Business model change – myth and reality

As the CEO came onto the stage in the auditorium, a hush spread across the crowd of some two hundred senior managers of the company. This meeting was called to provide some “special announcements” to the wider leadership team, and there was a strong sense of anticipation in the room.

“Today, I am delighted to announce some major changes that will dramatically improve our business model for the future” said the CEO with great flourish.  The CEO then proceeded to outline major changes to the regional and the divisional structure of the business, including a string of new appointments and personnel changes. Congratulations were offered to those in new roles, and the meeting concluded on a high note with major expectations for growth as a result of the changes.

But lets pause here and ask ourselves two important questions:

  1. Does this really reflect a business model improvement?
  2. Would this scenario give us confidence about the growth path of the company?

The answer to both questions is a resounding no. Lets see why.

The first point is to understand what the business model really means. The business model is a term that has grown in usage over the past five years in particular, but is sometimes misunderstood. It is much more than just organization structure, although structure may well be an important component of the business model conversation.

The business model is about how the organization delivers to its customers and grows its revenue and its performance overall. Hence, the business model comprises a bundle of ingredients including channels to market, the pricing strategy, the cost model, the use of technology and the personnel strategy. Simply talking about organisation structure change in isolation is not a business model change. How many times have we seen organisation re-structure dressed up as business model change? Of course, re-structure may be important for the business in many ways, but we need to be careful that we don’t get caught “fiddling while Rome burns” as the story goes.

The second aspect of the business model story is that fundamentally it is about value. Specifically, how does the business model contribute to shareholder value? At a more granular level, how does the business model deliver new or enhanced revenue streams or a different cost model for instance? The business model needs to have a very clear link to the delivery of value to customers, and changes to the business model need to strongly articulate how value will be enhanced as a result. In the example with the CEO above, the organisation re-structure in itself may be necessary but not sufficient for a real improvement in value to the business. But a retailer for instance who outlines a new online channel that will deliver real growth in market share and margins has a clear eye on the value equation.

The third and final point in the business model discussion concerns what I would call the level of engagement – with employees, with customers and stakeholders.  This engagement needs to involve all parties so that the business model can reach it full effectiveness. As an example, a financial services organisation that changes its business model by driving more online business needs a clear engagement with its staff and customers to accommodate the new approach. For instance, new capabilities will be needed to deal with customer queries and interactions in the online business, and full engagement will be needed to maximize the effectiveness of those capabilities.

The CEO above may well have had very good reason to sing the praises of a re-structure in the business, but lets keep some perspective on the scope and depth of the impact on the business model overall, and the real outcomes the CEOs announcements will deliver.



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