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OutlookPoint of View

Ideas that create the future

Imagine a world where employees understood what it takes fortheir company to make money. Sales pitches would punch theright buttons. Products would include the features that

customers want at a price they would pay. The website wouldtrumpet high-priority messages.

But such understanding is rare. Few people can state clearly whata business model is, much less how their company makes money.

Speaking the same language

By "business model" people mean everything from how acompany earns its money to how it structures the organization.Most often, they are referring to components of a model. Takethe so-called clicks-and-mortar business model. This just saysthat the company reaches customers over the Internet andthrough retail storeshardly a complete business model.

A real business model is the organization's core logic forcreating value. More specifically, it is:

s The set of value propositions an organization offers to itsstakeholders,

s along with the operating processes to deliver on these,

s arranged as a coherent system,

s that both relies on and builds assets, capabilities andrelationships,

s 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 singlemodel guaranteed to produce financially superior results; however,the more successful models do share three characteristics.

First, they offer unique valuesometimes in the form of a newidea. More often, it is a combination of product and servicefeatures that offers more value; lower price for the samebenefit or more benefit for the same price. Home Depot, for

example, combines the low price and selection of a superstorewith the knowledgeable advice of a full-price specialtyhardware store.

Second, winning business models are hard to imitate. Byestablishing a key differentiator, such as customer attention orsuperb execution, these models build barriers to entry thatprotect 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 inand day out. Obvious? Many firms, new and old, lack a clearunderstanding of where they make money, why customers prefertheir offerings and how many customers actually sap revenues.

Since organizations compete for customers and resources, abusiness model must highlight what is distinctive about thefirmhow 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.

What makes a good business model anyway? Can yours

stand the test of change?

Jane Linder and Susan Cantrell

Component of business model Examples

Pricing model s Cost plus s CPM (cost per thousand)

Revenue model s Advertising model s Subscription model s Fee-for-service

Commerce process model s Bricks-and-mortar s Clicks-and-mortar s Direct-to-consumer

Internet-enabled commerce s Market-makerrelationship s Aggregator s Virtual supply alliance s Value network

Organizational form s Standalone business unit s Integrated Internet capability

Value Proposition s Less value at very low cost s More value at the same cost s Much more value at greater cost

Source: Accenture

Figure 1. Business model components

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Changing business models

Even the best-designed business model cannot last forever. Itmust change to keep pace with shifting customer needs,markets and competitive threats.

Our discussions with executives and analysts suggest sixcommon approaches to change:

1. Change incrementally to extend an existing business model.

Expand geographically, add customers, tweak prices, extendproduct and service lines. These are all incremental changesthat can boost the returns from an existing business model.For example, W.W. Grainger has always given customersconvenient access to orderingthrough physical branches,telephone, fax or even teletype machines. Adding Internetsales channels just strengthened Grainger's business model.

2. Renew the distinctiveness of an existing business model.

This approach focuses on revitalizing value propositions tocounteract the forces that encourage competition based onlyon price. Teradyne, for example, a worldwide leader in semi-conductor test equipment, wins customers with innovativeproducts but makes money through a steady stream ofproduct upgrades and attentive service. Their value

proposition naturally migrates from leading-edge products totrusted service. To revitalize its model, Teradyne periodicallyintroduces breakthrough products that reset the bar.

3. Replicate a model in new domains. Companies thatreplicate their business models take new products into newmarkets by using the same business formula, la AuroraFoods and the Gap. Aurora Foods buys poorly performingbrands like Aunt Jemima Waffles and Lender's Bagels anduses its extensive brand marketing and cost-cutting skills togive them a new lease on life. Likewise, the Gap applies itsbrand marketing and merchandising expertise to createentirely new, "cool brand" retail formats such as BabyGap,Banana Republic, and Old Navy Clothing.

4. Add models to a portfolio through acquisitions. Many firmsreposition themselves by buying and selling operatingcompanies. For example, Seagrams started as a wine andspirits company, but recent acquisitions now classify it as anentertainment firm. Its own acquisition by Vivendi adds anew wrinkle, as the French company hopes to use its cellulartelephones, pay television, and Internet portals to distributeSeagrams' entertainment content.

5. Leverage existing capabilities to add new models. Somecompanies grow by building new business models aroundunique skills, assets and capabilities. The Canadian firm

Bombardier started out manufacturing snowmobiles. It got afoothold in financial services by selling on credit then movedinto capital leasing. Experience manufacturing snowmobilesled to opportunities in large scale manufacturing, includingaircraft. Based on leasing experience and aviationbackground, Bombardier offered fractional jet ownership tocorporations and high-net-worth individuals. Like crossing astream on stepping stones, Bombardier has leveraged thecapabilities, knowledge and relationships that it developed aspart of one model to create the next.

6. Change a business model fundamentally. This meanstransformationof the organization, its structure, culture,values and capabilitiesto create value in a new way. Thefaster this must happen, the more seismic the change. Firmsthat move up-market or down-market or shift into servicesor solutions when their products become commodities facethis challenge.

Implications for management

We see three management imperatives:

1. Clarify your business model to improve your organization'sfocus. Do your people understand the organization's business

model and how they contribute to it? Do they know whatmakes your firm distinctive and how the company makesmoney? If they did, their everyday decisions would probablysupport your profit-making agenda more strongly.

2. Make change part of the agenda. By laying out the way youintend to change, you can create a business architecture thatsmoothes execution.

3. Establish a framework for agile competition. Think of yourbusiness modelnot your organizationas a set of buildingblocks. Expand your strategic range by experimenting withnew blocks, then mix and match them to create profitablenew combinations.

Jane Linder, associate director and senior research fellow

Accenture Institute for Strategic Change, is based inCambridge, Massachusetts, U.S.(jane.c.linder@accenture.com).

Susan Cantrell, research fellow Accenture Institute forStrategic Change, is based in Cambridge, Massachusetts, U.S.(susan.cantrell@accenture.com).

Please contact us at pointofview@accenture.com or visit us atwww.accenture.com.

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Outlook Point of View aims to provide a forumfor ongoing discussion between Accentureprofessionals and their clients.