Business Model
business model
Assess Your Company’s Potential to Innovate With a New Business Model
Business concepts are all well and fine, but what do these business model innovation concepts potentially do for you? I want to share some questions designed to help you apply what you have been reading to your existing business.
What is your current business model?
If you offer many products and services, you may have more than one. Understanding how you operate now will make it easier to think about how you can improve upon the present.
In thinking about this question, you will find it helpful to focus first on what benefits customers get from what you provide. Also, consider what benefits the customers’ customers get through to the end user of the product or service. In thinking about benefits, remember that customers always want more and at a lower price. How does your business model accomplish that for them?
As an example, let’s consider the Folger’s coffee business at Procter & Gamble. That business is an industry leader in providing coffee-based products to allow consumers to have a tasty, comforting beverage at home that may or may not stimulate them with caffeine. The products are sold primarily through supermarkets, discounters, and warehouse clubs.
Compare that with the Starbucks coffee business. Starbucks primarily provides high-quality coffee and tea products through a service in complex prepared forms in coffee bars to also provide an enjoyable experience. The company further offers roasted coffee beans as a product for tasty experiences at other coffee bars and eat-away-from home locales as well as for consumers to brew at home, so that customers can always have the good-tasting products they prefer.
The companies have two different business models that provide different products, differing amounts of experience, in different ways, and mostly in different locations. Notice that Folger’s could have innovated with the Starbucks business model before Starbucks even existed as a company. The model already existed in Europe, which is what helped stimulate the Starbucks model.
Had Folger’s taken this path, there would probably be only one business model now in the industry. Interestingly, the two businesses have started to compete directly with each other’s business models by offering prepackaged coffee-based beverages that are manufactured and distributed by others into normal beverage outlets.
What were the last five business models before the current one?
Understanding how you got to where you are today often provides valuable insights into what new business models would be most attractive in the future. The forces that made those innovations work may still be around today, or may have only been slightly changed.
Has your company had a process aimed at developing improved business models?
New business processes almost always emerge from a deliberate process of innovation. If your company has yet to establish such a process, chances are higher that you have a substantial backlog of opportunities for desirable new business models.
If you have such a process, does it look at business model innovation separately from product and technological innovation?
Many companies see new products and technologies as the only potential ways to provide increased benefits to customers and end users. As the coffee discussion suggested, it can be easier to add more value by turning a product into a service than it is to focus only on improving the product itself.
For example, General Food’s Maxwell House division had introduced flavored coffees conceptually like what you get in a coffee bar in the early 1970s. Few would argue that the taste and experience of these canned items are a match for what is offered at a Starbucks or a coffee bar using Starbucks products. Without a separate focus on designing and implementing new and better business models (that may include new products and technologies), you are probably missing most of your opportunities.
When was the last time your company changed its business model?
If the answer is more than two years ago, the odds favor there being a current opportunity to implement an improved business model.
How many times has the business model changed in your industry in the last ten years?
If the answer is less than three times, there is probably untapped potential for a new business model now.
How expensive is it for you to develop and test a new business model?
The answer differs a lot from industry to industry. If the costs are low, then you have very high potential to develop an improved business model. You will face few internal hurdles to doing the necessary early experimentation. Conversely, if the costs are high, you will probably need to create an improved way to develop business models that is less expensive.
How risky is it for you to develop a test a new business model?
For some companies, reputation is so important, for example, that it is difficult to even test new things until they are almost perfect. In other industries, working with crude prototypes is the expectation.
What do you lose if your business model experiment fails in all of the predictable ways that it could? If not very much, what are you waiting for?
If much is at stake, consider ways to reduce the amount at risk or the visibility of your flops. Early experiments should be expected to create “learning” rather than solutions, so you need to have a way to get your learning on the cheap.
Copyright 2008 Donald W. Mitchell, All Rights Reserved
About the Author
Donald Mitchell is chairman of Mitchell and Company, a strategy and financial consulting firm in Weston, MA. He is coauthor of seven books including Adventures of an Optimist, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. You can find free tips for accomplishing 20 times more by registering at:
www.2000percentsolution.com
What are the tax implications in this business model?
If I manufacture keychains on a website for $1 that allows individuals to personalize them, mark them up and sell them for $2 on my website and at the end of the month I pay them $1 for each keychain sold, what are my tax implications? If an individual sells 700 keychains and I pay them $700, what do I have to report and how.
In your example, you would have $1,400 of gross income, but you would have a $700 deduction to take against it – either as costs of goods sold or as a sales commission.
Either way, you end up with $700 income.
This would get reported on Schedule C. If the result is over $400, then you may also have to pay self-employment tax on Schedule SE.
Lastly, check your state sales tax laws. For sales to any customers that reside in the same state as you, you would need to charge them sales tax if the volume of sales rise above the level of “casual sales.”
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