This is a guest post from Paul Osborn from The Agile PMO. http://www.the-agile-pmo.org.
No Business is Forever.
The recent (as of September 2017) bankruptcy filing of Toys’R’Us, reminds us that no business is forever. Companies that were once extremely successful fail, and it happens all the time. Markets are constantly changing – what worked yesterday may not work tomorrow. Just ask Circuit City, Radio Shack, or Blockbusters.
Business Models are Theories of the World
Business models are theories of the world, and of how the business fits into that world. If you’ve ever started a business, you will know the importance of a business model. In this article we’ll talk about the three theories that all business models assume.
1. A theory about of the market works.
2. A theory about the company’s mission and purpose.
3. A theory about the internal capabilities that are needed.
To be successful, these theories must (1) fit reality, (2) be consistent with each other, (3) be known and understood by everyone in the organization, (4) be tested constantly. Discovering a winning theory takes time, hard work, and not a small amount of luck. When companies get it right, they can be very successful indeed…that is until they’re not.
Business Models Don’t Stay True Forever
Successful business models don’t stay true forever – in fact they may not stay true long at all. A business model is a hypothesis about society, markets, customers, and technology – all of which are in a constant state of flux. Just because it has proved to be valid in the past does not mean that it will continue to be valid in the future.
The first sign that a business model might be obsolete is often an unexpected failure – a tried and true strategy that has worked in the past suddenly stops working. However, even unexpected successes can also be signals that the business model is in trouble. The initial response is to ignore such signs by dismissing the failures as simply bad luck or incompetence, and the successes as attributable to skill. The second response is invariably to tinker with inconsequential details, while keeping the basic business model unchanged. Such efforts merely postpone the inevitable decline.
Internal factors also affect the business’ ability to execute its business model successfully. After a company achieves its original mission, it is in danger of taking itself for granted unless it can find a new mission to aspire to. If the company remembers the answers but has forgotten the question, a successful model that was based on thought and discipline will degrade into mere ‘culture’. Culture is not substitute for discipline, and the theory of business is a discipline.
Two Ways to Keep Your Business Model Valid
What should be done to keep the business model valid and alive? Good places to start are to look at noncustomers, and to do periodic reviews of all the company’s products and activities.
1. Noncustomers. A noncustomer is anyone who is not doing business with you. Noncustomers will always be able to tell you far more about how the market is changing than your customers will. By asking where the noncustomers are going, and how has their behavior changed, you may be able to detect the flaws in the assumptions behind your own business model.
2. Periodic Reviews. Every few years assess all of the products and services being offered, and ask ‘if we weren’t in this business already, would we get in to it now?’ Walking away from a large physical or emotional investment, particularly if it has been successful in the past, is one of the hardest things in business you can do and takes merciless objectivity. However it is a truism that if you don’t aggressively manage your own products, then your competitors will do it for you.
Reevaluate the Theory Before Buying the Business
Before you buy a company make sure that you understand why the business has been successful in the past. Look for signs that the assumptions behind the original business model are still valid. Focus on noncustomers as much as customers to detect early signs of change, and question all of the products lines that the company is engaged in, asking whether they are products of the past, or of the future.