Has your business model exceeded its shelf life?
“Within five years, if you’re in the same business you are in now, you’re going to be out of business.” — Peter Drucker
Imagine New Year’s Eve 2024. While you’re getting ready to ring in 2025 with family and friends, you take a few minutes and reflect on the year coming to a close. As you think back over the past 12 months, a question comes to mind: What did I do as a leader that had the greatest impact on my business in 2024? Leading operating reviews? Analyzing financial performance? Coaching direct reports? Recruiting new talent? Each of these activities matter, but their impact will be suboptimal if your business model is stale.
Every business operating model has a finite shelf-life, which at some point losses effectiveness. It’s easy to see with examples like Blockbuster Video. Customer expectations for video content shifted from physical, retail store access to on-demand and eventually streaming. Alternative content delivery options, formats, and providers (Netflix, Amazon, Hulu, Disney+ to name a few) became available. Then a global pandemic hit, creating an extraordinary accelerant to the evolution of entertainment content access. Changes in demand, supply, and customer delivery alternatives all advanced obsolescence of the retail video store option business operating model.
Change is a constant factor
Perhaps it’s more challenging to see similar shifts to operating model dynamics in your business, but things are changing right now. Your customers are changing. Their expectations are changing. Your competitors are changing. Your employees are changing, as are their expectations.
Forty-four years ago, Harvard Business School strategy professor Michael Porter wrote about how competitive forces shape strategy. Porter discussed five competitive forces that define the attractiveness (relative competitiveness) of an industry: the threat of substitute products or services, threat of established rivals, threat of new entrants (contextualized with barriers to entry), bargaining power of suppliers, and bargaining power of customers. Prevailing wisdom says when barriers to entry are low in an industry, the risk of new companies venturing into a given market is high. Conversely, when barriers to entry are high (e.g. significant capital requirements to participate in the industry), incumbents have an advantage over new entrants.
Today, industry disruption is aided by technology and new approaches to innovation which change these competitive forces. Most industries — including those once perceived to present high barriers to entry — are vulnerable to disruption. Innovators reduce time-to-market, elevating the threat of substitute offerings. In many industries, the hurdles of high upfront capital requirements no longer exist.
Consider the music industry. In the 1960s and 1970s, record companies invested millions in sound studios and recording equipment. They worked with record manufacturing firms which required large capital investments in pressing and packaging equipment, physical distribution channels, and marketing resources. Today, with low-cost ProTools recording software, recording artists can create their product and distribute through streaming services, going direct to their audience, bypassing the legacy record company operating model.
3 categories of change
What are the indicators that it’s time to refresh or redefine your business operating model today? There are three categories of change that indicate this is the time to assess an operating model refresh: Changing demand, changing supply, and changing customer engagement approaches. This set of questions can help identify emerging changes in these areas, suggesting the need for an operating model refresh:
- Changing customers — What changes do you anticipate in your customer base over the next 3–5 years (demographics, geographic, economics)?
- Changing customer expectations — What changes do you anticipate in customer expectations of your offering over the next 3–5 years (product, technology, ease of use, features, quality, pricing)?
- Changing employees — Employees are a core element of what you provide customers. What changes do you anticipate in employee expectations of your business over the next 3–5 years (evolution of the company’s value proposition to employees, career and professional development, benefits, compensation)?
- Suppliers — What changes do you anticipate in suppliers over the next 3–5 years (supply chain changes, new suppliers, product offering, industry consolidation, technology, costs, pricing)?
Changing customer engagement approaches
- Interfaces — What changes do you anticipate in the way your company interfaces with customers (human interaction, physical sales/service locations, self-service, technology platforms)?
- On-demand — What changes do you anticipate in the availability of on-demand customer engagement offerings (accessing your products or services where, when, how the customer prefers)?
This partial list suggests how leaders can evaluate the need to refresh, refine or reengineer their business operating model.
Back to New Year’s Eve 2024, and the self-imposed question: What did I do as a leader that had the greatest impact on my business in 2024? One powerful answer can be “In the summer of 2023, I decided to review our company’s business operating model and see how it aligns with the future we anticipate. The changes we made later that year led to a breakout performance in 2024!”