Business and Business model – 4

Let me stick my neck out and say this: the concept of business model doesn’t really help articulate or clarify any fundamental dimension that can affect our understanding of a business. The key aspect of the concept is the focus on how the revenue is earned which is another way of asking who is going to pay (and why) and how much. As I have pointed out in the first part, this was already being done well before the concept of business model was ushered in and two businesses clearly demonstrated the clarity with which each understood this: hospitals and print media. I had also mentioned that Google’s ‘business model’ was the same as the good old print media’s.

My fear is that an attention to the concept will lead to wasteful thinking. Since we are on this, let me say also that I am extremely wary of so-called novel concepts such as ‘blue ocean strategy’, which simply refers to exploring new opportunities rather than expanding the same. It is a pity that many have gotten carried away by this with a cottage industry having evolved around it, making it seem backward to discuss opportunities in the same field. Everyone who talks of blue ocean strategy should simply listen to what Rajiv Bajaj says on his business. George Bernard Shaw said that ‘fashion is accepted madness’. How true!

Fleeting or permanent

To come back. Whenever a new opportunity is sighted, the challenge is always to grasp whether it is a sustainable opening or simply a short-term tactical opportunity. Many years ago, there was a garment category called stonewashed jeans. It entered India sometime in the mid-1980s with a lot of fanfare, attracting many into the sector only to fizzle out in just six months! Even as it was entering India it was going out of fashion in the US and no one noticed this in the rush to enter to a ‘profitable new market’. Inevitably, there were discounts and offers (Sale) aplenty soon after to finish the huge pile of unsold stocks!

Let us take the current shortage of semiconductor chips which has adversely affected several businesses given that chips have a wide range of uses. Many of you would have read of the developments in India with the government emphasizing the need to develop indigenous chip making and with many business groups having rallied to seize the opportunity with the Tatas highly visible. The first step is to ask a very basic question – is this (the shortage) a temporary event or a lasting change? What if the problem gets resolved and the global supply chain in chips gets swinging again? The investment is substantial and so is the lead time. In sum, what is the risk?

Just as finished writing, I read this article in The Wall Street Journal on Intel investing up 10 $95 billion in chip manufacturing. According to WSJ, “Intel Corp. INTC 0.26% plans to build new chip-making facilities in Europe valued at up to $95 billion, responding to a cross-border race to add manufacturing capacity at a time of a global chip-supply crunch. Intel Chief Executive Officer Pat Gelsinger on Tuesday said the company was planning two chip factories at a new site in Europe and could potentially expand it further, with the increases raising the total investment over about a decade to the equivalent of as much as €80 billion. Rival Taiwan Semiconductor Manufacturing Co. TSM 0.59% , the world largest contract chip maker, this year said it would spend a record $100 billion over the next three years to increase production capacity. South Korean rival Samsung Electronics Co. last month said it plans to boost investments by one third to more than $205 billion over the next three years, in part to pursue leadership in chip manufacturing”. (https://www.wsj.com/articles/intel-plans-investment-of-up-to-95-billion-in-european-chip-making-amid-u-s-expansion-11631027400?mod=itp_wsj&ru=yahoo). You will understand now the importance of the question I raised – the risk of excess supply in some time should all plans fructify.

The risk varies. Years ago, in 2000, I was keen to set up a business in training in embedded software. Yes that specific. (I wish I had) Even as a novice in the technology industry, I could see that everything was about embedded software, not just mobile phones. BSNL in fact had started using it in landline itself. The key risk, which would have been a serious obstacle, was the availability of trainers equipped and qualified to teach and train in embedded software. There were hardly any institutions, other than C-DAC, which was then known for serious work in embedded software. In my view, this is a key question in the semi-conductor business too.

Let us look at a more recent (and different) story. In May 2021, AT&T said it will spin off its sprawling media empire, “including HBO, CNN, TNT, TBS and the Warner Bros. studio, into a new venture with Discovery. That follows a February agreement to hive off a 30% stake in satellite broadcaster DirecTV and give up operational control of its pay-TV unit, which was hollowed out by customers trading pricey channel bundles for less expensive alternatives. All told, the two reversals erased tens of billions of dollars of equity value, as AT&T cut deals to exit its investments and shed debt” (https://www.wsj.com/articles/att-hollywood-ending-erased-billions-value-hbo-discovery-warner-11621297279?mod=hp_lead_pos2). By the way, this is a must-read story for anyone who is keen on understanding business as an area.

The original idea behind the merger was to challenge Comcast in the pay-TV business, challenge Alphabet (Google’s parent) in digital advertising and Netflix in streaming. Cable mogul John Malone, a major Discovery shareholder, said that although he believes Time Warner is doing fine, merging content and distribution usually doesn’t make sense. “I think that the technology of connectivity and digital technologies are one focus, and creating content that people get addicted to is another focus,” he said. “And you seldom would find both of those in the same management team.” The two most successful players in direct-to-consumer streaming video, Netflix and Walt Disney, are almost entirely focused on entertainment, and don’t own cable systems or broadband businesses. Asked Monday whether telecom and media combinations made long-term sense, Mr. John Stankey, CEO of AT&T, said he didn’t know. “I won’t conclude that there isn’t possibly going to be that kind of reordering in the industry over time,” he said. “But for right now…that’s probably a mismatch at this juncture.”

Back to basics

My point in referring to this story is to underline the importance of understanding the basic question: what is business? In this instance, the question had an added dimension. Can three independent businesses hang together in one entity and blend into a single business? It turned out, in this case of AT&T, that the answer is no. Can we definitively say this is curtains for such efforts?

Hark back to a few more years. There was a time when many pharma companies had a substantial business in farm chemicals. And then there were many divestitures because of the argument that both businesses had completely different life cycles and hence it did not make sense to domicile them in one entity. And come years later, they came together again because, ‘experts’ said, conditions had changed. Some IT service companies who had merged two departments of Media and Entertainment into one going by technology underpinnings will also face the same question.

This is the point that Peter Drucker keeps emphasizing. What are your assumptions? Do they hold valid now? If not, what explains the change?

The real danger is stagnation – stagnation in thinking. But you don’t overcome stagnation by changing the moment you feel you have noticed signs of change. Don’t look for words or even concepts to help you. Years ago, during the 1970s, the world witnessed a combination of stagnation and inflation, which was bizarre because the reigning thinking was that inflation was an accompaniment of rising levels of growth. What the world experienced however was inflation and stagnation. But instead of attempting to understand this seemingly deviant phenomenon, economists took the easy way out – coined a new term, stagflation. And such was the poverty of thinking that this term gained currency as a self-evident expression.

Well, managers cannot afford that. Yet, many do. You don’t.

Takeaways

Business model doesn’t really help in articulating a business

Understanding the underpinnings of businesses is more important

Don’t look for easy solutions

You can read part 1, 2 and 3 of this article by clicking on the buttons below: