We work with many business owners who are concerned with changes in their company’s nominal revenue, referred to generally as “growth.” On an annual basis, revenues increase, decrease, or stay the same but this nominal revenue growth does not account for changes in the pricing of services or products sold.
Nominal revenue growth includes changes due to new business, as well as increases or decreases in pricing or changes in costs of goods sold (COGS). To understand what is actually happening, we need a real revenue growth analysis.
In terms of overall profitability, the net income is the obvious place to start when analysing a company’s financial statements. This bottom line dollar amount on a company's income statement is a good indicator of profitability because it puts a value on the amount a company takes in once all costs of production, depreciation, tax, interest and other expenses have been deducted. However, it should not be used exclusively when evaluating a company.
If a business has benefitted from the release of a new product or recent acquisition, for example, growth could still be stunted over the long term. To get the full picture, assess short-term earnings estimates, along with future prospects. Also avoid focusing on historical performance data.
AppSquadz ultimate goal of understanding the business model variations in the digital world is to be able to analyse them and address real-world problems that the business faces. It's one thing to understand what the business models are and what distinguishes them from each other, but it's quite another to be able to understand what is going wrong, why, and what results another business model might provide. A profit pool analysis will indicate which companies within an industry are earning a disproportionate share of profit relative to share of revenue.
This can be particularly revealing if there is significant business model variation within the industry, which may provide clues as to the benefits of one model over another in a particular industry.
If I were to distill the process above into a few steps:
Document the Current Business Model Develop a business model canvas and "unpack" the business model. Address all nine building blocks and the components described by Hamel to gain a shared understanding of the business in its current state.
Map Current Profit Pools complete a profit pools analysis of the company's varied business units and/or the industries the company operates in.
Explore Alternate Business Models Understand the Business Model, which models your company is employing, and the critical success factors for each.
Assess the Impact Brainstorm alternate business model canvases for the company and explore how the customer and partner relationships would be affected by a significant change. Understand how the company's key resources or key activities change as the business model change.
Business Modelling and Competitive Response Develop operations, service, and financial models to support new business model scenarios. Be sure to incorporate competitive reactions, apply game theory to understand potential moves and counter-moves. Which models provide higher profit or revenue opportunities? Which are most susceptible to being undercut by entrenched incumbents or young start-ups.
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