“We had no idea what we were getting into with this decision….”
George F. Brown, Jr.
…making changes to a firm’s business model…most frequent reason motivating changes in the business model is that the “Old business model is failing to deliver adequate growth”, followed closely by the “Old business model is failing to deliver adequate profits”.
“A new business model is required due to external changes (e.g., regulation, technology)” and “A new business model is required in a new market or product segment”.
Our consulting firm recently worked with a company that manufactures capital equipment used in many factories to produce products made of plastic and similar materials. Their technology offered many advantages over that included in competitor products, and they achieved substantial market share gains with larger businesses. Their targeted customers, however, included a large number of smaller firms, and they had very little success in gaining sales into the small and medium business segment.
Research identified the reason for that failure: these firms didn’t have the internal infrastructure needed to support the technology included in the products, and these firms were taking the “safe, familiar route” associated with competitor products. As a result, several years ago, the firm decided to create a customer service organization which would take on service responsibilities on behalf of smaller firms that purchased their equipment.
The implications of this decision were summarized by one of the firm’s senior executives:
“We had no idea what we were getting into with this decision. First of all, we learned that our customers assumed that we were available to provide service on a 24×7 basis. Our operations traditionally involved normal business hours – and we had assumed the same for the service arm we created. That was wrong, and a costly mistake as we had to add staff for the many hours we had assumed we didn’t need to cover.
“Second, we thought our responsibilities were tied to our products. This too was off the mark. More than half of the service calls that we got were associated with something that was at best peripheral to our products, some not in any way linked except in the minds of our customers. But we had to learn the larger systems in which our products were operating, and be able to steer our customers towards a solution to whatever problems they had. It just wouldn’t work to say that the issue wasn’t our issue – we tried that a couple of times and learned quickly never to do so again.
“And as one more illustration, we sell through a dealer network, a group of firms with which we’ve had great relationships over the years. I’ve never seen such a firestorm as occurred when our service people started working directly with the end customers. You would have thought we were the competition – at least that’s how the dealers reacted. It took us over a year to calm the waters with our dealers, and even today some of them still seem suspicious of us.”
This firm eventually enjoyed success with its service offering, gaining market share with the small and medium sized businesses in their target market. They even succeeded in implementing a fee-for-service program for these customers after the warranty period had elapsed, with the service business operating at a slightly better than breakeven basis at this time while continuing to bolster their ability to sell into the small business segment.
They also learned a lot about making changes to their business model in the process, and it is doubtful that this firm will ever again make similar changes – going from a product to service business, dealing directly with end customers instead of going through intermediaries, etc. – without a full understanding of their implications. The executive quoted above commented “I didn’t even know what our business model was. But I’ve learned my lesson – whatever it is, beware of making changes to it”.
Business Model Changes: Motivation and Difficulty
Despite that advice, making changes to a firm’s business model has become a high-frequency activity. In a recent survey of business executives, we heard of four reasons that have motivated making changes to a firm’s business model. The two primary motivations are performance problems. The most frequent reason motivating changes in the business model is that the “Old business model is failing to deliver adequate growth”, followed closely by the “Old business model is failing to deliver adequate profits”.
External motivations are also important in many cases. While trailing the above performance-related motivations, two other factors were recognized as important in decisions about changes to business models:
“A new business model is required due to external changes (e.g., regulation, technology)” and “A new business model is required in a new market or product segment”.
All four of the motivations cited above scored above 3.8 on a scale that ranged from 1, meaning “Rarely a factor” to 5, meaning “Frequently a factor”.
Changes to a firm’s business model, while not an everyday thing, are a common enough occurrence that they warrant executive attention. The comments of two executives who contributed to this survey provide a good perspective. One executive from the packaging industry noted: “I’ve come to think about strategy in terms of business model changes. Whether we can successfully make the changes needed is the litmus test of whether a strategy proposal makes sense.”
A similar perspective was offered by an executive from the electrical products industry:“One thing I’ve learned is that the implementation challenges are centered on changes to the business model. We don’t fail at product development, we’re good at pricing appropriately, our sales team knows their customers. It’s when we venture into the unknown with some element of the business model that we get into trouble.”
Like many firms that have suffered the pains of changing elements of their business model, this executive says that he is now very quick to say …“Wait a minute – have you thought out the implications of what you are proposing in terms of changes to our familiar business model?”
