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What Makes a Good Business Model, Anyway

What Makes a Good Business Model, Anyway

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10/25/2012

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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 their company to make money. Sales pitches would punch the right buttons. Products would include the features that customers want at a price they would pay. The website would trumpet high-priority messages. But such understanding is rare. Few people can state clearly what a business model is, much less how their company makes money.
Commerce process model

Figure 1. Business model components
Component of business model Pricing model Examples
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Cost plus CPM (cost per thousand) Advertising model Subscription model Fee-for-service Bricks-and-mortar Clicks-and-mortar Direct-to-consumer Market-maker Aggregator Virtual supply alliance Value network Standalone business unit Integrated Internet capability Less value at very low cost More value at the same cost Much more value at greater cost

Revenue model

s s s

s s s

Speaking the same language
By "business model" people mean everything from how a company earns its money to how it structures the organization. Most often, they are referring to components of a model. Take the so-called clicks-and-mortar business model. This just says that the company reaches customers over the Internet and through retail stores—hardly a complete business model. A real business model is the organization's core logic for creating value. More specifically, it is:
s

Internet-enabled commerce relationship

s s s s

Organizational form

s s

Value Proposition

s s s

Source: Accenture

s s s

s

The set of value propositions an organization offers to its stakeholders, along with the operating processes to deliver on these, arranged as a coherent system, that both relies on and builds assets, capabilities and relationships, in order to create value.

example, combines the low price and selection of a superstore with the knowledgeable advice of a full-price specialty hardware store. Second, winning business models are hard to imitate. By establishing a key differentiator, such as customer attention or superb execution, these models build barriers to entry that protect their profit streams. 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.

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

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 semiconductor 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.
©Accenture 2001. All rights reserved.

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