This paper is the first in a series of four reports on business model change in the UK and Ireland, produced by Grant Thornton in co-operation with the Economist Intelligence Unit. Three subsequent briefing papers focus on business models in the construction and property sector, the media sector and the retail sector. All content was written by the Economist Intelligence Unit with the exception of the foreword, model behaviours and perspectives presented after page 26 of the PDF. 

The UK and Irish economies are enduring their worst recessions since the Second World War. The Economist Intelligence Unit expects that GDP, after a significant decline in 2009, will edge only slowly back into the positive zone in the UK in 2010, and that Ireland not emerge from recession until 2011.

Although painful, the unique circumstances of a downturn can act as a 'burning platform' for companies: an opportunity, driven by urgency, to change their business models—the core objectives they pursue and the ways in which they operate. But are companies ahead of the curve, seizing opportunities, or do they have their heads stuck in the sand? A survey conducted by the Economist Intelligence Unit for this study found that over one-third of companies in the UK and Ireland are pursuing, or plan to pursue in the near future, changes to their core products, target markets or revenue-generation mechanisms meant to position themselves for renewed market growth.

Most companies, however, exhibit complacency about the need to pursue innovation in their business models, believing that adjustments to cost structures are sufficient while market conditions remain tough. Over the next 18 months, the majority of UK and Irish companies surveyed for this study seem focused on survival rather than looking to business model changes that could position them to meet domestic and global competition when conditions improve.

Business model change has been overly cost-centred and left many companies unready for the future. Eighty-six percent of executives claim their companies have adjusted their business models in some significant way as a result of the downturn. For the majority (63%) of companies, however, the cost structure has been the dominant focus of changes, although a minority have also pursued change in their value proposition (38%), revenue generating mechanisms (34%) or target markets (32%). Cost control is always important, but companies risk leaving themselves open to threats from rivals that are innovating more broadly. Fully one-third of companies admit that the assumptions in their business models will need an overhaul as a result of the recession.

By concentrating on cost, companies may be missing opportunities to use business model innovation to address future risks. Cost structures will remain the central focus of business model change in the next 18 months, according to survey respondents, although to a lesser extent than in the recent past. Expectations of input prices rises and new climate change regulation, however, amongst other things, suggest both risks and opportunities for companies that more ambitious innovation in supply chains and new product and service development could help them address.

Executives are pessimistic about a rapid return to market growth. Over half of those surveyed expect recovery in the main markets in which they operate to take 18 months or longer. Moreover, modest predictions about demand growth are, respondents say, the biggest uncertainties amongst their current business assumptions, with most emphasising downside risk. Such caution is in line with the Economist Intelligence Unit’s own forecasts for the UK and Ireland, which see "little to suggest that a sustainable robust recovery is imminent".

Complacency is preventing more widespread business model innovation. A worrying strain of complacency amongst British and Irish companies is revealed in the survey. Nine in ten (89%) executives believe that their company's business model is set up to let them succeed over the next year and a half. Most respondents also seem to believe they will be able to get funding from their preferred source, even given the dire state of the financial sector. And over one-third of companies believe that competition will stay the same, diminish or fragment as a result of the downturn, even though competitors from within the industry, as well as from adjacent sectors and other countries, will be driven to find new markets and products.

Perhaps more worrying than complacency towards the need for change is a perceived inability of management to engineer change. One of the top two barriers to business model change cited by survey participants is the capability of their management to lead it. As one interviewee puts it, "there is an element of head in the sand". But while British and Irish companies may have been able to prosper during the good times with a 'business as usual' approach, they will need more meaningful change if they are to fully prepare themselves for life after the recession.

What is a business model?

The concept of the business model defies easy definition, there being no consensus in academic or corporate circles on its constituent components. Most would agree, however, with the notion that it represents the essence of the business, or the value an organisation strives to provide and the ways and means it uses to provide it. The business model is distinct from strategy, although changes to the former often reflect strategic choices.

For the purposes of this study, we identify five components of the business model:

The value proposition, or the benefits that a company's products or services provide to its customers.

Target markets: the customer segments and product and geographic markets a company aims to serve.

Revenue-generation mechanisms: an organisation's revenue and pricing models—for example, its decisions to earn revenue through direct sales, licensing, franchising, subscription or other mechanisms.

Cost structure, or the balance of fixed, variable and other costs within the organisation.

Value chain, combining a company's supply chain and the sales and distribution channels it uses to deliver its products and services to market.