Business analysis is a research discipline that helps driving change within an organization by identifying the key elements and processes that drive value. Business analysis can also be used in Identifying new business opportunities or how to take advantage of existing business opportunities to grow your business in the marketplace.
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A quick intro to the Business Analysis framework
On FourWeekMBA I’ve looked at hundreds of business models of companies from high-tech industries (Alphabet’s Google, Amazon, Facebook, Apple, and Microsoft) to more traditional industries, like luxury empires (LVMH, Kering Group, Tiffany, Brunello Cucinelli, Prada) and more.
I’ve analyzed from listed, public companies, for which data can be found in financial statements to small businesses for which data is not publicly available.
As I received this question over and over again, I thought to show a simple framework to analyze any business. For the sake of this framework, we’ll leverage on business analysis to reverse engineer a business to either help it grow or to gather insights that can help us grow our own company.
Keep in mind the business analysis requires a good amount of creativity, and while a single framework is a good starting point, you will need to use your experience, understanding of the industry and what is available out there to draw a picture of what you’re looking at.
In short, I think an effective approach to business analysis is that of the artist, rather than the scientist.
Thus, while we’ll be using a few data points to understand a business, we want to keep our minds able to connect the dots in several areas to draw a picture that unlocks strategic insights that we can test.
For the sake of providing a framework as a starting point to analyze any sort of business, you’ll need to answer a few simple questions, each addressing a key element of the business:
- How does it make money? (revenue generation)
- Where’s the real cash? (cash generation)
- What’s the key asset? (core asset)
- Who’s the key stakeholder? (stakeholder profiling)
- What player is competing for the same customer? (context mapping)
- What’s the key touchpoint between the brand and the customer? (core distribution)
- How does the company spend money? (cost structure)
Let’s analyze each of those elements to uncover and draw the picture of any business.
How does it make money?
Revenue streams are important as a baseline to understand any business. Following the money can be very powerful in business as it unlocks a set of questions that will help us drill down into the current picture but also to draw some possible conclusions about future operations and strategy.
For instance, if you look at Google revenue streams it’s interesting to notice a few things right away:
- The company still primarily makes money from advertising
- Google revenue streams are diversified (even though advertising is still the primary revenue stream)
- A very small percentage of Google’s revenues come from other bets
From those simple statements, we can drill further down and look at each revenue stream:
- Advertising revenues: Google makes money by two primary mechanisms: Google Ads and Google AdSense
- Other revenues: that comprises things like in-app revenues, but also hardware devices which Google sells
- Other bets: it comprises investments in other ventures
From this first look, we can depart from looking at other bets and other revenues. Not because those are not important for the future. Quite the opposite, one of the hidden gems of Google‘s success in the next ten, twenty years might hide there.
But here we’re not trying to predict the future, which is impossible. We want to reverse engineer the current business to gather some insights which will help us drive our own strategy now (for instance, if you’re building a business today by gaining organic traffic from Google understanding its logic helps a lot!).
Therefore, we’ll decide to drill down more
Why? We want to uncover where the real cash is.
Where’s the real cash?
When asking “where’s the real cash?” we’re not talking about cash flows, but rather about margins. In short, for companies like Netflix which run cash negative business models, it would be misleading to ask where’s the cash.
Instead, we want to look at the part of the business that has high-profit margins. For instance, if we look at Google’s advertising machine we can notice a few things:
To build a cash cow the company might do the following:
- Give up part of the margins on a line of business to strengthen another more strategic and scalable part of the business (think of how Google splits revenues with network members thus giving up a good chunk of margins, yet by making its search pages way more valuable for users, and advertisers)
- Build a freemium part of the business which while doesn’t get monetized it helps amplify the brand and to build a valuable core asset monetized asymmetrically (we’ll see what that means)
What’s the key asset?
The key asset is the main property that enables the company to make money in the long run.
For a tech business like Google that is represented by its search results pages, which endowed by users’ data and algorithms make them extremely valuable to advertisers.
If we think of a smaller business or a non-tech company that can be represented by its premises or its brand.
For instance, for a small Boutique hotel, its location is the key asset. For a luxury company, its brand is the most important asset.
The former is physical and easily identifiable. The latter is instead non-physical and abstract, yet still extremely valuable as it enables companies like Prada, LVMH, Tiffany and other luxury brands to capture high margins.
Therefore depending on the company, the main asset might be the technology, data or brand. Or better yet a mixture of those things.
Who’s the key stakeholder?
If you look at a companies’ like Amazon the complexity of the business goes well beyond a regular company. In short, at this stage, it’s important to highlight the difference between small businesses which are more linear in how they approach customers.
And platform business models that instead have a more complex value chain.
We could make this process harder and harder by finding more business types, classifying them in B2B, B2C, B2B2C and more. Or we can take a simpler approach.
Who’s the key user/customer and what’s the value provided to her?
In Amazon’s case, for instance, the company has multiple products and each of them has a different value proposition. Therefore, focusing on them all would be a mistake, as we want to go back and reconsider.
Who’s the Amazon repeat customer?
The customer who goes back to the Amazon e-commerce platform to buy over and over again is the key customer and where the company has built its success.
