Know when it’s time to change your business model

Posted by: on Oct 18, 2013 | No Comments

Your business model is the pathway to cash flow in and out of your business – with consideration of purpose and timing – that determines whether your company will be viable, grow or potentially wound down. It is the economic foundation of business.

Wiley: “Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers” by Jim Muehlhausen

There are several ways to define your business model, and there are just as many consultants such as Deloitte Development, LLC and The Boston Consulting Group who have their own models that they leverage to help their corporate customers.

At the most basic level, you can divide the business model into three core components, identified concisely by Jim Muehlhausen: “Offering, Monetization, and Sustainability.” Successful professionals in the area of business optimization will state unequivocally that ignore or undervalue any one of these components, and your business model will fail.

What I have witnessed over my career is that, to truly orchestrate a successful business means not only evaluating the strengths of each of these components separately, but anticipating changes that impact any one of the components and the larger impact to the company. Successful business models fail to address the Sustainability components, e.g. technology, essential for growth and business continuity over time.

Often, change to your business model can be a “tweak” to existing resources, processes or delivery. Other times, the required change is so disruptive that it requires complete reinvention of operations across all components. As noted by Vijay Govindarajan and Chris Trimle in the Harvard Business Review on Rebuilding Your Business Model, “A forward-looking CEO must do three things: Manage the present, selectively forget the past, and create the future.” A good exercise is to take the initiatives you have identified in the Muehlhausen diagram and allocate them into the “present, past and future” categories from HBR.

Know the signs

Often the visible sign of business model flaws is a symptom – cash-flow problems which can arise from any number of areas, including:

  • What your customers want is changing
  • Matching competitor pricing
  • Increase in supply costs
  • Increase in operational costs
  • Unrelated operational investments

That symptom can be indicative of deeper challenges, such as industry disruption and innovation. By the time that symptom has appeared, what may have been a tweak early on is now a complete redo.

Being preemptive of cash-flow problems, therefore, is critical to success. Common signs to change your business model include:

Commoditization
Complete corporate dedication to “beating the competitors” can diminish differentiation, creating a commodity-based offering that minimizes profitability. Today, Michael E. Porter of the Institute for Strategy and Competitiveness at Harvard Business School is widely hailed as the leading author and expert on competition shaping business strategy.

Market Maturity
It’s common knowledge that every business, and every industry, has a lifecycle. Managing the phases of that lifecycle can determine the duration of corporate success. The phases across industries are similar: introduction, growth, maturity, and decline. Companies often plateau in the maturity phase – even though they can be in that phase for decades. One key to success is to maximize the growth phase – which has generated business focus on innovation in order to extend that growth. Because lifecycle phases can change rapidly due to technology, companies at a plateau or decline should change their business models. One example is Verizon FiOS, whose introduction of fiber-to-the-home technology allowed them to compete not only with mature cable TV and high-speed Internet service providers, but with other mature services such as home security monitoring and new services like smart home technologies. The key to success in this market cycle is to have never taken your eyes off innovation and your customer.

Corporate Culture
Employees are the face of the company. When business decisions undermine morale, you create a defeatist culture that can literally impact the profitability and dedication to purpose of the collective team that is the company. Overcoming such obstacles is possible, however, as demonstrated by companies such as AT&T, who’s lobbying, coupled with criticisms of censorship and suppression of competitors, led to divestiture and reorganization in 2005. During this time of criticism, morale at AT&T was at an all-time low, with individual employees feeling embarrassed by association with the company and its leadership. As you can see, however, poor business practices do not necessarily signify the complete destruction of a corporation. Take, for example, the 2010 BP oil spill at the Deepwater Horizon offshore oil-drilling rig. While the tragedy resulted in expulsion of Chief Executive Tony Hayward, market conditions have continued to result in record profitability driven by strong lobbyists, unprecedented demand and well-established distribution channels.

As noted in ForbesBrandVoice by Kevin Warren, President, U.S. Client Operations, Xerox, “I firmly believe that reframing changes in the form of opportunities creates an energy that helps drive success.”

With an eye on your customers changing needs, technology advances and a continued optimism a company will keep employees, investors and customers excited about their products and services – ultimately matching achieving the cash flows your company deserves.