In a business model assessment, you are trying to critically evaluate if you should commit time and resources to move it from concept to initial testing and development.
This guide provides a comprehensive, step-by-step process to determine if a business model is desirable, feasible, and viable – and whether it has the realistic potential to compete effectively in its market.
Strategy vs Business Model: Assessing Competitive Advantage and Realistic Potential for New Business Models
It’s critical to distinguish between strategy and business model, understand the determinants of competitive advantage, and assess the how to or if to move forward and invest in developing a Miminim Viable Product.
1. Strategy vs Business Model What’s the Difference?
Strategy Explained
Strategy is the long-term plan that shapes a company’s direction and competitive positioning.
It outlines the “why” behind business decisions, defining where to compete, what value to provide, and how to achieve goals over time.
Business Model Explained
A business model focuses on the “how.” It explains how a company creates, delivers, and captures value through customer segments, value propositions, revenue streams, cost structures, and channels.
Essentially, the business model operationalises the strategy.
The Relationship Between Strategy and Business Model
- Strategy sets the objectives and market positioning, while the business model provides the operational structure to achieve those objectives.
- For example, a strategy may be to become the leading e-commerce platform for sustainable goods, while the business model will detail how to achieve that through sourcing, logistics, customer engagement, and revenue mechanisms.
Goals and Context
To determine whether your business model is worth pursuing, you need to assess its potential for competitive advantage, understand its scalability, and evaluate the practical hurdles you will face with competition (in the short and long term).
The focus should be on validating desirability, feasibility, viability, and competitive positioning, ensuring that your model has the potential to succeed and grow.
2. Strategy and Competitive Advantage
As you’ll appreciate this is a BIG topic so I’m going to give you the short version and run through. A business model assessment is very context specific so this is just a few pointers and a guide to help you think more deeply about your business model.
What is Strategy?
A good strategy is a coherent set of actions designed to achieve a competitive position, aligning the company’s capabilities with market needs.
It is about making deliberate choices and trade-offs to carve out a unique place in the market.
According to Michael Porter, a prominent strategy thinker,
“Strategy is about making choices, trade-offs; it’s about deliberately choosing to be different.”
Key Characteristics of a Good Strategy:
- Clear Choices and Trade-offs: It defines what you will do and what you will not do. Making trade-offs is essential to avoid trying to be all things to all customers.
- Long-term Vision and Positioning: A good strategy involves a clear vision of how the company will achieve and sustain competitive advantage over time.
- Alignment of Resources and Capabilities: A strategy aligns internal strengths (resources and capabilities) with external opportunities in the market.
- Differentiation or Cost Leadership: A successful strategy creates a unique value proposition or cost structure that sets the business apart from competitors.
What Strategy is Not
It’s important to clarify common misconceptions about what constitutes strategy:
- Strategy is not Strategic Planning: Strategic planning often focuses on setting financial targets, budgeting, and short-term goals. It’s operational and administrative, rather than a cohesive approach to creating value.
- Strategy is not a Vision or Goal Statement: While a vision sets a company’s direction and goals outline what a company aims to achieve, strategy defines how it will be achieved. Simply stating, “We aim to be the market leader” is not a strategy without detailing how you will achieve that position.
- Strategy is not Best Practices: Emulating industry “best practices” may improve operations but does not inherently create a competitive advantage. True strategy requires unique positioning, not just adopting what others do well.
Richard Rumelt, another strategy expert, argues that
“Bad strategy is more than the absence of good strategy. It grows out of specific misconceptions and leadership dysfunctions.”
What is Competitive Advantage?
Competitive advantage refers to what allows a business to outperform its rivals and create superior value for its customers. This could be due to unique capabilities, resources, or positioning that competitors cannot easily replicate.
According to Jay Barney’s Resource-Based View (RBV), a firm achieves competitive advantage when it possesses resources and capabilities that are:
- Valuable: They enable the company to exploit opportunities or neutralise threats in the market.
- Rare: Not commonly possessed by competitors.
- Inimitable: Difficult for competitors to copy or develop.
- Organised: Effectively managed and deployed to realise their full potential.
This resource-based view emphasises internal resources—such as talent, technology, brand, or processes—as the foundation of a sustainable competitive advantage.
Modern Perspectives on Competitive Advantage
Modern thinking around competitive advantage expands beyond internal capabilities, focusing on adaptability, customer-centricity, and ecosystems.
- Adaptability Over Sustained Advantage: Rita Gunther McGrath challenges the idea of sustainable competitive advantage, suggesting that transient advantage is more realistic in today’s dynamic markets. Companies need to build temporary advantages and be prepared to move to the next advantage as markets and technologies evolve.
