Best Practices or “Next Practices”?
There’s a lot of buzz among business leaders about examining and reinventing their company’s business models, for several reasons. One, the emergence and growth of a global economic system are changing the size and scope of the market. Two, rapid changes in technology are increasing the speed at which business is done. Three, good old-fashioned competition, but now it’s not only from within your industry but also from game-changers from unexpected places. Who would have anticipated the impact of wireless communication, for example, which has created market expectations for wireless transactions in the banking industry?
A fourth reason is the influence of businesses successfully creating customer experiences. Take American Girl Place, for instance. Inside the store is a cafÃ© with doll-size high chairs, silverware, and teacups for tea parties; a hair salon for doll hair styling; and a portrait studio where your child can take photos of herself with her doll. This retailer sells more than products; it sells experiences that make very loyal customers—all built from a reinvented business model that moved a toy company into a new category all by itself. (I personally don’t frequent the place, but I do have a granddaughter!)
For these reasons, it’s time to examine whether your business model is obsolete or at risk. Even if your organization is doing well following the same business model it’s always used, there’s a good chance that the same business model will not be effective in the future.
(By the way, it’s irrelevant if you have successfully climbed the corporate ladder to the corner office, because your skills, experience, and talents are peculiar to your organization’s existing business model. You aren’t paid for what you’ve done in the past, but for leading your organization into the future. That means you probably need an overhaul, too.)
Now are you wondering if your business model will stand the test of time? Start by evaluating whether any of these warning signs sound familiar:
(1) Next-generation innovations in your products or services aren’t really innovative, but are merely small improvements or improved features; (2) your customers are satisfied with new alternatives from other companies instead of staying loyal to your traditional offering or brand; or (3) revenues are falling and profit margins are being compressed due to competitive pricing pressure. These are all signs that your tried-and-true legacy business model may be in peril.
Or perhaps you are comparing yourself to your industry’s best practices and you measure up, so you might be deluding yourself into thinking that’s OK.
But there are also good examples of companies that have not settled for business models built on their industry’s best practices. Rather, they have been able to identify big opportunities and invent “next practices.” I first heard that term several years ago from the late C. K. Prahalad, a visiting professor in the executive program at the University of Minnesota’s Carlson School of Management. He taught this concept for two decades, publishing articles about this idea in Harvard Business Review and elsewhere.
Prahalad taught me that the real winners are those who can innovate, imagine, take risks, and execute strategies to achieve a vision of the future. Peter Drucker once said that “the best opportunities are visible, but not seen.” To find opportunities, Prahalad urged business leaders to see them where others only see problems. Instead of looking at the 4 billion people on three continents who want to participate in the growing global economy as a problem putting price pressure on your products, see it as an opportunity for geographical expansion and/or for developing products tailored to those markets. Instead of looking at growing pressure to manufacture in a more environmentally friendly manner as a problem, view it as an opportunity to develop sustainable processes.
Models for Emerging Markets
According to the Economist, Western multinationals expect to find 70 percent of future growth in emerging economies—40 percent in India and China alone. Sitting in a boardroom in the Midwest looking at these reports might make one think that if one doesn’t create a viable offering to international emerging markets, one will miss out on tremendous global economic growth. And I would agree.
But taking your current business model and adapting it by simply offering a cheaper model of what your American customers are willing to buy won’t generate enough profit to make this effort worthwhile. Instead, companies need to reinvent their business models to identify specific unmet needs in emerging markets—primarily in the middle of those markets, which has the most potential customers. This strategy requires new business models to deliver an innovative refrigerator, washing machine, or car that doesn’t exist in the American market.
One illustration is the Tata Nano car, developed in India to cost about 100,000 rupees (about $2,500) for the Indian middle market. Launched in March 2009 as “The People’s Car,” the price for a Nano has gone up to about 150,000 rupees today, and sales have not met initial hype, as the company struggles to position the car as a safe alternative for families who crowd four or more people onto two-wheeled scooters. But it is still the world’s cheapest car. Tata is also building a dealer network in towns of fewer than 500,000 people, reducing requirements for down payments, and extending the Nano’s warranty. These adjustments have made the share of Nano customers who are buying a car for the first time to about half of total customers.
The point here is that it took an Indian entrepreneur to build an Indian car company to serve the unmet needs of the Indian middle market. Why wasn’t Ford Motor Company or General Motors the first to offer the world’s cheapest car? My guess is that they are relying on their conventional business models that have worked for them for the past 100 years.
Only history will prove the ultimate winners and losers in the fast-changing global economic system that is on the rise, albeit in fits and starts. But my money’s on those companies that can envision big opportunities in the future and create “next practices” business models.
Mark W. Sheffert, chairman and CEO of Manchester Companies, Inc., provides investment banking and corporate renewal/performance advisory services. Contact him at email@example.com