Retrench or refresh (1)

The authors of the report Retrench or refresh? Do existing business models still deliver the goods? recently published by the Economist Intelligence Unit and Grant Thornton make the point that organizations expecting to survive the recession should do more than control costs. They should look at their business model and change it appropriately. Rightly, the report authors point out that the notion of a business model 'defies easy definition'. One that I've found helpful is that it is the 'what and how' of a business. "The business model of a company is a simplified representation of its business logic. It describes what a company offers its customers, how it reaches them and relates to them, through which resources, activities and partners it achieves this and finally, how it earns money". (For a more detailed discussion of this definition see Osterwalder, A. (2007). How to describe and assess your business model to compete better.

In a sense a business model is what someone seeking investor support to set up a company would describe in the business plan and in this vein the report considers a business model to comprise the value proposition, target markets, revenue-generation mechanisms, cost structure, value chain. In the authors' estimation companies should innovate in all five components of the model. Some case studies illustrate the point. For example, Vodaphone, a mobile services provider, is moving into new markets, 'transforming itself into a provider of 'unified communications' and Virgin Money (UK) is looking to becoming a high street bank

The challenges to doing this are seen to be five-fold:

1. The outlook for the next couple of years remains very gloomy and businesses hold "few illusions about growth prospects"
2. The downturn affects businesses in different ways and at different time points and this "uneven economic terrain inevitably affects how business models evolve"
3. The focus on cost cutting and control is used "as an excuse to do nothing else"
4. The capability of managers to change the business model is limited and simultaneously managers are complacent about their business models.
5. The ability to convert risks into opportunities (two aspects are discussed: the supply chain and "the spectre of climate-change regulation")

Six ways that companies are meeting (or not) these challenges to changing their business models are presented with some advice given on the focus required:

1. Heads in the sand – these companies need to stop being complacent and/or ostrich like and wake up to current market conditions.
2. Ahead of the curve – these companies are making rapid adjustments in several aspects of their business model and need to focus on good implementation of the changes
3. Fighting the last war – these companies should stop the 'salami slicing' approach to cost cutting and focus on revenue generation and growth opportunities.
4. Best before – these companies recognize that their business model has expired and need to focus on finding new revenue models.
5. Moving to the margins – these companies need to focus on how to change gear from cost cutting to margin building.
6. Hitting the panic button – these companies need to develop strategic clarity to "focus on profitable revenues, identify critical risks, and formulate appropriate responses"

While it doesn't specifically mention organization design (although in one instance – companies who need to move to the margins – re-structuring was suggested). However, it seems clear that if the business model is changed then the organization must be redesigned to support this.