Retrench or refresh: Do existing business models still deliver the goods?


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This paper is the first in a series of four reports on business model change in the UK and Ireland, produced by Grant Thornton in co-operation with the Economist Intelligence Unit. Three subsequent briefing papers focus on business models in the construction and property sector, the media sector and the retail sector. All content was written by the Economist Intelligence Unit with the exception of the foreword, model behaviours and perspectives compiled by Grant Thornton UK LLP.

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Retrench or refresh: Do existing business models still deliver the goods?

  1. 1. Retrench or refresh?Do existing business models still deliver the goods?
  2. 2. Foreword IntroductionDo existing business models About the reportstill deliver the goods?Most companies need to A key finding of the research indicates a What is a business model? lack of urgency, even complacency, The concept of the business model defies easy definition, there being no consensus in academic orreview, and possibly renew, among two-thirds of respondents, when corporate circles on its constituent components. Most would agree, however, with the notion thattheir business models. faced with the need to change the ways it represents the essence of the business, or the value an organisation strives to provide and the they do business. ways and means it uses to provide it. The business model is distinct from strategy, althoughThis report, written in Most organisations surveyed turned to changes to the former often reflect strategic choices.cooperation with the cost-cutting at the outset of the recession, For the purposes of this study, we identify five components of the business model:Economist Intelligence Unit, and only a small percentage appear to The value proposition, or the benefits that a company’s products or services provide to its customers. have taken opportunities to betterreviews issues around the position themselves as the upturn comes. Target markets: the customer segments and product and geographic markets a company aimsresilience and robustness of We believe that this report will stimulate to models over the past boardroom discussions about strategic Revenue-generation mechanisms: an organisation’s revenue and pricing models – for example, options, and will trigger the move from its decisions to earn revenue through direct sales, licensing, franchising, subscription or18 months and how they may retrenchment to fresh thinking to capture other mechanisms.fare in the future. the fleeting opportunities available. Cost structure, or the balance of fixed, variable and other costs within the organisation. David Maxwell Value chain, combining a company’s supply chain and the sales and distribution channels it uses to Partner, National Leadership Board deliver its products and services to market. Grant Thornton UK LLPContentsForeword From Grant Thornton: Do existing business models still Model behaviours 27 deliver the goods? 2 Heads in the sand 28From the Economist Intelligence Unit: Introduction Ahead of the curve Fighting the last war 30 32 About the research The analysis in this study is based on a fresh thinking survey of 396 senior executives in the United About the report 3 Best before 34 Kingdom and 69 in the Republic of Ireland – Moving to the margins 36Executive summary 465 respondents in all – conducted by the Hitting the panic button 38 The case for business model change 5 Economist Intelligence Unit in October- Do existing business models still Business models – the challenges November 2009. The survey sample was deliver the goods? 6 senior, with half of respondents being construction and property sector, the media Views from the experts 40 What changes in business models C-level executives, and hailed from a wide sector, and the retail sector. All contentFindings are needed if companies are to survive range of industries and company sizes. was written by the Economist Intelligence Few illusions about growth prospects 8 in today’s uncertain economic climate? 41 To complement the survey, the Economist Unit with the exception of the foreword, Unequal opportunity? 10 What should business leaders Intelligence Unit also conducted a series of model behaviours and perspectives presented Playing defence when they need to score 12 focus on to survive? 45 in-depth interviews with corporate leaders after page 26. Battling complacency 16 What are the weaknesses in today’s business models? 49 in the UK. Please note that not all survey data shown Converting risks into opportunities 22 This paper is the first in a series of four in the charts add up to 100% because Seize the momentConclusion 25 reports on business model change in the of rounding or because respondents Put business models on the board agenda 52 UK and Ireland. Three subsequent briefing were able to provide multiple answers to Contributors 54 papers will focus on business models in the some questions.2 Retrench or refresh? New business models Retrench or refresh? New business models 3
  3. 3. Executive summary The case for business model change The UK and Irish economies are enduring their worst recessions since the Second World War. The Economist Intelligence Unit expects that GDP, after a significant decline in 2009, will edge only slowly back into the positive zone in the UK in 2010, and that Ireland will not emerge from recession until 2011. Although painful, the unique circumstances of a downturn can act as a ‘burning platform’ for companies: an opportunity, driven by urgency, to change their business models – the core objectives they pursue and the ways in which they operate. But are companies ahead of the curve, seizing opportunities, or do they have their heads stuck in the sand? A survey conducted by the Economist Intelligence Unit for this study finds that little more than one-third of companies in the UK and Ireland are pursuing, or plan to pursue in the near future, changes to their core products, target markets or revenue-generation mechanisms meant to position themselves for renewed market growth1. Most companies, however, exhibit complacency about the need to pursue innovation in their business models, believing that adjustments to cost structures are sufficient while market conditions remain tough. When asked in which areas their company plans to make significant changes to its business model in 1 the next 18 months, 37% of survey respondents cited target markets, 35% the value proposition and 31% revenue-generation mechanisms, while 46% pointed to the cost structure as a focus of change.4 Retrench or refresh? New business models Retrench or refresh? New business models 5
