The Challenge of Changing Your Business Model
Written by George F. Brown, CEO and cofounder of Blue Canyon Partners, Inc.
Our consulting firm recently worked with a company that manufactures capital equipment used in many factories to produce products made of plastic and similar materials. Their technology offered many advantages over that included in competitor products, and they achieved substantial market share gains with larger businesses. Their targeted customers, however, included a large number of smaller firms, and they had very little success in gaining sales into the small and medium business segment. Research identified the reason for that failure: these firms didn’t have the internal infrastructure needed to support the technology included in the products, and these firms were taking the “safe, familiar route” associated with competitor products. As a result, several years ago, the firm decided to create a customer service organization which would take on service responsibilities on behalf of smaller firms that purchased their equipment.
The implications of this decision were summarized by one of the firm’s senior executives:
“We had no idea what we were getting into with this decision. First of all, we learned that our customers assumed that we were available to provide service on a 24x7 basis. Our operations traditionally involved normal business hours – and we had assumed the same for the service arm we created. That was wrong, and a costly mistake as we had to add staff for the many hours we had assumed we didn’t need to cover.
“Second, we thought our responsibilities were tied to our products. This too was off the mark. More than half of the service calls that we got were associated with something that was at best peripheral to our products, some not in any way linked except in the minds of our customers. But we had to learn the larger systems in which our products were operating, and be able to steer our customers towards a solution to whatever problems they had. It just wouldn’t work to say that the issue wasn’t our issue – we tried that a couple of times and learned quickly never to do so again.
“And as one more illustration, we sell through a dealer network, a group of firms with which we’ve had great relationships over the years. I’ve never seen such a firestorm as occurred when our service people started working directly with the end customers. You would have thought we were the competition – at least that’s how the dealers reacted. It took us over a year to calm the waters with our dealers, and even today some of them still seem suspicious of us.”
This firm eventually enjoyed success with its service offering, gaining market share with the small and medium sized businesses in their target market. They even succeeded in implementing a fee-for-service program for these customers after the warranty period had elapsed, with the service business operating at a slightly better than breakeven basis at this time while continuing to bolster their ability to sell into the small business segment.
They also learned a lot about making changes to their business model in the process, and it is doubtful that this firm will ever again make similar changes – going from a product to service business, dealing directly with end customers instead of going through intermediaries, etc. – without a full understanding of their implications. The executive quoted above commented “I didn’t even know what our business model was. But I’ve learned my lesson – whatever it is, beware of making changes to it”.
Despite that advice, making changes to a firm’s business model has become a high-frequency activity. In a recent survey of business executives, we heard of four reasons that have motivated making changes to a firm’s business model. The two primary motivations are performance problems. The most frequent reason motivating changes in the business model is that the “Old business model is failing to deliver adequate growth”, followed closely by the “Old business model is failing to deliver adequate profits”. External motivations are also important in many cases. While trailing the above performance-related motivations, two other factors were recognized as important in decisions about changes to business models: “A new business model is required due to external changes (e.g., regulation, technology)” and “A new business model is required in a new market or product segment”.
All four of the motivations cited above scored above 3.8 on a scale that ranged from 1, meaning “Rarely a factor” to 5, meaning “Frequently a factor”. Changes to a firm’s business model, while not an everyday thing, are a common enough occurrence that they warrant executive attention. The comments of two executives who contributed to this survey provide a good perspective. One executive from the packaging industry noted: “I’ve come to think about strategy in terms of business model changes. Whether we can successfully make the changes needed is the litmus test of whether a strategy proposal makes sense.”
A similar perspective was offered by an executive from the electrical products industry: “One thing I’ve learned is that the implementation challenges are centered on changes to the business model. We don’t fail at product development, we’re good at pricing appropriately, our sales team knows their customers. It’s when we venture into the unknown with some element of the business model that we get into trouble.” Like many firms that have suffered the pains of changing elements of their business model, this executive says that he is now very quick to say “Wait a minute – have you thought out the implications of what you are proposing in terms of changes to our familiar business model?”
George F. Brown, Jr. is the CEO and cofounder of Blue Canyon Partners, Inc., a strategy consulting firm working with leading business suppliers on growth strategy. Along with Atlee Valentine Pope, he is also the author of CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs, published by Greenleaf Book Group Press of Austin, TX. See www.CoDestinyBook.com for more details.
