The Starcher Group

[starchergroup]

Market Context: The critical missing link in the strategy puzzle



“Why do once excellent companies with growing market valuations see their market valuation flatten and erode”?

I believe that there are key contributors:

• Lack of focus on the Strategic Context • Company structures, systems and processes (“Company”) are misaligned with the Strategic Context. • The Culture, Capabilities and Assets (“Core”) evolve too slowly in the current business environment.

What is the Strategic Context?

Context is the organization’s relevant external environment and Strategic Context focuses on business model and strategic elements of the external environment.

The premise: Organizations operate at peak efficiency when the Core, Company and Strategic Context are aligned and operate at peak effectiveness when each one of those elements is thoroughly understood.

“Why and how do these elements become misaligned?

 Strategic Context Company Core Alignment

The answer lies in 3 different patterns of change. Change in the external environment is accelerating; Companies evolve through a lifecycle of growth, maturity and decline and the Core evolves at a slow pace.

When overlapped and over time, the patterns of change lead to 2 key gaps:

Business Model Gap

The business model loses its fit; this has a profound impact on value creation potential and usually results in a deteriorating market value.

Shared Value Gap

“We cannot change fast enough to keep up with our markets!” The culture, assets and capabilities (“Core”) are no longer serving the company well. Effectiveness erodes while the perception of efficiency is still there. It becomes more and more difficult to execute while more and more energy is required to deliver business results.

There is an additional gap that needs to be mentioned, and that is the gap between real and perceived Strategic Context. This is often the result of inside-out perspectives, industry vs ecosystem focus, incomplete analysis, linear vs systems thinking, lack of strategy map, …

“Is this relevant to my situation?” Which one of these 5 market valuation patterns reflect your reality?

 Market Value Patterns

Decelerating – Market Value is still growing but the rate of growth is slowing.

Growing Sideways – Market Value is flat over a period of time, with the usual up and down noise.

Declining – Market Value is shrinking

Expanding – Market Value is growing at a relatively constant rate.

Accelerating – Market Value is growing and accelerating.

If your pattern in expanding or accelerating this work can help you understand why so that you can predict what potential triggers would lead to market value leveling off and declining.

Why are new insights required?

For the past 100 years, we have looked at markets through an industry lens. These industries were codified through SIC codes and more recently NAICS codes. This worked well until more recently when the digital world started blurring industry lines and redefining industries. As an example, Cameras were their own industry for a very long time. Bellows cameras were followed by analog SLR cameras then digital and more recently Point and Shoot digital cameras. Then mobile phones started adding camera capabilities and those eventually became good enough for most occasions. So is there a “camera” industry today? Yes but it looks radically different and is much smaller. More importantly it has been replaced by a digital imaging ecosystem that includes not only the camera devices but also image management, storage, manipulation, viewing and image fulfillment, to name a few. The digital era has made the traditional industry analysis necessary but no longer sufficient.

What additional approaches are required?

The key changes required include ecosystem analyses, strategy map development and listing of the complete and exhaustive set of strategic options identified by the strategy maps.

Ecosystem Analysis.

Ecosystem Analysis methods done at the strategic and business model level were developed in 2003. The analysis builds a view of the complete ecosystem, includes multiple layers (current and potential players, value delivery systems, profit pools, profit models, strategic control points, customers and experiences, and customer value gaps) and looks at the interplay of all these elements. The benefit to clients: one such analysis enabled us to reverse engineer a competitor’s strategy across an entire ecosystem.

Strategy Maps.

Strategy Maps are structured visual 2 or 3 dimensional representations of the ecosystem business types and businesses. It pulls together bits and pieces into a coherent picture that is easy to digest. Your business will be placed into a broader context and possible opportunities will become readily visible. It’s like having a big “YOU ARE HERE” in the middle of a map. The strategy maps are used to detail a complete list of strategic options.

Summary

Market dynamics have been changing and traditional approaches are leaving many companies with market values that are stagnant and eroding. Historical approaches are necessary but no longer sufficient. Understanding your complete Strategic Context is now an imperative and missing in strategy toolsets. The work will enable you to see your business within a broader context, understand all strategic options available and determine which one are most likely to generate value.

[starchergroup]

Strategy System drives Market Value!

What does it mean to “have a strategy?” Strategy is merely a statement of intent. To create value, one has to answer some fundamental questions:

• Do I understand the strategic context relevant to my business? • How do I know that I am considering all relevant strategies? • Can those strategies be implemented successfully?

What is needed is an effective strategy system! The full value is delivered as a result of using a complete strategy system. Key components include:

 strategy system

The Strategic Context identifies what strategies are available within an ecosystem and identifies a set of optimal strategies for the business. The company Vision is based on an understanding of that Strategic Context.

Decision Management connects the strategy systems elements and enables ongoing evaluation and evolution of strategy and implementation activities.

