Change your business model

I've been thinking about business models this week – what makes it easier or more difficult for companies to change or adjustment their model at regular intervals? Failure to do that has significant consequences as AT & T, a US telecoms company, found out. Originally established in 1885, in 2005 it was bought by SBC for around $16 billion. SBC was one of the 'baby bells' that was spun out of the company, known as 'Ma Bell,' as part of a 1984 court-ordered break-up.

The failure, at the time, of leaders of AT & T to change its business model in order to take advantage of new technologies such as wireless and internet were cited as reasons for the takeover. But they are not alone in this failure as Clayton Christensen, of Harvard Business School, and author of several books on innovation said on hearing that AT & T been bought. 'It is a tragic fall [for AT & T] and I lament the passing, because it was a huge disruptive success in its day. The world is filled with companies that are marvellously innovative from a technical point of view, but completely unable to innovate on a business model.'

As I was working on this I came across a white paper Retrench or Refresh? Do existing business models still deliver the goods.

The authors suggest that generally speaking, companies who are more adept at rethinking their business model have the following attributes:

1. Flexibility: to evolve to business models where a) products and services are able to be paid for on an as needed basis, for example, in the IT world from the software license model to the software as a service model, b) companies can scale up or down without loss of business continuity.

2. Ability to deliver short-term cost savings and/or efficiency gains to customers: to offer customers a greater level of granularity in the way products and services can be bought, for example Ryanair's menu of options compared with British Airway's all-in single price approach.

3. Capacity to drive innovation: to engage with those interested in participation in open-innovation (looking to people outside the organization to come up with new and/or improved product and service ideas)

4. Capability to enter new markets: to look outside their traditional markets and be in a position to offer products and services tailored to customers in these new markets.

5. Collaborative ownership structures: to achieve economies of scale and reduce competitive pressures

6. Use of the digital economy: to help reinvent what the company is capable of offering and how it offers it.

One way of developing the adeptness and attributes required was suggested by Peter Drucker (and I've written about this before). He called it 'Planned Abandonment' saying that the time to abandon a product, service, policy, rule, or other organizational element is much earlier than when it begins to cause problems. As a rule it is time to abandon when any of the three following conditions apply:

1. The product, service, market, process, or whatever still has a few good years of life
2. Its greatest virtue is that it is fully written off. Ask instead 'what is it producing?'
3. An old and declining product, service, market, process, etc is being maintained at the expense of new and growing products, services, markets, processes, etc.

Drucker suggested that the leadership team should regularly ask a series of questions aimed at pinpointing areas for abandonment. This is a good suggestion and one followed by Lenovo (a computer maker). Its team of nine leaders (down from two dozen at one time) are based in six cities and three continents, yet they meet every other month to review the business typically spending three or four days together in a key market, visiting local stores and listening to partners, customers, and employees.

The goal of these review meetings is to align the organization's goals, and take quick action where things are not working well. For example, following a leadership team visit to India, Lenovo restructured its business model there to drive growth in segments like small and medium business (SMB), government and education, which were not getting much attention earlier. The company separated SMB, earlier part of its consumer division, to make it an independent business. It also created different teams to handle its government and education business, as these required a different focus. These decisions were made because although it was the leading PC vendor in the enterprise space in India, success in that arena alone would not help to improve its share in India.

Lenovo, which launched its first personal computer in 1990, has the goal of becoming the first global consumer brand to emerge from China, and its management team is willing and able to change the company's business model as required to meet this goal. For other organizations a barrier to business model change are the skills of the management teams, and/or additionally the sheer complexity of the structures, processes, policies, and working practices that for any long established company have been in place over many years.

In a fascinating blog post, The Collapse of Complex Business Models, Clay Shirky, (writer, consultant, lecturer) discusses the idea that an organization's failure to respond to stress in the environment is not a lack of will it is simply that they cannot. One of the examples he cites is AT & T, mentioned earlier. His suggestion is that the complexities of long established organizations make them unable to change 'In such systems, there is no way to make things a little bit simpler – the whole edifice becomes a huge, interlocking system not readily amenable to change. .. Under a situation of declining marginal returns collapse may be the most appropriate response … Furthermore, even when moderate adjustments could be made, they tend to be resisted, because any simplification discomfits elites.'

What's your view? How easy is it to change a business model? What are your success stories in this?

One thought on “Change your business model”

Comments are closed.