Six issues at the top of tax and finance leaders’ agenda
New Deloitte research reveals that tax leaders are under increasing pressure to add strategic value as companies accelerate business model transformation, from undergoing digital transformations to rethinking their supply chains or investing in green initiatives.
According to Phil Mills, Deloitte Global Tax & Legal Leader, to “truly deliver value to the business, the tax function needs to rethink its resourcing model and transform its technology infrastructure to create capacity and control costs”.
And the good news, according to Mills, is that tax and business leaders have more options at their disposal to achieve this.
Reflecting the insights of global tax and finance executives at global companies, Deloitte’s Tax Operations in Focus study reveals the six issues at the top of tax and finance leaders’ agenda.
Trend 1: Businesses seek more strategic counsel from tax
Companies are being pushed to develop new digital products and distribution channels and accelerate sustainable transformation and this is taking them into uncharted tax territory. Tax leaders say their teams must have the resources and skills to give deeper advisory support on digital business models (65%), supply chain restructuring (49%) and sustainability (48%) over the next two years. This means redrawing the boundaries of what tax professionals focus on, and accelerating adoption of advanced technologies and lower-cost resourcing models to meet compliance requirements and free up time.
According to Joanne Walker, Group Tax Director, BT Group PLC, "There’s still a heavy compliance load today, but the vision for the future would be that much of that falls away, and tax people become subject matter experts who help program the machine, ensure quality control, and redirect their time to advisory activity.”
Trend 2: Tipping point for resourcing models
Business partnering demands in the tax department are on the rise, but 93% of tax leaders say their department’s budget is remaining flat or falling. To ensure that the tax function can redefine itself as a strategic function at the pace that is required, leaders are choosing to move increasing amounts of compliance and reporting to a combination of shared service centers, finance departments, and outsourcing providers that have invested in best-in-class technology.
Trend 3: Digital tax administration is moving faster than expected
in addition to the rising focus of the corporate tax department partnering with their business counterparts, transformative changes to the way companies share tax information with revenue authorities is also creating an imperative to modernize operations at a faster pace. Nine in 10 (92%) respondents say that shifting revenue authority demands on digital tax administration will have a moderate or high impact on tax operations and resources over the next five years—and several heads of tax said the trend is moving faster than expected.
"It’s really stepped up in the last couple of years," says Anna Elphick, VP Tax, Unilever. "Tax authorities don't just want a faster turnaround for compliance but access into a company’s systems. It's not unreasonable to think that in a much shorter time than we expect, compliance will be about companies reviewing a return that's been drafted by the tax authorities."
Trend 4: Data simplification and lower-cost resourcing are top priorities
Tax leaders said that simplifying data management (53%) and moving to lower-cost resourcing models (51%) must be prioritized if tax is to become more proactive at delivering strategic insights to the business. Many tax teams are ensuring that they have a seat at the table as ERP systems are overhauled, which is paying dividends: 56% of those that have introduced NextGen ERP systems are now highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of NextGen ERP systems said the same.
At Stryker, “we automated the source P&L process for transfer pricing which took a huge burden off of the divisions," says David Furgason, Vice President Tax. "Then we created a transfer price database to deposit and retrieve data so we have limited impact on the divisions. We are moving to a single ERP platform which will help us make take the next step with robotics.”
Trend 5: Skillsets are shifting
Embedding a new data infrastructure and redesigning processes are critical for the future tax vision. Tax leaders are aligned — data skills (45%) and technology process experience (43%) are ‘must have’ skills in a tax department of the future, but more traditional tax specialist knowledge also remains key (40%). The trick to success will be in tax leaders facilitating the way these professionals, with their different backgrounds, can work together collectively to unlock lasting value.
Take Infineon Technologies, which formed a VAT technology and governance group "that has the right knowledge about how to change the system to ensure it generates the right reports", according to Matthias Schubert, Global Head of Tax. "Involving them early was key as we took a greenfield approach, so we could think about what the optimal processes would look like and how more intelligent systems could make an impact
Trend 6: 2020 brought productivity improvements
Improved productivity (50%) and accelerating shifts to remote working (48%) were cited as the biggest operational benefits to emerge from COVID-19-driven disruption. But, as 78% of leaders now plan to embed either hybrid or fully remote models in the tax function long term, 34% say maintaining productivity benefits is a top concern. And, as leaders think about building their talent pipeline and strengthening advisory skill sets, 47% say they must prioritize new approaches to talent recognition and career development over the next two years, while 36% say new processes for involving tax in business strategy decisions must be established.