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5 Building Blocks of Business Models

A business model consists of five building block elements that, taken together, create and deliver value – Customer Value Proposition, Key Resources, Key Processes, Key Performance Indicators, and a Profit Formula.  Successful business models require that these key elements work in consistent and complimentary ways.

A profitable business is the best early indication of a viable business model.  However, over time, changes occur that can threaten business model sustainability.  For instance, sales can erode, cost and pricing increases can diminish value, products and services can be commoditized, or accounting practices can obscure actual product line margins leading to the sub-optimal performance.

Customer Value Proposition (CVP)

A Customer Value Proposition is an offering (what is sold and how it’s sold) that solves a customer need in each target market.

Key Resources

Key resources are people supported by technology, products, equipment and facilities required to deliver the CVP profitably.

Work comprises time spent on three types of activities:  Customer Value-Added, Essential and Non-Essential work.  Customer Value-Added activity (revenue-producing) is the ONLY activity for which the customer is willing to pay.  Essential activities are ones that must be performed to deliver the CVP, such as invoicing, while Non-Essential activity is re-work and unnecessary effort.

Key Processes

Effective operational and managerial processes consistently deliver value with increased scale and enhanced customer value.  Process examples include sales, manufacturing, distribution, service, and employee evaluations.

Process Improvement includes:

  • Analyzing the Current Process
    • Workflow Steps
    • Work Time
    • Cycle Time
    • Customer & Internal Process Issues
  • Process Re-engineering
    • Re-designed Workflow
      • Fewer Steps
      • Less Work Time
      • Reduced Cycle Time
      • Enhanced Customer Value
      • Business Case for Change

Cycle Time is a key process driver that reduces cost while increasing value.

Key Performance Indicators: Data Analytics

The management decision process is challenged with the manual manufacturing of static, latent or non-existent key performance indicators, resulting in “gut-based” decision-making.  In contrast, effective management of business models requires real-time and integrated data analytics.

Profit Formula

The profit formula is the blueprint of how the organization creates profit for itself while delivering value to the customer:

  • Revenue = Price x Volume
  • Cost Structure: direct costs, indirect costs and economies of scale. (People costs typically dominate a business models cost structure.)
  • Margin: Transaction contribution needed to achieve desired profit
  • Resource Velocity: How quickly resources need to be used to support target volume, lead times, and throughput to achieve profit.

Executive management struggles with execution of the profit formula, and flat-line budgets attempt to eliminate performance variability.  Without management having first-hand knowledge to make informed decisions, margin performance suffers.  In most organizations, the KPIs are at the macro level, and not micro level, thereby inhibiting change.

Which of the 5 building block has been most important to your business?

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