- Good Strategies Today Focus on Agility: The ability to sense market shifts quickly and reallocate resources toward new opportunities is essential. In practice, this means developing business models and operations that can pivot rapidly when conditions change.
- Customer-Centricity as the Core: A strong modern strategy focuses on customer needs, experiences, and outcomes. The Jobs to Be Done (JTBD) theory by Clayton Christensen suggests that competitive advantage arises from understanding what “job” a customer hires a product to perform and creating superior solutions for that job.
- Outcome-Driven Strategy: Companies today need to develop business models that adapt around changing customer needs, not just products. This involves deep market research and continual validation that the value proposition remains aligned with customer preferences.
- Network Effects and Platform Ecosystems: In industries with platform businesses (e.g., technology, social media), competitive advantage is often derived from network effects – where the value of the product increases as more users join.
- Building Ecosystems: Strategies must focus on creating ecosystems where third parties (e.g., app developers, suppliers) contribute to the product’s value. The ability to manage and scale these ecosystems becomes a competitive advantage in its own right.
- Value Innovation Over Competition: W. Chan Kim and Renée Mauborgne’s Blue Ocean Strategy emphasises creating uncontested market spaces (“blue oceans”) rather than competing in oversaturated markets (“red oceans”). A good strategy focuses on creating value that doesn’t just match competitors but makes them irrelevant.
- Innovative Differentiation: A contemporary approach to strategy involves innovating on both value and cost, creating offerings that stand out and don’t directly compete on the same terms as existing players.
What Makes a Good Competitive Advantage Today?
In the context of modern strategy, a strong competitive advantage is:
- Customer-Centric and Outcome-Focused: It revolves around understanding and solving specific customer needs better than anyone else.
- Agile and Transient: The business can quickly pivot to new opportunities, staying ahead of market changes and competitors.
- Based on Unique Resources and Capabilities: Advantage stems from assets or skills that competitors find difficult to imitate or acquire.
- Ecosystem-Oriented: Leverages networks, partnerships, and platforms to create additional value beyond traditional product offerings.
- Value-Driven: Prioritises creating new value for customers, breaking out of traditional competitive constraints, and finding untapped opportunities.
In sum, a contemporary strategy aims to create differentiated value, is market-responsive and adaptable, and leverages unique resources and capabilities effectively. When aligned well, the strategy paves the way for a business model that achieves and sustains competitive advantage in its market.
Now we can with these foundations in mind explore how to assess the competitive potential of a new business model through factors that define competitive advantage.
3. Business Model Assessment
Assessing a business model’s potential for competitive advantage is determined by how well it delivers value, scales, and adapts to changing market dynamics.
This includes customer focus, operational feasibility, financial sustainability, and scalability. It also considers adaptability, resource utilization, and strategic alignment – all which are vital for achieving a lasting competitive advantage.
Why because things like digital technologies are a common resource that despite their increbible innovation potential do not necessarily deliver competitive advantage.
It is strategies such as first mover and network effects, lock-ins, data aggregation, proprietary intellectual property (such as patents) that lead to more distinct advantages.
The following sections are prompts – depending on your business model some sections might be more rlevant than others, although lock ins are more universal.
Customer-Centricity and Value Innovation
A competitive business model must place customer needs at its core, offering a UVP that stands out. The key is to understand whether you differentiate through cost, value, niche focus, or other means.
Step 1: Define and Assess the Unique Value Proposition (UVP)
- Question to Ask: What makes your offering different or better than alternatives? Does the differentiation come from a lower cost (cost leadership) or added value (differentiation)? Are you targeting a specific niche segment (e.g., luxury, sustainability)?
- Identify where your business model diverges from competitors—whether through pricing, customer experience, features, brand positioning, or product quality.
Step 2: Use the Jobs to Be Done (JTBD) Theory to Deeply Understand Customer Needs
- Once you understand your UVP, apply Jobs To Be Done to uncover customer motivations, challenges, and the outcomes they seek when hiring a product or service.
- Contextualise the UVP in terms of the “job” it’s solving. Does the UVP align with the job customers want done? Are there emotional, social, or functional aspects that are particularly compelling?
Step 3: Match Value Proposition to Customer Needs and Validate Differentiation
- Evaluate how your business model’s value proposition specifically meets those jobs in a way that provides unique or superior benefits compared to alternatives. This is where you test the alignment of your offering to customer preferences.
- Validate the value assumptions through customer research—interviews, surveys, or prototype testing. This helps confirm that the UVP genuinely resonates with target customers.
