Identifying Effective and Sustainable Business Models

It is no surprise that the entrepreneurial industry holds business models in high esteem and is considered as an essential in any type of business.

A strong model that has found its way into a company’s business plan can help align stakeholders and give angel investors insights on its long-term vision business potential. Bootstrapping business owners are also less likely to make costly decisions as there is already a framework to follow.

Overall, defining a business model is important because it guides and directs the company as a whole. From financial management to operations, all sectors rely on and work with a similar model and goal in mind.

However, there may be times when the viability of a business model is questionable. How can one determine if a venture is realistic and practical? While daunting, worthy pursuits can be identified amidst lofty business models when the right research and strategy are put in place.

Research the market

According to the Business Plan Development Guide written by Management and Marketing professor Dr. Lee Swanson, it is always best to replace assumptions with factual and expert information.

A business strategy highly dependent on theories and personal beliefs is less likely to scale because it is not backed by the current state of the market.

Since driving company revenue is one of the main ways to ensure a business will be able to sustain itself, gaining customer interest and loyalty is the key to consistent sales. A thorough market analysis will give factual insight into the demand for the products, the size of the market, where such a business will most likely thrive, and the prices customers are willing to pay on average.

Furthermore, thorough market analysis goes beyond the customers’ needs. Business models should also take into account the number of similar options already available and how competitors are faring. One of McKinsey & Company’s new ways to approach business model innovation is to outline the model that is most dominant in a business’ industry. Reframing these beliefs can help a company keep up in an age where disruptive business models are rampant. But how will one disrupt established business models and stand out when competitor analysis is not taken into account?

Having a deeper understanding of customer demands and competitor strategies will give insight on where one stands in the market. This leads to discovering the business’ Unique Value Proposition, which will also play a huge role in pinpointing the business model that is effective and best suited to the company’s goals.

Craft a model that is open to innovation

Changing times, technological innovations, and diversifying needs will cause a shift in demands. While a company’s current business model might work in 2020, it may be obsolete by 2030.

When a model hinders the growth of businesses, it can be a sign that it is time to innovate.

The fact that 88% of the companies that made it to the Fortune 500 list in 1955 are now gone is proof of this.

One of the most recent examples is Toys ‘R’ Us. The formerly thriving toy company was founded in 1948 and became one of America’s top toy retailers for decades. Their downfall started in the early 2000s when they signed a 10-year partnership with Amazon, agreeing that Toys ‘R’ Us will be the exclusive toy vendor in the e-commerce platform.

The lack of the toy retailer’s online store and Amazon’s move to add more products in their toys and baby section meant that Toys ‘R’ Us missed the opportunity to have its own e-commerce presence. While the partnership was terminated in 2004, sales continue to drop until the company finally filed for bankruptcy in 2017.

Toys ‘R’ Us serves as a precautionary tale for companies who are hesitant to innovate and adapt according to the needs of the changing market. The rise of the internet meant that people now prioritize convenience, and the toy retailer’s struggle with bringing that shopping experience online was one of the reasons behind their bankruptcy.

According to Harvard Business Review, good business model choices create virtuous cycles. This means that a company’s processes can strengthen a business model over time and makes it a sustainable venture. To establish effective business model decisions, companies should first implement market research, keep customer needs top-of-mind, and continuously find opportunities for growth.

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