When The World Changes Around You, You Must Change With It

Many times, when we are starting a business, we start with what we already know. We act as though the world we live in has always been the same, and that the business models that our former employers utilized are necessarily the best ones for us. A look at the history of the world’s climate should be enough to remove that idea.

Just as the Vikings found Greenland a warm and hospitable place 1,000 years ago, but were driven out by cold temperatures a few hundred years later as part of a changing climate, so too yesterday’s business models were built upon the social, legal and economic situation in the preceding years, and the business models of today are likewise built upon the social, legal, and economic situation of the recent past. What exists today may not work in a decade, simply because the world is not the same place today as it was ten years ago, and it won’t be the same place ten years from now as it is now.

Newspaper Example

Fifty years ago, publishing a newspaper was a high-margin business. The returns were high, and the barriers to entry were also high. This enabled thousands of local papers to support large editorial, production, and distribution staffs. But the world was changing. First of all, there had been two world wars and a global economic depression within the previous two or three generations, so the nation was now aware that people needed to be aware of overseas events. This really made wire services, such as UPI and the AP, an important part of a paper’s story collection process. Social and economic change was coming to the nation, too. And radio and the new thing, television, were starting to provide news at no cost to the audience.

Thirty years ago, the newspaper industry was starting to show the first signs of pressure. In major cities, the Justice Dept. started allowing two major local papers to share production (printing) and distribution operations, as long as their editorial operations remained competitors. Twenty-five years ago, the Los Angeles Herald-Examiner closed down, leading to an exceptionally profitable few years at their rival Los Angeles Times. But KNXT-TV2 (now KCBS) added local news broadcasts from 4:30 PM until the network news. Local AM radio stations KFWB (960 kHz) and KNX (1070 kHz) were and are all-news stations, with sports, traffic, and all the top stories of local or national significance covered every half hour. Again, this comes without any out-of-pocket costs to their listeners.

In the late 1990s, Time Warner, which is both a publisher and a broadcaster, saw the rise of the Internet, especially the World Wide Web, and knew they needed to be involved. They launched Pathfinder. Over the next few years, they and other media companies experimented with models: paid subscribers only, split access (some for paid, some for unpaid with memberships, some for anyone), ad-supported sites, and e-mail blasts (with or without an actual web-resident story). With few exceptions, none of those has worked out–the papers are looking for something with high enough returns to allow them to keep their cost structures, and it isn’t going to work.

Now you will hear publishers blaming the Web for their losses: “If it wasn’t for sites like Google and Yahoo plastering our headlines and story summaries on their sites, we’d be able to charge people to read our stories,” they say. Unfortunately, that isn’t really true. Google and Yahoo generally link back to the original site, so that people who choose to read it see whatever advertising or “buy a subscription” messages the paper chooses to put up. There are definitely content-stealing sites (they also plague bloggers, such as myself) but they aren’t the major reason that papers are in trouble–the world has changed, and they are still trying to live somewhere that no longer exists.

Rationale

In my business classes when I was in college, I learned that high returns tend to attract new entrants into the market. But they also seem to attract competition from “replacement products”. For example, if the price of automobiles gets too high, people can purchase other products and services to get them from point A to point B, including bicycles, motorcycles, skateboards, hang gliders, commuter rail lines, bus routes, running / jogging / walking and so on.

Likewise, high costs of entry tend to keep competitors out of the market, raising prices and profits. In the case of the newspaper industry, the high capital costs of printing plants tended to keep the number of competitors low. The broadcasting industry is also fairly capital intensive, what with the limited availability of licenses, the cost of transmitters and antennas, and the constant flow of electricity. Building a business in a field with high capital costs and high barriers to entry tends to be profitable, unless something changes. When change comes, it often sweeps away even entrenched companies.

Cruise Control

In effect, our entire business has been pretty much on cruise control … for the past several months we’ve been neglecting many important tasks and just letting our business coast. –Steve from MyWifeQuitHerJob.com

A successful business has a business model that is working. Such a business also has a number of other factors working on its behalf, including some that the owner(s) and manager(s) may not know about. For example, the United States automobile industry benefited from a combination of the legal environment, the economy in the 1900 to 1970 period, a huge unified market, and wide availability of (motor) fuels. It wasn’t necessarily the quality of their products or their management prowess that made Detroit the world leader in motor vehicles. When things changed, these companies started a long-term decline that continues to this day.

Operating your business successfully means taking an occasional look at your market and at the situation that supports your business. You want to understand what circumstances are contributing to your company’s success, so that you will be aware when changes could upend it. Your business model can be considered a simple sentence or two that describes how you make (or intend to make) money. For example, the model for Twitter, the popular “micro-blogging” service, could be described this way: get as many users as possible, while raising lots of venture capital, then figure out what to do about earning money. (NOTE: This probably won’t work for you, so don’t even think about it.) Anyway, remember that there is more to your success or failure than your good looks or smart decision-making, and if those things change, your business could be on the rocks like the auto companies were.

It is important that you have a clear idea in mind of what your business will do to make money, your business model. If your plan is to make money when people walk into your store to buy products, emphasize that in the choices and decisions you make. If your plan is to sell products to the stores, so the stores will have something to sell, then make sure to prioritize this in your decisions and choices. Your product line may change, your industry may change, but if you don’t understand your business model, you will still find it difficult to succeed.