  4. 4. Executive summaryDo existing business models still deliver the goods?Over the next 18 months, the majority of have also pursued change in their value regulation, however, among other things, Executives are pessimistic about a rapid Complacency is preventing more Perhaps more worrying thanUK and Irish companies surveyed for proposition (38%), revenue generating suggest both risks and opportunities for return to market growth. widespread business model innovation. complacency towards the need for changethis study seem focused on survival rather mechanisms (34%) or target markets companies that more ambitious Over half of those surveyed expect A worrying strain of complacency among is a perceived inability of management tothan looking to business model changes (32%). Cost control is always important, innovation in supply chains and new recovery in the main markets in which British and Irish companies is revealed in engineer change. One of the top twothat could position them to meet but companies risk leaving themselves product and service development could they operate to take 18 months or longer. the survey. Nine in ten (89%) executives barriers to business model change citeddomestic and global competition when open to threats from rivals that are help them address. Moreover, modest predictions about believe that their company’s business by survey participants is the capability ofconditions improve. innovating more broadly. Fully one-third demand growth are, respondents say, model is set up to let them succeed over their management to lead it. As one Following are the key findings of of companies admit that the assumptions the biggest uncertainties among their the next year and a half. Most interviewee puts it, “there is an elementthe research: in their business models will need an current business assumptions, with most respondents also seem to believe they will of head in the sand”. But while British overhaul as a result of the recession. emphasising downside risk. Such caution be able to get funding from their and Irish companies may have been ableBusiness model change has been overly is in line with the Economist Intelligence preferred source, even given the dire state to prosper during the good times with acost-centred and left many companies By concentrating on cost, companies may Unit’s own forecasts for the UK and of the financial sector. And over one- ‘business as usual’ approach, they willunready for the future. be missing opportunities to use business Ireland, which see “little to suggest that a third of companies believe that need more meaningful change if they areEighty-six percent of executives claim model innovation to address future risks. sustainable robust recovery is imminent”. competition will stay the same, diminish to fully prepare themselves for life aftertheir companies have adjusted their Cost structures will remain the central or fragment as a result of the downturn, the models in some significant way focus of business model change in the even though competitors from within theas a result of the downturn. For the next 18 months, according to survey industry, as well as from adjacent sectorsmajority (63%) of companies, however, respondents, although to a lesser extent and other countries, will be driven to findthe cost structure has been the dominant than in the recent past. Expectations of new markets and products.focus of changes, although a minority input prices rises and new climate change6 Retrench or refresh? New business models Retrench or refresh? New business models 7
  5. 5. FindingsFew illusions about growth prospectsDownturns are more than times of in particular China and India – have increase of 0.8% in 2011. Worse still, its GDP growth at market exchange rates, 2008-2011 (% change). Moreover, respondents believe thateconomic destruction; their very merely experienced a growth slowdown forecast sees many downside risks and demand is the biggest uncertainty in theirharshness can also induce rapid rather than a decline.) These conditions “little to suggest that a sustainable robust 10 current business assumptions (cited byinnovation across companies. This study are taking a toll – full corporate recovery is imminent”. The Irish picture 9 34% of respondents), and far more think– relying on a broad-based survey of over liquidations in England and Wales in is bleaker, with GDP expected to remain 8 it likely that in developed markets growth450 senior executives and in-depth the last half of 2008 and first half of negative in 2010 and to turn positive only 7 will be below expectations (25%) ratherinterviews with 11 corporate leaders – 2009 were up 44% on the preceding in 2011. 6 than above them (6%). John Frankiewicz,investigates how business models, and the 12 months; the number of companies 5 CEO of the construction companyassumptions which underpin them, are entering administration or receivership Willmott Dixon, sums up the prevailing 4changing in light of current conditions. shows a similar rise. view: “We have faced the worst recession 3 The current economic malaise is hitting Looking ahead, executives are since the war, and now we are going to 2Britain and Ireland hard. UK GDP pessimistic. Fifty-one percent of UK face some difficult years ahead.” 1dropped by 4.7% in 2009 and Irish GDP respondents and 62% of Irishby 7%. The UK’s decline is tougher than respondents expect a recovery to take at 0most suffered by European Union (EU) least 18 months in their main markets, in –1countries, and about twice as severe as many cases longer. Although downbeat, –2the downturn in the United States. these expectations are realistic. The –3Ireland’s GDP contraction is the worst Economist Intelligence Unit predicts –4among the EU’s pre-expansion members. anaemic GDP growth in the UK of 0.7% –5(Meanwhile, emerging giants in Asia – next year and an only slightly better –6 –7 –8 –9 –10 2008 2009 2010* 2011* UK Ireland USA Germany France Japan China India *Forecast. Source: Economist Intelligence Unit8 Retrench or refresh? New business models Retrench or refresh? New business models 9