Step 4: Benchmark Against Competitors for Differentiation and Superiority
- Compare your value proposition directly against competitors, focusing on how it differs in terms of price, quality, brand experience, or customer service. Ask, “Why would a customer choose our product over another?”
- Look for gaps in competitor offerings that your UVP uniquely fills. This comparison should help identify whether your differentiation is significant enough to stand out.
Step 5: Test the Defensibility and Long-Term Viability of the UVP
- Ensure that the value you deliver is defensible over time, meaning it is difficult for competitors to replicate. Think about elements like proprietary technology, brand loyalty, or unique customer relationships.
- Evaluate whether your business model can sustain this UVP in the long run. Is there a risk that competitors could imitate it or that changing customer needs could erode its appeal?
Operational Feasibility and Efficiency
To ensure feasibility, the model must be able to operate efficiently and at scale, leveraging resources and capabilities to deliver value in a cost-effective manner.
Step 1: Identify Core Activities and Capabilities Required for Value Delivery
- Question to Ask: What are the essential activities needed to deliver the business model’s value proposition effectively? For example, do you need complex manufacturing, distribution, or technological capabilities?
- Map out all necessary operational activities and the resources required to execute these activities (e.g., technology, talent, supply chain partnerships). Understand the core competencies needed to deliver value consistently.
Step 2: Assess Feasibility of Resources and Processes
- Question to Ask: Can the company realistically support these operational activities given its resources and current capabilities?
- Evaluate your capacity and expertise in these critical activities. Are there any resources or processes that present significant risks or challenges to operational feasibility? This includes financial resources, technical expertise, and supplier reliability.
Step 3: Test Scalability and Operational Flexibility
- Question to Ask: As demand increases, can the business scale operations without significantly increasing costs or compromising quality?
- Ensure that key activities are not only feasible at their current scale but also scalable. This includes evaluating systems, workflows, and supply chains for flexibility and adaptability as the business grows. Financially model fixed vs. variable cost through different scale points – this is particularly relevant for manufacturing investments.
Step 4: Analyse Cost Structures and Potential Efficiencies
- Question to Ask: Is the cost structure sustainable as you scale? Can the business achieve economies of scale, and are there opportunities for reducing variable costs?
- Identify areas where costs can be reduced or optimized, such as through process improvements, automation, or supplier negotiations. Ensure that the model’s cost structure aligns with your revenue streams and maintains profitability.
Step 5: Test for Operational Risks and Contingencies
- Question to Ask: What operational risks could disrupt your ability to deliver value, and how can you mitigate them?
- Identify potential bottlenecks, supply chain disruptions, or capacity limits that could hinder smooth operations. Develop contingency plans for risk mitigation to ensure operational resilience and continuity. Identify the 5-10 risks, prioritize based on level of risk and likelihood and assess impact.
Financial Sustainability and Viability
According to a CB Insights report analyzing startup post-mortems, 38% of startups fail because they run out of cash or fail to secure new financing.
The report highlights the how managing finances leads to success or failure, with one startup founder noting:
“We failed because we were not able to raise additional funding. We had overestimated the market and growth opportunities, which left us financially strapped.”
(Source: CB Insights, “The Top 12 Reasons Startups Fail”, February 2021)
The key is to start with a clear definition of revenue potential and cost structures before moving into profitability, financial health, and long-term sustainability.
Step 1: Define Revenue Streams and Revenue Model
- Question to Ask: What are the main ways the business will generate income? Are these revenue streams diversified or reliant on a single source?
- Clearly identify all revenue streams (e.g., product sales, subscriptions, licensing fees) and validate how they align with the customer’s willingness to pay. Understand the revenue model (e.g., one-time sales vs recurring revenue) and how it fits into the overall business strategy.
Step 2: Project Costs and Unit Economics
- Question to Ask: What are the fixed and variable costs required to deliver the value proposition? How do these costs compare to the revenue potential?
- Break down the cost structure into fixed costs (e.g., rent, salaries) and variable costs (e.g., production costs, logistics). Project the unit economics to understand profitability on a per-customer or per-unit basis. This includes the contribution margin (revenue per unit minus variable costs) to determine if the business model can achieve positive margins.
Step 3: Assess Profitability and Break-Even Point
- Question to Ask: How much revenue is needed to cover all costs, and when will the business become profitable?
- Use financial modelling to calculate the break-even point, where total revenue equals total costs, and profitability begins. Evaluate different scenarios (e.g., best-case, worst-case) to test the model’s profitability under various market conditions and assumptions.
Step 4: Test the Sustainability of Financial Ratios and Growth Metrics
- Question to Ask: Does the business model support healthy financial ratios, such as LTV/CAC, and is the growth financially sustainable?
