Outlook Point of View

Ideas that create the future

What makes a good business model anyway? Can yours

stand the test of change?
Jane Linder and Susan Cantrell

Imagine a world where employees understood what it takes for Figure 1. Business model components
their company to make money. Sales pitches would punch the
right buttons. Products would include the features that Component of business model Examples

customers want at a price they would pay. The website would Pricing model ■ Cost plus
trumpet high-priority messages. ■ CPM (cost per thousand)

Revenue model ■ Advertising model

But such understanding is rare. Few people can state clearly what ■ Subscription model
■ Fee-for-service
a business model is, much less how their company makes money.
Commerce process model ■ Bricks-and-mortar
■ Clicks-and-mortar
Speaking the same language ■ Direct-to-consumer

Internet-enabled commerce ■ Market-maker

By "business model" people mean everything from how a relationship ■ Aggregator
company earns its money to how it structures the organization. ■ Virtual supply alliance
Most often, they are referring to components of a model. Take ■ Value network

the so-called clicks-and-mortar business model. This just says Organizational form ■ Standalone business unit
that the company reaches customers over the Internet and ■ Integrated Internet capability

through retail stores—hardly a complete business model. Value Proposition ■ Less value at very low cost
■ More value at the same cost
■ Much more value at greater cost
A real business model is the organization's core logic for
Source: Accenture
creating value. More specifically, it is:
example, combines the low price and selection of a superstore
■ The set of value propositions an organization offers to its
with the knowledgeable advice of a full-price specialty
stakeholders,
hardware store.
■ along with the operating processes to deliver on these,
■ arranged as a coherent system, Second, winning business models are hard to imitate. By
■ that both relies on and builds assets, capabilities and establishing a key differentiator, such as customer attention or
relationships, superb execution, these models build barriers to entry that
protect their profit streams.
■ in order to create value.

A business model has many parts each often, and erroneously,
called a business model in its own right (see figure 1).
Characteristics of a good business model
Review of the business models of 70 companies finds no single
model guaranteed to produce financially superior results; however,
the more successful models do share three characteristics.
First, they offer unique value—sometimes in the form of a new
idea. More often, it is a combination of product and service
features that offers more value; lower price for the same
benefit or more benefit for the same price. Home Depot, for
Finally, successful business models are grounded in reality.
They are based on accurate assumptions about customer
behavior. Their cost structures fit their revenue streams, day in
and day out. Obvious? Many firms, new and old, lack a clear
understanding of where they make money, why customers prefer
their offerings and how many customers actually sap revenues.
Since organizations compete for customers and resources, a
business model must highlight what is distinctive about the
firm—how it wins customers, woos investors and earns profits.
Effective business models are rich and detailed and the
components reinforce each other: change any one and you
have a different model.
Outlook Point of View aims to provide a forum
for ongoing discussion between Accenture
professionals and their clients.
Changing business models
Even the best-designed business model cannot last forever. It
must change to keep pace with shifting customer needs,
markets and competitive threats.
Our discussions with executives and analysts suggest six
common approaches to change:
1. Change incrementally to extend an existing business model.
Expand geographically, add customers, tweak prices, extend
product and service lines. These are all incremental changes
that can boost the returns from an existing business model.
For example, W.W. Grainger has always given customers
convenient access to ordering—through physical branches,
telephone, fax or even teletype machines. Adding Internet
sales channels just strengthened Grainger's business model.
2. Renew the distinctiveness of an existing business model.
This approach focuses on revitalizing value propositions to
counteract the forces that encourage competition based only
on price. Teradyne, for example, a worldwide leader in semi-
conductor test equipment, wins customers with innovative
products but makes money through a steady stream of
product upgrades and attentive service. Their value
proposition naturally migrates from leading-edge products to
trusted service. To revitalize its model, Teradyne periodically
introduces breakthrough products that reset the bar.
3. Replicate a model in new domains. Companies that
replicate their business models take new products into new
markets by using the same business formula, à la Aurora
Foods and the Gap. Aurora Foods buys poorly performing
brands like Aunt Jemima Waffles and Lender's Bagels and
uses its extensive brand marketing and cost-cutting skills to
give them a new lease on life. Likewise, the Gap applies its
brand marketing and merchandising expertise to create
entirely new, "cool brand" retail formats such as BabyGap,
Banana Republic, and Old Navy Clothing.
4. Add models to a portfolio through acquisitions. Many firms
reposition themselves by buying and selling operating
companies. For example, Seagrams started as a wine and
spirits company, but recent acquisitions now classify it as an
entertainment firm. Its own acquisition by Vivendi adds a
new wrinkle, as the French company hopes to use its cellular
telephones, pay television, and Internet portals to distribute
Seagrams' entertainment content.
5. Leverage existing capabilities to add new models. Some
companies grow by building new business models around
unique skills, assets and capabilities. The Canadian firm
Bombardier started out manufacturing snowmobiles. It got a
foothold in financial services by selling on credit then moved
into capital leasing. Experience manufacturing snowmobiles
led to opportunities in large scale manufacturing, including
aircraft. Based on leasing experience and aviation
background, Bombardier offered fractional jet ownership to
corporations and high-net-worth individuals. Like crossing a
stream on stepping stones, Bombardier has leveraged the
capabilities, knowledge and relationships that it developed as
part of one model to create the next.
6. Change a business model fundamentally. This means
transformation—of the organization, its structure, culture,
values and capabilities—to create value in a new way. The
faster this must happen, the more seismic the change. Firms
that move up-market or down-market or shift into services
or solutions when their products become commodities face
this challenge.
Implications for management
We see three management imperatives:
1. Clarify your business model to improve your organization's
focus. Do your people understand the organization's business
model and how they contribute to it? Do they know what
makes your firm distinctive and how the company makes
money? If they did, their everyday decisions would probably
support your profit-making agenda more strongly.
2. Make change part of the agenda. By laying out the way you
intend to change, you can create a business architecture that
smoothes execution.
3. Establish a framework for agile competition. Think of your
business model—not your organization—as a set of building
blocks. Expand your strategic range by experimenting with
new blocks, then mix and match them to create profitable
new combinations.
Jane Linder, associate director and senior research fellow –
Accenture Institute for Strategic Change, is based in
Cambridge, Massachusetts, U.S.
(jane.c.linder@accenture.com).
Susan Cantrell, research fellow – Accenture Institute for
Strategic Change, is based in Cambridge, Massachusetts, U.S.
(susan.cantrell@accenture.com).
Please contact us at pointofview@accenture.com or visit us at
www.accenture.com.
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