Understanding a business’s model is foundational to any business strategy or M&A discussion. This understanding provides insight into how the business operates, generates value, and competes in its industry. However, many organizations encounter significant challenges when attempting to map out their business models. These challenges often stem from common pitfalls that, if not adequately addressed, can result in flawed strategies, misguided decisions, and missed opportunities.
One of the most common mistakes is viewing the business model too narrowly. Companies often focus excessively on particular aspects, such as revenue generation or product innovation, neglecting other essential elements like customer value proposition, supply chain management, or competitive positioning. Such an oversight can lead to a disjointed and incomplete understanding of how the business operates and competes.
Organizations also tend to overlook the dynamic nature of business models. They are not static constructs but evolve with changes in market conditions, competitive landscapes, technology, and customer behavior. Failing to regularly review and adapt the business model can result in misalignment between the business’s operations and its changing environment.
Finally, organizations frequently struggle with translating their business model into actionable strategies. A well-defined business model is only as good as the strategies and initiatives it informs. Yet, companies often find it challenging to turn their understanding of their business model into strategic priorities, performance metrics, and operational plans.
These challenges underscore the importance of using robust, versatile tools for mapping and understanding business models. Different tools can shed light on different aspects of a business, provide a more holistic view, accommodate changes in business environments, and guide strategic planning. The following list introduces the top 11 business model mapping tools that can be instrumental in advanced business strategy and M&A discussions.
- Business Model Canvas: Developed by business theorists Alexander Osterwalder and Yves Pigneur, the Business Model Canvas provides a holistic, visual overview of a company’s business model across nine key components. These include value proposition, customer segments, customer relationships, channels, key activities, key resources, key partnerships, revenue streams, and cost structure. By laying out how a company operates, the Business Model Canvas paints a picture of how it creates, delivers, and captures value. However, this tool focuses more internally, lacking a deep dive into the company’s competitive environment or consideration of external market trends and regulatory landscapes. Ideal for initial strategy discussions, the canvas offers a broad overview but should be used alongside other tools for a comprehensive understanding.
- Value Proposition Canvas: As an extension of the Business Model Canvas, the Value Proposition Canvas zeroes in on customer profiles and the value offered to them. It breaks down the customer’s jobs, pains, and gains and aligns these with the company’s products/services, pain relievers, and gain creators. This tool proves indispensable when customer-centric businesses are in focus or when customer experience enhancement is the objective. It might, however, overlook other critical aspects, such as the company’s internal processes or supply chain dynamics.
- Lean Canvas: Ash Maurya’s adaptation of the Business Model Canvas is designed specifically for startups and entrepreneurs. The Lean Canvas focuses on problem-solution dynamics, key metrics, and competitive advantages. This tool is excellent for businesses operating in dynamic, lean startup environments. Still, it might not adequately capture the complexities of larger, established businesses or provide in-depth insights into broader strategic aspects.
- SWOT Analysis: This widely-used strategic tool evaluates a company’s Strengths, Weaknesses, Opportunities, and Threats. A SWOT Analysis provides an immediate snapshot of the current internal and external factors affecting a company. The primary limitation of this tool is its static nature. While it offers a snapshot in time, it doesn’t account for dynamic changes over time, requiring regular updates to remain relevant.
- Porter’s Value Chain: Devised by economist Michael Porter, this tool breaks down a company’s activities into primary (such as logistics, operations, marketing, and service) and support (infrastructure, human resources, technology development, and procurement) to analyze where value is added within the organization. Porter’s Value Chain is excellent for understanding operational efficiency, but it might not fully encompass the broader strategic context or the external competitive landscape.
- PESTEL Analysis: This tool offers macro-environmental analysis, evaluating Political, Economic, Social, Technological, Environmental, and Legal factors affecting an organization. PESTEL Analysis provides valuable contextual understanding for a business model but might not delve into the details and intricacies of the company’s individual business operations or internal structures.
- Strategy Canvas: A component of the Blue Ocean Strategy, the Strategy Canvas visually contrasts a company’s offerings with those of its competitors, offering a clear visualization of points of differentiation. It’s ideal for competitive analysis. However, the Strategy Canvas might not adequately evaluate the internal operational aspects of a business or the potential impact of macro-environmental factors.
- Value Builder System: This innovative model was conceived by John Warrillow, the author of the best-selling book “Built to Sell”. The Value Builder System focuses on enhancing the value of a business, making it more appealing to potential acquirers and capable of commanding a premium price in the market. It addresses eight core value drivers, ranging from financial performance and growth potential to customer satisfaction and the Switzerland structure (the degree of dependency on any one employee, customer, or supplier). This tool encourages business owners to assess their company’s performance holistically and work on areas that can significantly boost overall business value. However, it may not be as effective in early-stage or smaller businesses that have not yet established some of these foundational elements. Its primary strength lies in preparing businesses for an acquisition or sale, thus it may not be the best fit for companies seeking tools for daily operational management or for addressing immediate, short-term challenges.