When you do look at the customer from that perspective, you stop assuming that Amazon Prime is another revenue stream, and instead, you understand that besides that, that is a way for Amazon to lock-in loyal customers and make their repeat purchases convenient (Prime Customers won’t pay for delivery).
The same happens if you go back and ask a similar question for a company like Google.
Who’s the person that drives up the value of the most important company’s asset?
If you look at Google‘s business model it’s easy to get fooled:
You might assume that as Google makes money by selling advertising to businesses, it will be the company that pays Google to be the most valuable customer.
Yet, in Google‘s case, the most valuable customer is the one who doesn’t pay: its users
That is because Google runs an asymmetric model. In short, the company won’t monetize directly its users, but it will monetize the core asset which is built on top of the free users‘ attention.
Where free users provide valuable data to Google‘s algorithms, the company matches its technology with the users‘ data and sells part of that as paid adverting.
In short, in an asymmetric model user and customers are not the same.
In a more symmetric model instead, users and customers are the same stakeholders. The customer wearing the hat of the user provides valuable data to the platform. The company refines that data through proprietary algorithms and as a result, it gives back a valuable service to its customers.
That is how the Netflix business model works.
In those cases when the user is what provides valuable data to the core asset of the company, it’s important to understand that the tech company will prioritize its strategy around the user over time.
What player is competing for the same customer?
Once found the key stakeholder, the person who helps the company build its most valuable asset, we can zoom out a bit and understand the context in which the company operates.
One way to find comparable companies to map out the context is to look for those organizations that match the business and financial profile.
We do that because there is no company operating in a vacuum. And even when a company which is better suited to help customers get things done might dominate.
In many other circumstances, better distribution strategy, capital moats, and more effective business models can help companies dominate beyond the value provided by their core products.
That’s why context matters.
In Google‘s case we’ll look at the other players which are also grabbing the attention of users around the globe:
An attention-based model usually follows an asymmetric monetization strategy. Therefore, given Google‘s key stakeholder (its users), and the fact that it’s an attention-based model, we can understand right away what products/platforms in the marketplace are comparable:
- Google (Alphabet)
- YouTube (Alphabet)
- Instagram (Facebook)
- Bing (Microsoft)
- TikTok (ByteDance)
- DuckDuckGo
- Amazon
Therefore, in order for Google to keep its competitive advantage is important to keep an eye on these.
*Note: The reason why Amazon is on the list as its website is one of the most important product search engines, intercepting the commercial intents of billions of people in the western world.
What’s the key touchpoint between the brand and the customer?
While disruptive startups built their name and grabbed market shares quickly by breaking down the trade-off between value and cost (at the basis of a blue ocean strategy) there is another component of the success of any organization which can’t be ignored: distribution.
Distribution is the key touchpoint that makes customers connect with a brand, that enables companies to monetize their core assets and that enables them to keep tight long-term control over their business.
The importance of a distribution strategy can’t be overstated. Distribution isn’t just about delivering a product in the hands of the key customer that is also about:
- Enabling the company to be perceived inline with its pricing strategy and the brand’s identity
- Building up the habits that enable users/customers to become champion of the product (just like you can’t stop using Google)
- Build competitive moats
How does the company spend money?
How the company spends its money informs about how it’s investing back into strengthening its core asset, thus building future growth.
Where do you find the data?
A set of useful resources to find the data you need to analyze several businesses are:
- EDGAR Filings
- Crunchbase
- Owler
- SimilarWeb
It’s important to remark that when it comes to data it’s not important how many data points you find. Often it requires a bit of creativity to ponder the right question.
In that case, a single data point can tell you a lot about a business.
FourWeekMBA business analysis framework summarized
To analyze any business you can ask a few simple questions:
- How does it make money? (revenue generation)
- Where’s the real cash? (cash generation)
- What’s the key asset? (central asset)
- Who’s the key stakeholder? (stakeholder profiling)
- What player is competing for the same customer? (context mapping)
- What’s the key touchpoint between the brand and the customer? (core distribution)
- How does the company spend money? (cost structure)
Each of those questions will lead to an understanding of the several blocks that make up internal and external strategic forces that shape the business.
FourWeekMBA resources used to draw the framework:
- What Is Business Model Innovation And Why It Matters
- What Is a Business Model? 30 Successful Types of Business Models You Need to Know
- Business Strategy: Definition, Examples, And Case Studies
- Marketing Strategy: Definition, Types, And Examples
- Platform Business Models
Business model case studies:
- How Does PayPal Make Money? The PayPal Mafia Business Model Explained
- How Does WhatsApp Make Money? WhatsApp Business Model Explained
- How Does Google Make Money? It’s Not Just Advertising!
- How Does Facebook Make Money? Facebook Hidden Revenue Business Model Explained
- The Google of China: Baidu Business Model In A Nutshell
- How Does Twitter Make Money? Twitter Business Model In A Nutshell
- How Does DuckDuckGo Make Money? DuckDuckGo Business Model Explained
- How Amazon Makes Money: Amazon Business Model in a Nutshell
- How Does Netflix Make Money? Netflix Business Model Explained
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