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The gap is widening. The forces of the COVID economy mean not only is the gap between companies who are thriving and those who are contracting growing bigger, the pace of this widening is happening faster than ever. One year in, we need to understand the factors behind this new economic force, and how to stay on the right side of the gap.
McKinsey call the gap in economic profitability the power curve. Whatever you call it, getting on the wrong side of it when the pace of change is as rapid as it is today means excessive delay or stagnation can be terminal. The last economic crisis created by the GFC showed us it was speed of recovery that became the multiplier for success. So right now is the time to make decisions that will keep you ahead of the curve.
McKinsey research has identified that corporate strategy, specifically the ability to persistently unlock big strategic moves, that determines which businesses stay on the upside of the curve. They have labelled legacy business models as the greatest risk to organisations; that resilience needs to be built into business models, and future-proofed models have a series of consistent attributes that enable big moves and free themselves of organisational inertia.
I would agree with that. But before we go redesigning the model, we need to know two mission-critical pieces of information:
1. What your customers want or need
2. How your proposition should pivot to deliver
These two mission-critical points are essential to steering any business model innovation. Customer insight and proposition design are the north star which provides you with the intent for business model innovations. Customer insight and proposition design are how you can future-proof your organisation through recovery and leap-frog competitors and adjacencies.
That’s where TheDesignThinkers come in; using customer insight to design propositions that meet emerging market opportunities. Unlike McKinsey, we don’t start with the bottom line, we start with what people want.
I’m very keen to discuss what your customer insights tell you and how you are using that to shape your proposition design. Only then should we talk about your business model.
McKinsey lists 5 attributes of future-proofed business models:
1. Improve differentiation
Business model innovation drives pricing advantage and mitigates the risk of commoditisation. Brand, experience, first mover advantage and premium. Specifically, your gross margin needs to reach the top 30 percent in your industry.
2. Programmatic M&A
Inorganic growth of IP, process, capabilities and market share are critical for pace, and buying in is faster than growing.
Specifically, spending no more than 30 percent of your market cap but over 10 years adding to at least 30 percent of your market cap.
3. Strong capital expenditure
Double down on what is working and starve what is not. Use your vision to determine the long range view. Specifically, be in the top 20 percent in your industry in your ratio of capital spending to sales. That typically means spending 1.7 times the industry median.
4. Dynamic resourcing
Move your resources and talent about to staff new ventures and build capability in the process. Specifically, reallocating at least 50 percent of capital expenditure among business units over a decade.
5. Strength of product
Consolidate, automate, rationalise. Specifically, improving productivity at a rate sufficient to put you in the top 30 percent of your industry.
First published on The Design Thinkers.
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