Once strategies have been selected, Strategic Planning connects potential strategies with market realities – what business results are required and what combination of operating activities and strategies will deliver on those results.

Design Strategy translates the strategy into a set of potential products, services and experiences.

Portfolio Management optimizes people, time and money investments in the context of those strategies.

Can I create value if I am missing some parts of the Strategy System? Yes but …

Lacking a Portfolio Management process, you will select a sub-optimal set of projects to work on, leaving money on the table.

Lacking a Design Strategy, how closely will your selection of products, services and experiences tie to your strategy.

Lacking a Strategic Planning process, how will you manage risk and adapt your strategies and plans.

Living with a Decision Management System that evolved through many reorganizations vs being designed, your organization’s decision making will be less effective.

How effective is your Strategy System? Are some elements missing or ineffective?

[starchergroup]

No Customer Value Gap - No Business Model!

Customer Value Gaps are the source of value for your business model. What is a Customer Value Gap? It is a gap between the desired and actual/latent customer experience where the customer is willing to pay to close the gap. This “payment” can be in the form of price premium, changing vendors or increased loyalty and preference.

Customer value gaps exist at 3 levels, Functional, Emotional and Social.

Functional      “It works”

Emotional       “It brings me satisfaction”

Social              “I want to belong”

Many insights can be gleaned if customer value gaps are identified across multiple dimensions, for example:

• Customer segments • Strategic Segments • Customer decision journey • Customer touch points

In general, we find that there is the most value at the social level, followed by emotional and functional levels. For example, in motorcycles, Harley Davidson is one of the few brands that can leverage the “I want to belong” customer value gap, in their case into significant sales of accessories where significant margins are found.

A simple example from a restaurant perspective, segmented into fine dining, excess capacity levels and friction (ease of getting to location, parking, …):

 Customer Value Gaps

What are your Customer Value Gaps? How are they linked to your Business Model, Experiences, Solutions and Products?

[starchergroup]

Can’t find growth? Look beyond your industry to your business ecosystem!

Understanding your complete Strategic Context is now a business imperative; visualizing your business within a broader context, understanding all strategic options and determining which ones will likely generate value is a foundation to identifying growth and profit.  Ecosystem analysis is an element of Strategic Context.

What is an ecosystem?  Drawing the precise boundaries of an ecosystem would be an academic exercise but includes, among others:

• Companies to which you outsource business functions • Institutions that provide you with financing, • Firms that provide the technology needed to carry out your business • Makers of complementary products that are used in conjunction with our own • Makers of substitute products and services • Competitors and customers, when their actions and feedback affect the development of your own products or processes • Entities like regulatory agencies and media outlets that can have a less immediate, but just as powerful, effect on your business.

With the transition from a siloed analog to a connected digital world, industries are being transformed, blended, and connected in new ways.  Previously unrelated industries overlap and merge, and old definitions fade away into history.  Car mounted mobile telephony and analog cameras used to be very unrelated until the advent of digital cellphones and digital cameras; now they are part of a new industry and ecosystem:  the  Smartphone.  Digital SLRs and point and shoot cameras are now stagnant to decaying categories and car-mounted telephones are a thing of the past.

Why invest in Ecosystem Analysis?  What is the value of this work?  

• Gaining Deep Insight.  You are able to truly understand the sources of value, gain insight into the ecosystem evolution and step back from the product level fog.  An Ecosystem half-life is 7 – 10 years while product half-lives are measured in months.   • Developing Strategic Context (see prior post) with a complete view on what business strategies are available.   • Uncovering billion dollar opportunities, if available.  Looking deeper at the ecosystem at the business model level will reveal any of those opportunities if they are present.  This means iteratively looking at the business model layers of the ecosystem:  Customer Value Gaps, Customers and Experiences, Strategic Control Points, Profit Models, Profit Pools, Value Delivery Systems, Current and Potential Players.  Those layers are then available to overlay over the ecosystem frame. • Having a common frame that can be shared across the organization.  One component of aligning the organization is to create a common mental model and frame of reference.

What are some examples?  (Insights from the examples will not be shared here due to the proprietary nature of the work)

• Simple ecosystem sketch using jobs to be done as framework, Web Real Time Communications.  We identify the most relevant dimensions of the ecosystem.



• Ecosystem frame, Imaging ecosystem circa 2004.  This is the result of iteratively looking at all the business model dimensions and ensuring that they align on a common frame.



• Business Model Landscape, Imaging Ecosystem circa 2004.  This is a precursor to strategy maps.  A complete inventory of potential strategies can be developed from this frame.



In summary,

Using your industry as the unit of analysis might be hiding significant risks and opportunities; using a business ecosystem perspective will provide deep insight and strategic context, and identify additional strategies that might have been previously hidden.  If you are looking for billion dollar opportunities, then taking the additional step of looking at the ecosystem at the business model level will reveal whether any of those opportunities exist within your broader ecosystem.

