Core businesses become core for a reason: their business designs work–or worked. Eventually, all businesses require renovation. Sometimes, they require revolution. But it can be hard to tell when your company needs a radical re-design, not just a sprucing up, before it is too late. Large companies can linger for years with a business design that’s going nowhere.
Some signs are obvious, like falling margins or shrinking market shares, though it could be that you’re just underperforming. What other factors might indicate you need a fundamental redesign?
Going “Back to Basics” doesn’t work … again.
During times of trouble, executives often talk of going ‘back to basics’ and honing the fundamental components of the business. This can be an excellent approach to navigating through trouble, but it provides little direction for the future. If you find your company returning to basics more than a couple of times, then perhaps doing better at what you already do is not the answer.
The music industry provides the most obvious and tragic example. After peaking around 2002, CD sales declined slowly at first, then with accelerating impact. Numerous so-called record labels tried squeezing more efficiency out of the same value chains, shifting executives who had succeeded before into vastly different market contexts and trying more of what had worked in the past. Not surprisingly, they failed not once, but multiple times.
You’re in a cost war, and you’re not winning.
Competing on cost is a race to the bottom. Unless your company is equipped to win, it might be time to evaluate or transform the way you compete. If an emerging competitor has a cost structure you just can’t beat or a much better funded competitor decides it’s war, then consider changing the basis of competition.
As Wal-Mart ascended in the 1970s and 1980s, other discount stores, such as Kmart, failed at beating the Bentonville titan at its own game. Target Corporation, by contrast, envisioned an entirely new approach to the discount market: cheap chic. Though a chic, stylish experience at discount prices was almost comically unheard of, Target built a powerful position and strong growth by creating clear strategic differentiation. Wal-Mart and Target are both discount stores, but they’re not competing solely on cost and have both thrived. Kmart, however, tried to do a bit of both and failed.
Other companies like yours are already in trouble.
Given how tough it is to be objective about one’s own industry, we should all seek insights from other industries and markets. In particular, seek companies in adjacent or apparently different businesses that share fundamental characteristics. You might see leading indicators for critical trends that are harder to see from the inside.
Compare the music business with book publishing, for example. They’re similar in many respects, though traditional music retailers and publishers (known quaintly as “record labels”) endured the collapse of their business models earlier than print-based media has. Book publishing executives had nearly a decade to witness the ineffective responses of their music industry brethren, and to create standardized digital publishing formats, paving the way for the electronic readers like the Kindle and book apps for mobile phones that are surging in popularity now.
Your business model might not be the one you think it is.
Your business model isn’t always the problem. Some companies just execute better, or focus on the right things. However, it is important to know when your business model isn’t the one you think it is.
The epic battle in the U.S. market between Toyota and General Motors (a.k.a. Government Motors) appeared to be between two companies with similar business models. One built products an increasing group of consumers demanded, the other didn’t. GM became less about selling cars that people wanted and more about providing financial incentives to move products out of factories. What began as a complementary financing function, a value-added service to consumers and dealers, became a driver for the company’s sales. GM became a bank that happened to make cars.
If you’re driving sales or making most of your margins from things other than your core business, it’s time to review your perspective. Such business model evolution isn’t necessarily bad, but you should always be clear about what is really driving your business so you’re ready to act appropriately before things go wrong.
Read more from Robert Wolcott and Michael Lippitz on how corporate entrepreneurs can take their vision to market and help their companies Grow From Within.
Robert Wolcott and Michael Lippitz are leading authorities on innovation and corporate entrepreneurship at the Kellogg School of Management at Northwestern University, and co-authors of Grow From Within: Mastering Corporate Entrepreneurship and Innovation (McGraw Hill, 2009). In the past six years, they have studied more than 30 companies across industry sectors and developed an ongoing dialogue with them about corporate entrepreneurship through the Kellogg Innovation Network (KIN).