a bicycle would definitely consider how their bicycle would be serviced when making their purchase decision.

The customer, in defining value, also provides guidance in the consideration of models. If the customer sees the business offering as a whole, the separate activities undertaken by a firm should be considered as sources of advantage, or where they are not offered, and should be, as sources of disadvantage.

Step 2: Specify the Target Segment

Unless the firm is a very specific niche player, it may serve multiple segments of the market, and it may need to specify the changing propositions for each segment it chooses to serve and from whom it will derive economic rents. Quite often, a business provides more than one service or product; our bicycle shop, for example, provides bicycles, clothing, accessories, and service. For somebody seeking to purchase a new bicycle, these may be viewed as a bundle of services offered by the whole firm, and the proposition presented to them may be quite different than to an individual already owning a bicycle who wishes to have it serviced.

Segments can be broken down broadly by: (a) customer characteristics unrelated to the product, generally known as demographics (i.e., geographic span, socioeconomics, etc.); and (b) product and/or service-related approaches that define user types, usage, and benefits generally known as psychographics. The analyst should pursue a detailed analysis of each market segments served by the firm—additional examples of segmentation bases are widely available⁸—and tie the value proposition to customers who may desire different aspects of the product or service.

The objective is that customers' needs must be understood, along with their growth potential; for example, with airline flights, business consumers demand frequent, inexpensive flights with minimal delays, no lost baggage, and polite courteous service. If a customer's needs are not well understood, analytical tools using customer focus groups, Kano model analysis, or quality function deployment (QFD) may be especially useful.

Step 3: Determine Competitors

A firm exists within its industry because it serves those customers who see its value proposition as superior to its competitors. Typically, firms serving the same customer segments with the same product or service are perceived as "the competition." These firms will occupy a similar position along the industry value chain and may have similar resource characteristics. However, there may be firms that provide substitute products; companies that operate in niche markets; and suppliers or customers that have a credible threat of forward or backward integration. Firms that cause companies to forfeit their leadership positions are rarely obvious and do not attempt to compete directly against established rivals; instead, they find new ways to deliver value to customers. Firms often surrender segments that have become unprofitable due to commoditization and later discover that those same competitors have moved up the experience and learning curves and now threaten another segment. Interviews with customers and sales staff and systematic, regular competitor analysis conducted by the firm will help identify current and future competition.

The analyst, after determining who the competitors are, will need to articulate the value propositions of those competitors and the target markets served by those firms.

Step 4: Evaluate the Value Chain and the Cost Model

With the ultimate goal of delivering value to, and capturing economic value from, the customer, it is imperative that the value chain be understood. To deliver the right value to the appropriate market segments, price it correctly, and position itself properly, a firm must undertake a specific set of activities. Using value chain analysis,⁹ these activities can be analyzed to identify which step or steps provide economic advantage.

A value chain identifies a series of activities that must be undertaken to transform inputs into a product or service delivered to customers. Figure 8.4 identifies the activities of a classic value chain.

Figure 8.4 Classic value chain

On the other hand, a customer-focused activity value chain (AVC) emphasizes the activities that a firm engages in to learn about customer's needs and the work required with customers in design, development, delivery testing, and installation of the product or service. This type of value chain is better suited to firms that provide intangible products or services. The two value chains are complementary, and both may be used.

Figure 8.5 Activity value chain
Source: Adapted from Fahey, L. (1999). Competitors. New York, NY: John Wiley & Sons, p. 175.

The classic value chain facilitates an overview of what a firm does to access suppliers, its manufacturing, and service. A firm will pursue activities and employ resources to achieve its desired position and, as a result, will incur costs. Value chain analysis allows the analyst to determine the current advantage or disadvantage of the firm along each segment of the value chain and the resulting cost structure. The customer-focused AVC, on the other hand, identifies all the direct and indirect interaction with customers.

Conduct a classic value chain and/or AVC analysis of the target firm. Compare the two value chains to the firm's direct competitors, as determined from competitive positioning analysis. Firms that are competing using radically different positions may not pursue similar activities. Add the dimension of time to the value chain and AVC for both direct competitors and the target firm if appropriate. Use this analysis to extract where the firm has a competitive advantage or a competitive disadvantage. The time dimension should also include an understanding of experience curve effects.

For the business model being analyzed, determine which resources a firm is leveraging to deliver value to the customer. The resources may be tangible, such as plant and equipment, or intangible, such as patents, brands, or copyrights. They can be human, structural, or based on R&D. A firm's ability to turn its assets into customer value for different market segments is part of its competence or capability.

