When companies fail, fall short of earnings, or otherwise miss expectations of success, society is quick to blame the leader.
Why is that?
Perhaps because, psychologically, it’s easier to blame what we can see than it is to blame an unknown.
For example, CVS and Walgreens have been in the news lately for their decisions to scale back on vertical integration strategies and double down on their core business. But soon afterward, CVS reversed course and decided to replace its CEO.
In these situations, news articles often highlight a leader’s inability to achieve outcomes. But what if that’s not really the problem?
What if the root cause of poor earnings, missed success measures, and more are actually due to a less visible problem: the company’s business model?
What do I mean by that? First, the concept of a business model has multiple definitions, so let’s level-set on what I mean.
Business models explain what companies can and can’t do and which innovations they will and won’t pursue
A business model is made up of four interlocking elements that taken together, create and deliver value (see Figure 1). Business models determine an organization or company’s capabilities (what it can and can’t do) and its priorities (what it must accomplish). This, in turn, defines which innovations it can and will pursue. The business model framework is powerful because it enables the prediction of which initiatives will succeed and which ones will fail.
Once business models are solidified, they’re increasingly resistant to change—in both health care and other industries. I’ve written about this concept before, and why business models operate this way.
To survive infancy, organizations pivot their value propositions and adjust their resources and processes until they identify how to bring in the revenue they need to survive. Once this is determined, business model components become increasingly interdependent and resistant to change, especially in successful organizations. The ways in which the four components reinforce one another make the business model highly interconnected and thus more challenging to alter the longer it exists. In short, business models solidify over time.
Despite this truth about business models and how they function, organizational leaders often try to stretch their business models to serve multiple value propositions. But, as the theory explains, this often fails.
Figure 1. The four components of a business model
How does this apply to CVS and Walgreens?
CVS and Walgreens represent two health care behemoths that got their start as retail health entities. In recent years, they’ve doubled down on a vertical integration strategy, expanding their offerings more deeply into care delivery. Walgreens did so with an investment into VillageMD, and CVS did something similar with their overpriced acquisition of Oak Street Health.
But what do they have to show for these investments? As their recent announcements and stock returns highlight, the answer is not very much.
Yet, this isn’t really due to the failure of leaders themselves. It’s due to the companies’ business models. The value proposition of a senior-focused care delivery service is fundamentally separate from that of a retail pharmacy. Are they related? Yes. Do they serve overlapping Jobs to Be Done? Yes. But, do they fulfill the same Job to Be Done? No.
Due to the different value propositions, different resources and processes are required to deliver on those value propositions in sustainable ways. Said differently, CVS needs different staff and supporting assets to fill prescriptions than they need to manage chronic hypertension and diabetes in vulnerable senior populations, and they also need different processes to deliver each of those services. These services also require different revenue and cost structures to create sustainable margins.
These examples highlight the critical importance of a company’s business model structure regarding whether it will succeed or fail at any stated strategic change. Developing and pursuing a winning strategy is critically important, but understanding how one’s business model does—or doesn’t—support that strategy is perhaps more essential.
In short, the leader isn’t the key to success.
But the business model is.
So, the next time someone says, “Karen Lynch (or any other leader) failed in her CEO role,” perhaps you’ll think about this argument.
I know I’ll be more likely to reply, “Did she? Or did the business model fail her?”.
