Business Model Assessment

We must evaluate our business model regularly. This business model assessment allows us to determine when something needs to be adjusted, reducing the risks and improving the chances of a bright future.

What is a Business Assessment?

A business assessment systematically evaluates a company’s current operations, strategies, and performance. It aims to identify strengths, weaknesses, opportunities, and threats within the business. This process helps organizations understand their market position, operational efficiency, and areas for improvement.

At its core, a business assessment provides actionable insights that drive informed decision-making. By examining various aspects of the business, such as financial performance, customer satisfaction, competitive positioning, and operational processes, companies can develop strategies to address challenges and capitalize on growth opportunities.

Business assessments are particularly valuable during periods of change, such as market shifts, organizational restructuring, or scaling operations. They ensure the business remains aligned with its goals and adaptable to external factors. Tools like the Business Model Canvas, SWOT analysis, and financial performance metrics are commonly used to structure the assessment and make it thorough and effective.

Whether conducted internally or by external consultants, a business assessment is essential for identifying inefficiencies, uncovering competitive advantages, and setting a clear direction for future success.

Why Assess your Business Model?

Even if you created a reasonable business model at your venture’s beginning, it will still work out and remain sustainable forever. A business model assessment should be performed to:

• Get to know business strengths and weaknesses;
• Evaluate the team’s performance;
• Establish new goals;
• Delegate tasks and responsibilities to the team members assertively;
• Increase the market share and cash flow;
• Create a plan of action for every weakness or challenge perceived.

What Makes Strong Business Models?

First, to understand if a business model is strong enough, it must have its desirability, viability, and feasibility testing. That means:

• Desirability
• Feasibility
• Viability

Methodologies for Assessing Your Business Model

Business Model Canvas and SWOT Analysis

Alexander Osterwalder and Pigneur’s Business Model Canvas is the world’s most famous tool for business modeling. It comprises nine building blocks that can map every business aspect. These building blocks are:

1. Customer Segments: This block identifies the distinct groups of people or organizations a business aims to serve. Factors like demographics, behavior, or geography can segment customers. For example, a company might cater to individual consumers, businesses, or both. Understanding customer segments helps tailor offerings and ensures the business addresses its target audience’s needs and preferences;

2. Value Propositions: Value propositions represent the unique value a business delivers to its customers. This could include solving a specific problem, fulfilling a need, or offering a superior product or service. For example, a value proposition might focus on convenience, cost savings, or innovation. Defining clear value propositions ensures the business stands out and resonates with its audience;

3. Channels: Channels describe how a business delivers its value proposition to customers. These include physical or digital distribution methods, such as retail stores, e-commerce platforms, or mobile apps. The effectiveness of these channels impacts customer satisfaction and the overall success of the business model;

4. Customer Relationships: This block focuses on interactions a business establishes with its customer segments. Customer relationships can range from highly personalized (e.g., one-on-one support) to automated (e.g., self-service tools). Defining these relationships helps businesses ensure their approach aligns with customer expectations and operational goals;

5. Revenue Streams: Revenue streams represent the income generated from customer segments. They can include direct sales, subscription fees, licensing, or advertising. Understanding revenue streams helps businesses evaluate their profitability and identify opportunities for financial growth;

6. Key Partners: Key partners are external entities, such as suppliers, affiliates, or alliances, that help the business operate effectively. For example, a logistics partner might enable efficient product delivery. Identifying and managing these partnerships ensures smooth operations and reduces risks;

7. Key Activities: This block outlines the critical tasks and processes required to deliver the value proposition, serve customers, and sustain the business. For example, a software company’s key activities might include coding, testing, and updating its products. Prioritizing these activities ensures the business operates efficiently;

8. Key Resources: Key resources are the assets a business needs to function effectively. These can include physical resources (e.g., buildings, machinery), intellectual resources (e.g., patents, trademarks), human resources (e.g., skilled employees), or financial resources. Ensuring these resources are available and optimized is vital for success;

9. Cost Structure: The cost structure outlines the significant expenses incurred to operate the business. These costs include production, marketing, or infrastructure expenses. By understanding the cost structure, companies can identify areas for cost optimization without compromising quality.