Using the six asset categories identified in Figure 8.6, evaluate the assets the firm is using. The analyst should look beyond the firm's own assets; it is not necessary for a firm to control or own the assets it leverages in pursuit of its model. Alliances, relationships, and networks may provide an organization with a competitive advantage by using assets that are owned or controlled by another entity. Assets vary between the following five attributes:

Figure 8.6 Asset categories
Source: Adapted from Fahey, L. (1999). Competitors. New York, NY: John Wiley & Sons, p. 300.

• Availability—Not all assets are equally available; capital, for example, is not available in unlimited quantities.
• Specificity—An asset is specific to place, time, and space. An asset physically located in North America may provide little to no advantage in the Chinese environment. The range of application technology is typically limited; for example, technology designed to improve the hardness of rubber tires cannot suddenly be used in electronics.
• Sustainability—Performance, for example, can increase the stock of capital available, and poor quality may diminish the brand of the firm.
• Replicability—Organizational culture, knowledge, and other attributes may be difficult to reproduce. These may provide a source of great competitive advantage.
• Substitutability—Can a given asset be trumped by another asset, thus reducing the value of that asset?

Step 5: Evaluate the Value Network

It is important to consider the value the firm is capable of capturing in its extended value chain or its relative position to its customers, suppliers, and rivals. The relative positioning of a product or service is critical. If a firm produces a product or service that it can supply to only one customer, it will be in an inferior position as its customer will have significant bargaining power.

A firm may have developed a value network that is capable of competing in dimensions where it has not been able to before; for example, Sony, to compete in the game console market, established relationships with both IBM and Toshiba to produce multi-core processor architecture for Playstation in order to compete with the Microsoft-Intel team, who had a clear lead in technical expertise.

This value network analysis should include suppliers, customers, complementors, and competitors.

Step 6: Determine the Revenue Model for the Firm

The ability to appropriate value will depend on the revenue model the business uses. Examples are: a subscription model commonly used with magazines; fee for service commonly used by realtors and agents; direct sales to end users; and so on. It is important to ensure that revenues are greater than costs. Analysis of the firm's and competitors' financial statements over time will reveal if the target firm enjoys an advantage over its competitors.

The revenue model should describe each revenue stream and how each stream brings in revenue; for example, a newspaper may have streams from direct newsstand sales, paper box sales, subscription, advertising, classifieds, and the Internet, and each of these revenue streams will incur a different cost. The evaluation of the revenue model should include an understanding of price compared to the competition, the value proposition, product quality, service, and the value customers perceive in the model.

The analyst should also be able to determine if the revenue/cost model at this stage is superior to that of the competition and is likely to produce better profits. The key here is also profit potential, and this may be determined from actual financial results, although they can be misleading if viewed from a point in time—a firm may not have matured and may be in its startup stage; the more important measure then becomes profit potential.

Step 7: Determine the Critical Success Factors for the Industry

Critical success factors (CSFs) are a limited set of aspects that are necessary to secure and gain a competitive advantage. CSFs represent those areas that are critical to a firm's success, providing a direct link to organizational performance (see Chapter 3, "Avoiding Analytical Pitfalls").

John F. Rockart¹⁰ defined four basic sources of CSFs, as follows:

• Specific industry characteristics—The airline industry, for example, must provide frequent, on-time flights to successfully target business customers.
• Those arising from the chosen strategy of the business—High level of technical service is an important factor for companies seeking to differentiate themselves in the welding industry.
• Environmental characteristics or those resulting from economic or technological change—For example, a telecommunications firm taking advantage of deregulation in the industry.
• Those arising from the internal needs of the firm—An organic structure may be critical to a firm that has to compete in a highly innovative environment.

Critical success factors that relate to position, activities, resources, and costs will be used to determine the strength of the business model. Sources that may be useful in determining CSFs are management tools such as the balanced scorecard and benchmarking. Other tools, such as environmental analysis, industry structure analysis, internal analysis, competitor analysis, or using industry and business experts, are other sources for determining CSFs.

Step 8: Complete an Analysis Grid Detailing Each Element of the Business Model

The objective of this analysis is to detail where in its business model a firm is capable of producing a superior result. To complete the analysis, each element of the business model is placed in a grid, as shown in Table 8.1. Each element is ranked from 1 to 5 (superior) for the target firm and its competitors on an analysis grid.

Table 8.1
Business Model Analysis Grid

This grid should, at a glance, allow the analyst to determine which part of the business model is superior or inferior to its competitors.

Ultimately, the strength of firm's business model will be determined by its ability to convert the product/service domain to economic rents for the firm. The true value of this analysis lies in the ability of the firm to achieve a detailed understanding of the components of its business model and to make improvements in components of the model design. The firm may find ways to innovate along its revenue model, its value chain, or some other element, or disrupt its competition and generate greater economic rents. Because business models are not static constructs, the analyst will find it useful to generate both a current state and future state analysis and to review the analysis on a regular basis.

