Business model renewal : how to grow and prosper by defying best practices and reinventing your strategy

**Forget "business as usual." Don't believe everything you read about "best practices." There is no "magic bullet."** __When your market changes, you have to change your strategy and take control of your own success. You have to renew your business model.__ In a global market that is constantly evolving, you can't expect "magic bullets" or "best practices"—or any stand-alone business philosophy that many books and gurus offer—to guide your company through good times and bad. Instead you need to take an active role in reviewing and retooling your strategies. You need to stop thinking "business as usual." You need __Business Model Renewal__—a groundbreaking book that provides a language and multiple frameworks for how to think about and implement business model reinvention. A full-range guide to synthesizing and applying the most up-to-date thinking in business today, __Business Model Renewal__ challenges you to re-evaluate your methods, rethink your options, and reignite your organization. Constantly challenging the mindset of "tried and true" numbers-based solutions such as market share, financials, and metrics, Gorchels integrates both traditional concepts and cutting-edge ideas to avoid the usual "one size fits all" approach that can stifle a company's growth. You'll learn how to build a custom-made business model that encompasses the totality of how your company produces value—including design, infrastructure, culture, operations, and more. You'll learn how to adapt to newest emerging technologies, how to cope with the biggest market fluctuations, how to serve the latest demographic shifts, and how to plan ahead for your company's future. Envisioning business model renewal efforts drives leaders and managers to deal with the ambiguity of future thinking. Shifts in technology, market needs, and competitive arenas can never be known precisely, but must nevertheless be anticipated. Scenario planning and other group-based, collaborative efforts to study the future are therefore necessary components of business model renewal. So, too, is corporate culture, decision making, business model portfolio design, and change management. That's why the frameworks in this book touch on all of these facets. __Business Model Renewal__ won't give you seven proven steps, five key principles, or even 10 irrefutable laws. But it will challenge you to do the hard work of broadening the perspectives of your firm, the ecosystem in which it exists, the role of your personal leadership, and the followership within your corporate culture. Excerpt CHAPTER 1Defy Best PracticesWhen I was contracted to go to Eastern Europe to teach managers after the fallof the Berlin Wall, I took with me my toolbox of best practices. I addressed theprinciples of business acumen, segmentation, and planning. The classes in Polandand Hungary consisted of individuals from various management levels in a broadcross section of industries, yet the approach to strategy fit and benchmarkingagainst world-class competitors was appropriate. I was impressed by theentrepreneurial drive of the audience members; it came not from a high-techinnovative perspective but from a desire to start their own businesses.Several years later I taught a series of classes in Shanghai and Beijing. Themanagers in the audience were from multinational corporations, and many hadreceived their degrees in Australia and Europe. They were interested indeveloping more skills based on Western business practices to apply in verylarge organizations.Although these situations were different in many ways, the common element wasthe thirst for best practices, and the capacity to learn and grow from them wasincontrovertible. Yet a lot has happened over the last twodecades—significant technological metamorphosis, transnationalfluctuations, demographic shifts, and other upheavals—that has prompted arethinking of business as usual. This doesn't mean that everything from the pastmust be thrown out, but it does imply a more nuanced approach to the basics.Best practice is an elusive term. Some people use it to define actions(often taken by exemplar firms) that are presumed to be the reasons for a firm'ssuccess. Others use it to justify following a prescribed set of protocols thatthey believe improve performance. In some cases these best practices are indeedlinked to superior performance, and in other cases they are based on historicalinterpretations or assumptions of cause and effect.Although there are arguably examples of best-practice tactics orbest-practice processes, can the term be applied to strategiesand business models? That becomes more challenging since there so manyinterrelated pieces to the puzzle. Businesses operate within ecosystems thatinfluence (although they do not necessarily predetermine) success or failure.The outcomes of a firm's strategy or a business model are not independent of itsenvironment. Yet many executives and managers examine key success factors(perceived best practices) in excruciating detail without really exploring theinterrelationships among the factors or between the factors and the environment.Peter Drucker once pointed out that "eventually every theory of the businessbecomes obsolete and then invalid" (cited at the Drucker Institute website).Thus, chances for success are increased when executives become contextualleaders, making and implementing decisions on the basis of the context of thesituation.Traditional approaches to strategy assumed a fairly stable and predictableworld. This is no longer the case, and market leadership no longer guaranteesprofitability. Companies increasingly need an adaptive corporate culture, alongwith acceptance and appreciation of