“Select a once rapidly growing company whose growth stalled. Then, contemplate the root cause for its decline and be prepared to share your reflections at the retreat.”
This assignment was one of many I asked leaders of a rapidly growing, omni-channel apparel retailer to complete in preparation for our two-day strategy retreat. (Omni-channel refers to the fact that people increasingly engage with companies across multiple channels, using each channel for different tasks.)
Your company must change as fast or faster than its industry to maintain success.
The chosen once-celebrated examples of stalled growth included company names that used to fill articles on “best practices” to secure revenue growth. If nothing else the following names serve as a testimony to why leaders should never assume their existing business models will remain vibrant over the long haul.
Kodak
- Too slow (or quarterly profit focused) to change from film to digitally-based business models
- Never fully immersed itself in digital photography technology even though it was its inventor
HP
- Invested too late in services that would add value to its increasingly commodity-like hardware offering
- Ineffective CEO successions
- Inconsistent Board guidance
Borders
- Failed to invest in disruptive technology and innovate its business model until it was too late
Research in Motion (maker of BlackBerry)
- Missed the growing importance of an APP ecosystem that personalizes cell phones and improves their functionality
- Assumed IT Departments (who prefer BlackBerry) would control cellular phone brand choice into the future
Catherine’s (a woman’s clothing retailer)
- Alienated its core market of middle-aged women in trying to attract younger customers. This is a mistake that Talbot’s is making.
J Peterman ( Australian company using colorful storytelling to sell its unique clothing line)
- Expanded too quickly and in the process took on too much debt
- Lost relevancy as styles changed
Best Buy
- Isn’t adjusting fast enough to technology change and its impact on how customers learn about and purchase consumer electronics
- Failed to build emotional connection to its brand
- Failed to adjust its business model in light of Amazon’s lower cost business model
Sears
- Failed to see collapse of the discount/department store boundary
- Failed to innovate its business model as Walmart and category specialist retailers gained share
- Failed to remain relevant to younger generations
J.C. Penny
- Lost sense of “place” and emotion during the shopping experience
Levi Strauss
- Got caught between cheap commodity and high end jeans
- Missed private label opportunity to secure scale, an important cost driver
Land’s End
- Poor leadership succession after founder retired
- Sold to wrong company (Sears), which is draining company of investment funds. The resulting reduction in product quality is breaking a historically strong brand promise
Roller Blade (roller blades) and Gary Fisher (snow boards)
- Iconic leadership created/grew entire categories around their brand but acquiring companies homogenized these brands, curtailing growth
Never forget that your role as a leader is to work with other leaders to foster a balanced (by age) portfolio of differentiated business models and build the ecosystem, platforms and culture that keep these business models efficient and hard to copy. If your company ends up inadvertently competing largely on price, there’s no one to blame but the leadership team. Challenging the assumptions behind your business model is the best step you can take to avoid the distress that stalled growth creates according to the authors of the HBR article, “Why Growth Stalls.”
But challenging assumptions may not be enough, as leaders easily deceive themselves. Bill Welter, co-author of The Prepared Mind of a Leader: Eight Skills Leaders Use to Innovate, Make Decisions, and Solve Problems (Jossey-Bass, 2006) offers an iron-clad rule: change your business models as fast or faster than your industry is changing. In other words, you must run his “sense, make-sense, decide then act” cycle at the speed at which your industry is changing or faster.
Most industries used to run at the speed of walking. Speed increased to a brisk walk, then jogging, which became running in the information age. Most of the companies listed above failed to sense, make-sense, decide or act in time as their respective industries sped up.
Does your firm sense, make-sense, decide and act fast enough while still managing today’s business well? The secret rests in dividing to conquer:
- Have people take deliberate time off to observe and reflect. Google gives developers 20% of their time to engage in whatever they want to work on.
- Charge focused teams with the task of building new business models as other teams manage the mature ones for maximum profitability.
What changes can you make to avoid the stalled growth so many companies encounter?
Kay, It was a pleasure working with you. Thanks for the mention in your blogpost. Business model innovation is the key issue and you certainly have you finger on the pulse of what’s needed.
Great food for thought, Kay. Thank you.
Hello Kay
While I agree intellectually with your views and most importantly the underpinnings of why management need to act thereon, I have found the practical realities somewhat different. 4 quick points:
•I have found that most management teams find it very difficult to manage multiple business models simultaneously, never mind conceive of new ones. I have blogged on the subject as this is a major challenge.
•The large majority of successful management teams I interact with lack a consensual way of approaching business model thinking. The term has quite different meanings within the same team who often describe the workings of their core business model quite differently.
