When and how companies should change their business model

Some companies have a very flexible approach to their business model – while others have a very fixed approach.  Some have adapted over time others have failed because they failed to.

So, how can companies ensure sustained success by changing their business model?

Firstly, let’s be clear on what we mean by “business model”?

A company’s business model is the way it goes about making money.  A bank might make money by selling banking and other financial services, a car manufacturer might make money by selling cars and ancillary services and so on.  Changing a business model means selling a significantly different product or in a significantly different way.

Most conventional companies have a single core business model, some will add some ancillary business models and a few will extend the brand into related areas.

As an example – Dunlop started by making tyres and then because of their experience with rubber expanded into sports kit made from rubber (shoes and balls) and then further expanded into other sports equipment because of their relationship with sports.

Michelin, another tyre company, extended into maps and restaurant reviews as a way of encouraging people to use their tyres more.

Other companies are more monogamous staying wed to a single business model.  Most pharma companies develop, make and sell medicines – they don’t seek to extend beyond that.

Other conventional companies have completely reinvented their business model several times.  Nintendo started out in 1880 as a playing card manufacturer before trying their hand at taxis, hotels, TV and food before eventually moving into toys and eventually video games and then devices and consoles.

What distinguishes Post Conventional businesses is their willingness to disrupt their own business model.

It was Apple Computer invented the desktop computer and then disrupted in with the laptop, then the smartphone and tablet and next wearables, along the way they also changed the name to just Apple to reflect the need to change.  Netflix started by sending DVDs by post, then disrupted that by moving to streaming movies and then making content to stream.  And DONG energy (Danish, Oil and Natural Gas) is now disrupting the oil and gas sector as Orsted, a leading player in offshore wind energy.

So if it is possible for companies to change business models, why do some companies prefer to go out of business than to question theirs?

For example 8 US Coal companies have filed for bankruptcy in 2019.  They clearly knew that their business model was in trouble, because they spent millions trying to defend it, lobbying governments and on PR activities.   Why not spend the same money on revenue replacement activities?

On the whole the answer comes down to leadership.

When a business starts it requires leadership to overcome all of the challenges and solve all of the problems.  If that business is then successful over decades the skill of leadership in the organisation is replaced by the skill of management.  The role of management is, fundamentally, about creating reliability. When a business, and by extension its business model, is successful, why would you change it?   What you want is to get as good as you can at doing your business model.

Leadership – which is fundamentally about change, is disruptive, and therefore,  under these circumstances, undesirable.  After a few years of success leadership, as a skill, is eradicated from the business and the successful business continues with lots of management skill pursuing reliability.  When something comes along to disrupt the business model, such as renewables for the coal industry, they lack the skill to reinvent their business model, so instead they go out of business (after spending millions trying to put their disruptor out of business).

At Holos we like to think about five key elements that can help businesses disrupt their own business model before someone else does it to them:

Leadership – The obvious baseline is that businesses need to enable the skill of leadership as well as the skill of management.  Leadership and management are skills, not people.  It is important to have a good depth of both skills in the organisation with individuals agile in switching between them according to circumstances.  We can also add the skill of followership, where we are willing to support others who are showing signs of leadership.

Bandwidth – It is all very well having skilled leadership and management, but it is worthless if they have no bandwidth.  If senior people are too busy they lack the time to think creatively or strategically or to pay attention to the bigger picture.  For senior people we use the mantra – everything that can be delegated must be.  The time freed up must be used to learn, experiment, explore and pay attention to Context.

Context – Is about keeping ourselves up to date on what is going on in the world and particularly in our sector.  How are technology, demographics, politics etc changing things?  This is not something that can be delegated.  I am often astonished when I do our Megatrends talk for companies at how little people know about what is going on around them, even in their own sector.  If we don’t pay attention to context, how would we know if our business model was under threat?

Cause – What is the cause we are here to serve?  What is our vision, our purpose and our mission?  Conventional businesses can often get away without articulating a vision.  Their purpose is just to get good at what they do, their mission is just to have the resources and capability to achieve their purpose.  For Post Conventional businesses it is essential to have a vision that describes specifically the destination they seek to arrive at.  Without a clear vision it is very difficult to take decisions.  If we have a well articulated cause it makes it much easier to identify our options in looking for new business models.

Conditions – How do we need to behave, what habits do leaders need to adopt or change in order to create and curate the kind of culture that will be required to achieve the vision? There is a very significant culture difference from conventional to post conventional businesses.  The former is focussed on reliability, procedure and obedience.  The latter requires people to be able to add adaptability, accountability and challenge and trust and alignment are even more important..

We are currently in a period of disruption not seen since the Industrial Revolution.  Digitisation, decarbonisation and ageing are changing the technologies we use, the energy we use and the demographics of both workforce and customer base.  Everything is changing and it is clear that conventional businesses will not survive at scale in a post conventional world.

If your business has largely the same business model as it had 10 years ago.  If disruptive thinking and ideas are discouraged.  If the business has no clear vision it is probably already under threat of disruption.