- Evaluate key financial ratios:
- LTV/CAC Ratio: Ensure that the lifetime value (LTV) of a customer is significantly higher than the customer acquisition cost (CAC)—a typical target is a ratio of 3:1 or more.
- Payback Period: Calculate how quickly the business can recover CAC from customer revenue.
- Gross and Net Margins: Test whether gross margins (revenue minus cost of goods sold) and net margins (profit after all expenses) support long-term financial health.
- Ensure that the model’s growth trajectory is sustainable without excessive capital burn or cash flow strain.
Step 5: Evaluate Long-Term Financial Health and Risk Mitigation
- Question to Ask: What are the potential financial risks, and how can they be mitigated to ensure the business remains financially stable over time?
- Test for financial risks such as changes in market demand, price sensitivity, cost fluctuations, or dependency on key customers or suppliers.
- Develop contingency plans for financial risks, including managing cash flow, adjusting cost structures, or diversifying revenue streams. Ensure that the model has financial flexibility to withstand economic downturns, changing customer preferences, or competitive pressure.
For a business model to be competitive and sustainable, it must be able to grow while enhancing its value and defensibility over time.
This requires examining how the model can scale, leverage network effects, and build mechanisms to lock in customers and make it difficult for competitors to replicate.
Step 1: Evaluate Scalability of Core Operations
- Question to Ask: Can the business model scale efficiently without significantly increasing costs or operational complexity?
- Test the operational model to ensure that as demand increases, processes and resources (e.g., technology, staff, supply chain) can support this growth without becoming a bottleneck. Assess whether the model enables efficient growth through automation, streamlined processes, or scalable platforms.
Step 2: Identify Opportunities for Economies of Scale and Scope
- Question to Ask: Does the business benefit from economies of scale (reduced cost per unit with increased production) or economies of scope (cost efficiencies from offering a variety of products)?
- Look for areas where increased volume lowers costs or where existing resources can be leveraged to add new products or services. For example, using the same distribution channels for multiple products.
Step 3: Test for Network Effects and Their Impact on Value
- Question to Ask: Does the business model create network effects that enhance value as more users or partners join? How do these effects contribute to competitive advantage?
- For platforms or marketplaces, analyze whether an increased user base adds value for other users (direct network effects) or if different participant groups (e.g., buyers and sellers) benefit from one another (cross-side network effects). Assess how these effects support growth and customer acquisition.
Step 4: Develop Customer Lock-in and Switching Cost Strategies
- Question to Ask: What mechanisms are in place to lock in customers and make switching to competitors costly or inconvenient?
- Identify ways to build lock-in through features like loyalty programs, contracts, product ecosystems (e.g., software compatibility), and personalization. The goal is to increase the customer’s dependence on your product or service to discourage them from moving to alternatives.
Step 5: Assess Barriers to Replication and Defensibility
- Question to Ask: How difficult is it for competitors to replicate your business model and disrupt your market position?
- Test the durability of your network effects, economies of scale, and customer lock-in. Ensure that these elements are defensible over the long term, whether through proprietary technology, brand strength, customer data, or exclusive partnerships that make your model hard to imitate.
Dynamic Capabilities and Continuous Learning
Everyone talks about being lean, agile and adaptive but putting it into practice is harder than you think.
When you are hyper-focused on developing your product, getting it to market and refining it you can lose sight of how competition are reacting or how the market is shifting. Examples abound where companies have lost sight of shifts.
Historically Kodak is a case study of a firm that lost sight of how the market was shifting to digital. More recently Replika which focused on improving its scripted interactions and basic AI responses, didn’t foresee models like ChatGPT. Chatgpt quickly advanced to create more natural, contextually aware, and engaging conversations. Mya Systems, a company that created AI-driven recruitment bots to help with job application screening, scheduling interviews, and answering candidates’ FAQs. Mya focused on optimizing recruitment processes using AI for structured, scripted interactions. However, as ChatGPT and other advanced language models emerged, they quickly showcased much broader, more nuanced capabilities.
- Start with Market Sensing: Understanding how well the business detects opportunities and threats ensures that it can stay ahead of market changes.
- Build a Culture of Experimentation and Learning: Once opportunities are identified, fostering a culture of experimentation ensures the company is ready to test new ideas and respond to customer feedback.
- Leverage Core Competencies for Innovation: Core competencies become the foundation for adapting to changes and innovating effectively.
- Incorporate Flexibility into the Model Structure: Ensuring the business model is built for adaptability allows for smooth operational pivots when necessary.