Our research identified fourteen key dimensions of changes to business models. While there were differences among them, a basic finding was that all posed a substantial degree of difficulty in implementation, with every one of the fourteen scored above the midpoint on a scale that ranged from “Not Very Demanding” to “Extremely Demanding”.
Looking at the rankings is best done while listening to The Ballad of John and Yoko: “You know it ain’t easy. You know how hard it can be.” Any change to a firm’s business model is going to be taxing – and, as will later be discussed, has a great potential for going badly.
The changes that were ranked as most demanding were ones associated with newly targeted markets.
Ranked most difficult was “Shifts from a domestic business to a global business”, followed closely by “Shifts between a business market and a consumer market”.
Requirements for such business model changes are included in the growth plans of most businesses today, especially those associated with new global market opportunities. It’s rare to find a firm not looking at opportunities in emerging markets like China, India, or Brazil. They should be forewarned that, according to this research, such plans involve the most demanding of all possible changes to the business model. One executive commented on an element of his firm’s globalization plan by saying …
“It took us five years to learn what we didn’t know that we didn’t know.” Another reflected that “The list of things we did wrong out of habit is far longer than the list of things that transferred correctly.”
Not too far behind in assessed degree of difficulty were “Shifts in the focus between small customers and large customers”, “Shifts between a product business and a service business”, and “Shifts from a bricks-and-mortar business to an ‘e’ business”.
What comes across from this survey and the comments of the executives who participated is that each of these changes requires competencies that might be in scarce supply within the firm.
The case study presented at the beginning of this article illustrated the challenges of moving into a service business and of expanding the reach to smaller customers.
Several other observations provide further illustration as to the demands associated with these business model changes. A senior executive in a major distributor that had implemented a new ‘e’ business platform provided this retrospective: “I gained a whole new appreciation for our sales force in this process. It took us months just to catalog our product line – no one actually knew what all we sold. And that was just a start. I couldn’t imagine how much information we had to assemble to offer a credible ‘e’ business platform to our customers. Take my worst imagination on how demanding this change would be, multiply it up a couple of dozen times, and you’re still short of the mark.”
The case examples that were offered relating to business model changes go on and on. Even for some of the changes that were ranked as less difficult to implement (a careful choice of words, as all were ranked as difficult, none as easy), the examples that were cited fully passed any test needed to rank them as challenging. One instrument manufacturer implemented a change that required a production to order business model, whereas their firm has previously only produced to stock. An executive in this firm commented that “I had no idea we could have been doing so many things wrong, at least for our new custom offerings. We had pride in having optimized our operations, and I guess we had done so for our traditional stock products, but we had to go back to square zero and rethink how we did everything from order taking to quality control.”
A firm in the telecommunications industry had a strong track record of managing the short life cycles of its products. When it did an acquisition of a firm in an adjacent space that managed products with long life cycles, it learned, according to a senior executive, that “Even our compensation systems were wrong, as we had bonuses tied to sales of new products. That was one of the easier changes to recognize and address. Some of the others, to be honest, we’re still working two years after the acquisition to understand and resolve.”
Changes to a firm’s business model are thus frequent, typically motivated by sound strategic thinking, and in essentially all cases, a challenge to implement. That reality underscores the importance of the following finding from our research. By a very substantial margin, the two reasons cited as responsible for situations in which the new business model failed to deliver the hoped-for results were “Implementation process was poorly managed” and “Internal resistance to the new business model”.Those two factors emerged from a long list of problems that spanned a spectrum from a flawed strategy to customer resistance to competitor responses.
Seven themes were frequently mentioned by executives as tools for ensuring success with changes to the business model. The two most frequently mentioned were oriented towards the challenge of internal resistance to the new business model. There is no question that executives understand the possibility of a disappointing outcome that reflects Pogo’s famous saying that “We have met the enemy and he is us”. Their insights can help others avoid that unfortunate outcome.
“Leadership Buy-in and Involvement” was at the top of the list of the frequent recommendations to overcome internal resistance. There was no lack of clarity about the importance given to this by the executives who contributed insights on this topic. The message was that approval wasn’t adequate, that what was needed was meaningful involvement.
Some of the observations of executives on this factor included: “C-Level commitment is critical. Senior executives have to understand the plan, be able to explain it, and even pass the test of being able to sell it to employees and customers.” “Problem solving has to come from the most senior levels of the corporation. That’s the only place where roadblocks can be overcome, where options can be approved.” “When internal resistance occurs, it will become the undoing of a project unless the corporate executives take prompt action, perhaps getting rid of those who can’t agree with the new directions.”