[starchergroup]

Can’t find growth? Redefine what business you are in!

Your most recent growth strategy failed to find significant growth.  You looked at organic and inorganic growth but were not able to find the growth you wanted.  Where to look?  In another post, “Can’t find growth? Look beyond your Industry to your Business Ecosystem!” we discussed looking more broadly at your ecosystem.

Another related but different area to explore is redefining what business you are in.  How your business is defined reflects your chosen business boundaries and is often embodied in your mission, your vision, the unspoken assumption in every strategic conversation, …. , basically you would say “We are in the _______________ business!”

Business redefinition is an area where you can identify and unlock significant new sources of value yet it is neither easy nor risk free.  It would be easy but simplistic to simply broaden the definition that you currently have, say from computers to computing or trucking to transportation.  Of course broadening the playing field alone would yield some new growth opportunities but how do you know if you are likely to be able to successfully leverage your business into these new areas?

There are 3 steps to redefining your business:

1. What is your current definition? 2. What is my strategic context? Where I do currently play? 3. What options do I have to redefine my business and which one is optimal for me?

Below is a framework that is useful for understanding what options are available:



Here is how the process works:

What is the current definition?  Single product in a single segment?  Service across an industry?  Business Model in a single segment? …

What is the strategic context?  Where do I currently play?

Ecosystem Analysis Trend Analysis Economic, Environmental, Geopolitical, Societal, Technological Competitor Analysis History Porter 5 forces SWOT, TOWS

Strategy Map Ecosystem definition Experiences Value Delivery Systems Value Migration Strategic Segments Customer Value Gaps Strategy Map

Strategic Options

Where do I currently play?  Align the current business definition within the Strategic Context

What options do I have to redefine my business and which one is the optimal one for me?

Value:  There is increasing value delivered to customers when going from providing products, to services, to solutions, to experiences and to business models.  For example, the value of generating a new business model can be 1,000 times greater than delivering a single product.

Scope:  As I increase the breadth of my scope, value captured increases as you serve a single segment, multiple segments, an industry and an entire ecosystem.

Value and Scope:  Capturing value by delivering on both value and breadth.

Choices include:

1. Increase value of the offering within the current scope 2. Increase scope while maintaining the same value 3. Increase value of the offering and scope at the same time

An example will help to illustrate, though we will only focus on some key pieces of the work for brevity.

Company X in the Hearing Aid Industry currently offering products in multiple segments of the industry.  The industry as defined by this player is hearing aid products and solutions.  Visually this is where they are playing:



The segments from a consumer perspective include people with normal hearing and people who are hearing impaired and from a company perspective segments are users and non-users of hearing aids.  Looking more broadly and developing a perspective on the ecosystem, we can add an additional dimension that deals with whether we are interested in hearing correction alone or wanting to look at hearing enhancement also.  We can see this visually:



What now stands out is the opportunity to redefine the business from “Hearing Aids” to “Managing Hearing”.  The former includes medical products that focus on correcting hearing deficiencies through advanced technology while the former includes hearing correction and adds products to protect and enhance hearing.  The option exists to redefine the business at the product level or to further expand into experience management, adding some additional opportunities to grow value.

Visually, this is what the scope of the new business definition could looks like.



Business redefinition is another option in the search for new sources of growth.  The key is having a mastery of what is happening in the broader ecosystem, what the business models are and likely to be in the future, whether there are disruptive forces that are at play and whether the ecosystem itself is likely to be redefined in the near future.  Finally, you have to be able to deliver strategic options that balance the rewards with the risks.

[starchergroup]

Can’t find growth? How much value do you want to create?

Sustained growth has always been hard to find and it is not getting any easier.  I have posted a couple of blogs related to finding growth: Can’t find growth? Redefine what business you are in!  Can’t find growth? Look beyond your Industry to your Business Ecosystem!

An interesting area that I do not see covered is how much value are you looking to create.  In my internal and external consulting over the last 10 years one of the first questions I ask is “how much value are you looking to create?”  $1M? $10M? $100M? $1B?  The absolute numbers matter less (because they depend on what business you are in and the size of your business); rather it is the relative order of magnitudes.

About 10 years ago when I was driving a business model agenda at HP, I took the time to calculate the relative value of a feature improvement, an architectural innovation and a business model shift.  The results:

Order of magnitude

Major feature change              $1Ms example:  performance improvement

New Product                           $10Ms example:  new printer

Architecture innovation            $100Ms example:  new chip architecture, shift in engineering design,  

Business model shift                $1Bs example:  low cost business model, systems business model

Why does this matter?  Whether you were asked by management to find new sources of value or you are a consultant, asking how much value needs to be identified will point you to where you need to start looking.  Do I need new features?  Do I need to innovate the architecture or do I need to be able to innovate the business model or come up with a new business model.  The work is very different.  The risk is very different.  The skills and resources needed to deliver on the request are very different.

