This article first appeared in the March, 2007 edition of the Jacksonville Business Journal
Every company has a defined way - or model - in which it conducts its business. The elements of a business model include a vision and mission, a set of products and services, a "go-to-market" strategy for identifying and winning customers, a service delivery model for providing products and services, a human resource model, and a financial model.
Sometimes business models are carefully constructed. More often, they simply evolve over time. Your business model determines how much profit you can potentially earn on a given amount of revenue. It can also become the ceiling that prevents you from achieving greater success.
When Business Models Need to Change
Consider an industry in which a number of companies each offer multiple brands that comprise a wide array of competing products. This model is common in retail markets, such as dairy food products.
Imagine a company that owns several brands in a particular category. It grows by acquiring other brands. Because each brand name already has recognized value, the parent company retains the existing brand names, and allows each acquired brand to continue its business uninterrupted. Each brand functions as an independent business unit, with its own profit and loss statement. The overall company minimizes cross-business unit interaction so that each brand can maintain autonomy and sustain itself on its own bottom.
The strength of this model is that each brand can respond to the needs of its market and customers. Accountability is high, and employees identify with their brand, rather than with the overall company. The disadvantage is that there is no synergy across brands. In a worst case scenario, several brands that belong to the same company may actually compete with each other.
Recently the CEO of one of my client companies that uses this business model went to a trade show. He saw two of his brands on the trade show floor - each with its own booth. Neither knew the other was going to be there. There was no common trade show planning, no synergies captured, no attempt to cross-sell across brands, no efforts to share resources, etc. The brands actually saw each other as competitors! Lots of expenses leaked away, and lots of potential value was lost.
The reverse of this model can be just as bad. If all the brands were integrated under one corporate monolith, brand identity and employee identification might be lost. Brand accountability would be reduced and employee passion for specific brands could be converted into unfulfilling and unnecessary corporate bureaucracy.
But there can be a solution somewhere in the middle that maintains the autonomy of the brands but also provides some corporate services that capture cross-brand synergies. The requires a change of the business model and must have the active support of senior management.
A Different Example
Here's an example of a different business model that has the potential to change the paradigm of the publishing industry. The traditional publishing industry uses a market analysis and screening process to select books for publication. Books are then printed, inventory is maintained and distribution occurs through bookstores and other similar channels.
Over the past several years, however, a completely different web-based publishing business model has emerged, enabled by new printing technology and the internet. In this new model, authors send their books to a web-based publisher who converts them for a small fee to whatever format the author desires, and makes them available through the publisher's website, the author's website, Amazon.com and other selected internet sites. Books are printed on demand - one at a time - as orders are received. The author sets the price. The publisher gets a manufacturing fee per book and some share of the royalties. The process is controlled by the author, not the publisher. No inventory. No significant hard dollar investment. No long lead times. No traditional distribution channels. It's difficult to say what the long term impact of this model will be, but a quick look at businesses such as eBay and Google show the potential dramatic impact of a different business model.
Large airlines using capital-intensive major transfer hubs are finding it increasingly difficult to compete with companies like Southwest that use a different business model. Business models are built around market conditions. Companies must maintain enough flexibility to shift with changing market conditions.
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