The traditional response to earnings downturns is to hunker down and defend the status quo. But if the downturn is caused by a structural disruption this is the wrong response. This discussion presents a better response that finds opportunities within challenges – and describes what it takes to capture them.
How does your company respond to a downturn in earnings? The traditional approach is to reduce headcount (often middle management), shrink non-operating spending, reinvest some savings in advertising and exhort the salesforce to sell more great product; e.g. Coca Cola, late February 2014.
But what if the downturn has been caused by a growing trend that will eventually undermine your business (i.e. a structural disruption)?
Then the traditional response to an earnings dip is unhelpful – cutting the company’s ability to respond to a disruption and reinforcing the company’s commitment to the current course.
Instead, when these sorts of disruptions occur (and ideally before), it is time for open-mindedness to new ideas and allocation of resources to respond with a better business model.
We call this sort of step-out thinking ‘Radical Strategy’ because it steps beyond the incremental improvements/optimisation of the existing business model – where most corporate strategy work is focused.
Consider some of the disruptive business model types that are emerging – and which are very difficult to answer by optimising existing approaches:
- Distributed production – local production of raw materials including food and energy – e.g. farmers markets; rooftop solar photovoltaics
- Peer to peer networks – directly connecting producers/providers and customers/users cutting out the ‘middleman’- e.g. Zopa
- Product aggregation and comparison – Where comparable products are aggregated to provide customers with choice and convenience, often including reviews from other customers. Examples include Tripadvisor and Moneysupermarket
- Paid from savings – where a service provider is paid from the savings that they achieve for their customers thereby creating an alignment of incentives – e.g. the Green Deal
- Servitisation – selling services instead of physical products – e.g. heat instead of boilers; light instead of light bulbs.
- Collaborative consumption – where customers do not need to own a product by instead rent or borrow it only when needed – e.g. Zipcar; Airbnb; Streetclub
- Circular resource flows – recapturing end of life products for remanufacturing, recycling and reuse – e.g. Fuji Xerox photocopiers; printer cartridge recycling; Interface carpet tile recycling (a Lavery Pennell project)
- Upcycling (a variation on circular resource flow) – creating products that have a higher value than the end-of-life products from which they are made – e.g. U.S.E.D Seatbelt Messenger Bag
- Mass personalisation – Using customer data and flexible production systems to develop products and services to suit individuals’ needs – e.g.Google’s targeted online advertisements and Shoes of Prey where women can design their own shoes
- Peer collaboration – working together with competitors to co-invest in infrastructure and share distribution systems – e.g. Cash Services Australia, a JV utility which manages cash for Australian banks (and former client)
The emergence of these models is no accident: they better meet customer needs by tapping into new technologies (e.g. internet, smart phones, big data, remote sensing, connectivity) and changing consumer demands (e.g. transparency, social responsibility, provenance/sustainable sourcing, social connectedness, instant access, sustainability concerns). And this is important to know; it is necessary to look behind emerging business models to understand how disruptive they are likely to be based on the strength of their underlying drivers.
There are a number of examples of sectors currently being disrupted:
- European energy utilities are struggling in the face of a low carbon imperative, low wholesale energy prices and rapidly growing renewable and distributed energy. RWE’s chief executive Peter Terium is quoted in the Financial Times saying that they are experiencing the “worst structural crisis in the history of energy supply” (Feb 15/16, p. 15).
- Retail stores, whose customers, while standing in their stores, are comparing prices and ordering online from competitors using their smartphones.
- Financial services providers including banks and insurers, whose differentiation is being eroded by peer-to-peer lending and online supermarkets comparing their offerings.
Examples of companies who have embraced some of these new business models are Caterpillar (with their remanufacturing business), Marks and Spencer (recycling clothes), Interface carpets (recycling) and British Gas (who offer a range of energy- and home services).
How did they do it? They invested in:
- Developing a clearer understanding of the market. See how Shell went about understanding urbanisation and how it will impact on energy use at http://laverypennell.com/future-cities-report-shell/ (a project completed by Lavery and Pennell).
- Building the business case for change. This required deeper understanding of the new business model being explored, as well as a clear view of all of the types of value that could be created.
- Giving it a go. Trying, pivoting and, if necessary, failing fast are key themes for companies to respond to disruptions in a cost-effective way.
Is your company facing imminent disruption? Here are a few tell-tale signs:
- Start-ups in your field are growing quickly by meeting your customers’ needs in a different way
- You are lobbying extensively to protect the status quo
- Senior executives are in furious agreement that your business model is still the right answer after 20 years and that competitors will fail
- Your company is convinced that it will all turn around with the release of the next model (which is what Australian car makers said about big cars – all of them will be shut down by 2017)
- Senior executives are saying “All we need is for the economy to recover” – when customers are not happy with your offering
- Your marketing team has changed its messages rather than changing products
- Staff are focussed on short term targets and improvements, with no-one thinking long term and no investment in trialling radical new ideas