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Evaluating Your Business Model
When clients come to Blue Canyon to evaluate their current business model, they want to know if a new model can help them build a stronger competitive advantage, mitigate looming business threats, and/or help them make more money by exploiting market dynamics. This assessment requires courage, especially when the business is doing well, hitting its targets, and remaining profitable. Since changing a business model is often fraught with risk, Blue Canyon has identified 4 key guidelines for B2B executives to consider when re-evaluating a business model.
1. Re-evaluate Your Business Model When Times Are Good
Too often, the leadership team of B2B companies seek to change their business model only when times are bad; profits or sales may be down and investors may be anxious, putting pressure on management to re-evaluate. Unfortunately, once a business has reached this point, it may be too late to recover lost ground and re-gain a leading position. Often in these situations, changes are reactionary and companies end up implementing a “new” business model, which is perfect for fighting the last war they lost – not the next war they need to fight and win.
Best-in-class B2B companies are constantly re-evaluating their business model, especially when times are good. It’s at this time when profits are high that a company can be at its most vulnerable. These situations breed complacency, and changes in the marketplace that demand changes in the business model go unnoticed. Further, the old adage “If it ain’t broke, don’t fix it” can become the predominant thinking. In companies that are logically risk-averse, management can be slow to make changes and find it difficult to justify changes to the organization when all seems to be working well. Often, however, new entrants are attracted by these handsome margins and they seek to capture this profitability, perhaps in new ways. Therefore, management should be constantly vigilant. Finding new ways of doing things can build barriers to deflect new entrants and can help you keep up with changes in the marketplace.
2. Consider The Customer Chain, The Value Chain, And Your Value-Adds
We recently conducted a customer chain/value chain analysis for a client and discovered that among 8 steps that they and their intermediaries performed to successfully offer end customers their solution, 3 key value-added steps stood out to customers, and of which our client was deemed to be highly differentiated. These 3 steps involved locating the source of critical raw material, decontaminating/preparing this material, and holding adequate inventory of finished goods. To take better advantage of these value-adds, our client changed its business model to hold excess inventory, which they had not done in the past. While holding inventory usually translates into higher working capital costs, our client found that holding excess inventory allowed them to exploit a key capability which customers valued and for which they would pay a premium – the ability to fill an order at any time. This provided our client with a stronger competitive advantage and they soon became a market leader. Our analysis pointed to a simple alteration of their business model – holding excess inventory for sale. It is important to provide guidance as to what should be emphasized to enhance your current business model.
3. Consider How To Better Capture Value And Price Accordingly
We have written extensively on the importance of not only creating value, but capturing value. We recently published a white paper, Driving Growth through Monetization, that delves into approaches and case studies to demonstrate how to capture more value through different monetization models. Your pricing approach and revenue capture model must reward you for the additional value you create in the value chain and the increase of costs incurred from changes to the business model. As an example, the client described above enhanced their business model by not only holding excess inventory, but also segmenting the market and introduced a revised pricing strategy. In select target segments, our client successfully charged higher prices to customers who gained the most benefit from receiving orders quickly and accurately, allowing them to significantly profit from their investment in holding excess inventory by tripling EBITDA within the first 18 months.
4. Changes To Your Business Model Need Not Be Revolutionary
As described above, changing your business model does not necessarily mean creating a radical, disruptive change within your organization, or among your customers. A change can be as simple as deciding to hold excess inventory and charging customers for the benefit of doing so in order to better serve segments of the market that you have ignored or overlooked in the past, but which are growing and can be highly profitable. We encourage you to not approach a re-evaluation of your business model with fear of potentially upending your current business, but as an opportunity to identify areas you may have been missing, and take advantage of them.