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Steve McKee


How Broken Is Your Business Model?

Nothing focuses the mind like the sight of the gallows

Published: Wednesday, May 23, 2018 - 11:02

Hasbro recently reported a double-digit decline in revenue and a big internal overhaul. That followed Mattel’s news that it will be hiring its fourth CEO in as many years as it also tries to overcome slumping sales. Why are the behemoths of the toy business in such trouble? Because their most significant historical distribution channel, Toys “R Us, declared bankruptcy.

Why did Toys “R Us declare bankruptcy? Because of Amazon.

It’s true that other factors contributed to the decline of all three companies, including an ill-timed leveraged buyout that loaded Toys “R Us with debt. But it was the advent of e-commerce in general, and Amazon in particular, that is dealing the heaviest blow. Toys “R Us’ demise means that Hasbro and Mattel must find a way to adjust to the same distribution dynamics that a year earlier felled Sports Authority and caused Whole Foods to wave the white flag.

Although the winds of change have always been unrelenting, never before have they created such noticeable gusts. We feel them in the marketing consulting business; for example, Google, Facebook, and their ilk rapidly continue to sweep up ad dollars that used to come our industry’s way, causing a permanent shift to which firms like mine must adjust. I suspect you feel the breeze in your business as well.

In research we conducted this year, a plurality of corporate leaders confessed to unprecedented difficulties in managing (and even understanding) what’s happening to their businesses, with more than four in 10 going as far as to say they need an entirely new business model. It was especially true of companies whose growth is slowing or who are struggling with the “Amazonification” (aka: commoditization) of their industries.

Clearly, this is no time to be complacent. Because there is no time to be complacent. It’s all happening too fast.

Corporate strategy used to largely focus on carving out a defensible competitive position within an industry. Today it’s not enough to think in terms of the niche alone, or even of the industry. It really is a question of business model. As one of my partners recently quipped, we’ve got to stop defending the gates and focus on building the tower. We have to be willing to sacrifice branches to save the tree.

We must become the destructor rather than the destructed. It’s on us to question everything about the business proposition we’re putting forth into the world, granting no quarter to sacred cows.

For example, as Hasbro and Mattel face what amount to existential challenges, what business model, exactly, should they be pursuing? To the casual observer, they both look like toy manufacturers. Is that what they really are, or should remain? Are they toy developers? Toy market-makers? Are they in the business of play? Entertainment? Education? Should they pursue vertical integration? Disintermediation? Cooperation?

These are deep and consequential questions, and the more of them these companies explore, the more additional ones may surface, at least for a time.

Which leads to the question for you: How broken is your business model? If you say “not at all,” I say you’re probably not paying attention. You may be out in front of your competition, but these days you’re less likely to spot them in the rearview mirror as they are darting out from a side street, arising out of the dust, or dropping from the sky. We’re now in a “butterfly effect” economy in which a shift in one business model can affect all others.

Most leaders I know don’t have their heads in the sand; they have some sense of where their business model is being threatened, up to and including obsolescence. That’s a good sign. To paraphrase Samuel Johnson, nothing focuses the mind like the sight of the gallows. But most also struggle with what to do about it.

That expertise, in fact, is the “tower” my company continues to build. Ironically, our changing business model is to help other companies identify and leverage their changing business models. It’s nothing if not relevant to the times.

There’s a cliché that says every family is dysfunctional in its own way. Similarly, every business model is broken—or breaking—in its own way. If you’re feeling the marketplace shifting under your feet, you’re not alone. Nothing, it appears, is beyond disruption or off limits to the forces of creative destruction. Not to pick on Amazon, but the company just announced it’s going to start delivering packages straight to the trunk of our cars, for crying out loud.

So, yes, every company should ask itself, “How broken is our business model?” But there’s a second, more important question: “How might we break someone else’s?” All it takes to transform threat into opportunity is the proper mindset.

Whatever the case, don’t ignore the very real (if sometimes imperceptible) likelihood that your business model is becoming obsolete. Even if your company is cruising along, someone or something is coming after, hovering over, or undermining it.

First published on the SmartBrief blog.


About The Author

Steve McKee’s picture

Steve McKee

Steve McKee is the president of McKee Wallwork & Co., an integrated marketing agency that specializes in working with stalled, stuck, and stale brands. McKee has more than three decades of experience coaching troubled companies, during which significant research was conducted to understand the challenges of corporate growth, unearth keys to strategies that work, and discover common pitfalls to avoid. McKee is the author of When Growth Stalls (Jossey-Bass, 2009) and Power Branding (St. Martin's Press, 2014).


Evolving commerce

It would seem that Mattel and Hasbro have something up their sleeves as, up until the ax fell, it was a common belief that they would be Toys 'r' Us' white knights.

To add to the problem, with 3D measurement techniques and low cost additive manufacturing units, they (among many) will need to contend with product replication.

Revisit old an retail model to fit today's consumer behavior?

Seeing the behavior of in-store shoppers makes me curious about the old catalog showroom stores (my first part time job that wasn't babysitting or delivering newspapers). The problem with these stores in the past was the required delayed gratification. Some models were in the onsite warehouse, but others had to be ordered and picked up weeks later. Today, shoppers are happy to wait the 24-48 hours after seeing an item in a retail store then ordering it up from a less expensive online source.

Toys 'R Us might only have needed to provide 2 or 3 of each toy in the store, then provided kiosks so shoppers could go online and order from the preferred source. Follow the Dell model, and order the toy to be made by the manufacturer upon order. Inventory reduction throughout the supply chain, consumer gets exactly what he or she is looking for...now we need to address the truck driver shortage.

Driver shortage

With apologies to Stephen Sondheim - "Send in the drones!"