Does this sound familiar? Selling a product or service you believe is premium, yet find yourself competing on price; or a slump in sales turns to a focus on cost management but it doesn’t seem to be improving the bottom line. Both result in a lot of hard work with little reward.
The problem in many cases is a misalignment between the business’s strategy and its business model. Aren’t they the same thing? No!
‘Misalignments result in a lot of hard work with little reward’
What we discuss here is the difference between the two and some tips to get them pointing in the same direction, enabling you to gain results from all your hard work.
Your business model is what your business does at its core and it reflects the market in which it does it.
Your business strategy is the plan of attack which dictates the day to day tactics used to achieve your business goals.
Two examples of misalignment
Imagine a pie shop. A pie shop deals in retail, fast food; this means its model is high turnover with low margins. Cost management is absolutely necessary but the key driver of revenue and growth is ultimately the number of pies sold, to grow in profitability you need to sell more pies. This means its strategy should be focused on increasing traffic flow into the pie shop to generate high product turn over enabling profitability through volume of sales.
‘Common mistakes ultimately lead to disaster’
A common mistake however, especially if the business finds itself in a temporary seasonal low cycle, is to start focusing on cost management to try and increase profits. Cost cuts usually lead to fewer staff, inferior/ cheaper ingredients, and a rise in prices as the pie shop now tries to maintain or even grow its bottom line by increasing its margins, contradictory to its model.
With less capacity for customer service, inferior product and higher prices customers now no longer identify value for money which means fewer customers (the jaws of life become the jaws of death). The downward spiral continues as the pie shop continues to focus on cost reduction and mark ups to spare margins as cash flow gets tighter. Ultimately the misalignment between the business model and the business strategy leads to disaster.
Another example is a luxury premium product with a high cost structure competing on price, maybe as a reaction to a new competitor. Employing a strategy that focuses on reducing margins and boosting turn over becomes contradictory to the luxury business model which at its core is based on low turnover and high margins. The cost structure is not sustainable if the margins are too low, plus low prices and promoting high turnover will damage the luxury brand, which means lost credibility and ultimately, you guessed it, disaster as customers stop seeing the value they are looking for in the product.
As you can see from the above examples, to be successful your business strategy must align with your business model.
4 Keys to avoiding misalignment and securing a successful business strategy
- Understand what your business does at its core; what is your business model
- Make sure your strategy is designed to execute on the core requirements of your business model, check this every time you update your strategy
- Understand your product or service and how it is consumed; who is your target market
- Understand the difference between what it is you sell and what the customer is buying
- Why do they buy it?
- Why do they buy it from you?
- What constitutes value for money for your customer?
This seems intuitive and a little simple, it is. Its simplicity is the reason why misalignment is such an easy mistake to make. Businesses may start off on the right track but as circumstances change, strategies change and they can over time end up completely misaligned. Even if the situation is recognised businesses can find it hard to turn back to where they should be.
Is your business strategy aligned with your business model? If not, how can you fix it?
If you would like to find out or if you would like to gain access to more helpful business insights please come and find us at MERCK Business Consulting. www.merckbusiness.com