How to Shock Management into Rethinking the Business Model – Prove They can be Blindsided by a Fingerprint

By: Tony Singarayar

Despite a detailed process with countless hours of work, and sincere efforts to take a longer-term, strategic look at where to play and how to win, many businesses fail to anticipate fundamental shifts that should cause them to rethink their entire business model. The results are often disastrous – too many businesses end up on life support. This article presents a new concept called “Competitive Fingerprints” that will allow readers to anticipate shifts and adapt their business model to capitalize on future market realities.

This is a short introduction to a longer article about a topic that is fundamental to commercial success, but is frequently ignored by senior managers, and results in seriously flawed strategies and decisions …and often, in catastrophic and highly visible business failure.

The Fingerprints described in this article will compel business leaders to seriously assess the strength and staying power of their Business Model. Rethinking (and re-tuning) the business model is an essential part of “managing”, and should be a common practice, but it isn’t because senior managers spend too much time worrying about commoditized products and too little time worrying about commoditized business models. Why? Senior managers are not trained in, and have no practice with, using business model innovation to get sustainable competitive advantage. Senior managers vigorously deny this – they would, of course – accepting this is to accept that they have abdicated responsibility for something that is a core responsibility.

These “Fingerprints” do more than reveal a failing business model – they make it embarrassing for managers not to confront it. They make it inescapable. They are prescriptions to avoid being blindsided.

Too many managers have poor visibility of their business model

A speaker sometimes feels rising panic because of a growing confusion in themselves and their audience as they try to explain a difficult topic. The speaker knows it isn’t going well – the audience just isn’t getting it. Key points that made sense in the speaker’s own thinking are not sounding clear as they are spoken. The harder the speaker tries, the worse it gets. The best strategy at this point is to shut up. As Abraham Lincoln said, “Better to remain silent and be thought a fool than to speak out and remove all doubt”. I wish many senior managers followed this advice.

It’s not an unusual story: despite hundreds, or even thousands, of hours of meetings, research, and PowerPoint presentations, a business finds itself at a crippling disadvantage because it missed or misread a fundamental shift in the industry business model. At analogy, we call these a change in the “Fingerprint” of an industry.

How can a long, detailed and sophisticated planning process, result in a strategy that misses obvious changes in the industry Fingerprint even as they are happening? My colleagues in Analogy and I, have had four different opportunities to observe why this happens. In our careers (in multinationals, Startups, US Government Labs), Research (into hundreds of business models over last 16 years), entrepreneurial work (several startups), and consulting (advising senior managers in several US, European and Asian companies), we have found one overarching reason.

The reason why senior managers miss obvious flaws in their business model is that few of them think about the business model as another asset that can be improved to deliver competitive advantage – just like they think of products, services, people, processes, equipment, and so on. The business model is not part of management meetings. Lower level managers rarely propose modifications – they work within the confines of the current model. The business model is just not part of standard language of the business. It might be a shallow layer of ideas discussed as a smart topic at an occasional meeting, but there isn’t any depth to business model thinking – no fundamental set of principles that are commonly understood by decision makers – therefore it cannot be deeply ingrained into planning that reliably leads to advantage.

What this means is that many senior leaders think they understand the industry business model, and may even be able discuss it in ways that sound really smart – they may talk the talk, and walk the walk, but they cannot think the thoughts. The management team does not have a shared thinking framework, a common language, that allows them to think together and therefore upgrade their shared business model IQ – the ability to predict, observe and analyze industry shifts, and then agree which of them to respond to, and how to do so.

Everyone knows what a business model is, until they try to explain one

Unfortunately, when fundamental shift happens in an industry, it is often too late for entrenched incumbents to make changes to their business model even if means the difference between life and death for the business Missing a shift is serious and has sent a long list of companies into intensive care.

It’s a serious affliction – many don’t make it. In just one industry, think about Nokia, RIM, Sony-Ericsson, Palm, Motorola. Think about other big brands like Kodak and K-Mart. Waterford and Wang. Borders (remember when there were bookstores in the mall?) and Blockbuster. Lenox, Lionel and Lehman Bros. Hostess, Hechinger disappeared and now Hewlett Packard, with 70 years of new ideas behind it, is in trouble. As is Dell.

Fingerprints broaden, deepen, and clarify our insight into an industry business model. They make us see things we wouldn’t otherwise see. They isolate and amplify – they make us pay attention to things we might miss – both bad things and opportunities.

When there is poor visibility of the business model, managers don’t pay attention to it. When there is low business model IQ, they don’t recognize threats and opportunities even when they do see them.

