Want To Grow? Look At Your Business Model
Economic booms are times to harvest revenue; recessions are times to conserve profits. It's a sign of how forward-thinking the business community has become that we're turning our attention to growth this fall, not waiting through the winter to see if this great, paralyzing blizzard of a recession is really melting away.
But as we dig out and survey the intellectual landscape for guidance in planting the next growth crop, we find a paradox. Management literature suggests diametrically opposed solutions for companies seeking to grow: "Stick close to your core" and "look for opportunities far from any competitors, where no one has gone before."
Both camps are backed by excellent research. There's fairly indisputable empirical evidence showing that the closer to the core a company's growth strategy is, the lower its chance of failure. But there's also prime evidence to show that truly transformative growth opportunities lie in totally uncharted territory, far from your core way of doing things.
Blend both schools of research and you seemingly reach an uncomfortable truth: Companies seeking transformative growth need to venture far from their core. Yet the chances of success there are bleak—a thought not lost on the markets.
How can we grow faster by keeping on?
Objections arise because the Street prefers safe, stick-to-your-knitting strategies. It is implied that if you keep doing what you're best at—and don't do anything random, risky, or distracting—the rest will somehow take care of itself.
Except that it won't. If that were so, no one would be discussing growth strategies. They'd just go on happily doing what they do so well. Yet the debate goes on and on: How can we create transformative growth when the only safe course is to do what we do best?
This debate seems impossible to resolve because it's centered on the wrong question. We've been paying too much attention to what companies do—and not enough to why they do it. So as an antidote, let's return to first principles and ask the most basic question: What made your company successful in the first place?
Every successful business is, either explicitly or implicitly, operating according to a successful business model—one that works and has been improved upon over time. Here we come to a second paradox: The same business model that has guided your success can also impede your growth by keeping you from entering into the unfamiliar territory that will let you grow further. "Every new business we've ever engaged in has initially been seen as a distraction by people externally, and sometimes even internally," Amazon (AMZN) CEO Jeff Bezos has said.
Intel (INTC) calls this dynamic a "creosote bush challenge," named after the desert cactus that sprays poison to prevent other plant life from taking root.
Do you know your own business model?
People don't do this intentionally. They don't come to work in the morning saying: "I'm going to choke off new avenues for growth." Nor do they come to work saying: "I'm going to execute my business model." They probably don't really know their business model.
Do you? Can you explicitly describe the value you're delivering to your customers and the precise way in which your company's processes integrate critical resources to deliver that value at a profit? You've likely spent far more time thinking about improving your products to maintain your margins or to attract a younger or more international or otherwise larger customer base. In other words, you're focusing on the effect of your business model, not the structure of it.
An explicit business model defines what a company can do and how it provides value. Once you know the strengths and limitations of your current business model, you can determine how much it must change to address transformative opportunities or threats.
Business model innovation can be more than a buzz phrase. It can be a disciplined corporate process. Understanding and articulating your company's existing business model—the value it delivers both to your customers and your stakeholders—is the first step. Next reconsider every part of your business model. You need to think beyond margins and market share and look at the entire structure of your profit formula to see if you could successfully fulfil an important, unmet need for customers. Could you, for instance, set lower target margins if you increased sales turnover and simultaneously lowered your overhead, thus turning a profit in an entirely new way?
Too many companies have it backwards. They focus on profits in bad times and on revenue in good times. But it's not revenue that brings transformational growth—it's radically new ways to turn a profit. That's in season every turn of the business cycle.