Written by George F. Brown, CEO and cofounder of Blue Canyon Partners, Inc.
Our consulting firm recently worked with a company that manufactures capital equipment used in many factories to produce products made of plastic and similar materials. Their technology offered many advantages over that included in competitor products, and they achieved substantial market share gains with larger businesses. Their targeted customers, however, included a large number of smaller firms, and they had very little success in gaining sales into the small and medium business segment. Research identified the reason for that failure: these firms didn’t have the internal infrastructure needed to support the technology included in the products, and these firms were taking the “safe, familiar route” associated with competitor products. As a result, several years ago, the firm decided to create a customer service organization which would take on service responsibilities on behalf of smaller firms that purchased their equipment.
The implications of this decision were summarized by one of the firm’s senior executives:
“We had no idea what we were getting into with this decision. First of all, we learned that our customers assumed that we were available to provide service on a 24x7 basis. Our operations traditionally involved normal business hours – and we had assumed the same for the service arm we created. That was wrong, and a costly mistake as we had to add staff for the many hours we had assumed we didn’t need to cover.
“Second, we thought our responsibilities were tied to our products. This too was off the mark. More than half of the service calls that we got were associated with something that was at best peripheral to our products, some not in any way linked except in the minds of our customers. But we had to learn the larger systems in which our products were operating, and be able to steer our customers towards a solution to whatever problems they had. It just wouldn’t work to say that the issue wasn’t our issue – we tried that a couple of times and learned quickly never to do so again.
“And as one more illustration, we sell through a dealer network, a group of firms with which we’ve had great relationships over the years. I’ve never seen such a firestorm as occurred when our service people started working directly with the end customers. You would have thought we were the competition – at least that’s how the dealers reacted. It took us over a year to calm the waters with our dealers, and even today some of them still seem suspicious of us.”
This firm eventually enjoyed success with its service offering, gaining market share with the small and medium sized businesses in their target market. They even succeeded in implementing a fee-for-service program for these customers after the warranty period had elapsed, with the service business operating at a slightly better than breakeven basis at this time while continuing to bolster their ability to sell into the small business segment.
They also learned a lot about making changes to their business model in the process, and it is doubtful that this firm will ever again make similar changes – going from a product to service business, dealing directly with end customers instead of going through intermediaries, etc. – without a full understanding of their implications. The executive quoted above commented “I didn’t even know what our business model was. But I’ve learned my lesson – whatever it is, beware of making changes to it”.
Despite that advice, making changes to a firm’s business model has become a high-frequency activity. In a recent survey of business executives, we heard of four reasons that have motivated making changes to a firm’s business model. The two primary motivations are performance problems. The most frequent reason motivating changes in the business model is that the “Old business model is failing to deliver adequate growth”, followed closely by the “Old business model is failing to deliver adequate profits”. External motivations are also important in many cases. While trailing the above performance-related motivations, two other factors were recognized as important in decisions about changes to business models: “A new business model is required due to external changes (e.g., regulation, technology)” and “A new business model is required in a new market or product segment”.
All four of the motivations cited above scored above 3.8 on a scale that ranged from 1, meaning “Rarely a factor” to 5, meaning “Frequently a factor”. Changes to a firm’s business model, while not an everyday thing, are a common enough occurrence that they warrant executive attention. The comments of two executives who contributed to this survey provide a good perspective. One executive from the packaging industry noted: “I’ve come to think about strategy in terms of business model changes. Whether we can successfully make the changes needed is the litmus test of whether a strategy proposal makes sense.”
A similar perspective was offered by an executive from the electrical products industry: “One thing I’ve learned is that the implementation challenges are centered on changes to the business model. We don’t fail at product development, we’re good at pricing appropriately, our sales team knows their customers. It’s when we venture into the unknown with some element of the business model that we get into trouble.” Like many firms that have suffered the pains of changing elements of their business model, this executive says that he is now very quick to say “Wait a minute – have you thought out the implications of what you are proposing in terms of changes to our familiar business model?”
George F. Brown, Jr. is the CEO and cofounder of Blue Canyon Partners, Inc., a strategy consulting firm working with leading business suppliers on growth strategy. Along with Atlee Valentine Pope, he is also the author of CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs, published by Greenleaf Book Group Press of Austin, TX. See www.CoDestinyBook.com for more details.