Why you need to think about business models

By Gillian Lees

We are about to launch our next Innovation Theme – resilient business models – as part of our continuing CGMA Innovation Agenda.  To quote CIMA’s newly-published Annual Review 2012, ‘the business model is an organisation’s primary value-creating system.  Understanding the business model is essential to an organisation achieving sustainable success.’

Now you could reasonably argue that business models have been around as long as there have been organisations – so what is really new here?  The quick and simple answer is  that the pace of innovation has speeded up to such a degree, thanks to forces such as technology and globalisation that the business model that served your organisation well may be on the verge of being upended by what Harvard’s Clayton Christensen terms a ‘disruptive innovation’.  He realised that it is not technology, for example, that is the disruptive force - but the new business model that the technology makes possible.

So it is essential as part of horizon scanning to be able to consider ‘What does this trend mean for our business model?’  I’d also add that I have heard more than one chief executive/company director/chairman over the last week alone say that they expect their CFOs to have a full understanding of the organisation’s business model.

One of the best ways of acquiring a ‘business model mindset’ is to collect case studies – and there are plenty of them around.  I will share with you a couple of my favourites to start the ball rolling.

First one is a retail story – and of course we all know that internet retailing is the big story.  Or is it?  The UK supermarket retailer, Morrisons has recently bought 49 High Street stores from the failed film rental company, Blockbuster and a further seven from the failed camera retailer.  What’s interesting here is that a channel that will work in one context (grocery) won’t work for another (cameras, DVDs etc). 

Basically Blockbuster’s business model has been superseded by online streaming services provided by the likes of Apple iTunes, Netflix and Amazon’s LoveFilm.  A further interesting part of the overall picture is that Tesco, the world’s third largest supermarket group, has just announced a significant write-down in its UK property portfolio because growth is no longer to be found in building large out of town stores.  The future is multichannel with a mix of big stores, local convenience stores and online. 

What interests me about this story is that ‘conventional wisdom’ a while back was that everything would go online – the reality is more nuanced because online grocery is fine when you can plan ahead, but when you are dashing home and need something for dinner, then convenience wins.  Lesson number one is therefore that business models have to be designed with actual customer behaviour in mind – and the new, high-tech approach might not be the right one.  The ‘new’ grocery business model is therefore built on a mixture of delivery channels.

My second story is one where the Internet has indeed shifted the goalposts very dramatically; that is the rise of ‘peer to peer rental as reported in The Economist’s recent Technology Quarterly.  Sharing sites such as Airbnb and RelayRides can match owners and renters so that you as an individual can double up as a taxi firm, car rental firm or even a guest house as and when it suits you.  So your car that sits on the drive for part of the week while you commute by train, for example, could be rented out for additional income.  And the renter pays less than renting from a traditional car hire firm.  This is a whole new business model made possible by the web.  No wonder that incumbents such as Avis and GM are looking to get involved.

There are lots more out there – even if none apply specifically to your own industry, it is really useful to see the way that business models can change and the key drivers.  The real challenge then is to be able to think about what could disrupt your business model so that you can respond.

Over the coming weeks, we will be launching a series of briefings on various aspects of business models on www.cgma.org/business-models  to help you develop your understanding in this area.  And in the meantime, I’d love to hear some of your business model stories too!