- McKinsey 7S Framework: This holistic tool evaluates how well the seven key elements of a business (strategy, structure, systems, shared values, style, staff, and skills) are aligned. The 7S framework is ideal for understanding organizational intricacies and how different pieces work together, but it might not offer granular insights into specific operational aspects of the business.
- Four-Action Framework: Another tool from the creators of the Blue Ocean Strategy, the Four-Action Framework, is used to challenge and rethink a company’s business model by examining industry factors that should be eliminated, reduced, raised, or created. It fosters innovative thinking, which can be crucial for companies looking to differentiate themselves in the market. However, it might be less effective in industries where stability and tradition dominate.
- The Three Horizons Model: Originally from McKinsey, this tool is used to manage different stages of growth within a company, helping to balance between the immediate need to maintain the current business and the longer-term need to innovate for the future. It’s great for evaluating a company’s growth potential and long-term sustainability, but it might not provide a detailed view of the day-to-day operations or the immediate operational challenges a company might face.
- The PROMISE Model: In addition to the tools mentioned, our firm, Fifth Chrome has developed a business model tool called PROMISE. Based on the seven most-critical factors that drive growth, the PROMISE model is a comprehensive, 360 approach to a business. PROMISE is an acronym and stands for People and Professional Development, Rewards and Recognition, Organization Structure and Leadership, Management Operating System, Innovation and Critical Thinking, Strategic Future, and Employee Experience. The PROMISE model helps businesses to address business challenges by working on the underlying structures and constraints.
Choosing the right tools to map a business model depends on the specifics of the company and the objectives of the strategy or M&A discussions. Using these tools in combination can help provide a comprehensive and more nuanced understanding of the business.
Let’s now turn our attention to some concrete examples of how these tools can be deployed based on the nature and scale of different businesses.
For early-stage startups, the tools that are most suited for business model mapping include the Lean Canvas, Value Proposition Canvas, and SWOT Analysis. These tools help articulate the value proposition, identify startup-specific challenges, and evaluate strengths, weaknesses, opportunities, and threats respectively.
SMEs might find significant benefits in using the Business Model Canvas, PROMISE Model, Value Proposition Canvas, Value-Builder Model and Blue Ocean Strategy Canvas. These tools help them gain a comprehensive understanding of their business model, cultivate a strong value proposition, and explore untapped market potential.
For companies in the FMCG, F&B, and other direct-to-customer industries, the Value Proposition Canvas can be an excellent choice. To provide additional depth, the Business Model Canvas, Porter’s Value Chain, PROMISE model, and the Three Horizons Model serve as complementary tools, helping these companies delve into operational efficiency and long-term growth.
For mid-market businesses experiencing a rough patch, the PESTEL Analysis, McKinsey’s 7S Framework, the PROMISE model, Value-Builder Model and the Four-Action Framework can come in handy. These tools can provide insights into environmental factors, and organizational alignment, and encourage a review of the existing business model.
For large corporations, a combination of PESTEL Analysis, McKinsey’s 7S Framework, the Four-Action Framework, Porter’s Value Chain, and the Three Horizons Model can be highly effective. They offer insights into macro-environmental factors, internal alignment, value creation, and potential areas of growth and innovation.
Businesses undergoing significant changes like mergers, acquisitions, or major restructuring can particularly benefit from tools like the McKinsey 7S Framework, Porter’s Value Chain, the PROMISE model, and the Four-Action Framework. They allow companies to assess alignment, identify areas of value creation, and challenge existing business model elements, which are crucial during periods of transition.
For technology or innovation-driven companies, particularly those in fast-paced sectors such as tech startups, tools like the Business Model Canvas, PROMISE model, Lean Canvas, Value-Builder Model, and the Three Horizons Model can be especially beneficial. These tools foster a focus on innovation, adaptability, and long-term growth, all key factors in a rapidly evolving technology landscape.
Finally, universal tools like SWOT Analysis can be used by businesses of all types and sizes for their versatility and broad applicability. These tools can help visualize overlaps and interactions between different aspects of a business model and provide a snapshot of a company’s current position.
In conclusion, understanding a company’s business model is pivotal to forming effective strategies and making informed decisions, particularly in the context of mergers and acquisitions. However, as we’ve discussed, the process of mapping a business model can be riddled with challenges and common mistakes. By using appropriate business model mapping tools, companies can gain a more holistic, nuanced, and dynamic understanding of their business model. While no single tool can offer a complete picture, using a combination of tools that cater to your company’s unique needs and circumstances can significantly enhance your strategic insights. Whether you’re an early-stage startup, a struggling mid-market business, a large corporation, or anything in between, these tools can provide invaluable perspectives on how your business creates, delivers, and captures value. Remember, these tools are not a one-time fix but require consistent use and adaptation over time as your business and its environment evolve. By doing so, your company will be well-equipped to navigate the complexities of business strategy and M&A discussions