I often engage with management teams that are simultaneously operating multiple business models. What surprises me is that the differences between the business model metrics, tradeoffs, scale and competency requirements have not been made explicit within their minds. One of the models tends to dominate with the balance delivering moderate or even unprofitable performance. When we start exploring the underpinning economics of each the performance drivers are often very different prompting interesting strategic and structural changes in how the teams manage each going forward. This begs a couple of important questions as well as a follow on blog post:
- How many business models can your management team successfully operate
- When should you try an operate more than one model
- How should you go about introducing new models
- When can you combine models and when should you keep them separate
Within this context, I read with great interest an article written by Ramon Casadesus-Masanell and Jorge Tarzijan on how LAN Airlines simultaneously and successfully operates three different business models at once. The three models are a full (two class) premium service international passenger business, international cargo business and a low cost no frills domestic passenger business. While each of these business use aircraft to transport paying loads they are fundamentally different businesses. They make the points that not only are multi-business model plays difficult to operate but often the cause of strategic failure. What makes LAN interesting is not only the fact that they have overcome the challenges of running three models, but that two of the models (International passenger and freight) complement each other turning otherwise unviable or uncompetitive possibilities into a profitable and difficult to compete against competitive position.
One of the biggest challenges is the fact that business models create, capture and leak value in differing ways, manifest a different set of challenges and typically require different sets of resources to be coordinated into a functioning set of activities. Even complimentary models have differences that make their execution difficult. LAN uses the same wide body planes to carry cargo and passengers to common international destinations. The trade-offs between passenger yields and cargo capacity gets tricky. Both passenger and cargo demand curves have different price elasticity’s. A 10% passenger fair reduction may increase demand by 15% which may however produce a per KG revenue lower than a cargo equivalent. What to prioritise?
The challenges in managing multiple business models are numerous:
- Complexity – By way of example, trying to develop 3rd party SW and body shopping capacity to short staffed 3rd party development teams using the same resource pool gets challenging. Despite similarities in the underlying operating resource i.e. technical people, expectations, remuneration, training, management requirements, project type and engagement times, customer pricing negotiations, IP continuity, performance risk, scheduling and margins all differ. Both models also scale differently and present management with different customer retention challenges. Managing 4 SW development teams (projects) in one location is considerably different to managing 250 contractors on 20 discrete customer sites.
- Broader set of competencies to be developed – Business model execution is competency specific. New models are often introduced to enter into a new market or introduce an extension of an existing set of products or services. Competing against new competitors, managing new cost categories, operating new processes, introducing new channels or service features not only adds complexity but widens and deepens the competency stack needed to compete. Selling strategic consulting services and managing associated projects present positioning, relationship, risk, IP and customer expectation management challenges that say provisioning SW integration skills don’t.
- Deeper and broader set of management skills – Every business model has key performance constructs that need to fire at a higher level for the model to deliver and more importantly be competitive. This may be logistics, customer service, scheduling, sourcing resources or selling. Being excellent at an array of fundamentally different business functions necessitates better people, process, systems and a set of complimentary operating habits. These often conflict.
- Conflicting investment requirements – This is especially prevalent with models that don’t share common assets. Improving call centre capacity and service levels may well enhance customer satisfaction levels of a single product indirect channel sales model but very little to improve relationships in large multi product direct named accounts model.
- Models scale in different ways – Differing models require different combinations of people, systems, processes, products, services, management layers, channel structures etc to scale at different times. The scale parameters create complexity, competency deepening and cost management challenges all at once and at different stages and for different reasons. Add to this the tendency for models that work at certain customer, product and resource ratio’s to stop working at larger scales. New cost structures and competencies need to be on-boarded to keep a larger “machine” operating. These may include larger sales forces, account protection and management’s larger HR and training responsibilities and additional management layers.
Operating multiple business models is a reality in many businesses as is wide performance disparities across the model spectrums. While you may simply be operating the wrong model for the profit pools you are competing for you may also lack the management competencies and operating capabilities to do justice to all simultaneously. Make your business model differences explicit. The better you understand the operating differences, similarities and potential common leverage points the greater your chance of successfully managing the associated complexities.