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How to think about your business model and thrive in a technology-turbulent world
In this second reflection on business models (you can read the first one here), Toby digs into why they have become critical to corporate and growth strategy. This is fundamentally a story about speed of change: how new technologies have lowered the barriers to innovation and competition, and how this brings exciting potential opportunities, but equally the need for a mindset of curiosity, to spot the competition that looks nothing like you!
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We didn’t talk about business models at the turn of the millennium. We had a few stories from the past such as IBM moving from typewriters to mainframe to consulting, and Nokia from wood and paper pulp through tractors to mobile phones, but these transitions were so infrequent they were notable. And business leaders really didn’t see this as part of their mandate.
Our further contention is that the ease of business model creation and the acceleration of new businesses competing with existing businesses means that businesses are having to ask the question of “what sort of business am I in?” increasingly frequently, increasingly within the life span of an incumbent CEO and therefore very firmly their mandate.
So why is it happening, why are businesses grappling with what sort of business they are in? What happened?
Understanding what changed is important to understand the things that continue to influence it as well as how to respond.
Our conclusion is that this acceleration of a shifting environment means that businesses will need to shift from thinking infrequently about their business model, seeing it as a rupture-inducing change, to thinking about it more integrated into the day to day. The shortening time horizons of new competition and business model obsolescence require that business model thinking be both part of the mainstream flow of strategy, and integrated into the day-to-day conversations.
So what happened? Technology happened, that’s what.
W Brian Arthur, in his book “The Nature of Technology” comments
“novel technologies arise by combination of existing technologies and that (therefore) existing technologies beget further technologies…. The overall collection of technologies bootstraps itself upward from the few to the many and from the simple to the complex. We can say that technology creates itself out of itself”
This mix of combinatorial technology and bootstrapping means every new technology emerging has the potential to act with any existing technology already available. This leads to an exponential growth of possibilities, new possible configurations have become possible that weren’t imagined (though respect to Star Trek, which actually DID imagine quite a few of them). Technology creates new and crossover influences on industries and actors, businesses in one defined sector find themselves having technology for another (think NVIDIA gaming to AI), technology shifts the point of customer need and acquisition (think online banking), it enables things that were not imagined beforehand (think the discussions around blockchain and its use in distributed energy)
Given its exponential shape there becomes a point where technology shifts from being not really observed or impactful, to absolutely dominant and everywhere.
Betting on business models, not technologies
The money that backs technology, particularly breakthrough big bet technology, has increasingly been venture capital. The role of venture capital was conceived out of the recognised difficulties of long cycle technologies to get the necessary backing over multiple years to allow them to get to fruition, and equally the failure of existing businesses against stock price targets to put aside the necessary risk-invested capital. Venture capital as a specific form of financial capital bets on the possibilities of technology to deliver significant future value and secures the outside investment to do this effectively.
The successful selection and backing of novel technologies over multiple years has given the VC industry the evolution from fledgling industry back in 1970s to the outsized role it plays today, this is a blend of the increased impact technology has on the economy, and the particular expertise and investment approach VCs bring. The chart below highlights that growth in the decade following the financial crash.
An often ignored truth is that technology doesn’t make money, businesses do. So clearly it isn’t investment in a technology that VCs are effectively backing, but the business opportunity wrapped around that technology. They are looking for a blend of technology that could reshape an industry or create new ones, and the emerging companies that can turn that into a profitable growing business. Those opportunities are accessed through some smart, some creative and some lucky deciphering of the customer need and how to serve it effectively.
We talked about this in our previous article, but worth recalling that it is solving for the customer need that drives revenues, the business model is the delivery structure of the offer, and ensures profitability. Offer innovation precedes business model innovation. To build technology into this, technology enables offers to exist and business models to function. Customers buy a problem solved, not a technology.
This relationship between technology and business is interesting. Technology is invention, business is innovation. Many of the now big tech stocks aren’t necessarily the technology owners or creators, but rather deciphered and harnessed the business potential embedded in the technology. For example social media didn’t have to turn out the way it did, the technology opened up many different possibilities, it’s just Facebook/ Meta, love’em or hate them, worked out a new way of using the emerging social media coupled with the diffusion of broadband and digital design to build a business.
It existed and grew because of the technology available, but its success vs, for example MySpace, was a function of working out the business model and necessary product, an approach that applied technology to build a better platform and apps, though more importantly was built on the understanding of building communities and interactions (high level view here if you want to dig in)
Success has something to do with working out what the business implications are of new technology, not just the customer experience. This is the coming of age of businesses adept in understanding the relationship between product and business model.
