Starting a new business is hard. I should know. Over the course of my career I’ve started many, with varied results. I’m not alone either, about one third of businesses fail in their first two years.
Keeping one successful isn’t any easier. The average life expectancy for a company on the Fortune 500 has declined from 75 years to 15 years, so even the most successful business falter. There are no guarantees.
Nevertheless, some manage to buck the trend. Procter & Gamble, 3M and IBM have all thrived for a century or more, prospering through countless business and technological cycles in widely divergent industries. While there is no silver bullet, every business needs to answer basic questions about how will they create, deliver, capture and maintain value.
1. How You Will Create Value
As Harvard professor Clayton Christensen likes to point out, companies are hired to perform jobs. Whatever business you’re in, you have to solve somebody’s problem. Nobody needs a quarter inch drill, they need a quarter inch hole. Figuring out how to create value is the core of any firm’s strategic intent.
Steve Jobs looked for things he thought were “sucky” and sought to make them better. When he returned to Apple, he looked at digital music players and was not impressed, but saw the possibility of “1000 songs in your pocket.” Before long, he was on his way to creating a breakaway product and the most valuable company in the world.
Sometimes, creating value isn’t strategic as much as it is accidental. Google started not as a company, but as a research project. The invention of post-it notes and penicillin was mostly accidental. Jim Collins, in his classic book, Built to Last
, makes the apt observation that many successful businesses start out with little idea what they are going to do.
Despite what many say, the value you create doesn’t have to be unique (even if it is, imitators will spring up soon enough), but it has to be real.
2. How You Will Deliver Value
Knowing how you want to create value isn’t enough, you also have to be able to deliver it. Google found that out very quickly when their search engine started crashing Stanford University’s servers and it became clear that clever algorithms weren’t enough. Today, the company maintains massive server farms in order to service billions of searches per day.
In a similar vein, Apple’s quest to give consumers 1000 songs in their pocket would have gone nowhere if they had not had strong manufacturing and development partners in Asia, who alerted them when a hard drive capable of delivering the performance they needed to make the iPod a reality became available.
The point is that ideas mean little without the capabilities needed to deliver them. Further, capabilities built up over time can often offer opportunities to create new value.
When Louis Gerstner took over IBM, he quickly realised that breaking up the company would eliminate the capability to provide extensive consulting solutions. Wal-Mart’s superior logistics capability enables it to consistently create value through lower prices.
3. How You Will Capture Value
While creating and delivering value are essential, it will all come to naught if you are unable to profit from it. In some businesses, such as retail, this is clear and straightforward, but in others the waters are considerably more murky.
Bars and pubs, for example, create and deliver value through offering a good atmosphere, live music and friendly, efficient staff. However, they often don’t charge for those things, but rather earn money from the mark-up on drinks.
Nowhere is this dilemma clearer than in the media business. For decades, very few publishers have been able to capture value by charging consumers for access. Largely it is advertisers who pay the freight. The New York Times, for example, has gained some revenues through their paywall, but lost it back in the form of falling ad sales.
pointed out that as more products become digital and marginal costs fall to zero, it becomes harder to earn money by charging directly for products and services. Obviously, business models have to adapt.
4. Your Business Model Won’t Last
In a classic 1960 article in Harvard Business Review, Theodore Levitt urged managers to ask themselves what business they were really in. Were the old railroad companies in the railroad business or the transportation business? Is Hollywood in the movie business or the entertainment business?
(from which I leaned on heavily for this post) makes the apt observation that business models have become increasingly unstable, rendering not only industries but basic logic vulnerable.
It used to be that a CEO could maintain the same basic formula for creating, delivering and capturing value for his entire career. Now, it’s unlikely to last a decade. What’s more, the cycles are shrinking and returns to scale are diminishing.
Clearly, business models don’t last anymore. In the new, semantic economy that’s emerging, a competitor can spring up and set up financing, manufacturing, distribution promotion and even access to supercomputers from the breakfast table and have them in place by lunch (almost).
A big idea, flawless execution and even a strong track record of success aren’t enough to prevail anymore. Unless you can continually create, deliver and capture value in a changing context, you’re toast.
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