In this blog series we explore various aspects of business transformation to open up the discussion on how those engaging in business transformations—business leaders and consultants—can succeed in their endeavours.
Read the earlier posts in this series:
- Change and Transformation are Not Interchangeable
- Drivers of Change and Transformation – Why Businesses Take on Business Transformation
- What Type of Business Transformation is Right for Your Business?
Over the next few posts we will explore:
- Keys to Successful Business Transformation
- The Role of the Business Leader in Transformation Success
- And many more aspects of change and transformation
Business model: “All it really meant was how you planned to make money.” Michael Lewis in The New, New Thing
Yes. Your business model is about your plan for making a profit.
Or to put it in more magnanimous, PR terms, your business model is about how you plan to create and capture sustainable value through the business.
A business model identifies the products or services a business plans to sell, defines a clear target market as well as the costs and investments you anticipate.
Business models are not a new-fangled idea for startups and newbies. They are equally important for both new businesses and established ones alike. Although many established, even very old organisations were founded long before business models became a topic of conversation, they survived because they had sturdy business models that helped them weather the time.
However, once again, it’s time to talk about business models because the world is changing.
New technologies and new forms of value creation—innovative capitals—are now available to us. Modern consumers are changing and adapting to global trends and their aspirations, wishes and needs are changing accordingly. In the world post COVID-19, more and more consumers are demanding more of businesses than ever before.
That is what has given way to another trend: Consumer driven business transformation.
At the same time, new, more nimble startups are disrupting practically all industries across the globe.
How UK CEOs are driving growth
In recognising these market realities, CEOs of established organisations are seeking to drive growth along multiple avenues. According to PwC, UK CEOs are more aggressively pursuing organic growth (84%), new products and services (59%), pursuing new mergers and acquisitions (39%) and planning to enter new markets (34%); way more aggressively than their global counterparts.
This is the time all CEOs, of big and small organisations, old companies and new must ask themselves a few questions:
• Does our business model still hold?
• Is our business model in trouble?
• Do we need a business model transformation?
“Having the ability to be brutally honest with yourself is the greatest challenge you face when creating a business model,” says Mark Cuban, the American billionaire entrepreneur and television personality you know from Shark Tank.
“Too often we oversell ourselves on the quality of the idea, service, or product. We don’t provide an honest assessment of how we fit in the market, why customers will buy from us, and at what price.”
Cuban was talking to founders of new firms. But this type of brutal honesty is even more difficult for established firms that have a status quo to maintain and laurels to stand on from past achievements.
That is why, of all the types of business transformation we have discussed in this series so far, business model transformation is undoubtedly the most difficult to envisage and execute.
It is far easier to argue “If it ain’t broke, don’t fix it.”
However, in this fast paced world of ours, this is bad advice in more ways than one.
Business model transformations are complex.
Compared to other business transformations, they are the most disruptive.
This is because more than any other type of transformation, it aims at changing the heart of a business, by changing the way it creates and captures value.
Look at your current business model
Your business may be operating under the traditional business models of franchise, distribution, manufacturing or retailer business models. While many newer business models were introduced to the world by startups, there is no reason why established companies with traditional business models can’t extend their businesses and incorporate new models such as these:
- Subscription model (HBO Go, Disney+)
- Bundling model (Fast food companies, restaurants that offer value meals and others who offer various deals)
- Freemium model (DropBox, LinkedIn, Upwork)
- Razer blade model (razors, printers, XBox)
- Product to service model (Zipcar, Lyft and Uber)
- Leasing model (U-Haul, Rent-a-Center)
- One-for-one model – Encourages social consciousness and donates towards a worthy cause.
- Crowdsourcing model (Wikipedia, YouTube, IMDB)
What business model transformation entails
By changing the business model, or even creating a new complementary business model may help you reach a new target market, change your value proposition and cost structure, and sharpen your relative competitive advantage vis a viz your competitors.
This may result in changing your revenue model, deliver new revenue streams, change your profit margins, your cost structure, the resource needs and your key performance metrics.
