ACCOUNTANCY BEYOND THE NUMBERS with Hayes Knight

Is it time to make a change?

Wow, we are into our fourth year of a declining or recessionary economy and the global news just gets worse and worse. First of all it was our government bailing out finance companies through the guarantee scheme, which at the time seemed like a huge rescue package. But since then the United States has been rescuing any business that even looked marginal and has had to borrow trillions of dollars and now we have Italy, Greece and most likely Spain on the brink of bankruptcy. Of course these economies are too big to fail, and so some sort of package will need to be negotiated. But the big question on my mind is how did it get so bad? How did nobody notice? Why didn’t anybody say stop?
Interestingly enough, it is those fundamental questions that we must all ask ourselves in business (or indeed in life) every day in order to be the best that we can be and to reach our potential.
This leads me to a wonderful quote that I read in a Harvard Business School white paper recently:
“One secret to maintaining a thriving business is recognizing when it needs a fundamental change.”
Let’s take a real life example that we can all relate to. In 2003, Apple introduced the iPod with the iTunes store, revolutionizing portable entertainment, creating a new market, and transforming the company. In just three years, the iPod/iTunes combination became a nearly $10 billion product, accounting for almost 50% of Apple’s revenue. Apple’s market capitalization catapulted from around $1 billion in early 2003 to over $150 billion by
late 2007.
This success story is well known; what’s less well known is that Apple was not the first to bring digital music players to market. A company called Diamond Multimedia introduced the Rio in 1998. Another firm, Best Data, introduced the Cabo 64 in 2000. Both products worked well and were portable and stylish. So why did the iPod, rather than the Rio or Cabo, succeed?
Perhaps it was because Apple did something far smarter than take a good technology and wrap it in a snazzy design with awesome packaging. It took a good technology (albeit not original) and wrapped it in a great business model. Apple’s true innovation was to make downloading digital music easy and convenient. To do that, the company built a ground-breaking business model that combined hardware, software, and service. The model defined value in a new way and provided game-changing convenience to the consumer.
Now everyone has heard this story, and of course it doesn’t stop there. Now we have the i-Phone craze and the i-Pad phenomena! So if this is such a great success, why do we not hear very many stories on a day to day basis? Probably because it is hard. Everyone is talking about reinvention, surveys report that over 50% of business owners and CEO’s believe business model innovation is critical and two thirds say they need to extensively adapt their business models. In these tough economic times it is a critical factor in survival, and then capitalisation on the improving economy. We have heard about the new normal – well basically that just means that we are operating in an environment of permanently changed landscapes.
Perhaps it is easier to break this daunting task up into three clear
(but not easy) steps;
1.    Realise that success starts by not thinking about a business model, but actually about thinking about the opportunity to satisfy a real customer who needs a job done.
2.    Construct a blueprint laying out how your company will fulfill that need
at a profit.
3.    Compare that model to your existing model to see how much you’d have to change it to capture the opportunity.

For a business model to work, we need four interlocking elements that, taken together, create and deliver value;
1.     Customer value proposition (CVP).
2.     Profit formula - a. Revenue Model; b. Cost Structure; c. Margin Model
3.     Key resources
4.     Key processes

These four elements form the building blocks of any business. The customer value proposition and the profit formula define value for the customer and the company, respectively; key resources and key processes describe how that value will be delivered to both the customer and the company.
The following diagram (source: Harvard Business School), shows how these elements link together in the process of reinventing yourself to stay ahead of the game.
As simple as it may seem, this is one way of looking at reinvention in a sustainable manner. And let’s face it, there has never been a better time to start this journey.