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Is your business model in trouble? What are the right answers?

As we entered 2016 there is more and more talk about market uncertainty, new technologies and business models disrupt companies, new start-ups disrupt incumbents and in general people talk about crises on the way. The question is why is it always challenging for incumbents to adapt?

The main reason is the assumptions on which the organization has been built and is being run no longer fit reality.

This subject will have 2 parts and this is the 1st one.

Peter Drucker probably the top management guru of the 20th century explained based on the ‘theory of the business’:

A theory of the business (Similar to Business Model) has three parts.

– First, there are assumptions about the environment of the organisation: society and its structure, the market, the customer, and technology.

– Second, there are assumptions about the specific mission of the organisation.

– Third, there are assumptions about the core competencies needed to accomplish the organisation’s mission.

The environment – society, the market, clients – dictates what the firm can and will be paid for. The firm’s mission determines such critical values as what constitutes quality in the eyes of the firm, what its contribution to society and the economy should be, and what kind of results and outcomes count as meaningful. Finally, identifying core competencies leads to key decisions about where the firm must focus to excel, where good enough is good enough, and where it chooses not to play at all. But as an organization becomes successful tends increasingly to take its business model for granted, becoming less and less conscious of it. Then the organization becomes sloppy. It begins to pursue what is urgent rather than what is important/right. It stops questioning. It remembers the answers but has forgotten the questions.

Some business models are so powerful that they last for a long time. But eventually every business model becomes obsolete.

Some examples of Business models are:

Multisided Platformwith more than 1 type of customers ( advertisement model e gGoogle, FB)

Long Tail:   Huge number of users selling small quantities (eBay, Netflix)

FREE:   Advertising income pays for the product (FB social networking, Newspapers, ..)

FREEMIUM:  Mainly Basic ServiceFree and pay for advanced (Flickr, SKYPE)

CONSUMABLES:  (Printer/toner, Razor/Blades)

OPEN:  We need to work with smart people inside and outside the company

especially for innovation (Procter & Gamble using external R&D resources) , IPlicensing (GlaxoSmithKline is monetizing unused IP assets)

Multisided Platform with sellers and buyers (Uber, Airbnb)

A business model always becomes very relevant for review when an organisation attains its original objectives. Attaining one’s objectives, then, is not cause for celebration; it is cause for new thinking.’

So what are the warning signs that a business model is running out of gas:

– When next-generation innovations offer smaller and smaller improvements. If you have trouble thinking/finding of new ways to enhance your offering.

– You hear customers saying that new alternatives are increasingly acceptable or even attractive to them.

– The problem starts to show up in your financial numbers or other performance indicators.

There’s always very early evidence that a business model is in trouble, but it usually gets ignored or dismissed. That’s because at most companies the people at the top got there because of their success with the current business model – so they are not the right people to question and change it.  

So what should companies do to avoid that their business models become obsolete and how should they get organized to compete successfully in the 21st century. In this article the focus is big established companies. Organizations need to allocate resources and the company management should lead consistently exploration of new business models (Freemium, Subscription,.. ) and watch the transition from HW to SW to services to systems to platforms. The question is how often should this be done?  In fact with the acceleration of disruption with all exponentially growing digital technologies my suggestion is that business modelling should be a yearly activity where even if an organization does not need to change the business model it has the opportunity to evaluate options for enhancements based on changes in business model attributes (e.g channel changes or slight customer behavioural changes,.. ). The message here is we need to evaluate business environment changes faster than in the past and the exact frequency of course depends on the industry dynamics. The higher the information content in a business model the more disruptive the business environment.  So What are the key principles to design a new business model?

  1. Look at the world through the eyes of customers and their jobs-to-be-done. Business model design is human-centered design
  2. Explore and imagine a new experience for customers that will create value for them.
  3. Reframe an industry by examining its foundation and make changes in line with changes in Customer behaviours/needs and/or reversing conventional wisdom.
  4. Use the Business Model Canvas as tool where you can combine and recombine capabilities(see example below)

Decide about a version of the new business model and test it in the real world. Learn, change and test again.

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Business models must be designed, prototyped, and tested in the real world, using metrics that make sense for innovation. 

Is structural business modelling process the solution for everything?  In an environment where the disruptions can happen from various competitors even from different industries or from the exponentially growing number of start-ups the answer can only be No. So what is the answer additional to business modelling?

I see 2 approaches:

– Offensive/Proactive (Invest on Innovation with the right organizational set up to be explained in the 2nd part of the article)

– Defensive

So what are the best defenses if any?

  1. Monitor through experts (need to find the right ones) technology breakthroughs and major customer behavior changes or many failed experiments. Partnering with start-ups and/or accelerators is a good way of monitoring technology and new business model breakthroughs.
  1. If you find out signs of disruption or even disrupted first decide if you could upgrade your current products/solutions to delay the growth of the disruptor and neutralize the attack (Microsoft has done this consistently e.g Internet Explorer versus Netscape and Office move to Cloud ). Then continue to improve till you neutralize the disruptor completely.
  1. If 2 does not work and the disruption is too fast and strong then shed tangible assets, work to slow down the disruptor (pricing, long term contracts with customers,.. ) and use your intangible assets (people, brand, expertise, patents,..) to change fast business model and diversify if possible (Fuji Film moved from Chemical Film to Cosmetics and Kodak has not been able to react at all).

In the next article I will describe organizational set up of incumbents for Innovation.

Any comments or additions?

Thank you very much

Mike Mastroyiannis is Business, Management & Executive Coach and Management Consultant for among others Exponentially Disruptive Innovations. He has served as CEO of business units in Multinationals, founded or lead start-ups and serves in advisory boards. He can be reached through LinkedIn or email mike@tenx2.com