But there is something common across these options.  We need to understand the customer value gaps – the gaps in experience where the customer is willing to pay to close the gap.  That information can be purposed to develop new features, new products, new architectures and/or new business models.  And without that fundamental understanding, it will be very difficult to impossible to find value, let alone sustained value growth.

[starchergroup]

Can’t find profits? Look to sustainability

It is tempting to look at sustainability only as “do good” when in fact it is BOTH “do good” and “do well”.  “Do well” is one lens to look at the business through and that is profitability, most often quarterly profits.  Sustainability is another lens that looks at a broader set of stakeholders, quarterly profits AND Market Value.  I would contend that looking at the business through the sustainability lens is a superior approach for shareholders.

How does sustainability enhance Market Value?

Increased Revenue  - increased competitive position and gives the firm access to some new markets, allows it to win bids, increases loyalty and retains business.

Reduced Cost  - increased efficiencies through lower materials usage, less waste and lower energy uses. Wal-Mart is looking to save $3.4B from packaging alone.

Increased Brand Equity  - increased Brand Equity through consumer perceptions and emotional connections. 91% of customers have a more positive image of a company when it is environmentally responsible.

Improved Employee Engagement  - increased engagement, increased productivity, better retention and greater recruitment quality.  A 10% improvement in employee Engagement has been shown to increase customer satisfaction by 6% and profits by 2%.

Lower Financing Costs  - lowered cost of capital.  Sustainable businesses outperform other businesses, are able to access Socially Responsible Investment funds and pass financial institution filters.  Sustainable businesses are seen as lower risk investment and reap the rewards through lower borrowing costs.

Lower Risk  - Supplier, Product, Facility, Regulatory, Competitive and Reputational risks are all lowered in sustainable businesses.  Risk is a tangible cost where the Expected Risk Cost is equal to the sum of the magnitudes and frequency of potential events.  For example, a blown well in the Gulf Coast was a risk at BP until the event happened at a $43B cost.

Integrating sustainability into business operations affects a number of other intangible areas that have an impact on Market Value but these are not well captured in management systems:  Business Model, Design, Innovation and Strategy.

While “Doing Good” impacts profits and tangible measures of Market Value, “Doing Well” impacts Profits and Intangible measures of Market Value, which have been a growing part of total Market Value.  The answer is clearly that companies should ensure that there is a focus on sustainability, knowing that it is not done at the expense of profits.

[starchergroup]

Manage your Business Model across the

There has been an explosion of posts on Business Models in the past several years.  Many of those posts relate to start ups / new ventures yet business models need to be actively managed throughout the entire business lifecycle.  The half life of a business model has shrink from 20 – 100 years (Railroads, steel) to 7-10 years; this means that the business model can no longer be assumed, it needs to be actively managed.

There are multiple business model schools of thought (Slideshare); they have their strengths and weaknesses so pick an approach that best suits your business and situation.

Start-up phase

Need:  A “good enough” business model design that can evolve as the start up launches and learns.  The leadership team needs to focus on the critical assumptions underlying the business model and document those.  If you are working with an advisor, it will be important to transfer business model knowledge so that the business knows how to evolve its business model over time and can get to a solid definition before the growth phase.

In Practice: With the advent of Lean Start Up and the focus on launching a Minimum Viable Product, there has been less attention devoted to the business model.  Having worked with a number of start-ups, I have found a lot of chatter around business models but very little real effort and focus on the part of the founders.  There is a Ready – Fire – Aim approach to launching the business and issues start when the business reaches the growth phase without a solid business model in place.

Recommendation:  The easiest way to get to a good enough business model is to use the Business Model Canvas.  It provides the structure and the process to get to a good enough business model.  Document the underlying assumptions so that those can be validated as the business learns.

Examples: Countless

Growth Phase

Need: A solid, validated business model design.  After launching your start up with a good enough business model, get to a defined business model before ramping.  Assumptions need to be validated, Customer Value Gaps need to be researched, the economic model needs to be established, the scalability of the model needs to be established.

In practice: As the growth phase starts, mind share is focused on the requirements of delivering growing demand for the product/service and putting in place all the structures and processes required to support a growing business.  The business model design is often considered important but not urgent and does not get the required attention.  Growing the business without a solid business model only makes it more difficult to change down the road and a flawed business model scaled up can be catastrophic.

Recommendation: Early in the growth phase, monitor the business model to ensure that is remains relevant and that new information and knowledge is used to continue validating the business model.  When the first signs of maturity appear in the growth phase (business deceleration), start the business model evolution and innovation process.  This activity is what will lead to the next growth phase and help you avoid reaching the decline phase.

