The business model of a company – its formula for sustained success – becomes deeply ingrained. It is reflected in who the firm hires, how it measures performance, who it targets as customers, the standards it creates for budgets, and how it views competitors. Indeed, the business model must permeate the firm in this way if the company is to become better at executing this formula than its competition. When a company is well-aligned around a business model, it repeatedly wins battles fought on that turf.
However, industries evolve. Pfizer became arguably the world’s greatest firm at selling blockbuster drugs like Lipitor, but the next wave of growth has to come from tightly-targeted therapies such as expensive biologic drugs, sometimes coupled with other offerings such as diagnostics and home monitoring. These new drugs call for totally distinct approaches toward R&D, marketing, sales, and business partnerships. They are sold at vastly higher price points, to far smaller populations. Cost structures, internal processes, staffing, and much else needs to change. For Pfizer, creating a new business model is wrenching.
To surmount these challenges, firms need to be proactive about rigorously defining the business model they have today and mapping how that model might have to change in various future scenarios. The company can then plot its transition, building new capabilities bit-by-bit and testing new models. Change can become more strategic and manageable.
This process begins with a rigorous de-construction of the current model, including clearly stated strategies (e.g. customers targeted), norms (acceptable gross margins), and unconscious factors (how headquarters interacts with staff in the field). Management can then discuss which aspects of the model are easily changed, which are threatened by industry evolution, and what inter-dependencies exist. While the output of this work could be slide decks of gargantuan scale, we find that focused workshops with key staff can achieve most of the objectives of this phase quickly and efficiently.
Subsequently, companies need to relate their future strategies to the new business model required for their success. Questions might include:
Who will be the most desirable customers? Who will we be competing against? What capabilities will make us win?
What will the P&L need to look like? The balance sheet?
What staffing mix would be appropriate for the new world? How would qualifications need to change? What will get people promoted?
How will we use sales channels? How loyal will our channel partners be?
How quickly will we need to make decisions? Who must be involved in decision-making?
Once the firm has laid out the potential components of a new business model, it can decide how to sequence its transition to new approaches. Seldom would a company want to change many variables at one time in the core business. That is like building the plane while flying it – dangerous. Instead, the firm may opt to create a separate business unit to trial a radically different model, or it might enact small-scale experiments within the core business.
For further thinking about how we approach creating new business models, please complete our short form.
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