Stressing the Business Model

Stressing the Business Model

Are you rigorously thinking through how your business model is being impacted by the multi-fronted economic crisis? In last month’s Effective Board we highlighted the value (and pitfalls) of inviting economists into the boardroom: understanding possible scenarios and risks is vital given the uncertainties. The next stage, though, needs to be about applying that understanding to the day-to-day realities. A good way of doing that is to break down the business model – because so many different elements of most business models are being hit hard. And all at the same time. What was a good understanding of the business model might no longer apply. So a well-structured and disciplined approach to the Board’s oversight is needed, making sure the Board understands the full picture of the implications. Here are a few thoughts on how to get that right, and on what to avoid.

Good practices to consider…

Break it down. The rapidly changing economic environment is affecting so many different components of the model: funding costs, input costs, staffing (recruitment, turnover, cost of motivating…), customer demand, competitors (pricing, survival…). And that’s all on top of the complications of the new post-Covid working environment, alongside the continuing risks of pandemic resurgence, geopolitical instability and supply chain pressures.

Things to avoid…

Looking at the business model in the same old way, assuming that the drivers and influences are largely unchanged or are minor changes that are manageable. Unless you’re very lucky and in an organisation that is both so strong and so well-managed that it can sail through a series of hurricanes unscathed, that’s unlikely to be the case. Extreme changes and pressures need new outlooks and different questions. And most will agree that we’re exposed to these stresses across pretty much the whole of any organisation’s model.

Good practices to consider…

Get into the detail of the cost line. Just about everything will be affected as the vast increases in energy costs work through, either directly or indirectly as supplier costs increase.

Things to avoid…

Relying on the aggregated number(s) in performance reports, budgets and forecast. It won’t show underlying trends and differences. This is one of those relatively rare times when boards should get down into the numerical detail.

Good practices to consider…

Factor in the “people consequences” explicitly. It may be just a single line in the budget, but as a driver of the business model, of course employees play a huge role and are a substantial cost for most organisations. It’s unclear how salary costs will accommodate both energy costs and general costs of living increases. And then there are all the implications for staff welfare and industrial relations that will soon be felt and will feed through to business model effectiveness.

Things to avoid…

Focussing on the big numbers and so neglecting the people angle. With so many individual elements affected, understanding the detail will matter. Of course, that means first working through what this means for your own employees and people strategy. But the breadth of the impact means that your suppliers and crucial dependencies are likely to be hit too.

Good practices to consider…

Think through the practical implications of what’s happening in the money markets. The abrupt reversal of quantitative easing and tightening of monetary policy to hit the emergency brakes on inflation are dramatic in scale and speed. Quite technical-sounding monetary actions could hit hard, so boards need to understand what the Fed and the other central banks are up to. We’re not talking theory here but real-life shocks.

Things to avoid…

Putting the monetary/funding environment in the “theory bucket”. Or failing to think through what a tightening of the monetary economy will mean for the real economy – and for you as part of it. That applies whatever your sector and whether you’re a commercial or non-commercial organisation: the impact on behaviours, funding and costs will be very similar.

Good practices to consider…

Focus on the customer even more than usual. The demand uncertainties of Covid fallout are now reinforced by a hit to consumer cash and confidence. And that’s happening regardless of where the property market is heading. Outside of retail and services, corporate customers too will be constrained by uncertainties and the unpredictability of an inflation environment that few are accustomed to.

Things to avoid…

Assuming that customers “will ride out the storm”. Some might, but any reading of the media, academic analysis or think tank output suggests otherwise for the many.

Good practices to consider…

Tie it into your principal risk discussion. Until now, the list of strategic risks has rarely needed to include “business as usual” elements. But the pressures that are building might have changed that.

Things to avoid…

Arriving at a list that looks pretty similar to past versions. That can happen when the list emerges bottom up from management layers that are not factoring in the big picture risks. Or when starting with the usual risks crowds out major new risks that are approaching quickly.

Good practices to consider…

Discuss the business model impact more frequently. Do it now. And keep doing it. Time is of the essence and the picture is changing constantly. Get ahead of the game on the budget planning, probably bringing in the Board at an earlier stage than usual to formulate or test assumptions, and to do a sense check of what is coming out of the system.

Things to avoid…

Waiting until the next strategy day. That could be some time off, and anyway might well get largely taken up (as usual) by management presentations across many strategic issues. And it shouldn’t wait either for the annual budget round to be nearly completed with the Board’s approval simply being the final step.

Good practices to consider…

Stress-test the business model by thinking through the impact of various scenarios. These won’t give you a forecast of events but they’ll help you understand the strengths and weaknesses of the business model. And don’t forget to reverse stress-test: work back from “What would it take to break us?” to understand what sort of combinations of events might really hurt.

Things to avoid…

Assuming there’s just a single set of pressures that can be projected in varying degrees of severity. Troubles are likely to come from all directions and their impact compounded. It’s best to understand now where the strong and weak points of the business might be, so you can start to build up resilience where it’s most valuable.



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