How Broken Is Your Business Model?

By Steve McKee

Hasbro recently reported a double-digit decline in revenue and a big internal overhaul. That followed Mattel’s news that it will be hiring its fourth CEO in as many years as it also tries to overcome slumping sales. Why are the behemoths of the toy business in such trouble? Because their most significant historical distribution channel, Toys R Us, declared bankruptcy.

Why did Toys R Us declare bankruptcy? Because of Amazon.

It’s true that other factors contributed to the decline of all three companies, including an ill-timed leveraged buyout that loaded Toys R Us with debt. But it was the advent of e-commerce in general, and Amazon in particular, that is dealing the heaviest blow. Toys R Us’ demise means that Hasbro and Mattel must find a way to adjust to the same distribution dynamics that a year earlier felled Sports Authority and caused Whole Foods to wave the white flag.

While the winds of change have always been unrelenting, never before have they created such noticeable gusts. We feel them in the marketing consulting business; for example, Google, Facebook and their ilk rapidly continue to sweep up ad dollars that used to come our industry’s way, causing a permanent shift to which firms like mine must adjust. I suspect you feel the breeze in your business as well.

In research we conducted this year, a plurality of corporate leaders confessed to unprecedented difficulties in managing (and even understanding) what’s happening to their businesses, with more than four in ten going as far as to say they need an entirely new business model. It was especially true of companies whose growth is slowing and/or who are struggling with the “Amazonification” (nee: commoditization) of their industries.

Clearly, this is no time to be complacent. Because there is no time to be complacent. It’s all happening too fast.

Today it’s not enough to think in terms of the niche alone, or even of the industry. It really is a question of business model.

Corporate strategy used to largely focus on carving out a defensible competitive position within an industry. Today it’s not enough to think in terms of the niche alone, or even of the industry. It really is a question of business model. As one of my partners recently quipped, we’ve got to stop defending the gates and focus on building the tower. We have to be willing to sacrifice branches to save the tree.

We must become the destructor rather than the destructed. It’s on us to question everything about the business proposition we’re putting forth into the world, granting no quarter to sacred cows.

For example, as Hasbro and Mattel face what amount to existential challenges, what business model, exactly, should they be pursuing? To the casual observer, they both look like toy manufacturers. Is that what they really are, or should remain? Are they toy developers? Toy market-makers? Are they in the business of play? Entertainment? Education? Should they pursue vertical integration? Disintermediation? Cooperation?

These are deep and consequential questions, and the more of them they explore, the more additional ones may surface, at least for a time.

Which leads to the question for you: How broken is your business model? If you say “not at all,” I say you’re probably not paying attention. You may be out in front of your competition, but these days you’re less likely to spot them in the rearview mirror as you are darting out from a side street, arising out of the dust or dropping from the sky. We’re now in a “butterfly effect” economy in which a shift in one business model can affect all others.

Most leaders I know don’t have their heads in the sand; they have some sense of where their business model is being threatened, up to and including obsolescence. That’s a good sign. To paraphrase Samuel Johnson, nothing focuses the mind like the sight of the gallows. But most also struggle with what to do about it.

That expertise, in fact, is the “tower” my company continues to build. Ironically, our changing business model is to help other companies identify and leverage their changing business models. It’s nothing if not relevant to the times.

There’s a cliche that says every family is dysfunctional in its own way. Similarly, every business model is broken — or breaking — in its own way. If you’re feeling the marketplace shifting under your feet, you’re not alone. Nothing, it appears, is beyond disruption or off limits to the forces of creative destruction. Not to pick on Amazon, but the company just announced it’s going to start delivering packages straight to the trunk of our cars, for crying out loud.

So yes, every company should ask itself, “How broken is our business model?” But there’s a second, more important question: “How might we break someone else’s?” All it takes to transform threat into opportunity is the proper mindset.

Whatever the case, don’t ignore the very real (if sometimes imperceptible) likelihood that your business model is becoming obsolete. Even if your company is cruising along, someone or something is coming after, hovering over or undermining it.

Originally published on SmartBrief on Leadership

Steve McKee

Co-founder and author, Steve specializes in addressing the most meaningful problems. Call Steve when you want to change the world. He’ll have a thought (and some research) on that.

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