  6. 6. FindingsUnequal opportunity? Case studyThe conclusion seems obvious. In the Bupa UK, explains: “Healthcare-related possible to improve efficiency and Vodafone targets the enterprise market platforms. Few telecoms operators but about the customer’s own businesswords of Jayne-Anne Gadhia, Executive businesses tend to be affected later than customer service. Mr Curran explains, on Business model innovation can go have mastered the range of business transformation,” in that the newChairman of Virgin Money: “Companies others. We see the recession being more the other hand, that fashion websites as a beyond serving the same customers; services that underpin the ‘unified capabilities should enable the moreneed to re-tool if they believe that their visible in 2010 than 2009.” Her peers group are actually changing very little, better to tap into entire new markets. communications’ concept, but Mr Kelly efficient processes companies need inbusiness models cannot cope with the agree: 59% of healthcare respondents continuing to invest heavily to establish Vodafone, according to Peter Kelly, believes that his company’s strong tough economic times.ever-changing landscape.” How this plays see any recovery to be at least two market share, much as Amazon did in its Director of its Enterprise Division, reputation and powerful brand as a ‘Unified communications’ will likelyout in practice is less clear. Not all years away. early years. explains that the mobile services mobile telephony provider will help it become a crowded field; in Septembercompanies face the same, or even a This uneven economic terrain Currently, though, most companies in a provider – the world’s second largest succeed in the corporate market. 2009, for example, rival mobile carrierhostile, market. Jason Kingsley, CEO of inevitably affects how business models shrinking market face Mr Frankiewicz’s by number of subscribers – is now Moreover, Mr Kelly sees clear strategic O2 announced a fixed-line service forRebellion Developments, a computer evolve. Rebellion is experimenting with challenge. He says “We can shrink with it transforming itself into a provider of benefits that make the risks worth taking. the business market, and traditionalgames developer, reports that of the lower price-higher volume sales strategies or change the way we do business. ‘unified communications’ (UC) to Vodafone has found unmet demand that fixed-line operators are touting theroughly 100 such companies in Britain with different distribution methods. We have done the latter.” businesses. In the UK, its new would help them establish a leading same ‘unified’ capabilities. Vodafone’sbefore the downturn, “more than a few Bupa is increasingly moving its product Vodafone One offering aims to provide position in the growing market. venture, however, promises to alter thedozen have gone bust in the last six and service delivery online where seamless contact for corporate “Customers are saying ‘I have a lot of competitive landscape in the lucrativemonths”. In another part of the employees across a wide range of costs going out in fixed, mobile and IT business communications sector, on the other hand, communications technologies – services. Addressing real customer needs,Andrew Curran, COO of the fashion including landline, mobile, PC, and an adjacent market that is as big ore-tailer, reports that voicemail, messaging and email – all bigger than our existing one, presents aonline trading is growing and fashion is with a single phone number. big opportunity” says Mr Kelly.the fastest growing segment within that. The shift involves a significant degree The downturn may increase the new“We have found ourselves in a sweet of risk. For one thing, the move has offering’s attractions. Vodafone believes itspot,” he says, with sales increasing by required substantial investment, can cut customer communications costs168% over the previous year. including the purchase of UK fixed by 20%. “That is a good opening Nor does the recession hit everyone system integrator Central Telecom, and discussion to have with a CIO or CFO,”simultaneously. Natalie-Jane Macdonald, tens of millions of pounds spent says Mr Kelly. Thereafter, he adds, “theManaging Director of insurance provider integrating its own communication dialogue is not just about taking cost out, Natalie-Jane Macdonald Andrew Curran Peter Kelly Bupa UK Vodafone10 Retrench or refresh? New business models Retrench or refresh? New business models 11
  7. 7. FindingsPlaying defence when they need to scoreAmid the economic turmoil, companies alterations to their cost structure, while letup in sight, sometimes severe cuts – In which of the following areas has your company already made significant changesare surprisingly calm: 85% of survey smaller numbers (just over one-third) including dropping headcount by over to its business model in response to the economic downturn? Select all that apply.respondents believe that their business have made changes to their core products half – are the only option. Moreover,models have proven to be very (21%) or services (the “value proposition”), even for companies in betteror at least moderately (64%) resilient. to their revenue-generation mechanisms circumstances, as Bupa’s Dr MacdonaldA substantial number of companies, (pricing models, for example) or to their points out, cost reduction should be 63%however, exhibit concerns. Eighty-six target markets. Looking ahead to the next about improving efficiency – never a bad Cost structure (balance of fixed, variable and other costs)percent say their companies have adjusted 18 months, companies’ focus on the cost thing. Indeed, as Mrs Gadhia of Virgin 38%their business models in some significant structure looks to be less single-minded Money observes, companies should Value proposition (ie the benefits that the firm’s products or services provide to customers)way as a result of the downturn. Even than it has been as the economy sputters never take their eye off their costs: 34%with such changes, one-third of to life, but it will remain uppermost in “Of course you have to pay attention to Revenue-generation mechanisms (eg pricing model, licensing versus direct sale, etc.)respondents believe that their models corporate thinking about business model your cost base, but that is true in allwill need an overhaul because of the change. Nigel Clibbens, CEO of business environments.” 