The Search for a Profitable, Scalable Business Model

Many of the would be entrepreneurs that I work with are totally enamoured with their business ideas.  Whilst this is important and inevitable to some degree, it is important to accept and understanding when starting a business that all small businesses start with a set of tentative hypotheses, whether these have been scrutinised as part of the pre start up planning stage or not, which remain largely untested.  As the venture unfolds, small business owners may revise their original hypotheses through a series of experiments and adaptive responses to unforeseen problems and opportunities.  Many small business owners encounter surprises and setbacks during the course of the first few years of operations that require them to modify or even completely revamp the original business idea.  

Paypal for example was not founded to be the online payment service that it is today.  Max Levchin, the founder of paypal, initially conceived the company as a cryptography company and then later as a means of transferring money via PDA'a.  They only found their sweet spot after a prolonged period of trial and error.  The transition was difficult and the company almost went under due to user fraud.  However, having started out in 1998, Paypal went public in 2002 and was ultimately bought by Ebay for $1.5 billion.  It's safe to say that this flexibility ended up being a considerable asset to the business.

Nokia is another example of a company that has changed dramatically from it's initial incarnation.  The company began life in the 19th Century as a paper mill.  Following World War 2, they entered the telegraph and telephone business as a manufacturer of cable.  By the 80's, Nokia's primary business activity was the manufacture of televisions.  They transformed themselves into manufacturers of mobile phones in the Finnish recession of the 90's as part of a streamlining project designed to keep the business afloat.  Today of course they are one of the worlds leading manufacturers of mobile phones, albeit in somewhat of a difficult market position due to the relative weakness of their smartphone offering relative to the competition such as Apple.  Perhaps we are about to see Nokia adapt again as a company, as mobile phone manufacturers today need to have a strong grounding in computer technology in order to effectively compete. 

These examples represent the tip of the iceberg as most businesses will adapt their initial concepts either significantly or moderately during the course of their lifetime.  Common events that trigger a change include:

Failure to Generate Sales

The business owner runs into a wall because customers are unwilling to switch from their existing suppliers or do not find adequate value in the product or service that the start up has to offer.  This problem is most common amongst those entrepreneurs that did not have the time, inclination or money to conduct adequate market research or perform a proper market test before committing to the venture.  

Declining Profitability

 The opportunities that entrepreneurs find in new or unsettled markets are often short lived.  However, even though pressure on initial profit margins is inevitable, most small business owners do not plan for this eventuality.  This perhaps is not surprising given that the short lived nature of the opportunity will demand quick rather than deliberate action.  Often the industry is either too new or too unpredictable to allow for a useful ex-ante plan.  Where there is an understanding and an anticipation of shrinking profits, most entrepreneurs simply exploit the opportunity for as long as they can whilst searching for new opportunities in the now changed market.  If no new opportunities are apparent, they can always walk away having made satisfactory short term profits despite the poor long term prospects for the business.

Stalled Growth

The initial niche, even if it is profitable, may be too small to satisfy the business owners aspirations for growth.  When the potential of a niche is exhausted, the entrepreneur must start looking for new opportunities.

Unexpected Opportunities

Sometimes small business owners encounter opportunities to build a much larger and more profitable business than they had initially expected or even wished for.  Many of these opportunities were completely unforseeable at the start of their ventures.These opportunities can trigger radical change in the nature of the products and services offered, customers served, channels of distribution used and so on.

The business world today is more unstable and less predictable than it has ever been.  Recessions are often looked upon to be periods of "creative destruction" where some old technologies, products and business models go into terminal decline.  There are two possible paths to take.  You can perpetually stick to what you know and what you have always done and accept decline as a natural part of the business lifecycle or you can adapt practices, prices and products in order to thrive and survive.  If you need help keeping up with the pace of change or if your initial hypotheses no longer stack up for you and your business, feel free to contact Continuous Business Planning today for a no obligation discussion of how to keep your business moving forward through effective adaptation.