5 Cultural watchouts when developing new business models

What are the major hazards when creating new business models? And what are the solutions to those common challenges? In the high-stakes game of business model innovation and new proposition development, those companies that find the formula will gain considerable rewards.   

Innovation is increasingly a survival instinct. From automotive to finance, manufacturing to healthcare, all businesses are being challenged to adapt by the next new regulation, tech gamechanger or shift in customer needs. 

Simply keeping up with the rate of disruption is the new competitive advantage, as many businesses struggle to stay relevant. Over the last half century, the average lifespan of a new business model has fallen from 15 years to less than five. And this applies to some of the world’s largest organisations. This decade, the average tenure of companies on the S&P 500 is predicted to drop down from 30-35 years to nearer 15. 

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Being necessary, however, doesn’t make innovating straightforward. In fact, 70% of new business models, product and service innovations don’t achieve what they hoped to. New growth engines are inherently risky and require a tolerant attitude to failure. If the business suffers a couple of costly misfires, its appetite for innovation can quickly wane and the focus will revert to efficiencies and cost reductions. 

A risk-averse approach brings its own long-term dangers. Retreating into current business models can set off a doom-loop of short-termism, in which the company is left behind market evolution, changing customer needs or new regulation. 

What tends to go wrong?

For those companies that choose to invest in innovation, there are five common cultural challenges that can unseat their progress. Understanding what to look for will help to avoid these pitfalls in the first place. 

1. A lack of internal belief, alignment and purpose

It pays to ensure that all key stakeholders are on the same page. Any disconnect will result in a value proposition that not only lacks clarity, but also runs the risk of being undermined by disaffected or confused teammates. An excellent concept can end up being mothballed, while an idea that needs killed will survive and suck oxygen away from better ones. 

What to do: 

Use these three elements to clearly articulate the new business model or concept and what you want to achieve:

1. Burning platform:  Leverage data to highlight what needs to change 
2. Customer opportunity:  Define the customer need and size of the opportunity. 
3. Business model canvas:  Write a one-page summary that leaves no room for ambiguity. 

You can always come back to these assets as the project develops, but at least you have a single source of truth for all stakeholders. 

2. Poor customer empathy and understanding

You don’t want to develop the perfect value proposition for a customer need that doesn’t exist. Avoid the white elephant in the board room. Optimism bias can play tricks on the mind, telling you there’s a ready market of customers just waiting for your game-changing concept. 

Then there are the good ideas that could have soared but end up nosediving due to a lack of insight and engagement with customers. Companies can stubbornly stick to misguided assumptions, old or internal data, or organisational myths about what customers really want. If you’re wrong about the customer, it’s far cheaper to find out at the start. 

What to do: 

Find the (honest) answers to these three questions:

1. Do you consistently engage potential customers throughout the development process?
2. Is this engagement based on real customers interacting with tangible MVPs?
3. Are you brave in adapting and pivoting based on credible and consistent customer feedback?

Three yesses will significantly bring the odds of success in your favour. 

3. Bad commercial assumptions

It’s not only customer needs that are misjudged by optimism bias. In the excitement to develop something that will revolutionise the future growth of the business, teams can get ahead of themselves. Just because an idea took hold quickly before, it doesn’t mean that history will exactly repeat itself. With a favourable wind, the new business model might achieve certain levels of revenue, margin, profit, customer acquisition, retention and satisfaction. That’s great. But what if you’re looking at last year’s weather forecast?

Also, a fast start is no guarantee of a long-term success. New business models and concepts can ultimately fail without robust thinking about what will happen in years two, three and four. 

What to do:

It’s critical to set the right performance expectations by building realistic KPIs based on benchmarks from similar or adjacent enterprises and sectors. You can then predict more accurately the right amount of time and investment to maximise your chances of success.

Quick tip:  Focus on customer KPIs at the initial stages and less on the commercials, so you can understand the degree to which you are meeting consumer or customer needs. If those customer metrics look good, then you can shift to making the model scalable and profitable with greater confidence.

4. Underestimating capability stretch

The DVF (Desirability, Viability, Feasibility) framework is a useful tool. Of the three, Feasibility is your dearest friend in the early stages of developing a new business model. While the consumer opportunity and potential profitability feel more exciting, it’s critical to properly think through the practicalities of deliverability. 

What to do:

1. Invest time in getting the opinions of people who have been there and done it before. Just to be clear, these people are not consultants! They are commercial directors, factory managers, start-up owners, behavioural experts, technology implementers and front-line customer service specialists who know why ideas succeeded and failed. Just a 30-minute call with an experienced insider could save you four weeks of expensive research into an idea that is doomed to fail. 
2. Consistently apply a DVF process with criteria and thresholds defined by the stakeholder team:

• Desirability - Does it meet customers’ needs? Is it useful? (Guide – put 15% of your assessment effort here)
• Viability - Is it financially sustainable? Can we make money? (Guide – put 15% of your assessment effort here)
• Feasibility - Is it technically possible to deliver? Can we deliver? (Guide – put 70% of your assessment effort here)

5. Optimism bias and aversion to challenge

Creating something new is emotional. It’s hard not to get involved. Seeing it through matters on a personal level. Unfortunately, these admirable human traits can get in the way of cold reason. Corners are cut. Hopeful predictions become confident forecasts. Ideas get approved that would have failed proper scrutiny. 

To mitigate bias, put your trust in data and evidence, rather than assumptions. Encourage and welcome challenge during the development process. Make it part of the culture. Even if it hurts a few feelings along the way. 

“There were a few scars from letting things run too long. But often, that can be quite beneficial. One cycle of pain can really sharpen minds later on. We got a lot better at being more brutal and being more open about why we killed things internally.” 

Dan Hall, now a director at Cognosis, recalls his time as UK strategy manager at the paint and coatings manufacturer AkzoNobel, where he delivered a portfolio of high impact projects on household names such as Dulux. Dan was speaking at a recent Cognosis panel discussion on value proposition development. 

What to do: 

Four principles to avoid optimism bias:

1. Build the right team: it should be cross functional with strong commercial experience and the right balance of critical thinker vs. can-do personality types. Be brave in swapping out team members to keep this balance right. 
2. Gather as many real-world insights and benchmarks as possible from people who have been there and done it. Use these insights to robustly challenge all assumptions. 
3. Run challenging “go-no-go” sessions to try and break the new business model, proposition or innovation. 
4. Consistently remind stakeholders that a “no go” is just as good as a “go” decision. 

The relentless pursuit of new growth engines

Non-stop innovation is now a non-negotiable for companies, given the constant change of business context. Those that can negotiate the pitfalls are well positioned to do more than survive – they can truly thrive in the years ahead and drive their industry forward. 

Cognosis can help you ignite your next growth engine or help build out that next new business model. We work with leading businesses to develop clear, customer-centric, and differentiated value propositions. With a robust and collaborative approach, which provides strategic rigour and objectivity, you will gain highly actionable outcomes. 

> PRACTICAL EXPERT GUIDE:  Discover how to successfully develop and ignite your next new business model.