Don't get caught with an unworkable business model

By Kay Plantes

The biggest mistake I've seen companies make is having a poor business model: one that is either not differentiated (and unlikely to become so), or that can never be profitable. No company can afford a weak business model in this recession.

Earlier columns described the core strategy questions that define a business model: Who is your target market(s)? What's the scope of your offering? What value promise leads customers to choose you over the competition? Why will you fulfill this promise and competitors won't be able to copy or improve upon it? How will you generate profits?

Customers measure value as the benefits of your offering less the costs of acquiring those benefits. If you can't be your industry's Wal-Mart (the lowest-price alternative), avoid being its Sears (an alternative lacking differentiated benefits). Be Target, offering unique, hard-to-copy benefits that matter. (In Target's case, the benefit is a terrific look that makes me, the consumer, more confident).
Would you invest to open an Orange Tree Imports (OTI) copycat, on the same block of Monroe Street? I hope not. Unless you have a significantly lower cost structure than OTI, you'll lose your investment. OTI would quickly match any improvements in service or merchandise that might lead customers to your store. And OTI has experience advantages you'll lack, like a customer mailing list. You and OTI would end up in price wars where only the customer wins.

This sounds ludicrous, but it is exactly what many businesses do: adopt the same business model as other companies in their industry, trying to beat competitors using cost reductions, incremental process improvements, and new products and services. Companies work hard only to see advances such as these quickly copied.

Don't try to improve a me-too business model. Rather, think stra tegically and differentiate your business in ways that matter to a group of customers. Locate right next to OTI but offer the finest in bathing-dressing room products and classes.

Unprofitable models It saddens me when I pass Rayovac on Schroeder Road, once one of our region's leading corporate headquarters. Rayovac became a business unit of Spectrum Brands, a large corporation that emerged after Rayovac's purchasers went on a buying spree and moved corporate headquarters to Atlanta.

Today, Spectrum is bankrupt, and not just because of the $4 billion in debt incurred in its creation. The root cause is its leaders' belief that they could combine Rayovac with a bunch of weak brands to create a broader offering that retailers would prefer to the brands sold separately.

This did nothing to fundamentally improve benefits for retailers or consumers. Any cost savings gained by merging companies were eaten up by debt costs and business complexity costs. Nor did the combined company have any overall competency to strengthen brands. It would have been wiser to use debt to move Rayovac into next-generation battery and energy storage alternatives.

Go to lunch with your team. Ask: Is our business model profitable? Is our value promise truly differentiated? If so, can we defend it against challengers? Is our offering relevant to customers?

Your luncheon insights will, if you act on them, pay for the lunch thousands of times over.

madison.com ©2009 Capital Newspapers. All rights reserved.