32% Huddersfield Town Football Club, Target marketsrecession. In some industries, thisdisconnect is particularly striking: 82% of explains that “costs are more controllable 22%financial industry executives think that than income and easier to deal with. Supply chaintheir business models have been resilient, They are usually the first port of call in a 20%but nearly half also believe they require crisis” and can thus receive a Distribution channels (how the firm delivers its products/services to market)substantial modification. disproportionate focus. 12% The concerns may result from the fact Taking cost out of the business is Our business model has not changed in response to the economic turndownthat the business model changes have certainly not a bad strategy. When facing 2%thus far focused largely on cost reduction rapidly crashing demand, as did Mike Don’t knowrather than other areas. In the past Farley, Group CEO of construction18 months, 63% of survey participants company Persimmon, with unit salessay their companies have made significant dropping by 46% in two years and no Source: Economist Intelligence Unit Mike Farley Persimmon12 Retrench or refresh? New business models Retrench or refresh? New business models 13
  8. 8. Case study In February 2009 – shortly after the the move has delivered increases in Russian oligarch Alexander Lebedev took advertising yield “by more than 50%”. control of 75% of the paper from Significantly, its free model means Associated Newspapers – the Evening that unlike other newspapers, whichIn which of the following areas does your company plan to make significant Rash, reactive cost-cutting, however, Giving it away to make a profit: Standard launched a tiered pricing scheme, increasingly see their future online,changes to its business model in the next 18 months? Select all that apply. all too frequent in a recession, brings its London Evening Standard selling the newspaper at 20p and 10p after the Evening Standard cannot introduce own problems. Dr Macdonald believes After more than 180 years as a paid-for 8pm and 9pm respectively, and offering it a paywall to its website. “We have that simply removing a predefined quota title, the London Evening Standard free at key sporting events. However, this no significant ambitions for our 46% of spend is ultimately futile, as “the cost took the decision in October 2009 to hybrid model meant that while circulation online strategy,” admits Mr Mullins.Cost structure (balance of fixed, variable and other costs) comes back”. It can also damage staff go free – a move resulting from the grew, the distribution and merchandising “The main thing is to concentrate 37% morale. An even greater danger in a convergence of several pressures on the of the paper became more complex and on distribution efficiency andTarget markets downturn is to use cuts as an excuse to do daily newspaper. expensive. “Also, it wasn’t changing our advertising revenues.” nothing else. In the coming 18 months, Circulation had been in decline for a leverage in negotiating advertising volume The consensus is that at a difficult 35% far more expect to address cost issues in decade, as new media sources competed and rates with big media agencies – we time for the newspaper industry, theValue proposition (ie the benefits that the firm’s products or services provide to customers) their business models (46%) than those for commuters’ attention. When the were still vulnerable,” says Mr Mullins. Evening Standard has succeeded in 31% reversing its fortunes. “It used to be that will adjust their revenue-generation arrival of two free evening newspapers, In May 2009, the newspaper re-launchedRevenue-generation mechanisms (eg pricing model, licensing versus direct sale, etc.) mechanisms (31%), even though equal London Lite and The London Paper, in and was offered free for one day. Some a case of spot the Evening Standard 23% numbers (24%) believe that each area 2006, added 900,000 copies to the mix, 850,000 copies were handed out – 250,000 reader – now it’s a case of spot theDistribution channels (how the firm delivers its products/services to market) train carriage full of them,” claims faces the greatest degree of risk within the Evening Standard suffered, its more than planned. “We realised the 15% the business model in that period. circulation declining by about 15%. demand,” says Mr Mullins, and “we Mr Mullins. “Going free was a boldSupply chain As the London Evening Standard has The economic crisis created further became interesting to advertisers again.” move, but it’s clear we’re back in the 12% demonstrated, however, revenue- problems. Revenue from classified and The move to go free permanently game again.”Our business model has not changed in response to the economic turndown generation changes can not only bring in display advertising dropped as budgets cost the Evening Standard an estimated 4% money, they can help to see off new shrank and with them, the newspaper’s £15m in annual revenue, according toDon’t know competitors (see box on page 15). ability to leverage the situation. Mr Mullins. At the same time, however, “In times of recession, the big players it saved £5m in annual marketing costsSource: Economist Intelligence Unit and slashed distribution costs from 30p get stronger and exploit their power over little people,” says Managing a copy to just 4p. Furthermore, the move Director Andrew Mullins. “As we got – coincidentally or not – saw off its free smaller, our ability to be exploited grew evening rivals. As a result, says and we had to fight harder only to Mr Mullins, the Standard’s circulation has Andrew Mullins secure more costly deals.” risen from about 250,000 to 600,000, and London Evening Standard14 Retrench or refresh? New business models Retrench or refresh? New business models 15