•Operating and optimising incumbent or proven business models requires significantly different skills to those needed in thinking and proving new models. The resource + process + operating habits + culture elements within the two environments are in my experience very difficult to manage within a single commercial entity, even if separated. ( I understand that there are case studies to the contrary). The core business tends to win out on most battles i.e. access to resources, sabotaging the chances of new success in subtle ways.
•Finding new opportunities with sustainable economic disequilibrium’s that have scale factors large enough to become material new growth platforms is tough. I have seen management teams walk away from interesting ideas because they do not solve the “growth gap”.
All of the above require significant leadership and management smarts. The competency of building and commercialising new models are competencies built over time, meshed in unwitting thinking flaws, mistakes, dead ends and failures. Things that many cooperates have very little tolerance for.
Frustrated!!!
Kevin
Kevin,
Thanks for your comments and you raise a great set of barriers to business model innovation that I have also observed. How might they be addressed?
First, it is vitally important that leaders separate their strategy process from their financial and operational management processes. I advise clients to (at least quarterly and ideally every month or two) assess their business models, the platforms and ecosystem they leverage, the assumptions on which they are designed (e.g., IT will control phone purchases at work) and strategic goals related to how the team aims to change the business. What’s changed in the external environment? What strategic issues are arising? Are we strengthening or weakening our differentiation, etc. are the kinds of questions asked in strategy meetings. “What do we need to do to make this month’s numbers?” and other questions of that type are excluded from the strategy meeting and when operational or financial issues arise, they are put on a parking lot list.
Second, leaders must hold as a goal creating a balanced portfolio of business models by age and cash needs, just as marketing/npd teams have held themselves to a goal of a balanced portfolio of new products (from line extensions all the way to new to market entrants). The portfolio aim demands leaders allocate money and time to test new business models and take those that work in pilots to scale. (Google is great at this.) Indeed, Kodak went bankrupt as it moved into printing way too late – i.e., when its film business’ cash generation could no longer fund the new business. (Whether or not printing was a good new business model for them is an entirely separate question.)
Third, recognize that organizational structure is in fact a strategy, not just a management decision. Design cross-functional business units around your business models and create cross-functional teams to manage each of your platforms. (It’s OK that people report to two people – welcome to the world of a more complex economy!) This approach to organizational structure will ensure that decisions will be made where resources and revenue accountability intersect and will help avoid macro/top-down decisions that lead firms to over invest in some places (e.g., the maturing core business( while under-investing in others (e.g., new business models).
The “It’s not big enough to fund our growth” barrier to innovation is a killer, for sure. Many large companies have turned into distribution channels, acquiring small start-ups that prove themselves (the new pharma approach). This may be wise (pharma’s assumption that discovery is scalable may be wrong and discovery might be best done in small companies). But oftentimes, leaders are assessing individual products versus large business models/domains of which the first product is merely the start. A lack of conceptual thinking leads them to not understand the full potential of a new idea. E.g., the iPod gave birth to the iPhone and iPad, for example. They are all part of a “mobile entertainment and communications” business. Assessing this size of this opportunity should come before assessing the iPad specifically. The iPad then becomes the first experiment in the “mobile entertainment and communications” business. Also, new products and services even if small in revenue keep brands energetic, a key ingredient driving brand equity.
Of course all these things are hard. But in today’s copycat economy, these kinds of management approaches are no longer nice, they are necessary.
Hello Kay
Thank you for your unexpected and comprehensive response. Would you mind if I include it in a Conversations in Growth blog post?
Thanks
Kevin
Kevin,
Please feel free to use our conversation. I found your comments to be very helpful and I am glad that you felt the same about mine.
Kay
An online search for business models lead me to your site and this blog. My profession is in accounting and I have broad experience in both Fortune companies and small business. My definition of business model is how to generate revenue; business is an organic body, money is its blood and accounting its arteries. Business models embody the spirit behind relationships with people. Therefore in my view when people in business build a stronger relationship with money than with people (customers, colleagues, co workers, vendoes, etc.) Business suffers and often dies. Business models for corporations changed in the late 90s to strenghten its relationship with money hence corporations are now ruled by the Supreme Court as “persons”. The business model for corporations is to operate like a manufacturer that requires mandates from government in order to force everyone to pay for the operation. Small business often has no choice but to focus upon
relationships in order to produce revenue but as growth occurs the business model is less and less about relationships with people and more about pumping blood into the arteries of
business. Accounting is where transparency promotes growth and privatizing stunts growth.
No business can do business with everyone without mandates. No business can survive without revenue. A business model embodies relationships, its a matter of either people or money or the ideal….a balance of both. Striking a balance was never competitive until now. Accounting is all about balances and balancing but few leaders in business ever attempt it in America.