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Reappraising Business Models to Adapt to Market Change

From Financier Worldwide’s Turnaround & Corporate Renewal 2007 Special Report.

When the market speaks, it does so with finality.

Fundamental change is inevitable in the business environment. Change brings the opportunity for new business models to flourish and for others, the opportunity to fail or falter. All too often businesses, particularly those with exceptional success, feel bullet- proof to the impact of dynamic or subtle market change. If they don’t like what the market says, they simply don’t listen.

Not long ago, who would have thought iconic businesses such as Sears Roebuck, General Motors and Maytag would falter so terribly. Even IBM, once the undisputed reigning heavyweight champion of information technology, needed rescuing.

In a failed or faltering business, dispassion- ate observers typically blame the CEO, who in turn points the finger at an array of external catalysts: the economy, foreign competition, unreasonable customer expectations, unions — the list goes on. We humans don’t accept blame readily, and we don’t listen well either. These traits are more prominent in those whose intelligence, education and driving ambition brought them to the pinnacle of leadership.

Nevertheless, senior leadership cannot escape responsibility for its actions and decisions.

Fundamental market changes

Clearly, there have been major new business trends that have introduced problems previous generations of business leaders did not have to face. First, the rapid growth of the mega-sized big box’ discount retailers who control the customer and, hence, control the entire supply chain. Second, an escalating shift in production to third-world economies with lower wage rates. Third, the rise of a global economy together with a beginning emergence of third-world companies as competitors, as well providers of cheap labour. Fourth, the accelerating pace of technological change, internet commerce, supply chain innovation and customer behaviour. Fifth, the absolute necessity to have an operational platform that provides a quality product, on time, every time and at a competitive cost. Finally, a culturally diverse employee market that values lifestyle, performance recognition and respect.

One way or another, these major trends affect nearly all businesses, small to large. In most instances, business models heavily reliant on personal business relationships, aging or stagnant technology, expected periodic price increases, and even heavily branded products like Maytag, cannot survive in their present form without adapting to fundamental market change.

The business model

A safe, general postulation is that the distilled essence of a business is to provide goods and services that the market values, while earning an acceptable profit. Strategies which align resources to provide what the market values, while earning an acceptable profit, are generally referred to as the business model. Whether it’s carefully crafted or grows haphazardly, every business has at least a general idea on how it intends to earn an acceptable profit.

Any business, large or small, that does not continually reappraise its business model and adapt to changes in the global market will likely encounter serious problems. Sounds simple. Yet time and time again, many businesses have difficulty recognising the impact of dynamic, fundamental change in the market’s value stream, reacting timely or executing a successful transformation of the company and its business model.

Failure to adapt: the ostrich syndrome

Louis Gerstner, widely touted as the saviour of IBM, said “Visions are easy. The hard work is change to succeed.” So, what happens when a company fails to adapt?

At IBM, change came just in the nick of time. Plans were already in place for a break-up. The company had lost $13bn in the previous two years when Gerstner arrived on the scene. Despite being the world’s largest technology company with a heretofore dominant business model based on the black-box magic of its mainframe computers and stellar customer service, it came to a near-death experience as it failed to recognise that major changes in its markets were just over the horizon. IBM fought personal computer technology as a threat to its business model. This insular thinking and a closed-loop corporate culture were not a good platform for recognising or accepting change.

In the not too distant past, Sears Roebuck and Company was king of retail, dominating the market for clothing, electronics, appliances, automotive equipment, furniture and household goods. Today, Sears, with a business model that seemed untouchable, now lies a withered semblance of its storied past glory, replaced by low-cost mega-stores like Wal-Mart and upstarts with revolutionary business models.

Superior products, customer loyalty and a world-class brand could not keep Maytag independent. Disregarding the growing dominance of the ‘big box’ retailers, Maytag chose not to sell through low-priced market channels. By the time their mistake was recognised, it was too late.

Certainly, it was not a lack of intelligence, market position, financial strength or technological aptitude that led these champions down what most dispassionate observers would consider the wrong path.