Examples: HP Inkjet where in 1995 the systems model (Razor / Razor blades) was implemented and fueled a new growth phase.

Maturity Phase

Need: How do I evolve the business model to get back onto a growth phase or add a line of business that is in a growth phase?  Can I evolve the business model based on changing assumptions and/or do I need to transform the business model?  Early in the maturity phase when profitability and cash flow are there to support this new exploration is when it is the easiest to tackle thinking about evolving your business model.  

In practice:  The business has grown to the point where senior executive attention has shifted to internal management of the business and a focus on delivering consistent quarterly results.  Customer knowledge is often obtained through many market research studies and executive customer visits.  No one is actively managing the business model and often the original design has evolved due to strategies, acquisitions and operational changes that were not always aligned with the business model.  The strategic context will have shifted and likely the business model is no longer aligned with the Strategic Context.

Recommendation: Without significant effort to re-establish a business model that delivers a new growth phase, the business is likely headed for the decline phase.  The longer you wait the more difficult it will be to overcome inertia.  This is when an external perspective is most needed, whether bringing in an expert to work with the management team or bringing in an outside team to design an evolved or new business model.

Examples: Outerwall (Redbox, Coinstar), HP Printing

Decline Phase

Need: Your market value is declining and your revenues and profit are relatively flat.  The business model is in need of transformation at a time when the business is doubling down on wringing efficiencies out of the current operations.  At this point the business model cannot just be evolved, it requires significant research and analysis to understand whether the business model can be evolved or if it will need transformation.  

In practice: Senior executives are loath to make significant changes and want to continue their current practices – after all that is what made them successful.  Changing the business model represents not only business but also personal / professional risk. Change often does not happen until a new management team is brought in to turn the business around.

Recommendation: The easiest solution is to avoid getting into this situation in the first place.  The best time to put energy into evolving your business model is while still in the growth and early maturity phase.  It does not appear to be urgent and important at that time while the reality is that it is a critical activity.  Successfully transforming a business model is one of the hardest things to do and the recommendation would be to bring in the best business model experts that you can afford.  This is not a capability that is internal within companies.

Examples: Kodak, Radio Shack, IBM, HP

About the Starcher Group LLC – We have been working Business Model projects since 2002, working with $1M to $25B businesses across 18 industries and counting.  To date we have identified and designed $2.5B in value for our clients.

[starchergroup]

Why its Culture AND Strategy! AND Alignment!

Culture eats strategy for lunch has been bandied about for many years, implying that Culture is dominant at the expense of other corporate dimensions, especially strategy.  The reality is that it is not about Culture OR Strategy, it is about Culture AND Strategy and how do they work together to deliver on the corporate vision.  

Taking this a step further and going beyond Strategy and Culture, delivering on the company vision requires alignment across a number of dimensions:  Brand, Business Models, Strategies, Values, Behaviors and Culture, Structure and Processes and Metrics, Results and Rewards to name a few.  It is out of that alignment that organizations are effective at delivering on the vision.

Although for business planning purposes we assume that Corporate Cultures are static, in reality they are not.  As the company evolves through its lifecycle, from the start up phase a culture emerges that that supports and reinforces the business model but then as the business matures and even starts to decline, the culture can become a liability and hinder needed changes.  

The chicken and egg question you ask?  Does Culture or Strategy come first?  The pragmatic answer is that culture evolves very slowly and certainly more slowly than strategies and so Culture needs to be assumed relatively fixed for shorter planning horizons unless the organization is willing to create a new organization with a culture aligned to deliver on the significantly different strategies.



Why Culture is Important AND Urgent!  Culture is difficult to replicate, can be a source of enduring competitive advantage and acts as a control point that enables your business model over a long period.  Intellectual Property, being another example of a Control Point, is very actively managed and tracked.  Do you track your Culture?  Culture is a critical dimension that needs to be actively managed – defining it, evolving it and changing it!

Examples of companies that successfully use Culture as a control point include Southwest Airlines, Virgin, Apple, Dell, … those are companies with unique cultures that enhance their business model (and brand).  As elements of your growth strategy depart more and more from the current business model, the cultural dimension becomes more critical to strategy execution.  Some strategies will be supported by the existing culture while other strategies will be inconsistent.  



Some examples:

Corporate acquisition.  Both companies had strong but different cultures.  The Compaq culture eventually became more dominant but is was not aligned with the HP Business Model nor were the HP employees integrated into that culture.  In the end multiple cultures co-existed with some level of friction.

You are launching an initiative to implement a new business model and an executive is assigned to lead the effort.  6 months into the project, it is clear that the initiative is behind plan and failing.  The executive that you selected had a cultural profile that matched the existing business, not the new business model.

