Operational Analysis for Business Model Diagnosis…
Posted on December 17, 2011
I spent the better part of the last 6 weeks in the classroom with our incredibly talented MBA participants here at INSEAD. I was assigned to teach a class on operations management, but we took a slightly different take on the subject, a renaissance innovation take. A traditional MBA class on operations builds basic tools of process analysis, inventory and supply chain management in the context of managing a firm’s sourcing, production and distribution. In our newly developed operations class at INSEAD, we take the same basic analytical principles but we learn and apply them in an entirely different context– to help us analyze, diagnose and reinvent the business models of firms. In our work with numerous companies on helping them innovate their business model, we have come to realize that such a scientific analysis and diagnosis of existing business models is a key first step to innovating a firm’s business model. Let me explain…
Business models at their very core describe how a firm makes money, in particular how a firm invests its resources, to create revenues in a rapidly changing business environment. There are two key dimensions to analyze existing business models– 1) how effective is a model at utilizing firm resources, and 2) how resilient is the business model in dealing with changes in the environment. Principles developed for operations analysis help us quantify and benchmark business models on these dimensions.
The process analysis toolkit, traditionally used for evaluating physical flows in a production setting, provides useful insights for evaluating the effectiveness of a business model in utilizing firm resources. The key to deploy this toolkit is to conceptualize a business model as a “machine” that takes dollars as input and produces dollars as an output (hopefully more than the input). With this conceptualization process measures such as throughput, flow times, etc. can be used to understand the effectiveness of resource utilization and identify the pain points in a business model.
Along similar lines, the matching supply with demand toolkit, helps us understand how resilient a business model is in dealing with risks that emanate from a changing business environment. The science of inter-firm incentives and relationships, helps us understand how different models help firms transfer, share and reduce their risks in the relationships with their partners.
Taken together, we believe the tools of operations analysis can provide a strong, scientific, analytical paradigm to diagnose the key pain points with different business models. Finding safe and effective remedies to the most excruciating of these pain points is the key to innovating business models.