How to combat the side effects of changing your business model

COVID-19 has forced many businesses to change their business model in order to survive.

Those changes may be beneficial in the short-term, but Frank Versace, Chief Relationship Officer with Judo Bank, says SME owners need to evaluate changes through two lenses — restructuring to survive in the short-term, and preparing for the long-term effects of the pandemic.

“Multiple scenario planning — thinking through some of the potential eventualities of the new market — is going to be really important.”

Versace warns of four side effects when making changes to a business model, and offers suggestions for how to manage them.

Side effect #1: Straying from what you know

When diverging from your current industry you may find yourself under-resourced, under-financed and overwhelmed. 

“Any pivot needs to be aligned with the capability of the firm,” Versace says. 

“For instance, you can’t have hospitality businesses converting into manufacturing firms. However, a hospitality business might take account of customers preferring fine dining as an at-home option, in the current climate.”

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Side effect #2: Falling into financial trouble

Underestimating the costs of transitioning a business can be a major stumbling block, says Versace. 

Also of significant concern are the coronavirus-specific financial pitfalls of a potential dependence on government funding and the deferral of loan repayments, utility bills and rent.

“Essentially what you’re doing with that dependence, is robbing from the future to deal with a loss or a crisis in the present,” he says. 

“Something we at Judo Bank are talking to our clients about extensively, is not just to focus on preserving cash flow for now, but thinking through how to position the business for re-emergence.” 

Side effect #3: Damaging your brand

A change in business model may also unintentionally damage your brand.

For example, many Australian craft brewers and distillers responded to the increase in demand for hand sanitiser by leveraging their alcohol manufacturing capabilities at the beginning of the pandemic. 

Whilst initially this satisfied the spike in demand and created income to cover shortfall, there is potential for the new product to contaminate the hard earned brand value of the core offering. 

Rebecca Evans, Judo Bank Director Relationships’ is proud to name the Fonda chain of fashionable Mexican eateries as her client. Fonda successfully evolved their business model with the launch of a subsidiary business, Stanley St Kitchen.

When COVID-19 hit, taking Fonda’s revenue with it, Stanley St Kitchen was able to make and supply quality pre-prepared food items for home delivery, and importantly, supply wholesale to local supermarkets. A new name, visual identity and website were created to support the new business.

“Obviously, image and brand is everything,” Evans says. “Fonda separated the different arms of the business to prevent a mixed message to the market.” 

Side effect #4: Alienating staff

A change in business model can be disruptive for staff who face increasing fears for their job security, together with a forced shift in their duties and responsibilities. 

Evans advises to keep employees informed and updated. Consider your message and communicate clearly about the direction you’re taking and the reasons why. Where possible, involve your team in the decision-making process — or at the very least give them a forum to be heard.

“Along with securing the financial backing they needed to change their business model, Fonda was just as successful at communicating the change to its staff,” says Evans.

“Employees were on board because they saw the Stanley St Kitchen model was a good way to retain staff, particularly in the food prep arm of the business,” she says. 

Responding and reacting to unexpected market challenges is what good businesses do well.

“Arguably, what’s more important,” says Versace, “is to not get bogged down with short-term priorities, but to plan ahead.” 

“Businesses that work through multiple scenarios in order to create long-term goals and strategies are the business we’ll see prospering on the other side of COVID.”