Businesses in garages
The third element has been the application of technology to radically alter the economics and risk associated with business building.
Technology didn’t just make new offers available (the iphone in 2007 was the combination of multiple technologies: touch screen, microprocessing, accelerometer, iOS etc.), it changed the dynamics around business building. This is at least in part due to the sheer complexity of technology for a business, creating questions such as ‘what do I focus on?’ and “which technologies are key to my business?”, “how to integrate new technologies?”, “which ones to pay attention to, which ones to ignore?.
The weight of complexity and the pace of change of the different elements of the business (how does technology affect a function and how does it affect across functions), meant it was increasingly hard to figure out what technology a business should apply where and under what conditions. This opened the space for “As a Service” businesses.
Salesforce.com is possibly the most visible and most successful of Software as a Service models; what it did was change the way businesses could be constructed. The core insight behind Salesforce.com at the time was the recognised complexity of existing software and the constant need to upgrade and reconfigure. This complexity and upgrade need meant any business firstly needed to have experts within the business to manage these transitions, and secondly needed to make clunky and complex capital expenditure to pay for these upgrades.
The insight was that this was a constant customer pain point, and that high speed broadband connections then being implemented allowed for a very different model,The idea became a subscription model for use, with built in upgrades. The customer benefit became a) no need for a team to manage the upgrade and make complex choices, b) a switch to variable costs as an ongoing payment c) the disappearance of an infrastructure complexity that wasn’t part of the core business. Again technology enabling, but the business model focusing. This is a business model innovation itself on top of a technology, and the real insight is what customers need and how to use emerging technology to make money (what’s our business model?).
These “X-as-a-service” plays then create a suite of easy plug and play approaches to a whole variety of business processes. The processes are often critical (e.g. CRM) but rarely the differentiating element. The customer wants to have the latest and greatest, but also wants this to be just available, to function and not to suck up management time in constantly deciding on expert technologies. As a service therefore declutters the management thinking from having to solve probably complex but ultimately peripheral questions and so allows the business to concentrate on what it does uniquely well and is core to its own offer. Over time this has gone from pure software type solutions (such as Salesforce.com) to whole parts of the physical business such as manufacturing, distribution and supply, to bang the drum, because technology made all of these accessible.
Previously setting up a business was a capital intensive business where all these things needed to be owned, designed, built and run. Make stuff and and a business needed a factory, which might take years to build, they needed to get to an effective unit cost which meant reaching a capacity utilisation of the equipment against the fixed costs invested, it meant, with scale, being able to access and negotiate the equally large beasts in the retail sector, having the marketing investment to create global campaigns that stuck with the audience. Whilst it meant a lot more upfront capital, it also created significant barriers to entry.
The flip side of this value for existing businesses to plug in a Salesforce.com was that the economies of scale eroded. What had been a hardship to get going also meant it was hard for anyone else to enter. Now significantly the entry ticket has been significantly reduced.
The economies of scale now sat in the provider of the service, not the customer. A small business can, using a service like Shopify, provide a world class online experience, equal to any large company. Extrapolate this to other areas of the business and nowadays you can build an entire business through various service providers, be it back office from sourcing and supply through companies like Alibaba, managing of logistics through an Amazon to payments and finance through Intuit, all the way through to using front end businesses like squarespace to design your website, or Shopify to manage the whole front end. You can literally start a business for thousands or tens of thousands of dollars.
The parallel rise of social media and the internet meant anyone can access a potential audience very differently and can access them across the globe. The growth of eBay was at least in part through the recognition that for every niche local market, there was a global market that was multiples larger and accessible through digital. And the cost of reaching them was so much lower. This in turn leads to new social media channels, new routes to accessing markets and the constant evolution of where to access your audience, but always at a significantly lower cost.
The outcome is the ability to pull together the component parts, that are already functioning, into a single business with operational costs not CAPEX, and at light speed. So why not just do it?
Be afraid of businesses who aren’t like you
The benefit to the large company had now become an even bigger benefit to someone thinking of busting into a space. Build a virtual company and reach your market through a virtual channel. This completely changes the nature of compettion Traditionally competition is someone who walks like you, talks like you and looks like you, a sort of industry navel gazing. Yet the plethora of possibilities created by combinatorial technology means that the biggest risk is someone who is relevant but not the same, and this is increasingly less likely to be a capital problem but an imagination one. This means no longer having a one and done approach to the offer and the business model, but being constantly aware of the customer and the context. How are customers changing, who aren’t our customers, are we over designing in the echo chamber of our existing customer? Have the factors that made our business model a beautiful fit changed, has the ecosystem shifted, are we no longer at the centre?
