May 24, 201112:00 AMMad @ Mgmt
with Walter Simson
Seven questions for ... Kay PlantesBeyond Price – Differentiate Your Company in Ways that Really Matter (Greenleaf Books, 2009). I can say from having recently worked with Kay that she is Schmart with a capital Schmu!
1. What is a business model?
Trader Joe's and Whole Foods are in the grocery store business, as is Walmart, but each with a different business model. A business model describes how a business provides value to a targeted group of customers while at the same time creating profits and cash flow for the business. These three "grocery businesses" differ in the resources, processes, and solutions they offer as well as the profile of their target customer, yet each is profitable. I like to think of the business model as the architect's rendering and construction drawings for a business. And companies can have more than one business model, as does Walmart.
2. How can addressing business models benefit a business?
In the Industrial Age, significant barriers to market entry existed and companies in an industry pretty much had the same business model, competing on who could offer highest quality or lowest cost. In the open markets of the Information Age, which we are in today, markets have fragmented and the advantages of scale and vertical integration have fallen. So many different kinds of business models can succeed. In fact, with individual products and services so easy to copy, business models have become the new basis of competition between companies.
3. What are common missteps companies make?
Here are three mortal sins: First, taking your business model as a given and seeking growth only through new products. The only way to avoid commoditization today is a better business model. Second, failing to segment customers/prospects narrowly, serving all with the same business model. Smaller and more nimble competitors will carve out a part of your customer base with a better business model. Finally, failing to recognize that company strategy is about more than business model innovation. Your company strategy includes identifying and improving the resources, processes, and solutions shared by more than one business model, a sharing that drives profitability and creates competitive advantages.
4. Can you give examples?
Apple has an incredibly smart company design that leverages knowledge, processes, and solutions. It's why Apple has the lowest R&D spend per dollar revenue of any of the top innovative companies and why long lines form outside their store with new product introductions. Dell is a famous example of a company that fails to successfully innovate its business models – it merely copies competitors. As a result, it's stuck in a nowhere land where it sells more and more, but makes less and less. DuPont introduced a lower-cost, online version of its offerings to appeal to more price-sensitive customers, a smart move that kept DuPont from being disrupted by low-cost entrants.
5. Why can't I just change pricing to attract business?
Every industry has a Walmart, the lowest-cost business model. And it's the only model that makes good money competing on price. If that's not you or who you want to be, you must create a different business model. Target focused on better shopping experiences and providing customers with greater confidence in their purchases, taking share away from Walmart, as Sears kept doing the same old thing with worsening results. But even Walmart is at risk absent change – Amazon lacks the cost of stores, Tesco sells primarily private-label products, and Dollar Stores are more conveniently located near shoppers, a benefit given today's $4/gallon gas. So Walmart is being forced to rethink its business model to compete against the new lower-cost models.
6. How did you get into this, anyway?
As a trained economist, I've always been interested in market dynamics and systems thinking, so business model innovation and company design came quite naturally. I joined Ohmeda after leaving my academic position at UW-Madison's economics department. We changed our business model in a really exciting way and ever since I've viewed strategy not as planning but as design of your company – your target markets, scope, value promise, advantages, profit drivers, processes, company-wide capabilities, etc. Getting better at the same business everyone else is in won't get you very far – building different business models better aligned with external trends and anchored in hard-to-copy company advantages will, on the other hand, make work fun again.
7. Where is your favorite place to work?
My writing office is surrounded by windows on three sides and 90-year-old stone on the fourth side, and there is not a single "to do" pile or list in the office. I go there with blank sheets of paper – for a writing project, a client project, or to reflect on my life. Here, I am in heaven.
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