Business models matter. You may have a brilliant product or service and not succeed because the model around it is flawed. Most entrepreneurs and business people will eagerly read up on enterprises that worked, but far less will take time to understand the reasons businesses fail. It is equally important to, so that you are aware what to avoid as you run your own enterprise.
In his writings, Antoine Dumont narrows down business model failure to five things. We outline them below with local examples.
Business models fail due to a mismatch between value proposition and customer segments. Value proposition speaks to that which a business offers its’ customers, solving specific problems they have.
When the business you have built, or are building is not responding to a real need, or addressing a real problem of the customer, then it will fail. It is quite possible to build a business that does not fit into the context where it operates from.
A few years back, some locals came up with a Zimbabwean version of Facebook — a platform that was meant to be localised social media. It never took off. Whilst it functioned perfectly from a technical standpoint, the update was extremely slow. I recall that I subscribed as a show of support for local innovation, but soon realised that most of us were there out of pity not because of a real need.
Facebook was already meeting all our social interaction needs, and our friends from outside Zimbabwe were on it. Motivation to actively participate on the “local version” was low. Inevitably, the platform shut down.
Every business must be clear that they are indeed solving a problem for the people they purport to serve.
Invest in researching the pain points of potential customers and avoid being a knock off version of something that has already gained traction especially at a global level. Often, that ship will already have sailed.
Business models fail due to financial viability issues. It is a no brainer that where costs are higher than revenue, there is not business to speak of. One must not fall so in love with their enterprise that they ignore the bottom line. The bottom line matters and the objective of business is making profit.
I have come across shop owners that have been housed in a certain building for years and are fixated with their location as well as their products, clothing especially, and will not easily reconsider moving or changing the product line.
That kind of business comes with fixed costs like rentals, utilities and administration costs, then full-time personnel to man the shop. To be profitable, you must cover those costs — but often just breaking even is difficult as clothing stores now are competing with folks in pavements right in front of their shops, “superior” models where there is no shop building cost and the selling is done by the owner themselves so no extra human resource is required.
What is required here is a shift to a Veblen good style product — targeting a clientele that has a taste for the finer garments, some have successfully done this. Costs may be high, but they are matched by revenue and financial viability can thus be achieved.
Business models fail due to poor environmental analysis. In a dynamic environment like Zimbabwe, business must consistently analyse their operating environment and especially so external factors.
Regulation is a major factor, when the operational guidelines are changed in a sector, they can cost an entire business its’ life.
Competition cannot be ignored either, every other business will be out to get a share of the limited customers money and they will do their best to undercut you on pricing, product and promotions.
In the digital age technological aspects must continually be looked into, the world is faster, machines are better, methods are improved. Within a year equipment and processes can become obsolete.
Finally, economic issues directly impact all businesses; the level of inflation, spending, saving, production in an economy determines your prosperity.
Scenario planning on a quarterly basis is a must — clearly outlining the base, best or bear case situation, and what the company will do in the event of such.
This ensures that the business quickly adjusts and gets into a requisite mode should the environment change.
Companies have very little control over external factors, and the risk of major changes can never be eradicated.
We highlighted the case of old type recording companies as an example before, the environment changed due to advances in technology and competition arose from new, modern players — musicians were now recording on their own or in new stables with portable technology and distributing on social media.
Recording houses were not able to swiftly convert to the new wave and so they all failed.
Business models fail because of poor execution. In the course of doing business, risks are not absent and they must be managed.
Lack of competency and poor governance on the part of management can cost a business. The theory of business is much easier to draw up than the actual operations.
A business is like steering a ship and many times there will be choppy waters, wind and storms.
No one can tell when hardship will arise, but the captain must be able and ready to ride it out underpinned by his training and experience.
But even so, on calm waters he must take care to do the right things to ensure smooth sailing. Some of the failed indigenous banks come to mind. Their counter-parties experienced the exact same economy, had perhaps very similar models, but those that failed were in many respects due to the quality (or lack thereof) of leadership and management.
Bad governance, poor decision-making resulted in the closure of several financial institutions — some went outside regulatory guidelines, some got greedy, others rejected sound advice from in house experts on the basics of banking. As a result, the businesses went under. A good model requires a good executor.
Business models also fail due to failure to adapt to change. It is very difficult to convince someone at the height of success, or who has enjoyed a good run over a long period to change.
Continuing in old ways is very comfortable, with a guarantee of profits rather than attempting new things that may yield uncertain profits.
Again, the banking sector provides an interesting example. The core banking business model is making money from interest and to a lesser extent non interest activity like banking charges.
However, with the advances in digital banking, there are fewer requirements for many branches and personnel to serve in them. People want banking services, but not necessarily brick and mortar banks.
We have moved from banking in branches with books, to using cards on ATMs and Points of Sale and are entering into internet and mobile banking territory. Banks that insist of the old way will soon find themselves priced out by the more affordable options.
This is true for any other kind of business; we must embrace the change that is coming in the digital age where everything is converging to ensure we do not fail.
The simple call is to understand that reinventing business models is not an option anymore; it is a path for sustainable growth and new performance (Elton-Pickford). We shall now begin to investigate capital-raising for business in the new economy.
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