Case Study: Dell Computer and the Printer Market

Dell Computer has been the darling of the personal computer industry, gaining market share—reported at 18.2% of all units shipped worldwide in 2004—and reporting revenue growth in double digits, outstripping its rivals year after year. Dell is a competitor to IBM, HP, and other firms, not only in computers but also in areas such as printers, storage, handheld devices, and increasingly in consumer electronics.

Dell has entered the low-end printer business using its direct model and threatens market leader HP. Can Dell's printer model propel it to success, allowing it to capture sufficient market share to disrupt HP?

Dell's competitors in the printer market are HP (the market leader), Epson, Lexmark, and Canon. HP by far has the largest share, with 60% of the existing market, Epson has 16% and Lexmark 12%. Dell has approximately 3% of the current market, selling a small number of printers to businesses while its most active market is the home consumer market. HP excels at R&D, rolls out new product lines to remain competitive, and expects to introduce digital printing, which could save corporations up to 30% in costs each year. HP earns 70% of its profits from sales of ink and printers.

Low-cost, high-quality, easy to use, readily available products win in the marketplace, and printers are no exception. However, innovative new printers that produce better pictures, use multimedia cards directly, and interface to other devices also sell. Highly differentiated products as a result of R&D, brand, and widespread distribution appear to be the driving CSFs for the printer industry, and Dell's brand cannot compete with HP's and Lexmark's.

Dell has adopted a low-cost direct sales approach to target business customers, which comprises 80% of its personal computer sales. Dell has licensed products from Lexmark, which it sells under its own brand name, that meet the needs of business customers. HP targets a larger spectrum of business printing with a broader range of products than Dell—for example, high-end color laser printers. Lexmark and Epson, while competing in the same range of products as Dell, offer customers dot matrix printers. HP and Lexmark have strong distribution networks and are readily available.

Dell has a well understood, sustainable competitive advantage along its activity chain that it has utilized to dominate the personal computer industry. Its cash conversion cycle, because of efficiencies, especially in inventory, has improved from minus 18 days in 2000 to minus 36 days in 2004. HP, however, has an advantage in R&D and the ability to launch new innovative products far more quickly than Dell. Dell must work with Lexmark, who manufactures its product. However, Dell could match this R&D capability by acquiring technology from a printer manufacturer and entering the market with product it manufactures directly and sustain its momentum by investing in R&D.

Both companies use the razor and blades model to generate revenue. However, Dell sells using its electronic model, while HP uses conventional distribution, which is significantly more difficult to manage. The advantage must go to Dell here.

Using an abbreviated form of the BMA, analysts can quickly determine where weaknesses or advantages might lie by comparing each element of the Dell and HP printer business models, as follows:

• Value proposition—Dell is competing on price with limited high-end printers available to large business that allows centralized management. It does not provide large printers with robust duty cycles. Advantage: HP.
• Target markets—The result of the value proposition and the product offering is that Dell's active market segment is the home consumer. In 2004, Dell sold some 31,000 laser printers, compared to over 2,000,000 for HP. Advantage: HP.
• Value chain analysis and cost structure—With Dell's value chain and cost structure and the complexity HP has in shipping product across the country for distribution, the advantage lies with Dell here.
• Value network—Dell purchases a number of its printers from Lexmark; however, both have a PC business and make storage devices. Consequently, neither have an advantage.
• Revenue model—Both companies use the razor and blades model, with neither having a significant advantage.
• Strategy—Dell has a sustainable competitive advantage with its revenue model; however, this does not seem to be well aligned in printers with the CSFs for the industry. HP printers are readily available for demonstration at stores and to distributors. Printers, in fact, may not lend themselves to Internet selling or distribution. Advantage: HP.

In examining the BMA grid in Table 8.2, we can see that HP indeed has an overall advantage with its business model, and Dell needs to seek a new value proposition, target market, and strategy if it is going to succeed. The printer market is extremely competitive, characterized by low prices and razor-thin margins. At this point in time, Dell has not been able to penetrate this market aggressively because of issues with its positioning, active market segments, and strategy.

Table 8.2
Business Model Analysis Grid—Dell Versus HP

FAROUT Summary

Figure 8.7 Business model analysis FAROUT summary

Future orientation—Medium. BMA provides a medium orientation, giving the target firm a comprehensive view of its own business model and its integration with the industry and macro environment. This integrated forward-looking view is mitigated by the erosion of customer value by potentially superior competitor offerings, or disruptive industry forces.

Accuracy—Medium. While the analysis is somewhat subjective, its accuracy is determined by the accuracy and skill of the analyst. This has been rated as "medium" but, depending on the quality of the analyst, this can vary.

Resource efficiency—Medium to high. Analysis of a firm can be completed rapidly; the research required and the complexity of tools used are limited. Medium-high resource efficiency should be expected.

