Thursday, March 10, 2011

Your Business Model is Broken

Your business model is broken!   If not, it will be soon.

 I can make that statement with confidence because every business model becomes obsolete with time and today’s rapid rate of social and technical change means every business has to evolve more quickly.

Peter Drucker, the famous management guru and social ecologist, described a business model as the answer to three questions:

    Who is your customer?

    What does the customer value?

    How do you deliver value to that customer at an appropriate cost?

In other words, it’s what you do, who you do it for, and how you do it.  When you make a change to any one of these areas, you are implementing business model innovation.

You are probably aware of the four stages of a product life cycle: Introduction, Growth, Maturity and Decline.  These same stages apply to business models as well.

In the introduction phase, there are a limited number of customers and a limited number of competitors.  Typically, the companies in the introduction phase of a new business model are spending more on development and marketing than they are generating in revenue.  It usually isn’t clear whether or not the new model is going to be a success or a failure.  

An example of a new business model still in the introduction phase is creating personalized wearable 3D portraits by converting portraits into 3D models and printing the models using a 3D printer. The technology exists and the product is wonderful, but very few people know that the product exists yet.

In the growth phase of a business model, the consumers have discovered and like what you are doing and your sales and profits are growing rapidly.  Competitors are jumping in and copying or improving upon the business model, but the expansion of the market means there are opportunities for lots of companies. Selling of photo books and photo gifts online is an example of business model in the growth stage. Sales in the entire category are growing rapidly and so are the stock valuations of the major players.

Eventually the growth slows down and the model enters the maturity phase. There is a lot of competition and capacity which pushes down prices and profits. Companies with strong brands and excellent operations will generate positive cash flow which can be invested in looking for new business model innovations. Selling digital cameras through big box retailers is a mature business model.

In the decline stage, the volume of business is shrinking and too many companies are chasing what is left.  Weaker companies go out of business and the stronger ones make acquisitions to keep their volume up. Silver halide photo finishing and commercial offset printing are businesses in decline.

Successful companies develop, test and introduce new business models continuously to keep the business growing.  They find new products and services that customers value and better ways to deliver those services.

In the Harvard Business Review, Matthew Eyring, Mark W Johnson and Hari Nair identify three steps to successful business model innovation.  First, you need to identify an unmet job that a target customer needs done.  Next, blue print a model that can accomplish that job profitably for a price the customer is willing to pay.  Finally, carefully implement and evolve the model by testing the essential assumptions and adjusting as you learn.

Is your business model broken yet?  What innovations are you introducing to generate growth?

Seizing the White Space: Business Model Innovation for Growth and Renewal