experimentation, to have a competitiveadvantage. Since experimentation necessarily produces failures (along withwins), there must be a tolerance of failure.CONNECT STRATEGIES AND BUSINESS MODELSLet's revisit my definitions of strategy and business model fromthe prologue. A strategy is a long-term plan of action to achieve a goal. Abusiness model refers to the totality of the way a firm produces value,including strategy, organizational design, infrastructure, culture, andoperational processes. It implicitly takes into account the ability to executestrategy profitably and is consequently broader and more comprehensive than astrategy.However, sometimes the relationship between a strategy and a business model isconfusing or inconsistent. Here are a couple of examples. Many years ago Iworked for a company that was being considered for acquisition by other firms inits industry. I was invited to be part of a leveraged buyout. The strategy forthe firm appropriately established a potential competitive advantage in theindustry, but the business model (including organizational structure andresources) was not consistent with the strategy. There was a disconnect betweenthe strategy and the business model required to operationalize the strategy. Ideclined the offer, and the firm folded shortly afterward.Let's look at the book publishing industry as another example. Firms intraditional trade book publishing are manufacturers that make products from avariety of materials, including paper. Another major raw material consists ofwords coming from suppliers (authors). The publishers convert the raw materialinto printed or digitized books and sell the books through their channels, suchas online aggregators such as Amazon and traditional resellers such as Barnes &Noble. The editing, design, manufacturing, and distribution are the "value-add"of the publisher, for which the author is paid a royalty. That is thetraditional business model. As long as new product strategy changes areincremental, they can survive with this model. But what if new product strategyis more drastic? Will the existing business model still work?For example, if the strategy is to create enhanced multiplatform books, perhapsmodifications in the business model are warranted. Let's say the authors nowprovide not just words but also embedded video and presentations; the editingand design functions of the publisher now change from standard copyediting toaudiovisual and technology support. New competencies must be built into thebusiness model. Also, the fact that the raw material being purchasedincorporates intellectual property that goes beyond words may cause a rethinkingof the contractual relationship between the author and the publisher. If thebook morphs from a printed product to a multiplat-form product, the value-add ofthe publisher may shift either to broader electronic editing and designfunctions or to the role of web-based intermediary. In any event, a change instrategy may or may not require a reexamination of business models to ensurealignment between those functions.Sometimes fluctuations in the external environment will require a change instrategy or a change in strategy will require a rethinking of the businessmodel. That is why it's important to use best practices and success stories assources of inspiration rather than as prescriptive how-to manuals.CONSIDER THE ECOSYSTEM OF SUCCESSWhat are world-class companies? Do they have larger revenues asevidenced by their presence on the Fortune 500 or a comparable list? Do theyhave better stock performance? Is their brand image stronger? Are they growingmore quickly? Have they received recognition by their peers (or third parties)for being world class? Do they have stronger relationships with customers andemployees? Do they use a balanced scorecard or espouse sustainability? What isthe role of corporate culture and current external factors? Can any companybecome world class simply by following a prescribed set of best practices? Ordoes it require being an innovative disruptor?These are not easily answered questions. However, I have worked with manyprofessionals who doggedly seek out world-class best practices and occasionallyforce-fit them into their organizations. They may believe there is a singleright approach and often minimize the due diligence necessary to learn thepreferred approach for them at a particular point in time.Let's explore some potential criteria that might be used to identifyworld-class companies, beginning with presence on the Fortune 500.Fortune magazine lists the largest corporations in terms of revenue. To beincluded, a company must be incorporated in the United States and file financialstatements with a government agency. Between 1955 (when Fortune firstbegan the 500 list) and 2011, there have been over 2,100 companies on the list.Only around 3 percent of them have been on the list from the beginning. Otherswere on the list for a few or several years before going private, being acquiredby another company, or going out of business. Still others have more recentlyattained the size to become part of the list.If we look only at the top 25 on the list (Table 1-1), we see subtlechanges over the years. In 1955 the top companies were heavily dominated byautomotive, oil, steel, and other industrial firms. Although some of thosecompanies were still present in 2011, it's not surprising that technology,financial services, and retail/wholesale have grown in significance. AlthoughI've listed only the top 25, similar observations can be made about the rest ofthe Fortune 500 and corporate America in general. Best practices arguably havechanged as these shifts have occurred, and that doesn't take into account whatmight be the requirements for emerging technology and bioscience companies.Obviously, size