Objectivity—Medium. The detailed nature of the analysis, while allowing for some subjectivity, forces structure on the analyst.

Usefulness—Medium to high. The analysis provides a comprehensive view of the business model and an opportunity to correct model irregularities and attack competitor's weaknesses.

Timeliness—Medium. Analysis can be completed readily but contingent on the detail required; in contrast to other analysis techniques, this is high.

Related Tools and Techniques

• Activity value chain analysis
• Competitor profiling
• Competitor segmentation analysis
• Customer value analysis
• Financial ratio analysis
• Functional capability and resource analysis
• Industry analysis
• Kano model analysis
• Quality function deployment
• STEEP analysis
• Strategic funds programming
• Strategic group maps
• Value chain analysis

References

Aaker, D. (2005). Strategic Market Management. Hoboken, NJ: John Wiley & Sons.

Afuah, A. (2004). Business Models: A Strategic Management Approach. New York, NY: McGraw-Hill Irwin, pp. 3, 5, 12, 173–209.

Chesbrough, H., and R. Rosenbloom (2002). "The role of the business model in capturing value from innovation: Evidence from Xerox Corporation's technology spin-off companies," Industrial and Corporate Change, Volume 11, Number 3, pp. 529–555.

Christensen, C.M., and M.E. Raynor (2003). The Innovators Solution. Boston, MA: Harvard Business School Press, pp. 56–65.

Drucker, P.F. (2001). The Essential Drucker. New York, NY: Harper Collins.

Fahey, L. (1999). Competitors. New York, NY: John Wiley & Sons, pp. 172–205.

Fleisher, C.S., and B.E. Bensoussan (2003). Strategic and Competitive Analysis. Upper Saddle River, NJ: Prentice Hall, pp. 104–121, 216–219.

Hjelet, P. (2004). "The Fortune Global 500," Fortune, July, p. 160.

Langdon, M. (2003). "Business Model Warfare: A Strategy of Business Breakthroughs," Innovations Labs white paper, Ackoff Center for the Advancement of Systems Approaches, University of Pennsylvania.

Linder, J., and S. Cantrell (2000). Changing Business Models: Surveying the Landscape, Accenture Institute for Strategic Change (www.accenture.com).

Hermes Newsletter by ELTRUN (The eBusiness Center for the University of Athens), October–November 2002, http://www.eltrun.aueb.gr/newsletters/1/18.pdf, p. 1 (referenced July 17, 2004).

Mitchell, D., and C. Coles (2003). The Ultimate Competitive Advantage. San Francisco, CA: Berett Koehler Publishers, Inc.

National Bicycle Dealers Association, "Industry Overview," http://nbda.com/site/page.cfm?PageID=34 (referenced July 13, 2004).

Quick MBA, "The Business Model," http://www.quickmba.com/entre/business-model/ (referenced December 11, 2005).

Osterwalder, A. (2004). "The Business Model Ontology" (PhD. thesis), http://www.hec.unil.ch/aosterwa/PhD/ (referenced October 19, 2004).

Rockart, J.F. (1979). "Chief Executives Define Their Own Data Needs," Harvard Business Review, March–April, 52(2), pp. 81–93.

Stalk Jr, G. (1988). "The Time Paradigm," Boston Consulting Group, http://www.bcg.com/publications/publication_view.jsp?pubID=300 (July 13, 2004).

Thompson, A., Gamble, J., and A.J. Strickland (2004). Winning in the Marketplace. New York, NY: McGraw-Hill Irwin, pp. 121–123.

Timmer, P. (1998). "Business models for electronic markets," Electronic Markets, 8(2), pp. 3–8. http://www.electronicmarkets.org/netacademy/publications.nsf/all_pk/949.

Weil, P., Malone, T., D'Urso, V., and G. Herman (2004). "Do Some Business Models Perform Better Than Others? A Study of the 1000 Largest U.S. Firms.," http://seeit.mit.edu/publications.asp (accessed July 11, 2004).

Wikipedia, the free encyclopedia. "Collective Business System," http://en.wikipedia.org/wiki/Collective_business_system (referenced October 24, 2004).

Endnotes

¹ Afuah, A. (2004).

² Chesbrough, H. and R. Rosenbloom (2002).

³ Timmer, P. (1998).

⁴ Linder, J., and S. Cantrell (2002).

⁵ Christensen, C.M., and M.E. Raynor (2003).

⁶ Mitchell, D., and C. Coles (2003).

⁷ Christensen, C.M., and M.E. Raynor (2003).

⁸ See Fleisher and Bensoussan (2003), Chapter 12.

⁹ See Fleisher and Bensoussan (2003), Chapter 9.

¹⁰ Rockart, J.F. (1979).