This switches the strategic reflection away from internal, where the focus is doubling down on what we have, choosing technologies that enhance our operations, seeking constant efficiencies and margin improvements. It switches it towards external, where the questions are about evolving offers and adapting business models. It means looking for outlier players who are changing the way the business is done (spotify vs Sony), or address the customer need in a completely different way (Tiktok vs Facebook). Any business needs to not look at people like itself but rather who is serving the customer and what need are they serving. If we loop back to Salesforce.com that is how they appeared, a business doing something weird with SMEs and “the death of software” that was irrelevant to the big accounts of the big enterprise software companies of the time, like Oracle and Siebel.
This is where the competition happens, not for shelf space (metaphorically or otherwise) nor even share of wallet (smart businesses go to a different wallet) but down at the level of the customer need and how to serve it. The likelihood is this can be resolved in multiple different ways. Competitive advantage sits somewhere there, the offer needs to sit there and the business model needs to emphasize it.
It's therefore not that this generation is necessarily smarter, or more entrepreneurial, it’s just that it has become far easier to go from a fledgling idea to giving it a go. The risk equation has dramatically shifted, and if you get it right there is significant upside, and even if you get it wrong, the time spent figuring out a new business, the lessons learnt from the experience are all positives in whatever you do next.
What this means is we have waves of new businesses emerging, and new enabling technologies to make the complexity of setting up and running that business disappear. All of these things become increasingly challenging for existing businesses who seek stable environments. As described earlier, the natural state for an existing successful business is to double down on what has made it successful. This isn’t going to go away, businesses will still need to codify and scale up more efficient and effective ways of working.
With a more rapid cycle through of technologies and accompanying businesses, as well as all the enabling technologies that let you do stuff differently/ better, it is increasingly unlikely that a business will have a stable business model for anything like the duration it may have had in the past.
Change will come from outside, through new offers, evolving needs, different businesses, and from within through the application of approaches and technologies which trigger new ways of thinking about what you do (the poster child being AWS out of Amazon). This in turn means business model change shouldn’t be the painful evisceration of the existing business, with all the turbulence and discord of the subsequent cycles of rebuild, instead it needs something more continuous, something built into the way the business thinks about itself.
What does this all add up to?
The increased impact of technology risks creating a whole lot of change and noise, a discordant cacophony that makes it hard to work out what is going on. As an example, if you are in retail you have seen ultra fast fashion, peer to peer reusable market places, subscription/ rental models, DTC, limited drops, influencer strategies, NFTs, TikTok, AI, ……. The list goes on. All of these things are shifting and create possibilities and threats.
These are all evolved technologies or products of technologies creating changes, or new businesses wrapped around different technology combinations. So what to do?
Given the cycle compression of businesses, any company today needs to move from a benign neglect of its business model to an active curiosity. This means putting the business model question inside the strategic framing, and in the innovation pot. We talked about business model narrative in the previous article, this is what you need to get going.
Having a good feel for your existing business model and the plot that runs through it that makes it work means
A much clearer view on which competition to watch for as well as where you are more vulnerable to new competition
A good filter on the purpose (and irrelevance) of much of the swirling noise of new tech (should I be in NFTs. etc.), so you can decide if it is relevant and why, what you would want to do with it
A feel for the customer base, which allows you to consider whether it is shifting, and whether the segmentation you have historically used is still right. Too many businesses just run with the ones they have always used, and demographics is rarely the right lens
Understanding what you can flex as you consider new offers, and what you should think about evolving because it is becoming a delivery or performance constraint against the offers you see
A greater sensitivity and ability to anticipate the changes the business could need, so make them a smoother and more anticipated event rather than a bone shuddering crunch.
It also means that it should constantly be on the agenda during innovation, even if looking at some kind of line extension. By opening the aperture and letting the innovation teams not just look at the offer, but make the whole business in scope it will
Open up the business to new possibilities
Strengthen the business model understanding and adaptability
Allow much more informed trade offs on product and future impact
Give you an organisation that is sensitive to the broader scope of the business, not just their functional slice.
And who knows, you may be laying the groundwork for the emerging businesses of the future, AWS went on a journey not dissimilar to that.
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