Model Behavior: Know When It’s Time to Innovate

March 2014

At some point in the lifecycle of your business, you’re going to need to change your business model. “Just as every product has a lifecycle, so does every business model,” advises Larry Gable, founder of Arlington, Massachusetts-based business consultancy LDG Associates. “The pace of change in technology and society continues to accelerate, thus shortening product and business model lifecycles.”

Once you’ve accepted the fact that change is about the only constant in business, the best defense against “business model stagnation” is performance monitoring, Gable adds. To that end, operators have several Key Performance Indicators that can be used to keep the pulse of a business, but it almost always comes down to cash flow. It’s the best early warning system any business has.

While declining cash flow is a clear red flag, “you’ll need to analyze the situation—perform a root cause analysis—and initiate a corrective action plan that may well cause your business plan and model to change,” Gable says. Certainly, cash flow is one indicator that it may be time for a shift, but other indicators include:

• Stagnant or falling sales
• Sales growth not producing proportionate growth in profit
• Declining profit and/or profit margins
• Overall decrease in demand
• Low customer satisfaction
• Low customer locality/repeat business
• Low employee satisfaction/loyalty
• The need to match competitor pricing
• Increases in supply costs
• Increases in operational costs
• Unrelated operational investments

In a broader context, disruption continues to be a factor in business model innovation. In the Harvard Business Review article, “When Your Business Model Is in Trouble,” Rita Gunther McGrath, assistant professor of management at the Columbia Business School, points to three key areas pushing disruption. “The first is the increasing speed of everything. Product lifecycles and design cycles are getting shorter. When the pace of change gets faster, people realize that they need to look for the next big thing,” she says. “The second issue is inter-industry competition. Competition is coming from unexpected places. Who could have anticipated that the iPad’s success would put all kinds of display devices—like electronic photo frames—out of business? And the third trend is disruptions from business models that offer better customer experiences instead of simply products. Traditional toy retailers are struggling, but Build-a-Bear gets people to pay good money to provide free labor and make their product themselves. Maxine Clark, the entrepreneur who thought that up, was brilliant.”

When it’s time to consider a business-model reboot, Gable offers this seven-step process to help guide your thinking:

1. Review the current model. Determine the strategic factors that are competitive advantages and the weaknesses that need to be changed.
2. Evaluate the market conditions. Determine how shifts in trends, technology, or taste have mitigated the perceived competitive advantages in the original model. Meet with key customers to gain insights and feedback on the factors affecting the customer’s purchasing decisions and how the business can create more value in the eyes of the customer.
3. Conceptualize the business model changes necessary to meet the current and future needs of the market.
4. Audit your internal assets (production, operations, and marketing). Determine the elements that can be redirected or repurposed to meet the current market need and what additional assets, technology, or training is required to implement improved business processes and develop competitive advantages.
5. Innovate. Seek new ways to service the market needs. Develop new methodologies for the delivery of products and services and identify under-served or undeveloped markets that can be served profitably.
6. Document the new model, and its procedures/processes.
7. Market your new business model, internally and externally. Educate your organization about the advantages of the new business model and how it will benefit the company and your customers. Tie the new model to the success of the company and to the success of each employee (e.g., design a bonus program based on specific benchmarks). Externally, let your clients know about the benefits they’ll see based on the model changes.

To learn more about business model change and innovation, check out:

• The Abundance of Choice. A Call for a fresh Value Proposition: The Need for the Right Choice
• Creating Value Through Business Model Innovation
• The Business Model Hub