  9. 9. FindingsBattling complacencyWhy do so many British and Irish with large supplies of cards, stationery Share of respondents who disagree The problem goes deeper. Cost Football, where teams rely more oftencompanies exhibit an apparent lack of and wrapping paper coming onto the with the following statement: reduction gives the feeling of addressing on deep-pocketed owners than on payingambition when it comes to business market at a deep discount. “Our existing business model is set the greatest immediate danger from a customers, may be an extreme case, butmodel innovation? A lucky few, as noted Other companies will likely act more up to enable us to succeed over the downturn – financial survival. the problem is worryingly widespread.above, may have reason to think there is quickly only when forced. In the Accordingly, a remarkably high 89% of When asked the main obstacle to business next 18 months.”no pressing need for change. Nobody, healthcare sector, for example, the respondents are convinced that their model change at their companies, tiedhowever, is completely safe in current delayed effects of the recession help business models will let them succeed in with cost for the leading answer is theconditions. David Bateman, Financial explain why 21% of respondents say 8% the next 18 months, with only 8% capability of management (23%).Director of the card and stationery their business models are not geared for Total showing concern for imminent problems. Eighteen percent also cite the corporatecompany Paperchase, notes that, even success in the next 18 months – well over 13% After years of relatively good economic culture, which management does so muchthough demand in his market typically twice the survey average. Financial Services times, in Dr Macdonald’s words, “a lot of to set. In certain cases, real change mayremains relatively constant during companies have become complacent”. even require a management shake-up. 5%downturns, the collapse of Woolworths Media Entertainment The research also reveals some concerns Mr Clibbens acknowledges thatand other retailers presented a challenge about the inability of the executive suite management change is “a good platform 8% at many companies to bring about to discard some practices.” Similarly, Construction Property business model change. Mr Clibbens says Dr Macdonald suggests that “the people 21% of his sport, “Too many clubs don’t who brought a company to where it is Healthcare Services know what to do to solve their problems today may not be same people whom 10% and hope it will all come right in the end. you need to unpick the business model.” Retailling They operate as hostages to events and let things happen to them.”16 Retrench or refresh? New business models Retrench or refresh? New business models 17
  10. 10. Trying to read the cards correctly Opportunities and threats in the external environment More likely is the danger which most How do you anticipate your competitive environmentThe apparent complacency of companies Those British companies looking for new geographic markets should benefit in the executives see from competitors changing over the next 18 months?in the UK and Ireland arises in part coming months from a continued weak pound: the Economist Intelligence Unit consolidating into stronger companies, Total Financial Media Construction Healthcare Retailingfrom a hopeful attitude about two key expects goods exports, for example, to expand by 11% in 2010 and 6% in 2011, as well as new entrants from abroad or services entertainment property servicesrisks. Whatever the immediate benefit after a steep decline in 2009; imports will also resume growth this year and next, from adjacent industries. They are right The competition will consolidate 48% 64% 39% 40% 34% 34%of belt tightening, cuts, especially if although at slower rates. By the same token, the weak currency will make UK to worry. As noted already, a minority ofunaccompanied by efficiency gains, MA targets more attractive for foreign suitors; inward foreign direct investment British and Irish companies, driven by New rivals will emerge 32% 18% 27% 38% 43% 30% from related industries do little to address perhaps the greatest is expected to expand by one-third this year and by 50% in 2011. recessionary pressures, have been seekinglong-term danger of any recession – new markets, testing new value New rivals will emerge from other geographic markets 20% 26% 17% 8% 13% 13%enhanced competition. While most Selected UK trade and investment indicators, 2008-2011 (US$bn) propositions and trialling new revenue- (eg emerging markets)survey respondents expect new 2008 2009 2010* 2011* generation models. In other countries The competition will fragment 13% 13% 16% 20% 11% 11%competitive threats of some sort to companies are doing the same, and those Goods exports fob 466.8 357.2 396.3 420.0emerge over the next 18 months, less affected by the recession have greater Competition is unlikely to change 12% 6% 25% 13% 15% 17% Goods imports fob 640.9 480.9 515.7 540.3a surprisingly large number of executives spending leeway to expand globally. Competition will diminish 10% 7% 14% 13% 4% 13% Inward direct investment 97.5 39.2 52.1 78.2in the media and entertainment (39%), Outward direct investment 139.3 121.5 118.9 129.2 Source: Economist Intelligence Unitretail (30%) and construction andproperty (27%) sectors think that *Forecastcompetition will remain unchanged oreven diminish. A significant number also Source: Economist Intelligence Unitbelieve it will fragment, which in somecases will result in less powerful rivals.Recessions, however, are rarely that kindto existing companies.18 Retrench or refresh? New business models Retrench or refresh? New business models 19
  11. 11. Case study Competition from adjacent sectors Following the customer agrees: “Customers have been going What will be your company’s most likely sources of financein particular can yield nasty surprises. Ultimately, the creation of new, more through tough times. They are more over the next three years?The iPod appeared amid a downturn competitive business models is the demanding, have a higher expectationnearly a decade ago from technology natural result of companies doing what of value and are less tolerant. You have Total Below £100m £100–£250m Above £250mcompany Apple, and the music and radio they should always do: following the to adjust your business model, or face Capacity to finance from with the company 37% 38% 32% 40%industries are still adjusting. Today high customer as closely as possible. Says them leaving.” Bank loans 22% 22% 26% 17%street fashion stores, says Mr Curran, are John Frankiewicz, CEO of Willmottconsciously delaying investment in their Dixon: “If cost control is the necessary Private equity 17% 22% 21% 8%websites to husband cash in the internal response to a recession, getting Bank