“Communication”, the second most frequently cited priority, goes hand in hand with leadership involvement. As one of the quotes above suggested, communications is one of the responsibilities that executives must assume. But the recommendations go far beyond that.
One of the points frequently made involved selling the changes to external audiences – not just customers, but also distributors, suppliers, and others. This requires the ability to translate the changes from the firm’s own perspective to those relevant to the external audiences. “Make sure your customer agrees to what you are doing, or you will never be successful” was the advice provided by one executive.
Other recommendations were focused on achieving success with the implementation process. “Testing, Risk Identification, and Adequate Funding”, reflected responses that cited “the unknowns” as the key source of implementation failures. One executive emphasized the need for some version of beta testing, from both an internal and an external perspective, of the planned changes before wholesale implementation was approved. He argues that there will always be surprises, and that you can often learn them through some form of beta testing. Another executive tied together the concepts of risk assessment and adequate funding. This individual argues that no plan ever goes as planned, but that funding levels typically assume a smooth path from start to finish. A third recommendation within this category emphasized the need to pre-test key systems and processes within the company. This executive noted that while the change might be centered elsewhere, virtually every change these days impacts on financial systems, enterprise IT systems, fulfillment systems, etc. Unless the implementation team can be confident that key systems are “change-ready”, the likelihood of problems is high.
Many arguments were provided in support of the need for a “Detailed, Fact-Based Strategy”. One argument began by noting that off-the-cuff strategies have such a high failure rate that it’s impossible to discern exactly where things went wrong. But when the strategy is defined in careful details that lead to a meaningful “What-Who-When” action plan, the implementation team has a genuine roadmap to follow and a basis for assessing progress and problems. Another executive noted that a good strategy will not only say what to do, but also what not to do – a tool that can be critical in helping the project team avoid heading down blind alleys.
And another set of recommendations advocated a “Full Time Project Team with the Right Skills”. Quite frequently, we heard examples of failures due to the fact that there was no time to manage the implementation project due to the commitments of “day jobs” or the “real jobs” held by project team members. “If it’s important enough to do, it’s important enough to put people on the project full time” was one executive’s observation. The “right skills” was another important theme. One executive observed that it was often the case that the new business model required skills not resident in the firm. But too many firms assume that these skills can be quickly learned, and fail to source individuals with the necessary expertise to be successful. This executive emphasized the need to think through the team’s composition and be realistic about whether the available talent pool is up to the task.
“Monitoring, Learning, and Removing Barriers” was cited as important from two main perspectives. The first is that no major project goes without surprises, and best practices dictate the need for processes to identify and overcome such surprises. The second is that monitoring processes typically ensure the involvement of key members of the management team, which is essential when barriers need to be removed. One piece of advice emphasized the need for learning and evolution: “Keep true to the vision, but be prepared to alter course…”.
Observations related to the importance of “Best-in-Class Project Management” emphasize the fact that the skills and competencies associated with implementation are every bit as demanding and complex as those associated with strategy development. Those firms that develop these skills within their firms will be well-equipped to manage complex changes to business models required from time to time. Specific recommendations involved almost every phase of project management, but the one given most weight was developing metrics through which progress can be measured and managed. One executive commented “If there is ever a time for a dashboard, this is it. You’re going to have ‘red light situations’ for sure, so you need a process that spotlights them early and allows you to address them.”
Elements of your growth strategy and of your strategy to improve results in an underperforming division are inevitably going to require that you define and implement changes to your firm’s existing business model. You can’t avoid them – and probably don’t want to avoid them in your efforts to drive growth and improve profitability.
Tell yourself and your management team that “You know it ain’t easy”, as that is a fact of life associated with essentially every dimension of change to a business model that can be identified. And recognize that at the top of the list as to why “you know how hard it can be” are things you can control – the implementation process and internal responses to the change. The results can be all that you had hoped for when you defined your strategy to drive growth and improve profitability, but that will only happen if you and your executive team take on the major responsibility of managing a change in your firm’s business model.
George F. Brown, Jr. is the CEO and cofounder of Blue Canyon Partners, Inc., a strategy consulting firm working with leading business suppliers on growth strategy. Along with Atlee Valentine Pope, he is also the author of CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs, published by Greenleaf Book Group Press of Austin, TX. See www.CoDestinyBook.com for more details.