How can you evaluate the risk and return of business models in your portfolio?

As a GRC consultant I evaluate business models by defining metrics like profitability, market share, brand reputation, and regulatory compliance. They map the landscape, identify threats, and focus on return on investment. The risk-return dance begins, weighing rewards against risks, creating a risk-return profile for each model. This allows for informed decisions, prioritizing models that offer a favorable balance. Continuous monitoring ensures sustainable growth while mitigating risks. This framework helps navigate the ever-evolving landscape of business models, balancing potential returns with risk realities.

Risk shouldn’t be measured by fluid and qualitative metrics like “uncertainty, volatility or complexity”, rather by concrete metrics like Revenue Loss, Profitability Loss, Increased Costs and others. Risk Metrics should be derived from Opportunity Metrics by way of inversion. Fluid and qualitative concepts should be used only in the analysis phase, i.e. in order to inform more tangible metrics (usually corporate-level KPI’s).

A portfolio matrix, like the BCG matrix, assesses the risk and return of business models based on their market growth rate and relative market share. High market share with high growth indicates a "star" business model with potential high return but also high risk. "Cash cow" models, with high market share but low growth, offer lower risk and moderate returns. "Question mark" models, with low market share and high growth, pose high risk but offer potential high returns. "Dogs" have low market share and low growth, typically representing divestment candidates due to low return potential and minimal risk.

Solid frameworks for portfolio management include the Ansoff Matrix, Porter’s Generic Framework, BCG Matrix, and McKinsey’s Nine-Box Matrix. You can consider one of those frameworks as a starting point and adjust it to your own business.

Scenario analysis evaluates the risk and return of business models by simulating various plausible scenarios. Identify key variables impacting business performance, such as market conditions or regulatory changes. Develop scenarios with different outcomes and assess their likelihood and impact on the portfolio's returns. By quantifying potential risks and returns under different conditions, scenario analysis helps portfolio managers make informed decisions and develop risk mitigation strategies.

Scenario Analysis is a qualitative method. An alternative method is the Monte Carlo Simulation, which is a quantitative method. It can help assessing risk and returns by way of Probabilistic Analysis, generating a range of possible outcomes by simulating thousands of scenarios, incorporating randomness and probability distributions of key variables of choice. It can also help identifying opportunity and risk factors which have the most significant impact on returns and losses.

"However beautiful the strategy, you should occasionally look at the results." - Winston Churchill. Monitoring and updating your business model portfolio is a continuous necessity, not a one-time task. Employ dashboards or scorecards to track the performance of your business models against goals and benchmarks. Utilize feedback loops and learning cycles to gather and analyze data, insights, and feedback from customers, partners, and stakeholders, allowing you to fine-tune and enhance your business models accordingly. How do you keep your business models relevant and effective? Share your approach and connect with others for more insights!

Business Models sit at the core of one’s Corporate Strategy and Execution. Any change to that aspect of the business, let alone the addition of new Business Models, will affect every major layer and function of the business. It can be quite disruptive to innovate through Business Models and should therefore be done in an informed way. At the same time, innovating through Business Models is an extremely powerful way to beat your competition. It’s best to assign distinct Business Models to specific Daughter Companies or to specific BU’s. Having a large set of Business Models within the same Corporation or the same BU can result in an extremely complex Enterprise Architecture and ultimately lead to an operational crisis.

Una tienda de barrio, buscaba aumentar sus ventas. Experimentar y diversificar su modelo de negocio fue la clave. Evaluar el riesgo: Analizamos competencia: precios, productos, estrategias. Su público objetivo: necesidades, preferencias, hábitos de compra. Evaluamos sus recursos financieros y humanos. Diversificar su negocio: - Inició un servicio de delivery a domicilio. - Ofreció productos frescos y orgánicos. - Creó un espacio de cafetería dentro de la tienda. Resultados: Aumento de ventas y fidelización de clientes. Mejora de la rentabilidad del negocio. Reducción del riesgo al diversificar las fuentes de ingresos.

?? Leverage AI for predictive insights into risks and returns, analyzing extensive datasets beyond human capacity. ?? Monitor global market trends, recognizing that business models may vary in success across different regions due to diverse market conditions. ?? Foster a culture of iterative learning, revising evaluations as new data emerges. ?? Engage various stakeholders for broader perspectives in the risk-return analysis. ?? Utilize rapid prototyping and MVPs to test and adapt new business models with minimal initial investment, enabling agile responses to market feedback.