How to avoid being blindsided by an industry change

I understand how individuals are blindsided. Some they just don’t see it coming – like a pedestrian in a crosswalk gets hit by a car that comes through a red light. Others see it coming, but aren’t able to react fast enough. Like a pedestrian who sees an out of control car approaching and knows he must get out of the way, but is just not being able to do so.

But how can a big, profitable, state-of-the-art business that is at the top of its game, invests in lots of sophisticated research, and has a long heritage of having the vision to pioneer product categories, be blindsided? When a company gets really good at one way of doing business, it automatically becomes bad at learning a new way to do business:

As Samsung has risen, others have failed, often in spectacular fashion: Motorola was split up and its handset business sold to Google (GOOG). Nokia watched its long-standing No. 1 position erode when it got blindsided by smartphones. The Sony-Ericsson (ERIC) partnership dissolved. Palm disappeared into Hewlett-Packard (HPQ). BlackBerry (BBRY) continues to be on a 24-hour watch and has had its belt and shoelaces confiscated. When it comes to mobile hardware, today there’s only Apple, Samsung, and a desperate crowd of brands that can’t seem to rise above being called “the rest.” (Sam Grobartin “How Samsung Became the World’s No. 1 Smartphone Maker” – BloombergBusinessWeek on March 28, 2013)

IBM will sell its PC division to China-based Lenovo Group and take a minority stake in the former rival in a deal valued at $1.75 billion, the companies announced Tuesday. (CNET News, December 8, 2004 4:37 AM PST)

Kodak co-founder George Eastman had a vision: One day the camera would be small enough so everyone would carry one in a shirt pocket. The Galvins of Motorola had an equally vibrant vision: One day we would all be connected without wires. Nortel’s vision was that voice, data, and images would extend to every person and device in the world. And all three visions were correct. It happened pretty much just as they visualized–except it wasn’t these innovative incumbents that won. It was the interlopers, the new kids on the block, the attackers. But you know this story, don’t you? Big company gets blindsided by upstart technology firm. Except, they weren’t blindsided. They saw it coming and they all tried to react. The key word: tried.

What are the signs that the industry Fingerprint is going to change dramatically? Could your company be next to enter the intensive care unit because it misses a fundamental shift in the industry Fingerprint?

Here’s how to tell

Look for changes in the industry that are likely to cause cracks in the six cornerstones of the dominant industry business model – the model that the top players (including you) use. These six cornerstones make a business model strong or weak at creating, delivering and capturing value. We have found them to be the key causes of success or failure in hundreds of business models. Having weakness in them is like building a house on a shaky foundation. It may look good initially, but won’t stand up for long. The most useful way to think about these six Cornerstones is to think about them in 3 groups that are the basis of how a company creates, delivers and captures value:

•  Group 1 represents Your Value Proposition (this is driven by 2 Cornerstones – your Product or service, and Revenue capture, Pricing and Profit Model),
•  Group 2 represents your ability to Generate Demand for your Product/Service (this is driven by 2 Cornerstones – your Brand/ Customer relationships, and your Professional/other Influencer relationships),
•  Group 3 represents your ability to reliably Serve the Demand (this is driven by 2 Cornerstones – your Manufacturing or other Sourcing, and your Distribution Channels).

For more on the six cornerstones and how they define the strength of any business model, please read “Include Business Model Review as a New Year Resolution”.

How do you find the industries where many incumbents could be blindsided?

1. Look in Industries behaving badly in one or more Groups.
   In some industries, customers have to tolerate persistent bad performance in one or more of the 3 Groups. They have to do something they don’t like, or to sacrifice something they feel they deserve to have. “Profit Model handcuffs” are one example – where customers have to pay what they consider unreasonable fees and charges because they don’t have a choice. For example, merchants who have to pay fees charged by credit card payment gateways, and consumers who have to pay for incoming mobile phone calls (which doesn’t happen in many countries outside the US), or have to pay many different bank charges. Or, look for industries where prices are high because of internal inefficiencies – like Hospitals or Retail stores. Or, where there is a price premium for a brand that does not deliver real value as it is with most branded medicine vs. generics. The big danger signal is having many consumers feeling they should not have to put up with something. An industry can “behave badly” only until an incumbent or new entrant addresses the problem. Then customers rush to the new value leader, and laggards lose.
2. Look in Industries with a new class of competitor delivering superior performance in one or more of the 3 Groups.
   Unlike in the previous situation, where the industry is waiting for a better solution, here, the better solution has arrived. Typically, the “superior performance” in one or more of the 3 groups, is delivered via one of three vectors – quality of output, speed of outcome, or lower cost. An example is how, when a well-functioning online channel emerges in an industry (books, for example), the bricks and mortar channel suddenly seems to be inefficient, inconvenient unable to offer the “Long Tail” of choice, and to charge prices that are too high.

By Tony Singarayar

Photo from shutterstock.com