What should a business do when it still makes a good product, but customers, retailers, competitors and its own cost structure no longer support the model that once made that product profitable? The usual response is to execute the existing strategy harder: more marketing, tighter cost control, higher sales targets, efficiency projects. If the problem is performance within a sound model, that can work. If the underlying economics have changed, harder execution preserves activity while delaying the real decision.
Consider a familiar pattern. A manufacturer of premium products with local production and a respected brand sees lower-cost competitors copy its successful designs. Large retailers start preferring suppliers who give them better margins. Customers become less willing to pay the premium. Cash flow weakens, which reduces the business’s ability to fund the changes needed to compete. The business has not lost its technical skill. Its economic system has stopped holding together.
This article explains how to tell whether a business faces a performance problem or a model problem, how changes in customers, channels, costs and competition interact, the four broad responses available and why acting while the business still has financial strength matters so much.
A business model is a set of connected choices
A business model is the set of choices about who the business serves, what those customers value, how the business differentiates itself, how it produces and delivers value, and how it captures enough of that value to sustain itself. When one part changes, others may need to move.
A premium position, for example, is not created by calling a product premium. It depends on customers seeing enough distinctive value to pay more than credible alternatives cost, and that premium must survive channel margins, production costs, service requirements and imitation. If any of those shifts enough, the whole model can stop working, even though nothing is wrong with the product itself.
Feedback loops make it worse
Economic pressure often feeds on itself:
lower margins → less cash → less ability to modernise → continued cost disadvantage → more pressure on prices and margins
The longer this loop runs, the fewer options remain. A move that was affordable two years ago, such as new equipment, a new channel or a change of production location, may become unaffordable once margins and cash have weakened. Recognising the loop early is one of the most valuable things leaders can do.
Common misreadings
- It is a sales problem. Sales are an outcome of the wider system. If customers can get an acceptable substitute for much less, extra promotion may not restore the economics.
- Past differentiation is still valuable. A design, feature, channel or capability that once created scarcity can become easy to copy or less important to customers.
- All revenue is worth keeping. Revenue that consumes disproportionate capital, management attention or capacity can prevent investment in better opportunities.
- Wait until it is clearly unprofitable. By then, scarce capital and time have been spent and options have narrowed.
- Persistence is always courage. Sometimes courage means persisting through temporary difficulty. Sometimes it means accepting that a model has lost its advantage and moving resources before decline becomes irreversible.
Reframe the question
The useful question is not “how do we save the existing business?” It is “where can this business still create distinctive value, and what should it stop carrying in order to concentrate there?” That question allows for keeping some activities, changing others and leaving some behind.
Diagnose before choosing
The same symptom, such as falling margins, can have different causes. Separate temporary underperformance from structural change by looking at:
- Customer value: are customers still willing to pay for what makes you different?
- Price: are realised prices falling because of competition, channel pressure or discounting habits?
- Cost: is your cost disadvantage temporary, structural or fixable?
- Channels: who captures the margin between you and the end customer, and is that shifting?
- Competitors: are new or cheaper alternatives taking share?
- Capital: what would it cost simply to keep your current position?
Four broad responses
Reposition
Reposition when the business still has valuable capabilities but needs a different customer, segment, proposition or route to market, one where those capabilities matter more. The risk is cosmetic repositioning: changing the story without changing the economics.
Transform
Transform when the market remains attractive but the way the business operates cannot compete. That may mean modernising production, changing sourcing, redesigning processes, adopting technology or forming partnerships. Transformation is justified only if future economics can support the investment and there is a credible path to the target.
Contain or harvest
Some activities remain useful but no longer justify investment for growth. Running them for cash, simplifying them and limiting further capital can be entirely rational, provided they do not absorb the management attention and capacity needed elsewhere.
Exit
Exit, by selling, closing or discontinuing an activity, makes sense when the business cannot create enough distinctive value, when the investment required is unattractive compared with alternatives or when the activity no longer fits where the business is going. Exit releases capital, people and attention, but it carries real costs: lost revenue, transition effort and effects on staff, customers and suppliers.
A hybrid response is common and often sensible: exit a commoditising product line while investing more in a distinctive one. That is not inconsistency. It is portfolio thinking applied to the business model.
Measure margin where the decisions are
Overall profit can hide very different economics underneath. One product line, customer group or channel may be highly profitable while another quietly loses money, with the average looking acceptable. Before choosing a response, measure margin by product, customer and channel, including the costs each one actually consumes, such as special packaging, extra service, discounts, rebates, freight and the time of skilled staff. A simple analysis, even an approximate one, often shows that most of the profit comes from a minority of activities and that some activities are being subsidised. That picture is the starting point for deciding what to reposition, transform, contain or exit.
Manage the people side of change
Changing a business model affects people: staff whose roles change or disappear, customers who relied on a product, suppliers whose orders fall and owners whose identity is tied to the original business. Handle these effects deliberately. Explain the reasons honestly, give as much notice as practical, follow legal obligations for consultation and redundancy, help customers find alternatives where you exit a line and give suppliers fair warning. A change managed with care preserves reputation and goodwill, which the repositioned business will need.
Capital capacity decides strategic freedom
The best option on paper becomes irrelevant if the business waits until its balance sheet can no longer support it. A move to new equipment, a new channel or a different production location usually requires money and the ability to sustain operations during the change. Margins and cash flow therefore are not just financial measures. They determine which strategic options remain available.
Leaders should understand which parts of the strategy are becoming hard to reverse, what money must be committed before the evidence is complete, and how much financial resilience remains if a change takes longer than expected. Acting while the business is still financially healthy keeps more options open.
