By Steven Swientozielskyj, FCMA, CGMA, Deputy President - The Chartered Institute of Management Accountants
Most CEOs have the same challenge top of mind: how can they position their organisation for long-term success in an era of radical disruption? From celebrated brands that go out of business in a matter of years to no-name start-ups worth billions of pounds overnight, today’s business environment is anything but predictable.
To succeed in these extraordinary times, organisations must continually challenge their systems, processes and strategies. That includes the way they think about their businesses and their customers. To thrive, organisations must continually rethink their business models.
McDonald’s faced this scenario when it tried to revitalize its stagnant milkshake business. The fast-food giant had been trying to increase its penetration of the milkshake market for a long time with little success. Armed with significant amounts of data, it tried first to adjust the product and then the pricing. Neither provided much gain.
But what if McDonald’s was trying to answer the wrong question? Harvard Professor Clay Christensen explains in this article how the company revitalised its milkshake business by asking a different question: What job is the customer trying to hire the milkshake for?
Data revealed that 40% of all milkshakes were purchased before 8:30am by adults on their commute to work. Looking at their business model through a new lens, McDonald’s realised that their customers were “hiring” the milkshake for a very specific job—and that their competitors were not just milkshake brands but rather all breakfast options: bagels, doughnuts, bananas and more.
So how did McDonald’s change their business model based on this new information? They modified their product and their delivery model for the job their customers were actually hiring them to do: keep them full and entertained on their morning commute. To accomplish this, they thickened the consistency of milkshakes. This gave their customers the opportunity to savour the shake longer. Since they knew their customers were in a hurry, they also installed machines that dispensed milkshakes with a prepaid swipe card. This allowed customers to come in and out with speed. By changing their product and delivery model to fit their customers’ needs, they were able to grow their milkshake business significantly.
The McDonald’s story is a great example of how an organisation looked at value creation from their customers’ standpoint. An organisation’s ability to view their business model from this new perspective can result in benefits including a higher rate of return, larger profit margins and greater market share.
So, you may be asking yourself, “How do I rethink my organisation’s business model to achieve long-term value creation?” The Association of International Certified Professional Accountants introduced the CGMA Business Model Framework to help organisations enhance decision-making by considering their business model through a series of lenses. Finance leaders are invited to share their views and feedback as part of a global consultation to make the framework even more robust, relevant and useful for business.
The framework and accompanying whitepaper identified clear steps to help organisations articulate their business model:
Step 1 - Define value
Start by articulating how your organisation defines value. Identify your stakeholders and your organisation’s value goals. This could include: profit at year-end, the number of satisfied customers, the number new products on the market or even growth in a particular product.
Step 2 - Create value
Next, identify how resources and inputs are transformed into goods and services that customers value and desire. Apple doesn’t just have great ideas and know-how. They have a great design-to-production process that allows them to quickly deliver innovative products that excite and delight their customers.
Step 3 - Deliver value
Then, determine how your organisation is bringing value to your customer. This question is critical, as it poses an opportunity to identify segments of customers and the various channels by which to reach them. Take Netflix, as an example. They were offering the same product as Blockbuster: motion picture movies for all ages and interests. However, Netflix delivered its product through a new channel that, ultimately, helped the brand gain massive market share.
Step 4 - Capture value
Finally, detail your organisation’s revenue model and how you are capturing value from your customers. Cloud services provider Oracle started with an ‘on-premise’ software revenue model. However, as technological innovation around the Cloud accelerated, Oracle shifted its model to a software-as-a-service revenue model, enabling it to increase penetration in a very competitive Enterprise Resource Planning (ERP) market.
By articulating your business through the four steps listed above, you can more easily identify what part of the value chain you’re trying to address and change.
Disruptors usually focus on a particular component of your business model. If you use a systematic framework to forecast your business model, you can have greater confidence that opportunities will leveraged and risks mitigated, helping you to achieve long-term success.