After filling out all the nine blocks of the canvas, a SWOT analysis may be used in conjunction with the Business Model Canvas to provide the basis for marketing strategy and decision-making. To analyze the strengths and weaknesses, as well as the opportunities and threats of each building block, you must:

1. Map the business model using the Business Model Canvas;
2. Score each block from 1 to 10 (1 for weak and 10 for strong);
3. Score each block from 1 to 10 (1 for threat and 10 for opportunity levels);
4. Those blocks classified between 1-5 are weaknesses/threats. And those above five are potential strengths/opportunities.

Evaluation Criteria from Morris, Schindehutte, Richardson, and Allen, 2006

Morris, Schindehutte, Richardson, and Allen propose a detailed framework that evaluates several aspects of the critical business model. These evaluation criteria ensure that the business model is feasible, competitive, and aligned with strategic goals.

For Morris, Schindehutte, Richardson, and Allen, the business model assessment must include:

• Company’s competitive advantage: This criterion assesses how well a business differentiates itself from competitors. A strong competitive advantage can come from unique products, superior customer service, or cost leadership. For example, a company like Apple leverages design and innovation to stay ahead of competitors. Evaluating this advantage helps businesses identify areas where they can excel and develop strategies to sustain their market position;

• Value network: The value network considers the relationships a business maintains with external stakeholders, including suppliers, distributors, and partners. These connections can enhance efficiency, reduce costs, or provide access to new markets. For instance, a retail company partnering with logistics firms ensures smooth delivery of products. Analyzing the value network helps businesses optimize their external collaborations;

• Value proposition: This focuses on the clarity and uniqueness of the value offered to customers. A strong value proposition directly addresses customer needs in a way that competitors cannot easily replicate. For example, Tesla’s commitment to sustainability and innovation in electric vehicles sets it apart in the automotive industry. Regularly evaluating the value proposition ensures it remains relevant and compelling;

• Set of internal rules and processes: This examines the internal systems and structures that support the business model. Efficient processes, such as streamlined production or effective communication channels, can significantly enhance operational performance. For example, a business that invests in automation may reduce errors and improve productivity. Reviewing these internal mechanisms ensures the business operates smoothly;

• Cost elements: Cost elements analyze where the business incurs expenses and whether these costs are manageable. Understanding fixed and variable costs is crucial for identifying areas to reduce expenses without compromising value. For instance, a software company might look for cost-effective cloud hosting solutions to minimize infrastructure expenses;

• Company’s strategy: This evaluates how well the business model aligns with the company’s long-term strategy. A misalignment can lead to inefficiencies and missed opportunities. For instance, a business focused on premium products should avoid strategies that prioritize cost-cutting over quality. Ensuring alignment guarantees that every aspect of the model supports the overarching business goals;

• Revenue and pricing considerations: This criterion examines how revenue is generated and whether pricing strategies are optimized. For example, offering tiered pricing plans can appeal to different customer segments. Evaluating revenue and pricing ensures the business remains profitable while meeting customer expectations.

NICE framework from Amit & Zott

Amit and Zott’s NICE framework focuses on four key elements that measure the effectiveness of a business model, especially in terms of innovation and sustainability.