Set review points in advance
Strategic shifts are hard to judge in the moment, so agree in advance what evidence will trigger a decision. For example: if a product line’s margin stays below a set level for two consecutive quarters, review it; if a major channel demands further concessions, test the alternatives; if a transformation misses its milestones, reconsider the plan. Review points written down while the business is calm make it easier to act when pressure arrives, and harder for attachment to familiar activities to delay the decision.
Six tests
| Test | Question |
|---|---|
| Customer value | What will customers still pay for that alternatives cannot easily provide? |
| Cost position | Is our cost disadvantage structural, temporary or realistically fixable? |
| Channel power | Who captures the economics between us and the end customer, and is that changing? |
| Capability | Which of our capabilities remain scarce and valuable, rather than merely familiar to us? |
| Capital | What must be invested to restore competitiveness, and what else would that money displace? |
| Options | Which choice keeps future options open, and which creates hard-to-reverse commitments? |
Express the decision explicitly for each significant activity: reposition, transform, contain or exit.
A worked example
This is an illustration. An Australian manufacturer of premium outdoor furniture sells through two channels: a range sold through a large home-improvement retailer, and custom and commercial work for architects, hotels and hospitality fit-outs.
Over three years, imported products that closely copy its retail designs appear at about 40% lower prices. The retailer asks for an extra eight percentage points of margin. Steel and labour costs rise. The retail range’s gross margin falls from about 38% to about 19%. Meanwhile, the commercial channel’s margin holds at about 42% and its order book is growing, but it is constrained by production capacity tied up in retail runs.
The owner works through the six tests. Retail customers no longer pay for the design difference. The cost disadvantage against imports is structural. The retailer’s power is growing. The business’s real distinctive capabilities are custom design, durability for commercial use and responsive local production, all of which matter far more to commercial clients. Restoring retail competitiveness would require investment the business cannot justify.
The decision is a hybrid:
- Exit the retail range over nine months, honouring existing commitments and managing the transition with staff and the retailer.
- Reposition towards commercial, hospitality and custom work, with more sales effort directed at architects and designers.
- Transform production for short custom runs, investing about $250,000 in cutting and bending equipment suited to smaller batches.
- Stop investing in retail packaging, displays and promotional programs.
Revenue falls in the first year as the retail range winds down, but gross profit recovers within eighteen months as capacity shifts to higher-margin commercial work. The business acted while it still had the cash to fund the change.
How this applies to a small Australian business
Small businesses often feel economic shifts quickly, especially when a few customers or channels dominate. Practical steps:
- Track margin by product, customer and channel, not just overall.
- Watch for imitation, channel pressure and falling willingness to pay.
- Separate temporary underperformance from structural change.
- Decide explicitly for each significant activity: reposition, transform, contain or exit.
- Act while cash and credit are still healthy.
- Plan exits carefully, including obligations to employees, customers and suppliers. Check employment obligations and contract terms with advisers.
- Talk to your accountant about the financial effects of each option.
The articles on steering a small business through a downturn and customers are more than revenue cover related ideas.
Signals worth watching
- Falling willingness to pay despite steady product quality.
- Growing channel demands for margin.
- Competitors imitating previously distinctive features.
- Rising investment needed just to stand still.
- Revenue growing while margin quality deteriorates.
- Initiatives aimed at restoring yesterday’s economics rather than creating tomorrow’s.
- Activities described as “core” without a clear reason customers will keep valuing them.
Common mistakes
- Treating a model problem as a performance problem.
- Defending inherited revenue regardless of its margin and capital demands.
- Waiting too long, until options have narrowed.
- Repositioning cosmetically without changing the economics.
- Underestimating the capital needed for transformation.
- Exiting abruptly without managing the effects on people and relationships.
Frequently asked questions
How do we know the economics have really changed? Look for sustained trends across several indicators, such as prices, margins, channel terms and competitor offers, rather than a single bad quarter.
What if the owners are emotionally attached to the original business? That is natural and common. Separate the analysis from the decision: gather the evidence first, discuss it with an independent adviser, then decide.
Is exit a sign of failure? No. Exiting an activity that no longer creates value can be one of the best decisions a business makes, freeing resources for better opportunities.
What if we cannot afford to transform? Consider partnerships, staged investment, containing the activity for cash while building alternatives, or selling the activity to someone better placed to transform it.
Can we test a repositioning before committing? Often, yes. Trial the new proposition with a few customers or in one region, measure margins and demand, and expand only when the results support it.
Should we tell staff early? Be honest and timely, within the limits of commercial confidentiality, and follow consultation obligations under employment law. Uncertainty handled badly can cost more than the change itself.
Questions to ask
- Which part of our revenue depends on economics that are weakening?
- Where are we investing to restore a position that may no longer be defensible?
- Which capabilities remain distinctive, and which are simply familiar?
- What would we stop funding if we designed the business for today’s market?
- How much strategic freedom would remain if margins weakened further?
- Which activities should we reposition, transform, contain or exit?
Bringing it together
Strong strategy is not loyalty to an existing business model. It is loyalty to the value the business can create. When the economics change, diagnose whether the problem is performance or the model itself, recognise feedback loops early, and decide deliberately whether to reposition, transform, contain or exit, often a combination. Act while the business still has the financial strength to choose. The most expensive mistake is often not choosing the wrong new opportunity, but continuing to fund an old answer after the market has changed the question.
Source: KEVOS notes. Examples and figures in this article are illustrations. This article is general information, not financial or legal advice.