overdraft 13% 22% 10% 8%downturn, allowing closer to understanding what clients Debt 12% 8% 10% 18%and its competitors to stake out much need in the current climate, and how Trade finance 8% 8% 6% 10%more of this lucrative growth market we can add value by knowing their Other equity 8% 9% 10% 5%than they otherwise might. Virgin challenges and helping to meet themMoney, meanwhile, has made no secret is the external one.” Indeed, a truly IPO 4% 3% 3% 7%of wanting to enter high street banking. customer-focused organisation will Source: Economist Intelligence UnitSays Mrs Gadhia: “The market is ready almost inevitably adjust its businessfor a new and trusted bank and we’re model in some way. Bupa’s Managing John Frankiewiczworking hard to make that happen.” Director Natalie-Jane Macdonald Willmott Dixon Attitudes towards financing reveal aneven more widespread and surprisingconfidence – if not complacency – about (those with annual revenue under £100m) improving for larger companies, smallthe future. The vast majority of surveyed – believe they will be able to access some companies are still having troublecompanies expect, over the next three form of bank financing, only slightly obtaining bank loans today and areyears, to be able to access their preferred less (and more, in the case of smaller having to pay higher rates for themethod of finance. More worrying is the companies) than the number expecting privilege. An economy recovering fromfact that only 35% of respondents – and to rely on internal sources. While the the effects of a banking crisis is not one44% of those from smaller businesses availability of bank financing is where financing will be easy.20 Retrench or refresh? New business models Retrench or refresh? New business models 21
  12. 12. FindingsConverting risks into opportunities Case studyBritish and Irish companies seem see “huge upward pressure” on inputs remodelling. Steve Churchhouse, Old game, new strategies—with the starting with its core product – the person their own bespoke offering”.relatively sanguine about their supply beyond the direct control of suppliers Executive Vice President of Supply Chain help of technology footballers themselves. Huddersfield has He admits that “We are a long waychains. No more than 30% of themselves. Companies therefore need to Development at jet engine manufacturer The last place one might expect IT to invested £50,000 in what he terms as the from that, but that is where we needmanufacturing executives, for example, develop, he maintains, “an intellectual Rolls-Royce, explains that Rolls-Royce is reshape the business model is a most advanced player-performance- to go. We can, for instance, text aand 25% of those from construction and relationship with their supply chain,” successfully arresting cost momentum on century-old sporting establishment monitoring system available in the parent with a season ticket and sayproperty companies, expect to make working with them on a range of areas the input side. “Rolls-Royce has an playing a game with even older rules. market. “It is standard in the Premiership ‘we know your daughter’s birthday ismajor changes to their supply chains such as local procurement and even intensive programme of cost down Huddersfield Town Football Club, [the UK’s top football league], but on Saturday, why not bring her toover the next 18 months. Among redesign of products to reduce wastage. engagement with its suppliers to sustain a however, is using technology to offer nobody in our league has it, so it can give the game?’”manufacturers, the reason may be “There is a lot more we can all do in culture of continuous cost improvement new products and help transform its us the edge.” The benefits of these technologicalthat they have already implemented this area.” within our supply chain and is putting relationships with customers. In this Meanwhile, to sell tickets, Mr Clibbens investments are all the greater because,far-reaching changes – over half of Larger companies have even more out a big signal to suppliers that the end the club reflects the consensus view of notes that “We have to be able to target Mr Clibbens notes: “Most footballmanufacturing respondents say their influence to initiate supply chain customers’ business model has changed.” survey respondents that technology’s our customers in a very sophisticated teams won’t embrace technology untilcompanies have done so during the heaviest impact on the business model manner.” This goes well beyond a web it is forced on them. This way we candownturn. But when asked how supply- over the next 18 months will fall in page to extend to mobile texting, email steal a march.” British executives inside conditions are most likely to change How are conditions most likely to change for your company three areas: enabling the creation of and pages on social networking sites such ostensibly low-tech sectors shouldin the next year and a half, the most over the next 18 months when it comes to the supply of key entirely new products and services; as Facebook. The team is even planning understand that their competitors maywidespread belief (among 30% of overall resources for your business? Select up to two. the building of closer relationships an online auction facility. be seeking to establish suchrespondents, 35% of construction and Total Media Construction Retailing Manufacturing with customers; and the creation of Finally, football, particularly in the technology-driven executives, 43% of retailers and entertainment property new marketing and product north of England, is often a community54% of manufacturers) is that input Prices will rise significantly 30% 20% 30% 43% 54% delivery channels. activity – a tradition the club embraces –prices will rise. This disconnect suggests Nigel Clibbens, the club’s CEO, calls but Huddersfield is also looking to, Larger and stronger suppliers will appear 20% 14% 17% 15% 19%that supply chain innovation among technology “an immense issue for us,” in Mr Clibbens words, “give each The geographic sources of supply will shift 20% 22% 10% 25% 22%British and Irish companies has not gonefar enough, and many may be in for a Traditional suppliers will disappear 16% 23% 20% 23% 13%shock if their price fears come true. Prices will drop significantly 15% 11% 20% 8% 17% It does not have to be this way. Source: Economist Intelligence UnitSmall companies may lack direct leverageover suppliers, but creativity within thesupply chain can accomplish much.Mr Frankiewicz of Willmott Dixonagrees that the construction industry will22 Retrench or refresh? New business models Retrench or refresh? New business models 23