The features of your new business model redefine everything including the following:
- Customer value proposition (CVP): What makes your product or service attractive to customers?
- Target market: What specific group of consumers are you planning to serve?
- Competitive advantage: What unique features does your product or service have that makes it difficult to copy?
- Cost structure: What costs are there that add up to your fixed and variable expenses to carry on the business? How does that affect your pricing?
- Key metrics: How will you be measuring success with the new business model?
- Resources: What physical, financial, intellectual and innovative assets do you need to operate this business model?
- Problem and solution: What are your target customers’ pain points? How do you intend to ease that pain effectively?
- Revenue model: What framework do you plan to use to decide what viable income sources you will pursue?
- Revenue streams: What are the different ways your business can generate income?
- Profit margin: By how much does your revenue exceeds business costs for each product or service delivery?
- Sustainability: How do you incorporate sustainability into your business, its products, services and processes?
This diagram from Reinventing Your Business Model, an HBR article demonstrates the complexity of a business model transformation.
The complexity and the uncertainty of a business model transformation comes from the fact that the way these elements interact can change with time and as your business matures. It may not always be easy to envisage what each element looks like after a business transformation. That is part of the risk of business model transformation.
The scale of business model transformation can also increase your level of risk.
- How much are you disrupting your current business model?
- Will the new business model cannibalise your existing customer base?
To change or not to change?
There are also other questions you must find answers for, either as a CEO, Board member, top executive, or even business consultant:
- How long can we hold on without a business model transformation?
- What trends are driving this transformation?
- How fast are they developing?
- Is inaction now even a viable option?
The authors of the HBR article sum up your dilemma: “One secret to maintaining a thriving business is recognizing when it needs a fundamental change.”
To change or not to change? “That is the question”, isn’t it?
Share your thoughts
Over the next weeks, we will continue the discussion on what leads to success in business transformations and what conditions are necessary.
We invite you to share your thoughts in the comments.
2 replies to "Do You Need a Business Model Transformation?"
Hi Tony
Just joined and exploring the site. I am speaking at a Credit-Connect Think Tank on Thursday 16 September on the topic of Business Transformation in the FCA regulated credit sector. I follow on from a session around wider usage of Open Banking. The focus is around use of AI/machine learning – ‘What is the future for collections?’. This discussion will discuss how business transformation can be achieved and adapted in what is currently an unpredictable climate. How can technology such as Machine Learning (ML), Artificial Intelligence (AI) and robotic process automation help collections processes.
This comes at a time when there is uncertainty around when demand will start to grow for debt advice as many creditors ‘return to collections’. Good data analytics are key. It is challenging senior management in SMF roles in the FCA world. The whole concept of ‘what does good look like?’ is being reviewed in advance of the FCA Consumer Duty rules in 2022.
Having spoken at the Credit Services Association (CSA) conference last week on the topic of ‘Future Regulatory Change’. We ran several polls around whether lessons learned from the pandemic will directly impact future target operating models, especially with hybrid working environments and increased digital engagement, where many firms in the sector had to change their approach to engaging with customers and offer considerable forbearance during the pandemic.
Technology clearly has a role to play, but the FCA and other regulators are focused on a firm’s culture and how this translates into positive outcomes for customers. This requires mapping of risk management frameworks down to frontline staff and ensuring customer journeys are consistent irrespective of the channel (including mixed customer journeys) they engage through. The vulnerability agenda is a high priority and this needs to be built into and evidenced in TCF policies and operating practices, including product design and communication strategies. Use of AI needs to be explainable.
This has put far more focus on business transformation programmes, ‘business readiness’ activity and dual running approaches when major change is delivered. ‘fairness by design’ and ‘data protection by design’ are also core factors.
Kevin – it will be interesting to see how this evolves and how ‘society’ as a whole responds as the Pandemic support structure is removed. I can see similar challenges within the housing sector with private landlords having been restricted from implementing any action against unpaid rent. The focus on banking generally (they are always newsworthy aren’t they?) will I’m sure mean that they tread very carefully but as you say, they will need to change and that opens up opportunities for us!
Good luck with the speaking engagement