Use Johnson’s Business Model Tips to Get Your New System Approved

A few months ago on the HBR Blogs, Mark W. Johnson published a short piece on A New Framework for Business Models where he reviewed Drucker‘s definition for a business model which is nothing else than a representation of how an organization makes (or intends to make) money and noted that, in addition to specifying how a company (intends) to make money, it should also specify why a customer would want to buy from you.

Why a customer would want to buy from you is answered by your customer value proposition which identifies something that your customer needs and proposes an offering that meets that need. Specifying how you’ll make money is a bit harder. To answer this, you need to analyze your:

  • Revenue Model

    quantity times price

  • Cost Structure

    direct costs, indirect costs, and overhead

  • Margin Model

    what is the actual profit

  • Resource Velocity

    how much throughput can you achieve

When I read this, I couldn’t help but notice how appropriate the definition is to business cases in general and how you also have to clearly answer these four questions if you expect to get funding for that new supply chain system you need. For example, if you want a new e-Sourcing system, you need to define:

  • Payback (Revenue) Model

    expected number of sourcing events times expected savings per event (on average)

  • Cost Structure

    software, hardware, support, etc.

  • Margin Model

    what are the real savings when the costs are taken into account

  • Resource Velocity

    how many more events will you be able to handle with the new system

Otherwise, you won’t have a solid business case that clearly outlines the ROI and why you should be allowed to buy it in the first place. Furthermore, if you can’t define the resource velocity, you can’t specify how it increased your customer value proposition, which, in the case of an e-Sourcing system, is increased event throughput to help other organizational units drive savings straight to the bottom line (as e-Sourcing can also reduce HR, Marketing, and Legal costs, for example).

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