Business models

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Question - Why should I analyse my business model or those of my competitors?

Answer - there are at least two reasons why you should:

1. Quick review of your strategy - going through a relatively short (one hour) business model review exercise is an excellent way to assess the robustness and thoroughness of your business strategy
2. Your competitors' strategies may well provide insights as to how you can grow your sales and profits, and gain share from them

Key points

Over the last few years, the most significant revenue growth has come from companies employing three generic strategies:

1. New product introductions, supported by strong brand communications (Viagra, iPod, PlayStation etc.)
2. Mergers & acquisitions/alliances, supported by significant brand communications, not least from the newsworthiness of the event itself
3. Adoption of a new business model (Dell Computers, IBM consulting, Amazon, Ryanair)

Understanding your own and your competitors’ (existing or potential) strategy has many advantages:

1. by finding a gap in the structure of the market, you can gain breakthrough revenues (as have many of the companies mentioned above)
2. by analysing and understanding your own business model, you can assess where it is and is not working, and make modifications to optimise your performance. Is it profitable to run a direct sales strategy and a distribution strategy side-by-side?
3. by analysing and understanding competitors’ business models, you can better understand what their next move is likely to be, consistent with their strategy, using scenario planning
4. having understood your competitors’ strategies, you may be able to block them, or to prevent them from blocking yours

Business models can be quickly analysed generically in terms of permutations around growth, maintenance or decline/exit, or they can be subjected to detailed assessments.

Apart from giving you the advantages listed above, a business model analysis can be used in a brand audit to understand the trajectory of a brand as well as its current position. You know the size of a competitor’s feet, but in which direction are they headed?

In more detail…………

Over the last few years, the most significant revenue growth has come from companies employing three generic strategies:

1. New product introductions, supported by strong brand communications
2. Mergers & acquisitions/alliances, supported by significant brand communications, not least from the newsworthiness of the event itself
3. Adoption of a new business model

None of these approaches offer sure-fire success. Indeed, they each have about an 80% failure rate. 80% of mergers & acquisitions fail to generate significant additional profits within the first five years; 85% of new products fail within the first 2 years; 75% of Internet companies never make a profit.

Nevertheless, there have been some startling successes.

New product introductions

Viagra, Cisco, iPod, Palm Pilot, PlayStation.

Mergers & acquisitions

We do not know the success of any specific mergers or alliances, but they are a strategy to increase volume and reduce relative costs, especially in commodity markets, like financial services. The other main reason to acquire other companies is to gain new product streams (as happens in the pharmaceuticals industry), or to gain knowledge of a technology, market or customer set.

New business models

There have been some high profile adoptions of new business models:

• Dell Computers – broke into a crowded computer manufacturing market by setting up a just-in-time manufacturing structure, and marketing directly to the end-customer (initially a corporation)
• IBM
– following a near-catastrophic collapse in their “box-shifting” model, IBM moved its focus to selling consultancy services, with maybe some computer hardware thrown in
• eBay – turned the old-fashioned auctioneering market into a worldwide frenzy by harnessing Internet technology to enable people to buy and sell almost anything (a SCUD missile is one of the more unusual items that have been put up for auction). They also bought PayPal to facilitate the payment process, and make more money from financial services
• Ford Motor Company – has for many years made most of its profits from financial services rather than from manufacturing cars
• Amazon – used Internet technology to become a massive global retailer, initially in books, CDs and DVDs/videos, but now in an increasing array of categories. More than this, though, they have leveraged the technologies they have developed as profit centres in their own right, and have now become a market place where other companies can promote their services in apparent competition
• Google – it could be argued that the Google algorithm is really a new product, except that they have been careful not to make sales directly from this. At the heart of the business model there is one of the best search engines in the world that is used freely by the searcher, and which will find you the “best” solution to your search, regardless of any payment by the site to Google. Profits come from “incidental” activities, such as Google Ads, and the sale of related technologies
• EasyJet/Ryanair – adopted the US cheap airline model to rip a hole in the airways market in Europe which was almost universally geared to premium services. Ryanair has a stated ambition to give away tickets for free, and to make its sales from incidental activities (hotel/car bookings, advertising etc.). One source of income used to be from municipalities who paid Ryanair significant sums to deliver millions of tourists to their door – but this practice was controversially banned by the European Court in 2004
• Dow/Xiameter – Dow decided that there was an opportunity for them to address the commodity sales market by setting up a second brand, Xiameter, that used a spot trading model to bulk-sell Dow over-capacity at competitive prices within a heavily reduced cost structure. Dow have proclaimed this approach a success

Why should business models be analysed and understood?

Understanding your own and your competitors’ (existing or potential) strategy has many advantages:

1. by finding a gap in the structure of the market, you can gain breakthrough revenues (as have many of the companies mentioned above)
2. by analysing and understanding your own business model, you can assess where it is and is not work, and make modifications to optimise your performance. Is it profitable to run a direct sales strategy and a distribution strategy side-by-side?
3. by analysing and understanding competitors’ business models, you can better understand what their next move is likely to be, consistent with their strategy, using scenario planning
4. having understood your competitors’ strategies, you may be able to block them, or to prevent them from blocking yours

In broad terms, generic strategies are based on growth, stability or managed decline/withdrawal, but there are several permutations to each of these generic strategies:

• Growth – high investment/profitable growth
• Growth – high investment/penetration growth
• Growth – significant investment/profitable growth
• Growth – significant investment/penetration growth
• Growth – incremental profitable growth
• Growth – incremental penetration growth
• Maintain – profitability maximisation
• Maintain – profitability protection
• Maintain – focused investment
• Maintain – sales protection
• Decline – sales decline/maximise profitability
• Decline – profits decline/maximise sales
• Decline – minimise sales and profits decline
• Decline – market exit through sale
• Decline – market exit through closure

And no doubt you can think of many more.

Detailed strategy analysis

The generic business model analysis only takes you to a certain level of understanding of what you and your competitors are capable of.

For a more detailed analysis, we recommend you assess each business model in detail across some of these headings:

• Market positioning (leader/challenger etc.)
• Growth trajectory (fast, long-term, harvest etc.)
• Partnership strategy (go-it-alone to a full alliance strategy)
• Source of competitive advantage (products/services, knowledge of the customer, setting the world standard etc.)
• Product configuration (packaged, customised etc.)
• Service configuration (free within the overall price, individually charged etc.)
• Pricing strategy (from giveaways to premium)
• Pricing configuration (outright sale, leasing etc.)
• Channel configuration (direct-to-customer, distribution etc.)
• Distribution strategy (weighted distribution, niche distribution etc.)
• Communication configuration (on/off line)
• Primary communications investment (media mix)

Again, no doubt you can think of more.

Application of analysis within brand audit framework

The Mud Valley™ Better-than-guessing™ business model analysis tool can be used to help you set your strategy versus the competition.

But within the brand audit toolkit it has a more specific purpose.

In assessing brand strength, we consider two key elements:

1. Brand Power – how significant are the brands in any given market today, in terms of awareness, reputation and customer intimacy? This tells you who has the biggest feet, but not where they are walking
2. Brand Dynamic – this looks at the trajectory behind the brand:
• Does the brand have a compelling proposition that could be fanned into significantly greater growth with the right investments?
• Does the brand have some market leverage it could exploit – e.g. channel relationships built across broader corporate relationships?
• Is the brand intent on growth, maintenance or decline?

If you combine these two elements into what we call Brand Force you get a real picture of what is going on – whether you are up against a sleeping giant, a hungry hyena, or a tortoise.

© 2005, Mud Valley ™ brand marketing community.

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