Your strategy calls for moving the company from a product to a solutions orientation and hire an executive from a solutions oriented culture.  The strategy is launched but soon sales of the new solutions are significantly behind plan – the sales force culture has difficulty adapting from a product to a solutions sale.

In summary:

When thinking of Culture and Strategy, we need to move away from an OR to an AND mindset - Vision AND Brand AND Business Models AND Strategies AND Culture.

To deliver on the company vision, alignment is key.  Although perfect alignment is impossible, choices have to be made about where best alignment is required and where good enough alignment is needed. In any case, alignment needs to be actively managed.  

Next time you are considering strategies that move beyond the core or acquisitions, cultural assessments and culture management are some capabilities that will add significant value.  The assessment will help ensure that implementation risk is understood and managed while the culture management will help define what culture you want and facilitate the required change management.  Having a great Culture and Strategy is just the first step towards value realization.

[starchergroup]

Demystifying Business Model Innovation

The volume of posts, articles and books on Business Model Innovation has increased significantly over the past year.  It is often positioned as the holy grail of value creation, attainable through thinking orders of magnitude more complex than strategy and business models.  The reality of doing business model work is still complex yet business model innovation can be reduced to 2 activities.

Looking at Business Model Innovation from a market perspective, it is rare to see business model innovation applied to an existing business.  Most often, business model innovation happens with new businesses, whether inside a firm or a new start up.



Looking at the issue from the company’s perspective, an existing business can evolve their business model or they can launch a new business with either an existing or new business model.  The number of companies who organically innovate their existing business model is exceedingly rare.  When it does happen, it is with business models where units are run relatively independently of each other e.g. Amazon, ITW, Danaher, early days at HP, …



To further simplify the thinking around business model innovation, you can leverage a traditional growth strategy framework and add a business model dimension.  This is helpful to help uncover new opportunities and make visible the greater risks involved with leveraged and new business models.



In summary, business model innovation can be reduced to 2 activities:

Evolving existing business models for existing businesses Defining and evolving business models for new businesses

[starchergroup]

What is your Market Value story? Ask your business model!

What is your Market Value story? Ask your business model!

Major changes in Market Capitalization are driven by Business Model decisions (or lack of decisions). With every major consulting firm writing about Business Models, it is clear that this is an area of great interest with senior executives. Let’s look at some Business Model stories of successes and challenges:

IBM 1975 - 2008

IBM’s Market Cap was in decline in the late 70’s, having missed the shift to minicomputers and it was only when IBM launched the desktop PC in 1981 that its Market Cap grew again.  An ill-fated decision to outsource what would become the principal Desktop PC profit pools of Chip and Operating Systems to Intel and Microsoft in the mid – 80s led to a long decline in Market Cap.  It was only reversed when IBM made the decision to launch its Services offering that the Market Cap grew again.

Dell 1995 – 2013

In 1995 Dell innovated the PC Business Model by offering PCs Direct to Business over the Internet.  The lower prices, customization and online ordering were enough to achieve over $100B in Market Capitalization growth in less than 5 years.  But without any significant means to prevent competitors from copying the model and the Dell business model ill-suited for the market shift to consumer PCs, Market Capitalization started to slide as fast as it grew and was only mitigated temporarily when Dell applied its Business Model to new categories (Storage, Printers, TVs).  That Business Model evolution worked temporarily but was reliant on finding new categories that were commoditizing so scalability was limited.   Its attempt to enter the Services business by acquiring Perot Systems in 2009 and an acquisition spree did not add any significant value as IT Services were already commoditizing.



Apple 1994 - 2016

There are two distinct Apple Business Model phases:

1995 – 2005:  The MacBook franchise period that grew Market Cap by close to $100B on the strength of a vertically integrated approach and a product experience that was simple and elegant.  By being vertically integrated Apple was not sharing its profit pool with specialist firms (e.g. Microsoft)

2005 – 2015: The iPhone franchise period that grew Market Cap by $500B on the strength of the combination of a product experience that was simple and elegant, a computing device that also had voice capabilities and the creation of an ecosystem of device and applications where Apple played the role of Keystone.  As a keystone, Apple created significant value for a number of ecosystem players and at the same time kept a significant portion of the total value created for itself.  

Post 2015:  Apple will need to innovate its business model across new categories and the question is whether any potential watch, TV, car or other Business Model Innovation will be sufficient to offset declines in its current franchises?



Every company, big and small, has a Business Model story.  There are two parts to that story.  The Business Model lifecycle with Market Cap / Value growth, plateau and decline, and the Business Model decisions that can chart a new trajectory for the business, both good and bad.  There are a finite number of patterns to look for, each with its own story.



Some key questions for you to ask:

What is my Market Cap /Value profile?   Why do I have this profile? Where am I in my Business Model Lifecycle?   What is my Business Model story?   What Business Model actions can I and do I need to take?

