Business model analysis is a necessary part of business model innovation. It is concerned with two key issues: (1) how the organization creates value; and (2) how the organization establishes unique resources, assets or positions that will achieve competitive advantage. It may involve an analysis of how value is generated at each stage of the value chain (a value chain identifies those activities in a firm that are strategically relevant and underlie its key capabilities).
An overall approach to business model analysis advocated by Johnson et al (2008: 52) consists of three steps: ‘The first is to realize that success starts by not thinking about business models at all. It starts with thinking about the opportunity to satisfy a real customer who needs a job done. The second step is to construct a blueprint laying out how your company will fulfil that need at a profit… The third is to compare that model to your existing model to see how much you’d have to change it to capture the opportunity’.
They recommend that the analysis should focus on the four elements of the business model:
- The customer value proposition: This means finding out what customers value or do not value about the present offering, assessing what they might want in the future and, importantly, because this is where the innovation comes in, identifying new products or services or improvements to existing products or services that customers will value.
- The profit formula: Gaining a better understanding about how well the present profit formula functions under each of its four headings (revenue model, cost structure, margin model and resource velocity) and establishing areas for improvement.
- Key resources: Examining each of the key resources (people, money, brand, equipment etc) to determine the extent to which they are adequate for the task in hand and will enable the organization to develop and compete in the future.
- Key processes: Reviewing each of the key managerial and operational processes to assess their effectiveness now and for the future.
The design follows the analysis but as Chesbrough (2010: 362) put it: ‘Designing a new business model requires creativity, insight and a good deal of competition and supplier information and intelligence’. And Teece (2010: 181) was certain that: ‘Business model innovation is vitally important and yet very difficult to achieve’. The design may be difficult but implementation is harder. Sparrow et al (2010: 15) asserted that: ‘In order for organizations to make their models work, they have to understand the potentially deep implications they have for people management’. The HR function has an important role to play in ensuring that businesses gain this understanding and act on it.