You’ve undoubtedly heard that insanity is doing the same thing over and over again and expecting different results.

Reality check: doing the same thing over and over again and expecting the SAME results is insane!

The essence of good management is to put in processes and procedures that are “repeatable and scalable.”[1] Organizations and reporting structures are established. Key Performance Indicators (KPI) are set. Measurements are made to assure that what was meant to be done is what is getting done and getting done efficiently. ISO9000, Six Sigma, and similar tools are implemented to eliminate variation because variation is the enemy of good management.

The Business Model Canvas: Take a Snapshot of the business

The Business Model Canvas[2] is one of the clearest, easiest to understand, visual models of a business. The nine boxes are the fundamentals of any enterprise. One can think of them as two models integrated into one.

Figure 1: Two sides of the Business Model Canvas

In well-managed companies, the left-hand side—the business side—is optimized for efficiency. Key Partnerships have been formed. Key Resources and Key Activities are in place. The Cost Structure and Revenue Stream are known and proven. Efficient allocation of resources to maximize the KPIs is the name of the game for management.

On the customer side, the Value Proposition—the “job to be done”—was identified, validated and mapped to Customer Segments. Customer Relationships were established as well as the Channels (if any) used to obtain, deliver, deploy, and support the solution.

Congratulations! Sales are booming! You are hiring! Your product teams are creating new features and maybe all-new products for your awesome sales team to sell! You’ve got great market position and obvious sustainable competitive advantage!

Life is good!

But…insanity lurks.

Since the dawn of business strategy in the 1960’s, scholars have cautioned business leaders that customers’ values change over time.

Theodore Levitt, in “Marketing Myopia”, wrote customers are “unpredictable, varied, fickle, stupid, short-sighted, stubborn, and generally bothersome.”[3] So companies typically ignore them and focus on their products instead.

Adrian Slywotzky warned that “[i]t is widely acknowledged that products go through cycles, from growth through obsolescence. It is not as well recognized that business designs also go through cycles and reach economic obsolescence. Customer priorities—the issues that are the most important to them, including and going beyond the product or service offered—have a natural tendency to change; business designs tend to stay fixed. When the mechanism that matches the company’s business design to the structure of customer priorities breaks down, value migration begins to occur.”[4]

In 1997, he identified a common pattern—the company’s “center of gravity” gradually migrates from the customer to the company.

Figure 2: The migration of the company center of gravity

The impact of failing to identify that value is migrating is dramatic: “The assumption of sustainable advantage creates a bias toward stability that can be deadly.” Furthermore, “a preference for equilibrium and stability means that many shifts in the marketplace are met by business leaders denying that these shifts mean anything negative for them.”[5]

Look back at some market leaders that fell into this trap: IBM. Kodak. Dell. Research in Motion. Microsoft. Intel. GE. The list goes on. Some recover. Most don’t.

What happened?

Remember your optimized business model? Well…it was designed for a particular moment – the moment it became “repeatable and scalable”.

As value migrates, a “Value Gap” grows between the “customer” side of the BMC and the “business” side. The customer side changes – gradually, and then suddenly.[6] But thanks to “good management”, the business side stays static.

In other words, you’re doing the same thing over and over again and expecting the same results.

Figure 3: As customer value migrates, a “Value Gap” forms

New value propositions, often enabled by new technology, enter the market and begin to do customers’ jobs differently—better, faster, and/or cheaper, or even an all-new job. At first, existing customers will likely resist, and pledge loyalty to current vendors. Then, they will experiment with low-risk use cases. As they get comfortable, they’ll move more jobs to the new capability—more correctly, to the new business model. They are “leaving you”.

Think of the way cloud computing got adopted. Archival, or cold, storage at first, then more and more mission critical data, then applications. If you were the new kid on the block, this was great. New companies started without this transition – the so-called “born in the cloud” companies. If, however, you specialized in selling expensive on-premise information technology, you were left behind as the customer value migrated toward NOT having expensive on-premise information technology and all its attendant costs and complexity. Your business side of the BMC stayed the same while the customer side moved away, and Infrastructure-as-a-Service became the norm.

How to protect against the Value Gap

The first step in protecting against the formation of the Value Gap is to acknowledge that it is nearly certain to happen – value will migrate. You should be conducting regular “environmental scans”, perhaps dedicating certain resources (a person, team, or consultant) to make periodic and episodic assessments of changes in the PESTEL factors (political, economic, social, technological, environmental, and legal.)[7] Most importantly, you should observe your customers (and prospective customers) to figure out how their “jobs to be done” are changing. Product managers are often in an excellent position to see value migration—if they are attuned to looking for it.

Some signs of value migration are declining profit margins; the need to discount to win business that you didn’t need before; longer close times; or lower repeat buying rate. These could all indicate that your customers are starting to see less reason to hire you to do their job and might be looking elsewhere.

The strategic planning process should be a rigorous examination of resource allocation. Too often, it is an exercise in re-arranging the deck chairs – incremental changes to the previous plan without examining the market conditions.

This “rigorous examination” must include an assessment of every part of the business model – both sides of the canvas, all nine boxes. Assessing changes in the customer side and sharing them with operations teams is a key component of great management, and key to consciously minimizing the Value Gap.

Research has shown that companies that make bold resource allocations based on external market data have 40% higher valuations over time than companies that simply make incremental changes to previous plans.[8]

Unfortunately, most companies follow the “incremental changes to previous plans” approach which virtually guarantees the growth of the Value Gap. The McKinsey research found that the major reason why companies get “stuck” in their planning is simply inertia.

Their recommendation for resource allocation starts with identifying four “fundamental activities”: seeding, nurturing, pruning, and harvesting. The most challenging of these activities turn out to be nurturing and pruning. (Seeding and harvesting are often quite obvious choices and don’t differentiate high performing companies from low performers.) Nurturing and pruning are difficult decisions politically because they involve taking resources from one group and giving them to another group.

A key to a successful resource allocation process is objectivity. Zero-based budgeting, conducting due diligence as an investor might, rules-based decision making—all are good ways to bring objectivity into the process. The authors describe an approach of sorting business units into buckets of “grow”, “maintain”, and “dispose”, with clear rules about how resources are allocated in each one.

Conclusion

“Good management”, when practiced in isolation, can lead to the creation of a “Value Gap” between customer needs and an “optimized” business model. Great management recognizes the signs of value migration and updates the “business” side of the model to keep in sync with the changing “customer” side.

 

[1] Steve Blank defines a startup as “a temporary organization designed to search for a repeatable and scalable business model.” (various sources, including “Four Steps to the Epiphany”) He also says that “startup” could apply to a three-person student shop as well as a multi-hundred employee group inside a Fortune 1000 company.

[2] “Business Model Generation,” Alex Osterwalder and Yves Pigneur, Wiley, 2010.

[3] “Marketing Myopia,” Theodore Levitt, Harvard Business Review Vol. 38 No. 4, July-August 1960

[4] “Value Migration: How to Think Several Moves Ahead of the Competition,” Adrian Slywotzky, Harvard Business School Press, 1996.

[5] “The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business,” Rita McGrath, Harvard Business School Press, 2013.

[6] “The Sun Also Rises,” Ernest Hemingway, 1926. The character was responding to the question “How did you go bankrupt?”

[7] “Business Model Generation” has an excellent template for this sort of process on pages 200-211.

[8] “How to put your money where your strategy is,” Stephen Hall, Dan Lovallo, and Reiner Musters, McKinsey Quarterly, March 2012.