alone does not define world class since many large firms grow tobe among the largest corporations in the world and then lose their footing.Perhaps public opinion and corporate reputation play a role in being perceivedas world class.In teaching executive education workshops for two decades, I have asked theclass participants (managers, executives, and professionals) to categorize alist of 10 to 12 companies as winning and losing. Two things commonly happen.First, most groups don't articulate the factors they use to define winning andlosing, although there is almost always a tacit expectation of current revenueand stock performance. Second, some companies (such as Apple, Dell, andStarbucks) have floated between the two columns, depending on the year. Theexecutives' gut instinct is to define winning or losing in the short term eventhough in further discussion they define a true winner, a successful world-classcompany, as managing itself for the long term. Winning companies should behealthy companies. Competitive advantages are fleeting, and companies mustcontinue to find new ones. IBM, for example, celebrated its centennial in2011—and it's a very different company than it was when it started. Itscentennial video demonstrates its ongoing business renewal.Let's use a different lens: admiration rankings. Fortune's surveys ofthe most admired companies have yielded dramatically different results between1984 and 2011. To gather the results, Fortune commissioned the Hay Groupto survey executives, directors, and securities analysts to select top companieson the basis of innovation, people management, financial soundness, quality ofmanagement, use of corporate assets, social responsibility, long-terminvestments, and quality of products and services. Each of these criteria mightspawn what are perceived to be best practices. Here again we see differentcompanies moving on and off the list over time (Table 1-2).Thus, it's more than stock value and admiration scores. Perhaps we must look atthe underlying health of a firm: its ability to improve and sustain performancein the future. What are the elements of a healthy company? Different metrics areappropriate for different industries and situations. Although we occasionallyread about centenarians living a long life despite not taking care ofthemselves, that is the exception rather than the rule. Some activities thatfeel good in the short term may be hazardous in the long term. We can list atleast a few factors related to longevity, such as exercise, a good diet, andefforts to maintain health. The same thing is true of companies. Successfulshort-term performance occasionally comes at the expense of underlying health.Thus, there are many definitions of winning and losing, as evidenced by thevarious rankings in Tables 1-3 and 1-4.One of the potential problems of blindly following world-class principles isthat companies begin to benchmark themselves against leaders in the existingindustry (this is sometimes a risk with Porter's five forces analysis). Overtime these companies may begin to perform at a higher level than the marketleader and drift toward complacency. To challenge your own complacency, studythe practices of niche players or others that may change the rules in thefuture. Don't allow benchmarking to cause complacency. Expecting simply to fillout templates and implement best practices abdicates the role of leadership.ARE THERE BEST-PRACTICE BUSINESS MODELS?A best practice, as defined by Wikipedia, is "a technique, method,process, activity, incentive, or reward that is believed to be more effective atdelivering a particular outcome than any other technique, method, process, etc."That's a very broad statement, but many managers seem to believe that there is amagic bullet in the form of world-class processes and best practices that youcan plug in to your firm and guarantee success. Unfortunately, it's not thateasy. Business success requires hard work, resources, and often plain luck. Iread on a blog somewhere that best practices come from practicing your bestconsistently. That's not a bad idea. Perhaps future best practices will be thosewhich turn conventional wisdom upside down.We can find several examples of what happens with the overuse of best practices.Long before Google became noted for allowing its engineers to pursue petprojects, 3M encouraged researchers to spend unscripted time exploring potentialnew products. Between 2001 and 2005, when former GE executive James McNerney wasCEO of 3M, emphasis shifted to operational efficiency and the application of SixSigma techniques. Although waste was curbed and margins improved in the shortterm, it took a toll on the 3M business model of innovation. Six Sigma is stillimportant in 3M's factories, but not in its labs.A growth agenda is typically part of a firm's strategy, which by definition is along-term plan of action to achieve a particular goal. Several authors haveattempted to define the management practices that are linked to successfulperformance (most commonly defined as long-term stock performance). Nitin Nohriain an article in Harvard Business Review titled "What Really Works"studied 160 companies over a 10-year period and identified four primarymanagement practices: strategy, execution, culture, and structure. It's worthnoting that the authors did not define best practices in these four areas butsuggested that superior performance came from clarity and alignment of thesevariables.A few years later Christian Stadler in "The 4 Principles of Enduring Success" inHarvard Business Review reported on a 50-year benchmarking study ofEuropean companies. The principles identified included the following: (1)exploit existing assets before exploring new ones, (2) diversify the businessportfolio to gain economies