Tuesday, December 16, 2008

Broken Business Models

This is a follow-up to my post on Two Kinds of Business Model. See also discussion on Business Improvement in the CBDI Forum Linked-In group.
In many different industry sectors, commentators are calling the business models broken.

Firstly, we don't have to take all of this at face value. I don't know of any sectors that are entirely unaffected by the economic downturn, but struggling isn't the same as broken. Broken doesn't mean having a bad few months, laying some people off, being extra careful (or worried) until economic conditions improve. Broken means fundamentally and irretrievably non-viable. It means that the old way you were making money has gone away and may never come back.

On the radio the other morning there was a discussion of the troubles at the Chicago Tribune. Someone was talking about "the business model" of the great traditional newspapers. Clearly this is Business Model (B) in my terms.

One of the things this kind of business model does is describe where and how value is created - for example whether you are using newspaper sales or advertising revenue to fund high-quality journalism. This is not a value chain in the traditional sense. Capability X generates the funds to support capability Y, but there is strict decoupling between X and Y, so that for example we don't allow advertisers or retail newsagents to influence the news-gathering agenda. There are lots of business models in which one activity subsidizes another one. (Doesn't that mean that enterprise architects need diagrams to show the generation and consumption of funds?)

This is not the only kind of broken business model. In some cases, a business model has long been cracked and it was only a matter of time before things fell apart. For example, people in the telecoms world have known for twenty years that the cost of a telephone call was on a diminishing curve, and that telecoms companies needed to find some other source of revenue.

In some industries, people are putting the blame on complexity. Sometimes even sophisticated investors were unable to understand how their money was being invested. In today's news we discover that a major hedge fund, run by Bernard Madoff, was being run as some kind of Ponzi scheme [BBC News, 16 December 2008, see also Bill Burnham on Madoff Madness]

So what kinds of business model are not broken? Chastened, the surviving hedge fund operators are talking about a return to simplicity and transparency. Complex enterprises based on fragile cross-subsidy may need to be unbundled. Perhaps we shall see a return to business models that we can explain to our children.

After a forest fire, it is the simple pine tree that reappears first, taking advantage of a clear space for quick growth before the more complex trees can get reestablished. Perhaps we may look forward to several years of straight and upright business models?

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