In an earlier article “Demystifying Business Model Innovation”, I introduced the notion that Business Model Innovation can be reduced to 2 activities:

1)  Evolving existing business models for existing businesses and 2)  Defining and evolving business models for new businesses.  

The process to accomplish this is quite simple, yet behind that process is a complex body of knowledge and experience that is required to deliver.



Bruce Starcher is the Managing Director of Starcher Group LLC, experts in Business Models since 2002.  He is also a Fellow with Maddock Douglas, an Innovation Consulting Firm and volunteers his time with Springboard Enterprises, coaching women entrepreneurs in the area of Business Model design and innovation.

[starchergroup]

Sustainability and Business Models

How do I integrate sustainability into my Business Model?  The answer is it depends and there is a spectrum of answers ranging from some organizations never entertaining sustainability activities to others who will have started the business with sustainability integrated into their core.



I have spent several years thinking about how to leverage my Business Model frameworks and processes to design sustainability into the organization’s Business Model and get beyond the perceived conflict between Profit, Planet and People.  The solution is rooted in reframing a Business Model’s outcome from Profit to Value.

A Business Model’s objective is to generate Value for the company, with Profit as the principal Value.  Sustainability’s objective is to generate Value for the company AND ITS STAKEHOLDERS, with profit one type of value, and in the process also generate Value to People and the Planet.

Different types of Value include:

• Net Income / Profit:  most common form of value, Revenue less Costs.  This is also the Retained Value from the Corporate point of view.

• Customer Retained Value: The difference between the customer reservation price (highest price willing to pay) and the actual price paid.

• Market Value:  there are several specific metrics that represent Market Value – Enterprise value, Market Cap to name a couple and represent the total value of the enterprise if sold to an unrelated party.

• Brand:  Successful Sustainability efforts have been shown to have a positive effect on Brand Value.

• Do less harm / Reduction of externalities:  there are many situations where reducing externalities also reduce costs, and that includes situations where sustainability has the effect of making operations “less bad”.  For example, to reduce the carbon footprint, one must reduce electricity usage, fossil fuel usage, travel and transportation.  Those items also reduce costs. • Increase in societal benefits:  examples range from employees volunteering in service days for local charities to providing community services in local villages with an eye to the long-term supply of quality labor and local goodwill.

How do this all change the process of designing, innovating and managing Business Models with Sustainability integrated?  Using our framework there are 3 specific changes required:

Starcher Group Business Model Framework

• Market Context:  a broader range of stakeholders needs to be considered and a systems perspective makes a broader set of linkages visible.  The insights gained here will help determine the sources and recipients of value.

• Customer Value Gaps:  what gaps in experience can be identified across all stakeholders and all segments across the Market Context.

• Value Proposition: considers the broader value created and the new perspectives on Market Context and Customer Value Gaps.

In the end, integrating Sustainability into your Business Model requires a reframing from Profit to Value.  And the reason why you would want to do this is simple: because it is good business!

Mr. Starcher has 15 years’ experience working with Business Models and launched a Sustainability Program from scratch at a Multi-National Corporation as Director of Sustainability. Mr. Starcher is Managing Director of the Starcher Group, a consultancy focused on identifying Meaningful Growth for its clients.

[starchergroup]

THE NEW INDUSTRIAL REVOLUTION WILL BE WON BY BUSINESS MODEL THINKERS

How many companies do you know that have lost or are losing relevance? We like to blame technology, marketplace, customer, and management for the loss of fortune. Companies like Dell, IBM, Kodak and on the horizon Sears have fallen. Companies like Best Buy, IBM, Allstate, General Motors, … have seen their Market Value flat-line over a long period of time and thus have not added to Shareholder Value. Why are blue-chip companies having difficulties when they have access to the brightest minds? The CEO and senior staff are assuming the company Business Model, not understanding that it is their business challenge. Fundamentally, the company’s Business Model can no longer be assumed and needs to be actively managed.

The New Industrial Revolution will be won by Business Model Thinkers

How many companies do you know that have lost or are losing relevance? We like to blame technology, marketplace, customer, and management for the loss of fortune. Companies like Dell, IBM, Kodak and on the horizon Sears have fallen. Companies like Best Buy, IBM, Allstate, General Motors, … have seen their Market Value flat-line over a long period of time and thus have not added to Shareholder Value. Why are blue-chip companies having difficulties when they have access to the brightest minds? The CEO and senior staff are assuming the company Business Model, not understanding that it is their business challenge. Fundamentally, the company’s Business Model can no longer be assumed and needs to be actively managed.

What are Business Models?