Amit and Zott established four significant criteria for analysis:

1. Novelty: Novelty assesses how innovative the business model is compared to competitors. Businesses that introduce new ways of creating value often gain a competitive edge. For instance, Airbnb’s unique platform for short-term rentals revolutionized the hospitality industry. A novel approach attracts customers and disrupts existing markets;

2. Lock-in: This element evaluates how well the business retains customers and partners over time. Strategies such as loyalty programs, personalized experiences, or subscription models foster customer retention. For example, Amazon Prime’s membership benefits create a strong lock-in effect by encouraging continued use of its services;

3. Complementarities: These refer to how effectively a business integrates related products or services to enhance customer value. For instance, Apple’s ecosystem of devices and services, such as iPhones, iPads, and iCloud, creates a seamless user experience. Evaluating complementarities ensures the business leverages its offerings to maximize value;

4. Efficiency: Efficiency examines whether the business minimizes costs while maximizing output. For example, implementing just-in-time manufacturing reduces inventory costs and improves resource allocation. Assessing efficiency highlights areas where processes can be streamlined.

Hamel 4 performance indicators

Hammel also defines four performance indicators to assess a business model’s overall health and potential. His four criteria are:

1. Efficiency: Efficiency measures how well a business utilizes its resources to achieve results. Businesses that optimize processes, like using renewable energy sources, can reduce costs while maintaining output. Assessing efficiency helps pinpoint operational improvements;

2. Uniqueness: Uniqueness focuses on what sets the business model apart from competitors. A unique approach, such as Warby Parker’s direct-to-consumer eyewear sales model, captures market attention and builds customer loyalty. Regularly evaluating uniqueness ensures the business remains distinctive in its offerings;

3. Fit: Fit examines how well the components of the business model align with each other. For instance, a company with a low-cost strategy must ensure its operational processes are designed to minimize expenses. Proper alignment ensures consistency and effectiveness;

4. Profit Boosters: Profit boosters analyze mechanisms that drive profitability. For example, upselling or offering premium services can significantly increase revenue. Identifying and leveraging profit boosters enhances the financial viability of the business model.

7 Questions

For each question, you must rank your business model’s performance on a 0 (bad) scale to 10 (excellent).

1. How difficult/expensive is it for your customer to switch to the competition?
2. How rapidly and easily can you scale your business model?
3. Can your business model produce recurring revenues?
4. Do you earn before you spend?
5. How much do you get customers or third parties to do the work (for free)?
6. How much does your business model protect you from the competition?
7. Is your cost structure better than that of your competitors?

This self-assessment framework involves answering seven critical questions to evaluate a business model’s performance. Each question focuses on a different aspect of the business, ensuring a holistic evaluation.

1. Customer Switching Difficulty: Assess how easily customers can switch to competitors. The harder it is to switch, the stronger the business model. For instance, companies with subscription models often have high customer retention;
2. Scalability: Determine how quickly and efficiently the business can scale. Businesses with digital products, such as software, are often highly scalable;
3. Recurring Revenues: Evaluate the ability to generate consistent income through subscription services or repeat purchases. Recurring revenue ensures financial stability;
4. Cash Flow Timing: Assess whether the business earns revenue before incurring expenses. For example, prepayment models improve cash flow and reduce financial risks;
5. Customer/Third-Party Contribution: Consider how many work customers or third parties contribute to the business. Crowdsourcing platforms, for instance, rely on user-generated content to thrive;
6. Competition Protection: Evaluate how well the business model protects against competitive threats. Patents, proprietary technology, or strong branding can create barriers for competitors;
7. Cost Structure Competitiveness: Assess whether the cost structure is more efficient than competitors. Lean operations or economies of scale often provide a cost advantage.

Assessing the Business Model Space

Besides assessing your business model design, you must evaluate your business model space, i.e., the whole environment, with its Market Forces, Key Trends, Industry Forces, and Macroeconomic Forces. By mapping out markets, trends, customer needs, competitors, and more, you can prepare your business for innovations, such as new associations, patterns, processes, and, ultimately, new business model ideas.

Conclusion

Although we must be realistic when assessing our business model, it is good to remember that the business model will only score a perfect 10 for some aspects. By asking yourself the questions above and seeking to improve your business model’s score on at least some of its elements, you are very likely to increase the long-term success of your business.

Want to learn more about Business Model Assessment?

Check out our Super Guide on this topic by clicking here.