business analysis framework!
On FourWeekMBA, I've looked at thousands of company business models, from high-tech industries to more traditional industries.
That is why, since the onset, I came up with my own way of looking at the business world by intersecting various disciplines (business modeling, financial analysis, technological modeling, and more, in what I would eventually organize around Business Engineering - that I defined in a completely different way, compared to the traditional definition).
Let me show you then an analysis framework I've been using over the years, keeping in mind that any framework will require a good amount of creativity to make our analysis valuable in the first place!
Thus, 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.
For that matter, 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.
Often, these insights might also come as a result of identifying a single data point that changes our whole understanding of that business!
To provide a framework as a starting point to analyze any business, you'll need to answer a few simple questions, each addressing a vital element of the company.
We'll tackle it by looking at three main competitive advantages a business can create over time:
Core moat:
What's the key asset? (core asset)
Market moat:
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)
Financial moat:
How does it make money? (revenue generation)
Where's the real cash? (cash generation)
How does the company spend money? (cost structure)
Let's analyze each of those elements to uncover and draw the picture of any business.
We'll start from the outer layer (the financial moat, to get to the core asset
Financial moat
In the. financial moat stage, we'll answer:
How does it make money? (revenue generation)
Where's the real cash? (cash generation)
How does the company spend money? (cost structure)
The purpose of the financial moat is to follow the money to dig deeper into the business and move toward what gives it a real market advantage. Eventually, we'll look for the business core asset.
How does it make money?
Revenue streams are important as a baseline for understanding any business.
Following the money can be very powerful in business.
It unlocks a set of questions that will help us drill down into the current picture and 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 through two primary mechanisms: Google Ads and Google AdSense
Other revenues: these comprise things like in-app revenues but also hardware devices that 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 or 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 to help us drive our 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 helps amplify the brand and build a valuable core asset monetized asymmetrically (we'll see what that means)
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.
Market moat
At this stage, we'll ask:
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)
The objective here is to understand what creates a competitive market advantage and point us toward the core asset of the company, which makes the business sustainable in the long term.
Who's the key stakeholder?
If you look at companies like Amazon, the complexity of the business goes well beyond that of a regular company.
In short, at this stage, it's essential to highlight the difference between small businesses, which are more linear in their approach to 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 and classifying them into B2B, B2C, B2B2C, and more.
Or we can take a more straightforward 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. 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 advertiser who 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 its users directly, 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, users 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 that 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 their core products provide.
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 stakeholders (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)
TikTok (ByteDance)
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, enables companies to monetize their core assets, and 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 in line with its pricing strategy and the brand's identity
Building up the habits that enable users/customers to become champions of the product (just like you can't stop using Google)
Build competitive moats
Core moat
Finally, at this stage, we can identify the core asset and put all together.
What's the key asset?
The key asset is the main property that enables the company to make money in the long run.
A tech business like Google, which is represented by its search results pages endowed by users' data and algorithms, makes 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, a small Boutique hotel's 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.
Putting it all together
As we identified the core asset, market, and financial moat, we can move backward to uncover the whole story.
In a case like Google, the company makes its money primarily by monetizing its search results pages (core asset).
It runs an asymmetric business model where the user and the customer are different (stakeholder profiling).
Products and platforms like Amazon, Facebook, and Twitter also draw the attention of users (context mapping); however, Google has a strong distribution network given, for instance, by the fact the company can cover the whole users' journey (core distribution).
Most of its money is spent on maintaining its core competitive asset (cost structure), while advertisers provide revenues and cash to the company, which makes it financially sustainable (financial moat).
FourWeekMBA business analysis framework summarized
To analyze any business, you can ask a few simple questions:
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 it make money? (revenue generation)
Where's the real cash? (cash generation)
How does the company spend money? (cost structure)
Last but not least!
Recap: In This Issue!
I presented to you the FourWeekMBA Business Analysis framework, designed to analyze any business by addressing key elements with a layer-by-layer approach, where we move from the outmost (seemingly superficial) layer ("how does it make money") to uncover where is the core asset, through the financial model, market moat and core moat!
Thus, this focuses on three main competitive advantages a business can create over time: core moat, market moat, and financial moat.
The analysis starts with the financial moat, examining revenue generation, cash generation, and cost structure.
Revenue streams are important for understanding the baseline of any business.
Identifying where the real cash is can uncover high-profit margins and strategic areas of the business (and it shows "how the business prioritizes strategically in the short-term").
Understanding how the company spends money reveals its investment in strengthening the core asset for future growth.
The market moat examines key stakeholders, competitor mapping, and core distribution.
Identifying the key stakeholders helps to understand the customers who drive the most value for the business.
Mapping the competitive landscape provides context and identifies comparable companies.