of scope, (3) learn from mistakes, and (4) beconservative about change. These two articles define success from theperspective of stock performance. In light of possible changes in the stockmarket, this definition of success might morph. As of 2011, Facebook and Twitterwere avoiding public markets by raising millions or billions of dollarsprivately, although by the end of 2011 Facebook was considering going public.Even Apple and Google, which have a market presence, are not paying dividends inthe way prior generation companies did. Whether these examples changecapitalistic business models is yet to be seen.As was suggested above, rather than detailed best practices, success comes fromthoughtful analysis and interpretation of information. In fact, sometimes takingthe opposite approach can be the best thing to do. Rather than learning frombest practices, can you learn more from worst practices and failures?Sometimes disruptions are so obvious that we can't overlook them, and at othertimes they sneak up on us. That's why it is important to review your businessmodel as often as you review your strategy. Sometimes a change in strategy issufficient to make progress toward your goals, sometimes a major restructuringof your business model is necessary, and in some situations a strategy changemorphs into a business model change.Michael Malone in The Future Arrived Yesterday: The Rise of the ProteanCorporation and What It Means for You argues that companies in the futurewill need to be "shape-shifters" that reinvent themselves on an ongoing basis.The causes for this are multiple. Ubiquitous technology, a global economy, and"networks of free agents" are all contributors to the need for ongoingreincarnations. The major challenge will be to determine how to couplepermanence with perpetual change.Alexander Osterwalder and Yves Pigneur in Business ModelGeneration recommend that organizational leaders analyze and discuss ninebusiness model building blocks: customer segments, value propositions, channels,customer relationships, revenue streams, key resources, key activities, keypartnerships, and cost structure. They recommend a simple approach of plottingthe building blocks on a poster and using Post-it notes to describe how each oneis related to a firm's business model and what might need to change. Newbusiness models may emerge from different combinations of variables.Mark Johnson in Seizing the White Space has reduced this set offactors into four elements, which he calls "the four-box framework": customervalue proposition, key resources, key processes, and profit formula. Hisapproach is to encourage managers to define potentially new business models byexploring the complex interdependencies of these parts.The authors of both books identified the following categories of business models(with examples of each in parentheses). Osterwalder and Pigneur describe fivepatterns: unbundling models (private banking), the long tail (LEGO), multisidedplatforms (Google), free (Skype), and open business models (Procter & Gamble).Johnson's archetypal examples included high-cost solution shop (systemintegrators), high-volume value-adding process businesses (MinuteClinic), anddemocratized facilitated networks (online auctions). (Continues...) Forget "business as usual." Don't believe everything you read about "best practices." There is no "magic bullet." When your market changes, you have to change your strategy and take control of your own success. You have to renew your business model. In a global market that is constantly evolving, you can't expect "magic bullets" or "best practices"—or any stand-alone business philosophy that many books and gurus offer—to guide your company through good times and bad. Instead you need to take an active role in reviewing and retooling your strategies. You need to stop thinking "business as usual." You need Business Model Renewal —a groundbreaking book that provides a language and multiple frameworks for how to think about and implement business model reinvention. A full-range guide to synthesizing and applying the most up-to-date thinking in business today, Business Model Renewal challenges you to re-evaluate your methods, rethink your options, and reignite your organization. Constantly challenging the mindset of "tried and true" numbers-based solutions such as market share, financials, and metrics, Gorchels integrates both traditional concepts and cutting-edge ideas to avoid the usual "one size fits all" approach that can stifle a company's growth. You'll learn how to build a custom-made business model that encompasses the totality of how your company produces value—including design, infrastructure, culture, operations, and more. You'll learn how to adapt to newest emerging technologies, how to cope with the biggest market fluctuations, how to serve the latest demographic shifts, and how to plan ahead for your company's future. Envisioning business model renewal efforts drives leaders and managers to deal with the ambiguity of future thinking. Shifts in technology, market needs, and competitive arenas can never be known precisely, but must nevertheless be anticipated. Scenario planning and other group-based, collaborative efforts to study the future are therefore necessary components of business model renewal. So, too, is corporate culture, decision making, business model portfolio design, and change management. That's why the frameworks in this book touch on all of these facets. Business Model Renewal won't give you seven proven steps, five key principles, or even 10 irrefutable laws. But it will challenge you to do the hard work of broadening the perspectives of your firm, the ecosystem in which it exists, the role of your personal leadership, and the followership within your corporate culture.