  13. 13. ConclusionThe spectre of climate-change regulation Changes in which of the following areas of regulation are most likely to affect your Money believes consumers willEven in downturns, governments do not business model over the next 18 months? Select up to two. “increasingly spend only with companiesdesist from new regulatory initiatives. that are making the greatest strides in Total Construction IT and ManufacturingAlthough many regulatory changes affect reducing their environmental impact, as property technologycompetition, most – happily – are not of well as offering products that address thethe business-model-changing variety. Carbon reduction/environmental protection 36% 65% 41% 63% issue”. The company’s Climate Change British and Irish companies are clear- simply pressing suppliers for lowerGreen regulation expected over the next Labour practices (eg hiring and firing) 30% 32% 28% 26% fund buys shares in businesses that have eyed about the current economic prices. Companies must plan for thetwo years, however, may prove to have Health and safety 24% 47% 19% 20% lighter carbon footprints. malaise and the recession’s likely after- impact that carbon-reductionjust such an impact for many British and According to Mr Frankiewicz, Intellectual property 16% 2% 24% 9% effects. Most have, accordingly, sought regulation will have on their business,Irish companies. Willmott Dixon is sure that new Tax legislation 16% 13% 15% 17% to reduce costs, and the cost structure but should also seek the revenue- Thirty-six percent of survey environmental regulation will come, looks set to remain a central focus of generation opportunities that may berespondents believe that regulatory Trade restrictions and tariff levels 2% 0% 13% 30% and believes it represents one of the change initiatives. The problem is that opened as a result. Financial disclosure 9% 2% 6% 2% company’s biggest opportunities.initiatives on carbon emissions or far fewer are looking at deeper business Too many companies in the UK and The company launched an entirely newenvironmental protection are likely to Date privacy 9% 2% 13% 2% model innovation to address future Ireland are suffering from a streak of business in 2007 called Re-Thinking,lead them to modify their business plans, Investment regulation 9% 5% 6% 4% pressures that they suspect are coming. complacency when it comes to the a consultancy that helps clientsthe area of regulation which they see as Source: Economist Intelligence Unit For example, given ongoing change in fundamental ways they do business, incorporate sustainability intomost likely to force change. As Mr Kelly customer preferences and behaviour – and perhaps from an inability of construction projects. It involvesnotes, “carbon emissions regulation is much of it driven by the emergence of management to engineer change. substantial RD spending and the hiringvery much on the agenda of business new technologies – more firms would Like every recession, this one will Rather than sitting back and waiting to consumers and other companies in of employees with different sets ofleaders at the moment”. In certain be wise to review their revenue, sort the losers from the winners. hear how new, more stringent carbon- reducing their carbon footprint opens up skills—“more academic, theoreticalindustries, such as construction (65%) distribution and pricing models. The latter will be those who seize emissions rules will affect them, some whole new product opportunities. Rolls- people who can look at newand manufacturing (63%), this With input prices expected to rise, the opportunities created by the companies are moving ahead with green Royce, for example, has created its own technologies,” says Mr Frankiewicz.expectation is, not surprisingly, much thoroughgoing change to supply chains upheaval, rather than simply survive initiatives for good business reasons. civil nuclear business unit in the He sees the fit with the group’shigher. That such regulation might affect should also be considered beyond the dangers. For one thing, they promise to help the expectation that governments will turn construction companies as a natural one,business models indicates that carbon bottom line. Mr Churchhouse explains increasingly to nuclear power to reduce though. “Once carbon is a currency,reduction now means more than just that through adjustments to its supply carbon. “Clearly companies should government and other players will have tochanging light bulbs: it will involve chain, Rolls-Royce has “had a lot of position themselves to provide reduce emissions. We have a huge part toreorganising supply, production, success in reducing our own carbon technological solutions to the problem,” play in that process. Also the cost ofdelivery and even product elements of emissions. We have reduced energy says Mr Churchhouse. energy could rise substantially over thebusiness models to – at the very least – consumption and saved cost.” The opportunities exist not only for next few years, impacting the bottom line.make them more energy efficient. More importantly, the interest of manufacturers. Mrs Gadhia of Virgin That will also be a driver for change.”24 Retrench or refresh? New business models Retrench or refresh? New business models 25
  14. 14. Model behaviours The analysis on the following pages is provided by Grant Thornton In-depth cluster analysis of the research shows six different characteristic behaviours in relation to business models, in response to the recession. These are: Heads in the sand Ahead of the curve Fighting the last war Best before Moving to the margins Hitting the panic button The analysis reveals a number of interesting factors: Respondents’ levels of confidence in business model resilience – to date and in the future. Levels and nature of change implemented and change planned to various elements of the business model. Changes to assumptions about the market environment – recent and in the future. Perceptions of risk to business models regarding strategic direction, clarity and focus. Alysoun Stewart, Head of Entrepreneurial Advisory, Grant Thornton UK LLP, comments on each. Alysoun Stewart, Head of Entrepreneurial Advisory Grant Thornton UK LLP26 Retrench or refresh? New business models Retrench or refresh? New business models 27
