Why SMEs need new business models

A fast-changing world means most businesses will not survive. But, argues Denis Oakley, FRSA, their problem isn’t lack of efficiency, it’s lack of creativity. It's time to stop copying their competitors’ business models and come up with their own.

The world is changing, and most businesses will die. They are going to die because technological, environmental and social change will make their business models obsolete. They will not, are not, changing fast enough.

Creative destruction is in many ways a wonderful thing. It reduced the average food spend of a family in 1977 from 25 per cent of average income to 15 per cent in 2010. Incomes have grown and the cost of producing and distributing food has decreased. And this is true across almost all areas of commerce and industry. In these areas our lives are far, far better, and will continue to get better, even if our happiness does not improve.

The trouble is that a huge amount of the value that the modern economy creates comes from the start-ups and the innovative companies at the leading edge. Meanwhile, the small and micro businesses that are the mainstay of economic value creation and jobs in the UK are far behind. An even bigger problem is their business models. Most small companies use very similar models to each other. When you walk into a charity shop, a lawyer firm, a car salesroom or a hairdresser’s, you know exactly how they work. There are tens of thousands of identical businesses across the UK. But a technological change that hurts one, hurts all.

Why do we have lots of businesses with identical business models? The half century from 1950 to 2000 rewarded companies that were operationally excellent. So long as they focused on improving efficiency and effectiveness, they could grow the bottom line and prosper. In most industries the best-performing business models were adopted by most companies. As a result, diversity dramatically decreased.

But with the age of uncertainty that started in the 1990s and has picked up pace ever since, simply becoming better at running a business has become far less important than creativity and insight. Tim Waterstone figured out how to run bookshops well and built a business that turns over £400m a year. But Jeff Bezos looked at how to sell books differently and built a business that turns over $400 billion a year. Sir Martin Sorrell spectacularly grew WPP to dominate advertising and turned over $20 billion last year. But Larry Page and Sergei Brin reimagined advertising and created a company that sold $120 billion in advertising over the same period.

The key to modern business success, and millions of SME jobs, is not being good at what you do; it is being able to see a different version of the world and creating a business model that exploits that new viewpoint.

When we look at the future of work, many jobs will be easily automated. Radiologists, lecturers, ophthalmologists and patent lawyers are going to be far less useful than a data set and a collection of deep-learning algorithms. One company that I work with estimates that it can reduce the number of people involved in supply chains by 80 per cent, simply as a side effect of making them work better. That’s a lot of managers, workers and stakeholders who are going to be left with an uncertain future.

The answer is not putting more money into technology, nor investing in start-ups. It’s certainly not protecting dying industries and business models with subsidies. The answer is to encourage small businesses to start experimenting with new business models. It is to help them start seeing different futures. It is to create an evolutionary leap, an explosion in business model diversity to fill the new opportunities that are opening up.

This is not easy. The idea of a business model as a holistic map of a system that generates profit is relatively new in the commercial world. And the idea struggles to not be limited to the innovation departments and start-ups. And yet, of the many tools and concepts on the market, it is one of the easiest to understand.

If I have the same business model as my competitor, I have no long-term advantage. It’s like two cars from the same maker in F1. Whoever is driving them, the time that separates winner from loser is 100ths of a second. But if you have a different business model to your competitors, you can do two things.

First, you can use it to create more value for your customers. You can leave the technical restrictions of F1 car design behind and build the best car that you can. I was speaking to the CEO of an international airline recently and he spoke of ‘ending passenger humiliation’ as the future of air travel – breaking the default airlines business model.

Second, by choosing and designing your own business model you are able to disrupt and break your competitors’ business models too. Tesla’s direct-to-consumer sales model has forced European car manufacturers to abandon a century-old relationship with car dealers, slashing their commission by 80 per cent. This isn’t a sales tactic so much as a way to open much larger markets for your vision of the future.

So, as we think about the future of work in the UK, it’s vital to think of business models. We need to help our millions of SMEs to think about how at risk their business models are. We need to give them the support to see new opportunities. And we need to fund those SME owners to take the challenge, helping them to grow strong new businesses that keep our workforce employed, productive and more satisfied with the work they do.

Denis Oakley works with startups and larger companies to develop and improve disruptive business models. He is a mentor at 500 Global and the Warwick Deep Tech Innovation Centre, and has spent 20 years building and accelerating technology startups in SE Asia, the Middle East and the UK.