3 Signs Your Business Model is on Fire

Last Updated Jan 18, 2011 3:21 PM EST


Historians have an envious perch from which to offer a definitive opinion on when a business model started to come apart. For Kodak, the arrival of the first digital cameras for consumers at the end of the 1980s would be such a landmark.

What are the ways you can recognize warnings in real-time that your business is under attack? Business consultant Rita McGrath offers three such signposts in the latest issue of Harvard Business Review. They are:

  1. Fewer innovations. The first sign is when next-generation innovations offer smaller and smaller improvements. "If your people have trouble thinking of new ways to enhance your offering, that's a sign," McGrath says.
  2. Customers tell you. If you listen to your customers, they will be happy to tell you when new alternatives are increasingly acceptable to them.
  3. Bottom line problems. Problems start to show up in your financials or other performance indicators.
These warnings probably arrive in this exact order. As you add less and less value to your product, customers find a cheaper alternative from competitors. So they buy less from you. The fall of your financials finishes the cycle. (You can purchase the full interview with McGrath on HBR.org, When Your Business Model is in Trouble.)

The good news is that long before your Titanic hits the iceberg you should have adequate warning to steer a different course. The bad news is that leadership often fails to recognize the signs. Says Harvard Business School historian Richard Tedlow:

"Denial is not merely being wrong," he says. "Everybody makes mistakes. Denial is falling into a cognitive Bermuda Triangle. Everything is clear, yet you lose your bearings." One key to avoiding denial is to empower and trust middle managers who are often the first to spot trouble brewing.

I predict a fairly quick demise for the digital photo frame. To see why, just look at the bottom of the unlock screen on an Apple iPad. You'll see a button that turns the device into a photo frame, which can be easily propped up on a table. Currently it only pulls up photos from your own photo collection, but you can see how it could be jiggered to display family photos sucked in from various sites, as photo frames now do. I'll bet that most of the millions of tablet computers to ship from a multitude of manufacturers over the next 12 months will include this feature.

Look around. What businesses do you think are about to be disrupted?

(Photo by Flickr user 1suisse, CC 2.0)

  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.