  15. 15. They also identify few risks to their sectors. Interestingly, however, almost business models. Close to half (43%) half of these companies (47%) are from believe that competition is unlikely to the media, construction and financial change over the next 18 months (average services sectors – industries that have 12%). Almost as many (39%) are suffered disproportionately in recent unlikely to change their demand years for diverse reasons. assumptions over the next 18 months – compared to 11% across the sample. Companies in this group: Yet more respondents than average As a rule, these are smaller businesses – (24% compared to 20%) predict changes half have revenues under £50m. in geographical sources of demand – The majority (50%) are privately owned, a fundamental shift to which businesses with a higher proportion than average surely need to adapt. It is difficult to of small cap companies. square a ‘no change’ mentality with this trend, suggesting a worrying Focus required: complacency which could cost these These companies need to heed, companies dear. and adapt to, current market conditions Such robust confidence in the light of and to mitigate critical risks over the recent market conditions and continuing long run – an omission which might call economic uncertainty may be into question strategic capabilities at Heads in the sand questionable in most companies or board level. These companies consider their business models very resilient and have strong faith in their model’s suitability over the next 18 months. Most state that their business model has not Comment This could be seen as the classic “ostrich” syndrome. However, given that these are generally smaller businesses it is more likely that their seeming inability to react appropriately to the changes changed (90%) and will not change (62%) – compared to in trading conditions denotes a lack of management capability and experience rather than a refusal to face up to reality. averages of just 12% across the whole sample. The only certain thing today is change and the watchword for every business needs to be flexibility They see little need to change or adapt their business models – in business models, in the organisation structures through which they are delivered, in the cost or the assumptions driving them in the future: 37% foresee base and infrastructure, and above all in management thinking. This is the time when openness to external support and challenge is likely to make the difference between survival and failure. no changes in business model assumptions during the next The outlook for the coming year is uncertain at best and if these businesses have not yet made 18 months, against an average of just 7%. fundamental changes to their approach and operating practices they are extremely vulnerable, particularly given the high percentage of these companies from high risk sectors. Proportion of respondents: 10% Model behaviour: Negative28 Retrench or refresh? New business models Retrench or refresh? New business models 29
  16. 16. They understand that change is the only And far from resting on their laurels, Companies in this group: constant, and are continually adapting this group still plans significant changes Often younger companies, with revenues their business models accordingly. to keep themselves ahead of the game: under £250m in two-thirds of cases, For example, 40% are concerned that • 46% cost structure change is in these companies’ DNA. new rivals will emerge from related • 44% target markets Nearly half (45%) are privately owned, industries – compared to only 32% • 43% value proposition while this cluster has a higher than across the whole sample. average number of small cap companies In doing so, these forward-thinking When asked how the assumptions behind and a slightly higher penetration of large companies are focused on improving their business model will change in the public concerns. Interestingly, 15% are both the top and bottom line in order to future, the main responses were: from the forward-looking IT and enhance margins: • Growth rates of demand (38%) technology sector (compared to 12% of • 66% have changed their cost structure. • The need to focus on margins (37%) total respondents) – the largest industry • 46% have worked on their value group in this cluster. Ahead of the curve proposition • 45% have altered their pricing model • 45% have examined their target markets Despite expressing strong faith in their business models’ resilience now and in the near future, and identifying little need for change, these companies are pressing on with Focus required: Almost half (45%) of this group believe that technology will impact most heavily on their business model through the creation of adapting their business models to stay ahead of the curve. new products and services – compared to a whole sample average of 30%. They may be looking for MA opportunities – they are All have implemented some measure of change to their likely to be well placed to make bargain acquisitions – or are potentially grooming their business for sale. These companies have a business model to date, and most (96%) anticipate doing more strategic vision in place – their challenge is to implement it effectively. of the same in the near future. Proportion of respondents: 19% Comment The businesses that have fared best over the past couple of years are those that have been Model behaviour: Positive courageous enough to make change the cornerstone of their agenda, and who went into the crisis with a very clear understanding of their core business proposition, of their key markets and of how best to leverage their strengths. These businesses are characterised by the type of innovation that has enabled them to flex every area of their business and to make best use of the tools available to them, whether through new technologies or through new working models. They have the strength of both focus and purpose to be able to take advantage of the opportunities that both the recession and the eventual upturn will offer. They also recognise that competitive advantage now comes not from new products and services, but from new ways of doing things.30 Retrench or refresh? New business models Retrench or refresh? New business models 31