- Create Continuous Improvement Systems: Establishing systems to monitor performance and gather feedback ensures ongoing learning and refinement.
Strategic Fit and Alignment Across the Business Model
To achieve a sustainable competitive advantage, all parts of the business model should be aligned and work cohesively together to reinforce the overall strategy. See article from David J Teece – Profiting from Innovation for a much deeper discussion on complements.
A strategically fit business model ensures that the value proposition, operations, revenue streams, and customer relationships complement each other to support growth, profitability, and long-term sustainability.
Step 1: Evaluate the Development of Unique Capabilities
Outcome: Identification of core capabilities that are rare, valuable, and create a competitive edge, such as proprietary technology, unique production processes, or exceptional customer service.
Key Action: Assess how these key resources are combined to build capabilities—unique skills, processes, and expertise that differentiate the business and are hard for competitors to replicate. Focus on capabilities that support the value proposition, drive efficiencies, or improve customer experiences.
Step 2: Test for Resource and Capability Leverage
- Key Action: Ensure that the identified resources and capabilities are not just present, but actively leveraged to their full potential to support the business model’s growth and strategic goals. This involves analysing how well these capabilities improve operational performance, product differentiation, and customer value.
- Outcome: Effective utilization of resources and capabilities to maximise their contribution to strategic positioning and market advantage.
Step 3: Enhance and Develop Resource Synergy
- Key Action: Test how well resources and capabilities can be combined or leveraged to create synergy across different parts of the business model. For example, assess whether technological assets can improve both product innovation and customer experience.
- Outcome: Development of resource combinations that enhance the overall business model’s effectiveness and contribute to a stronger, more unified competitive advantage.
Timing and First-Mover or Second-Mover Strategy
A business model’s success may depend on its timing in the market, particularly in deciding whether to be a first mover or a second mover. While first movers aim to establish dominance by entering the market early, second movers can capitalize on the first mover’s experience.
The focus here is on determining how the business model aligns with either strategy – whether to move quickly into a new market as a pioneer or enter later to improve on what’s already there.
The evaluation should focus on whether the business can overcome the challenges of being a pioneer or capitalize on being a fast follower.
Assess Timing and First-Mover Advantage
The goal is to determine whether entering the market early or at a specific time aligns with your business model and provides a defensible advantage over competitors.
Step 1: Assess Capital Requirements for Market Penetration and Growth
- Question to Ask: Does the business model have the financial capacity to support the high costs of educating the market, developing the product, and achieving rapid growth as a first mover?
- First-mover models often require significant capital for R&D, marketing, and customer acquisition to establish a new market or category.
Step 2: Evaluate the Market’s Level of Readiness for a New Value Proposition
- Question to Ask: Is the market prepared to adopt a new product or service, or does it require substantial effort to drive awareness and change consumer behavior? If not, is the market better suited for a refined or improved second-mover product?
- For a first mover, test how ready the market is for the value proposition by assessing customer awareness, pain points, and openness to new solutions. If the market is not prepared, the model may need to invest heavily in market education.
- Step 3: Assess Speed to Scale and Adaptability to Competitor Moves
- Question to Ask: Can the business model scale rapidly enough to build a defensible position as a first mover, or adapt quickly to improve upon the first mover’s weaknesses as a second mover?
- First movers must have the operational and financial capacity to quickly establish a strong market presence and set standards before competitors enter. This means investing in infrastructure, partnerships, and distribution channels
Step 3: Assess Speed to Scale and Adaptability to Competitor Moves
- Question to Ask: Can the business model scale rapidly enough to build a defensible position as a first mover, or adapt quickly to improve upon the first mover’s weaknesses as a second mover?
- First movers must have the operational and financial capacity to quickly establish a strong market presence and set standards before competitors enter. This means investing in infrastructure, partnerships, and distribution channels
Conclusion: Use These Steps as Guides, Not a Checklist
The sections covered a lot of ways and linked it back to strategy. Remember, a business model is not a strategy.
Business model assessment involves thinking about your strategy and how you can win and compete.
The business model can provide unique ways to differentiate how you create, capture and deliver value.
However, not every business needs to address all of these areas in detail. Think of these steps as guides to help you explore your business model more deeply rather than a strict list of tasks.
Your focus should be on what matters most to your business. For example, if you’re a startup, you might care more about how quickly you can scale and secure funding. If you’re a socially-minded brand, sustainability might be your priority.
The aim is to help you understand how your model supports your goals, handles market changes, and delivers value effectively.
By using these points selectively, you can concentrate on the areas that matter most for your business without being overwhelmed by every detail. This way, you create a focused strategy that aligns with your needs and maximizes impact.
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