Core distribution is the key touchpoint that connects the brand with the customer and enables monetization.
The core moat focuses on identifying the key asset that enables the company to make money in the long run.
The key asset can be technology, data, brand, or a combination of these elements.
By analyzing the core asset, market moat, and financial moat, the full picture of the business can be uncovered.
The framework encourages asking difficult questions to identify the single data point that can provide valuable insights about the company. Indeed, oftentimes, the real value of a business analyst doesn't stand in producing a 20-page report of it, but rather to uncover the single data point, which might give you the most clarity about the future prospects of a business!
Real-World Case Studies
Google (Alphabet Inc.)
Financial Moat:
Revenue Generation: Primarily through advertising via Google Ads and Google AdSense.
Cash Generation: High-profit margins from advertising, especially through its search engine.
Cost Structure: Investments in maintaining and improving its core asset (search engine, algorithms, data centers).
Market Moat:
Key Stakeholder: Users who provide valuable data for Google's algorithms.
Competitors: Companies like Facebook, Twitter, and Amazon, which also compete for user attention.
Core Distribution: Google's distribution network covers the entire user journey, strengthening its brand-customer touchpoints.
Core Moat:
Key Asset: Google's search results pages endowed with user data and algorithms, making them valuable to advertisers.
Amazon
Financial Moat:
Revenue Generation: Primarily through e-commerce sales, supplemented by Amazon Web Services (AWS) and subscription services like Amazon Prime.
Cash Generation: High margins from AWS services.
Cost Structure: Investments in logistics, technology infrastructure, and expanding its product offerings.
Market Moat:
Key Stakeholder: Repeat customers who benefit from convenience and loyalty programs like Amazon Prime.
Competitors: Other e-commerce platforms like eBay, Walmart, and Alibaba.
Core Distribution: Amazon's extensive logistics network ensures efficient delivery and customer service.
Core Moat:
Key Asset: Amazon's e-commerce platform and customer data, enabling personalized recommendations and targeted advertising.
Facebook (Meta Platforms)
Financial Moat:
Revenue Generation: Mainly from advertising across its platforms like Facebook, Instagram, and WhatsApp.
Cash Generation: High-profit margins from targeted advertising.
Cost Structure: Investments in content moderation, research, and development.
Market Moat:
Key Stakeholder: Active users who provide data for targeted advertising.
Competitors: Other social media platforms like Twitter, Snapchat, and TikTok.
Core Distribution: Facebook's platforms serve as key touchpoints for connecting brands with users.
Core Moat:
Key Asset: Facebook's social media platforms and user data, enabling precise targeting for advertisers.
Netflix
Financial Moat:
Revenue Generation: Subscription-based model with multiple pricing tiers for streaming services.
Cash Generation: High margins from subscription fees.
Cost Structure: Investments in original content production and licensing agreements.
Market Moat:
Key Stakeholder: Subscribers who provide viewing data for content recommendations.
Competitors: Other streaming platforms like Disney+, Hulu, and Amazon Prime Video.
Core Distribution: Netflix's platform serves as the primary touchpoint for subscribers to access content.
Core Moat:
Key Asset: Netflix's vast library of original and licensed content, driving subscriber retention and acquisition.
Apple
Financial Moat:
Revenue Generation: Diverse product lineup including iPhones, iPads, Macs, and services like Apple Music and iCloud.
Cash Generation: High margins from hardware sales, supplemented by recurring revenue from services.
Cost Structure: Investments in product development, marketing, and supply chain management.
Market Moat:
Key Stakeholder: Apple's loyal customer base, attracted by its ecosystem of products and services.
Competitors: Other tech giants like Samsung, Google, and Microsoft across various product categories.
Core Distribution: Apple's retail stores, online store, and partnerships with carriers worldwide.
Core Moat:
Key Asset: Apple's brand, ecosystem, and user experience, fostering customer loyalty and premium pricing.
Tesla
Financial Moat:
Revenue Generation: Sales of electric vehicles (EVs), energy storage products, and solar solutions.
Cash Generation: High margins from EV sales, with potential future revenue streams from energy products.
Cost Structure: Investments in R&D, manufacturing facilities, and expanding its product lineup.
Market Moat:
Key Stakeholder: Tech-savvy consumers interested in sustainable transportation and energy solutions.
Competitors: Traditional automakers like GM, Ford, and new players in the EV market like Rivian and Lucid Motors.
Core Distribution: Tesla's direct-to-consumer sales model and global network of stores and service centers.
Core Moat:
Key Asset: Tesla's innovative technology, brand reputation, and first-mover advantage in the EV market, driving demand and investor confidence.
Ciao!
With ♥️ Gennaro, FourWeekMBA
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