Ever since I started working with Business Models 15 years ago, there is still no common definition or understanding of what a Business Model is. I have found that using an analogy has worked the best: Business Models are like Architect blueprints except they are for businesses and not for buildings. All the building elements need to be designed in a way that is consistent and in support of an overall vision and every element is critical as any single element can seriously undermine the building performance. Take a 50-story building where the elevator system is short of capacity and all other elements are perfect. Long lines form on ground level in the morning, lunch time sees lines on each floor and in the evening long lines form at each floor to exit the building. This is a difficult building to work in, lease and will not perform financially. The same is very true for Business Models – any flawed element can spell trouble for the Business Model. In some cases, a simple misplaced choice can kill your Business Model.

Business Model thinking to diagnose business performance.

How do you know that your financial performance issues are Business Model related? Some causes include:

- Market Value is decelerating, stagnant or declining.

- Current strategies are not impacting Market Value.

- Declining profitability, even in the midst of growth.

- Declining total net income dollars.

Business Model gaps are identified in the diagnosis process. What are examples of gaps?

There is a wide range of possibilities, from the very simple to the very complex. It can be a single Business Model element such as what the company chose to monetize, it can be multiple elements working together to drive underperformance, or it can be misalignments across the Business Model system. By looking at the Market Context, the current Business Model as implemented and the Customer Value Gaps, the misalignments can be identified.

Business Models have lifecycles that often mirror the traditional Business Lifecycle. Changes to the Business Model are easiest during the growth phase, more difficult once the maturity phase has been reached and it is nearly impossible to modify the Business Model once it is in decline. It is not an analytical issue, it becomes a senior management issue facing declining profits and revenues and retrench. Classic examples are Kodak and Dell, and you can see the process unfold currently with Sears.

Business Model thinking to enhance business performance.

For a Business Model to be effective, it needs to be aligned with marketplace realities, Customer Value Gaps in the Business Model segments and internally consistent. There is a simple process to get to your optimal Business Model: What are the relevant Customer Value Gaps in your segments, what Business Models are most relevant to those gaps, what strategies are available to capture the value described in the Business Models and finally Strategy execution. All the complexity lies in executive that simple process.

Too often, companies launch growth programs without first assessing their Business Model. For example, if you are operating in a no-profit zone where profit is elusive, a growth strategy will only find additional profitless revenue. If you seek to launch a new Business Model to offset the decline of the current Business Model, you will find that management does not always understand how the new Business Model needs to be managed and its growth rate is not sufficient to offset the declines in the existing Business Model. The lesson is that Business Model challenges need to be addressed first before launching new growth programs.

Business Model thinking to transform business performance

When the Business Model has lost its relevance and Market Value has shrunk for a period of time, the only available choice is Business Model Innovation, something that is very difficult and not desirable.

With digitization, accelerating innovation and globalization, traditional industry boundaries have shifted and become less of a barrier. Additionally, the rate of change at the product and service level has accelerated and makes it difficult to make sense of the business environment. In our experience, ecosystems are now more relevant than industries, and opportunity and risk lurks within the broader ecosystem. Look to your ecosystem for growth! Beware of your ecosystem as that is often where disruption starts! Making sense of your market context at the Ecosystem and Business Model level is akin to being in a spotter plane over the forest – things just make a lot more sense at that level and change happens relatively slowly.

Compete at the Business Model level and create value orders of magnitude greater than any one strategy. IBM introduced its services Business Model in 1992 and created in excess of $100B in market value. Dell’s innovative computer distribution Business Model is another example where $130B in market value was created and also an example of how when a Business Model loses relevance, $68B in market value was lost in a decade. I once calculated that Lexmark’s introduction of the low-cost printer Business Model cost HP in excess of $1B.  

Business Model Innovation is very difficult yet the rewards can be huge. The returns are of the order of 1X for product feature innovations, 10X for product innovation, 100X for platform innovations and 1,000X for Business Model Innovations.

The central role of the Customer Value Gap – Business Models are customer centered.  

No Customer Value Gap – No Business Model!

A Customer Value Gap is a gap in experience where the customer is willing to pay to close the gap, where “pay” can be price premium, changing vendors, increased loyalty and preference. This is different from pain point where there is no discussion of whether the customer is willing to pay to remove the pain. Without a defined Customer Value Gap, there can be no Business Model that will generate value. Within your broader market context, Customer Value Gaps will be unique within different segments. For example, if you are using life stage customer segments within the Home market, Customer Value Gaps will be very different for “married with no children” and “retired no children at home”.

Customer Value Gaps are one of the most important elements of a Business Model and where a significant portion of attention and funding needs to be directed. It is the foundation for Business Models and if that foundation is not solid, the Business Model will be shaky and flawed.

Summary

Winners in the New Industrial Revolution will be competing at the Business Model level. New entrants and start-ups will find it easiest to introduce new Business Models but that does not mean that incumbents cannot be in a position to win the Business Model game. All it takes is access to Business Model expertise, internal or external, and a willingness to compete at the Business Model level. The option of ignoring your Business Model is likely to lead your company to under-performance and market irrelevance.