Original article from the Flevy business blog can be found here: http://flevy.com/blog/deconstruct-and-innovate-your-business-model/ The business model is at the core of any company’s corporate strategy. It defines how the company creates, delivers, and captures value. Most tech startups fail because they lack a viable business model. Even for enterprises with established business models, they often need to revisit and innovate on their business models. To understand the essence of a successful business model, first, let’s look at its 4 core components: • Customer Value Proposition, • Profit Formula, • Key Resources, and • Key Processes. Customer Value Proposition A successful company helps its customers get a “job” done. Doing the “job”—this is the “value” the business is delivering for its customer. For instance, Google helps customers with the job of finding information online. McDonalds helps customers with the job of feeding a greasy appetite quickly and cheaply. Flevy helps customers with the job of finding business documents they need for work. High customer value proposition is correlated with • Importance of the job to the customer; • Low customer satisfaction with alternative options in the market; and • Higher quality (or lower price) of your product relative to alternative options. Profit Formula It’s great to offer customers great value, but, as a business, the economics still need to work in your favor. We need to make money! This is the profit formula. The profit formula is the blueprint that defines how the company creates value for itself, while providing value for the customer. The profit formula consists of numerous economic components, including: • Revenue model • Cost structure • Margin model • Asset turnover and velocity

1. Deconstruct and Innovate Your
Business Model
Contributed by David Tang on March 26, 2013 in Strategy, Marketing, & Sales
The business model is at the core of any company’s corporate strategy. It defines how the
company creates, delivers, and captures value.
Most tech startups fail because they lack a viable business model. Even for enterprises with
established business models, they often need to revisit and innovate on their business
models.
To understand the essence of a successful business model, first, let’s look at its 4 core
components:
 Customer Value Proposition,
 Profit Formula,

2.  Key Resources, and
 Key Processes.
Customer Value Proposition
A successful company helps its customers get a “job” done. Doing the “job”—this is the
“value” the business is delivering for its customer. For instance, Google helps customers
with the job of finding information online. McDonalds helps customers with the job of
feeding a greasy appetite quickly and cheaply. Flevy helps customers with the job of finding
business documents they need for work.
High customer value proposition is correlated with
 Importance of the job to the customer;
 Low customer satisfaction with alternative options in the market; and
 Higher quality (or lower price) of your product relative to alternative options.

3. Profit Formula
It’s great to offer customers great value, but, as a business, the economics still need to work
in your favor. We need to make money! This is the profit formula.
The profit formula is the blueprint that defines how the company creates value for itself,
while providing value for the customer. The profit formula consists of numerous economic
components, including:
 Revenue model
 Cost structure
 Margin model
 Asset turnover and velocity
Many tech startups fail because their “business models” lack this critical component: the
profit formula. They aim to amass an impressive user base, but don’t have a practical way of
making a profit from its users.

4. Key Resources and Key Processes
A company must have access to the key resources and processes necessary to deliver its
value proposition and profit formula. In other words, the key resources and processes
describe how value will be created for both the customers and the company, itself. For
instance, for a consulting firm, the key resources are its people and its key processes are
people-related (e.g. training, recruiting programs).
Key resources are assets, such as people, technology, products, facilities, equipment,
channels, and brand required to deliver the value proposition to the targeted customers. It
must also have the key processes to properly leverage these resources. Key processes of are
usually characterized by operational and managerial processes that allow them to deliver
value in a way that is repeatable and scalable. Processes can take the form policies, metrics,
and culture, as well.

5. As alluded to, even with a
concrete business model, there
may come a time to modify and
innovate it. So, the question
is…
What circumstances
require business model
innovation?
There are five circumstances
that often require business
model innovation. They can be
categorized into Opportunities
and Needs.

6. Opportunity #1: Disruptive Innovation
The opportunity to address, through disruptive innovation, the needs of large groups of
potential customers who are shut out of the market entirely because existing solutions are
too expensive or complicated for them.
Opportunity #2: New Technology
The opportunity to capitalize on a new technology by wrapping a new business around it or
the opportunity to leverage a tested technology by introducing it to a new market.
Opportunity #3: Focus on Unmet Need
The opportunity to bring a focus on a customer need that currently is unmet. This is
common in industries where companies focus on products or customers segments, which
lead them to refine existing products more and more.

7. Need #1: Low-end Disruptors
The need to fend off low-end disrupters. I.e., these are new entrants that are low cost, niche
players.
Need #2: Shifting Competitive Landscape
The need to respond to a shifting basis of competition. It’s simply inevitable that what
defines an acceptable solution in a market now will change with time, leading core market
segments to commoditize.
Oftentimes, barriers exist that prevent a shift in business model. A barrier is not necessarily
overt political opposition to a shift in way business has been done. Rather, with time, the
fundamental understanding of the core business model often fades into institutional
memory. These are considered institutional barriers and may be financial, operational, or
strategic in nature.
To combat institutional barriers to business model innovation, many companies decide to
launch a separate brand or business to adopt the new business model. It’s best for the new

8. entity to be based in a completely separate office. This way, it won’t be mired down by any
of the parent organization’s habits.
Changing an organization’s business model is a BIG change. We need to be patient—patient
for profit. Successful companies usually revise their business models four or more times on
the road to profitability.
To learn more about Business Model Innovation , check out this business framework
published by PPT Lab . You can view more of PPT Lab’s business frameworks here .

9. About David Tang
David Tang is an entrepreneur and management consultant. His current focus is Flevy , the marketplace
for premium business documents (e.g. business frameworks , presentation templates , financial models ).
Prior to Flevy, David worked as a management consultant for 8 years. His consulting experience spans
corporate strategy, marketing, operations, change management, and IT; both domestic and international
(EMEA + APAC). Industries served include Media & Entertainment, Telecommunications, Consumer
Products/Retail, High-Tech, Life Sciences, and Business Services. You can connect with David here on
LinkedIn .

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