When Times Are Tough, Change Your Model

During a downturn, senior managers often put their companies under the microscope to identify where to cut or control costs that are dragging down the bottom line. Zeroing in on the minutiae of spending, however, may not be the best way to help a company's flagging performance. A better option: Look at the firm through a wide-angle lens.

“Take a very hard look at how you do business,” says Wharton management professor Raphael Amit. In a new paper, “Business Model Innovation: Creating Value in Times of Change,” Amit and Christoph Zott, a professor of entrepreneurship at IESE Business School, suggest that making a business model more innovative is key to a company’s long-term success. “We are saying that this is an alternative to cost cutting,” notes Amit. “Rather than cutting costs to preserve your bottom line, you can increase your top and bottom lines by finding new and novel ways to do business.”

Scrutinizing a business model should be "a starting point to see how you could serve your customers in a different way without having to produce a new product or service, the development cost of which is much, much greater,” Amit says. “There are … costs associated with changing the business model in an existing organization, but usually they are substantially less than the costs associated with a long-term R&D project.”

However, changing a business model is difficult for several reasons, says Zott. “First, it requires holistic thinking, which is not easy. It is much easier to optimize parts of a business — for example, marketing or accounting processes — than to improve all aspects of the business.” Second, he notes, “change is often resisted within an organization. It is difficult to modify or abolish deeply ingrained habits." Finally, it requires "courage, foresight and entrepreneurial initiative to do business in a different way from how it has been done before. These are rare skills within most organizations.”

Companies that have been pushing the boundaries of their business models are few and far between. Apple is one high-profile example: For most of its history, it focused on producing hardware, primarily personal computers. When the company created the iPod and music downloads through iTunes, however, it became the first electronics company to include music distribution as part of its business model. As the two professors note in their paper, “Rather than growing by bringing a new hardware product to the market, Apple radically transformed its business model to include an ongoing relationship with its hardware customers (similar to the ‘razor and blade’ model of companies such as Gillette). In this way, Apple expanded the locus of its innovation from the product space to the business model.”

Businesses often focus too much on strategy at the expense of business model analysis, notes Amit. A purpose of the paper “is to alert managers and entrepreneurs alike that they need to think deeply and thoroughly about their business model — namely the business template, how they do business — in addition to thinking about the strategy.”

To read more about business model innovation, see “Injecting New Life into Old Business Models” in the current issue of Universia Knowledge at Wharton.