The culprits

A dispassionate assessment of each of these cases and many others indicates the same causes time and again.

Refusal to accept that change is needed. Noted economist John Kenneth Galbraith said “Faced with the choice between changing one’s mind and proving there is no need to do so, most people get busy on the proof.” It is difficult to change closely held beliefs, and most people do not change mindsets easily. Once it becomes obvious that dramatic change is necessary, efforts are often too little and too late. In the case of Sears, the company had the market share, customer loyalty and funding to adjust its business model early on, long before Wal-Mart rose to the top. IBM was in a similar position, with the means and resources to dominate all aspects of information technology. Neither company adapted well. Gerstner saved IBM, while Sears suffered the ignominy of replacement on the Dow Jones by Wal-Mart, followed by ultimate acquisition.

Strategic arrogance. Call it what you like — arrogance, ego, hubris or wishful thinking — the belief that past success, particularly great success, can set an organisation apart from the potential negative impact of changing dynamics is one of the primary causes for business failure. Trapped in the limelight and aura of past glories, businesses tend to progress in a predictable manner, oblivious to the dangers lurking around the corner. IBM continued to fight a tsunami of strategic logic in its insular belief that its dominant mainframe computer technology was the only game in town.

Tribal survival tendencies. While the corporation is a distinct legal entity apart from its employees, its unique culture, values and identity frequently render it incapable of responding in a rational manner to either slight or dramatic environmental change. When danger appears on the horizon, corporations fight back, often heroically, with a strong tribal tendency to circle the wagons and push harder using strategies and actions that worked well in the past. Sears is a noteworthy example, fighting heroically to overcome the problems in a business model that were no longer suited for the changed market dynamics.

Three attributes of superior businesses

Staying ahead of the curve is not easy, and few companies do it well. Three attributes of superior businesses are:

Adapt. Charles Darwin noted that “It is not the strongest of the species that survive, nor the most intelligent that survives. It is the one that is most adaptable to change.” Companies must continuously evaluate their business model within the marketplace based on changing trends, technologies and consumer values. A company or strategic business unit only exists to provide an economic need. Businesses provide goods or services that fulfil one of many needs in an efficient and profitable manner. The market’s needs, preferences and values evolve rapidly. A successful business model must evolve while still delivering what the market values.

Listen. Wal-Mart founder Sam Walton said “The key to success is to get into the stores and listen to what the associates have to say.  Our best ideas come from clerks and stock boys.” Scratch the surface of any organisation and the ills of a troubled business (and potential solutions) will likely gush forth. Yet, too often, dissident viewpoints challenging a company’s traditional identity or an accepted strategy are squashed when they conflict with the prevailing business wisdom and culture. Superbly managed companies allow diversity of thought, even though dissident viewpoints are at odds with strategy and cultural norms.

Focus. In his book The Effective Executive, Peter Drucker postulated “Do the right things first.” In the face of failing fortunes, there’s often a tendency to take on too much at one time. Drucker is absolutely correct: identify the changes that will make a difference, and stay focused. Overloading the agenda is nearly as harmful as doing nothing at all.

Survival is not mandatory

Businesses fail for many reasons. Like life, perhaps, all businesses will experience birth, growth and ultimate demise. While there are numerable actions executives can take to promote sustainable profitability and success, continued adaptation to the increasing rate of change in the global marketplace is, at least, among the most crucial, if not the most important.

To address the dynamic marketplace, executives might attempt to reengineer, implement Six Sigma, study the Art of War by Sun Tzu, employ continuous process improvements or other innovative management techniques. But, ultimately, the company will diminish in power if its value proposition isn’t in sync with the market’s wants and needs. Despite earning the Baldrige Award, for example, IBM’s fortunes declined until Gerstner forced a change in thinking.

To prosper in the continually changing global economy, companies must reappraise their business model and renew it toward where the market is heading on an ongoing basis. A business that does not accept the importance of continued self-appraisal in all aspects of its business model, or fails in its execution, will falter, As Edwards Deming said “Survival is not mandatory.”

Ken Naglewski is a Managing Director at Focus Management Group.

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