It’s that time of year. The 2007 budgets are in place, business plans have been reviewed, and there’s excitement and consternation in the air. The economy remains a growing concern due to fourth-quarter expectations and results. It seems that with respect to the last three years, nothing can be taken for granted or assumed with any degree of confidence in terms of business growth and profit expectations.
Well, here’s a New Year’s twist. Is your industry changingω Do you need a new business modelω Three Vistage experts – Paul Ratoff, Bill Poppei and Lisa Nirell – have a lot to say on this subject. And a number of our Wisconsin TEC members agree with them.
First, are you tuning in to potential threats to your core business modelω Here are five possible ones:
• Continued customer demands for lower pricing.
For the past couple of years, many TEC members have at least been able to pass through cost increases, and others have been able to get value-added increases. A signal that your core business model has commoditized is that you can do none of the above.
• Customers are selecting an alternative solution to satisfy the same need.
For instance, in the aviation industry, very light jets appear to have the potential to carve significant market share away from the twin turbo-prop industry. The challenge here is to determine if the alternative solution is a true, long-term one or just a passing fancy.
• Gross margin erosion due to rising costs that can’t be passed along.
If price increases are impossible and costs can’t be reduced, then the only option is to change the business model.
• The industry is experiencing major innovation with new companies entering the marketplace.
Nowhere else has this been more evident than in the cell phone industry, in particular, or the consumer electronics industry in general. The speed of change can make it impossible to compete successfully if your business model is a strictly incremental one.
• You resist a new industry shift, even though customers want it.
There was a time when I recall that becoming ISO 9000 certified was a necessity to continue doing business with large firms. Nevertheless, some small companies didn’t want to invest in it, and their growth has been hampered ever since.
Any one of these five clues may signal that it’s time for your basic business model to change. Obviously, there are other clues that are more dramatic: major change in government regulations, obsolete technology, significant alterations to customary competitive protocols, and so on.
The million dollar question is whether it’s worth it for you to adopt a new model (higher risk) or to seek out a merger or sale possibility (lower risk). Lisa Nirell believes that if the following conditions exist, transformation to a new business model is unlikely:
1. Customers insist that two competitors work together and collaborate on the production and delivery of a product or service, and the companies in question refuse to do so.
2. Business leadership tolerates major dysfunctional behavior within the business. It takes a great deal of cooperation and teamwork to transform a business, and if this isn’t in the cards, forget it. Nirell adds that this is a common observation in family-owned businesses.
3. The founder or owner needs to create a succession strategy but hasn’t done so due to a health issue or retirement. After three to four years of effort, the company is simply unable to meet its stated business goals and objectives, and is clearly floundering like a ship with no rudder.
4. In addition, situations requiring major technology transfers, infrastructure with long lead times or high start-ups are unlikely candidates for business transformations and more suited for a sale or merger.
In spite of these caveats, transforming to a new business model may still be a practical alternative for you. The most important issue is to figure out a way to continue and leverage your brand equity and existing customer base.
If you don’t know what your brand equity is, then consider a market research approach where old customers, new customers, lost customers, vendors, employees and competitors are surveyed to make this assessment. For customers in particular, you will need clear answers to four questions:
1. What compels you to buy from usω
2. What is your absolute expectation for this product or serviceω
3. How else could we serve your needsω
4. What else influences your buying decisionω
The question of leveraging now becomes one of reshaping the business model to make it consistent with marketplace demand and expectation. Bill Poppei, for example, talks about how smart grocery chains have shifted from selling groceries to selling time, entertainment and nutrition. ESPN’s “Monday Night Football” has become an extravaganza of commercial entertainment, where the game itself is almost a secondary event.
In the final analysis, most TEC companies are constantly seeking ways to reinvent themselves to better meet and satisfy customer needs. Because of the nearness of global competition, the pressure is great to do so. As a result, business models have become more complex and competitively demanding. If your gross margins continue to be robust and you are looking forward to a 2007 that promises steady growth and profitability, then congratulations!
Whatever tinkering and changes you have made these past three years have obviously paid off for you. If this is not the case, then think hard about a business transformation in 2007 before it’s too late.
