How many business models are in effect in your enterprise? While your first inclination might have been to have said “one”, I suspect that before the words were halfway to your lips you thought better of that reply and were already considering the different business models in use across your diversified or vertically integrated business. But what if you are not a conglomerate, not a holding company, not vertically integrated, serving only a single, homogenous domestic market? Could it be that you just have one, basic business model?
No. Not even remotely likely. Consider the typical $50M to $100M+ service or product company. Most likely they have at least SIX different business models operating within their organization.
Beginning with the longer lead-time functions, we have R&D, followed by Marketing; R&D investments typically have a two to five year horizon (perhaps even longer for some industries like pharmaceutical or wine estates), while marketing generally takes a six to twenty-four month view of product launches and lead generation. The sales function represents yet another business model, with weekly, monthly and annual quotas paired with six to eighteen month sales cycles, and twenty-four month client management and territory development.
A fourth function to consider is maintenance services, which are tied to previous sales and tend to be not only smoother than the more variable product revenues but also driven by long-term, multi-year contracts and certain seasonal considerations. An organization’s infrastructure operates on yet another independent business model, consisting of multi-year facility leases, multi-year IT project implementations, and relatively fixed functions like payroll, HR and legal whose size is relatively inelastic with respect to revenues.
Finally, we come to operations, be that production, logistics, retail or professional services, which is the business model that comes first to mind when the question is asked, and often the only business model considered by executive management when trouble rears its head and changes need to be made. What changes? Freezes and cuts of course. Across the board cuts. Revenues are down and are forecasted to continue below plan for a least another quarter, which generates the knee-jerk reaction: “10% budget cuts for everyone!”
But is this really what you want to do? Do you expect your market to recover the following quarter, or the next fiscal year? Then why cut R&D and marketing? In fact, if sales are down, why cut sales? And nothing that’s happening now and in the immediate future is impacting your existing customers and their associated maintenance renewal stream. How are you going to take 10% out of a three-year warehouse lease even if you wanted to?
The right answer is of course that one size does not fit all, but what to do about that answer is the tougher question, with the correct response being related to several of my previous posts – Scenario Planning. Not only should your scenario plans have definitions and triggers and implementation plans, they should be granular enough to distinguish between functions, business models and severities so the changes and reactions are properly targeted to mitigate most of the current pain without jeopardizing the future. A brief example:
Level 1: Reductions to operations costs, personnel and inventory purchases.
Level 2: Level 1 + an across-the-board headcount freeze
Level 3: Level 2 + cutbacks in sales and marketing
Level 4: Level 3 + fixed cost restructuring
Level 5: Level 4 + reductions to R&D investment and maintenance services staff
This approach is nothing but common sense, but it requires discipline and preparation if it’s going to replace the standard all-or-nothing reaction. A poor Christmas season or rising fuel costs should not logically trigger a reaction that causes a business to eat its own children though cutbacks to next season’s designs or next year’s new products, but it’s difficult to justify and tolerate the level of short-term pain that something less than across-the-board cuts would undoubtedly generate. Difficult that is, unless you have done the planning, have confidence in that planning, and generated the scenarios that are going to provide you with the most optimal long-term result regardless of the near-term ups and downs.
