Benefits of the Old Fashioned Business Models in the light of Global financial Crisis

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Introduction

There are many factors which are requisite for success in business. Those factors range from proper and professional management of business resources to adoption of up to date business models in order to ensure continued existence amid ever stiffening competition. The main conventional goal of any business organization is to maximize profits and to remain solvent throughout.

Many business executives who shoulder the responsibility of foreseeing and leading other stakeholders towards achievement of this goal have therefore identified employee and customer satisfaction as one of the main keys to its achievement. Lutolf-Carroll and Pirnes (2009) argues that business operators believe in giving their customers value for their money; creating and selling safe, worth products; and going an extra mile to serve their customer needs.

These steps they argue are commonsense business values which pay off in the long run. Many business executives have therefore learnt through experience that a happy and satisfied employee in turn gives happiness and satisfaction to customers who are the main source of financial resources needed to generate profits and maintain solvency.

The ability of a business organization to consistently keep up a happy workforce and a superior customer service depends to a large extent on its ability to adjust to changes occurring in its area of specialization in order to sustain its competitiveness (Pinson 2008; Waddell 2004). Failure to adopt the relevant technological changes as well as appropriate business models in this age can be the main cause of its dwindling profits and eventual collapse due to its inability to offset liabilities.

Surprisingly there are business organizations which sticks to old fashioned business models and still manages to sustain and even increase their client base and remain solvent and competitive. The purpose of this essay is to establish the benefits and drawbacks of old fashioned business models in the light of global financial crisis with reference to Airdrie bank of Lanarkshire in the UK.

Need for Change in Business

The need to effect change in any part of your business originates from various factors. Some of these factors are internal while others are external in the sense that they originate from happenings outside your business which bears upon your activities either directly or indirectly.

Pinson (2008) for instance argues that changes that necessitate revision of a business plan on regular basis can be linked to three fundamental sources namely: changes inside your business, changes coming from the customers, regulatory changes, general economic changes, and above all technological changes among others.

A change within your business itself like the need to expand from B to C into B to B obviously brings need for change in your business. In addition, changes within your organization may call for changes in legal arrangement, adding up of new partners or can necessitate alterations in management.

According to Pinson (2008), increase or decrease in the sales of the product or service of your company depends largely on the taste and preferences of your customers. You are therefore bound to effect changes on the basis of changes in their tastes and preference in order to raise your sales and preserve you client base. In the clothing industry for instance you have to keep up to date with fashion styles and color preferences.

Technologically, it is naturally expected that you have to adjust you business in order to stay modern with the shifting business world (Pinson 2008; Wadddell 2004). In a nut shell, change is inevitable in business and how well a business organization manages change and adapts to changes determines its future survival and ability to preserve its solvency and continue making profits in a business environment that is highly competitive and increasingly risky.

Business models

Business models like any other part of your business is subject to change. It is important that we start by finding out what a business model is. According to Longenecker and Loeza (2010), the term business model refers to a set of common characteristics, behaviors and goals that a business pursues in particular business circumstances or situations. Longenecker and Loeza notes that a poorly worked out business model can be the main factor for business collapse.

Traditionally, businesses are categorized on the basis of the customers they serve. Here it is important to note that the main target of any given business whether the traditional brick-and-mortar or E- businesses is to serve satisfactorily a given category of customers. Consequently, the business model of your organization should be designed and developed to suit as much as possible the needs of your customers (Pirnes & Lutolf-Carroll 2009; Zhang 2011).

In addition, it should be able to adapt to changes particularly from its customers and other sources so that you may be able to build and sustain your client base. How can a business organization stick to its old fashioned business model and still continue making profits and remain solvent especially in the light of financial crisis of a global scale? What are the benefits and drawbacks of the old fashioned business models in the face of global financial crisis?

Airdrie bank in Lanarkshire in the UK is a prime example of a business organization that has stuck to its old fashioned business model and yet it has managed thrive and to prosper. According to its general manager, its customers love it and seem to be satisfied with their services. Rev Henry Duncan is credited with having started the savings bank in Scotland, in the 19th century. He was motivated by the need to ensure that his parishioners had a safe place to keep their savings.

The bank’s customers are the prime shareholders of the bank. Unlike the other banks, Airdrie does not assume common risks. It only issues debit cards to its customers, and no credit cards. Mr. Lindsay argues that they can only be in trouble if the whole of the British banking system collapsed and even then they would not have as much to worry about like others whose business model keep up to date with the changes taking place in financial sector. The big question then is why all these conservatism?

Benefits of the Old Fashioned Business Model in the light of Global financial Crisis

A good business model can prove hardy during times of global financial crisis like the one experienced in years 2007-2008 (House of Commons Treasury Committee 2010). The global financial crisis of this period was caused by what has been termed to as credit boom which arose from one of the products of financial innovation in the recent past Sanchez (2010).

Sanchez argues that mortgages for instance did not help to decrease informational problems which are common in credit transactions nor did it encourage suitable risk measurement. These facts may explain why some banks like Airdrie opt not to sell customers insurance or give mortgages and other credit products.

An old fashioned business model enables business organizations especially financial institutions to uphold preventive measures which include strict capital sufficiency standards, reserves and liquidity ratios for intermediaries, contingent capital and countercyclical loan-loss positioning and more information revelation (Sanchez 2010; Fair & Raymond1994).Such measures enable an organization to insulate itself from the negative effects of experimenting with financial innovations (Arup 2006).

Jansen, Steenbakkers and Jaegers (2007)asserts that some business organizations stick to the old fashioned business organization because it enables them tom safeguard their current and previous successes without taking unnecessary risks that comes with venturing into new processes and markets.

In the case of the financial institutions like Airdrie bank, players who stick to old fashioned business models are able to evade the risks that accompany untested financial innovations like the ones that brought about the global financial crisis of the years 2007-2009.

Old fashioned business model enables organizations to satisfy their customers who prefer the old fashioned familiar way Jansen, Steenbakkers and Jaegers (2007).Other business organizations stick to the old fashioned business model because shifting to new business model rarely generates short term profits thus making measurement of Return on Investment(ROI) hard. Thus they prefer to stick to the old fashioned business model which guarantees them profits with few risks to get into.

Drawbacks of the Old Fashioned Business Model in the light of global financial crisis

Sticking to the old fashioned business model can have devastating drawbacks for an organization especially during times of global financial crisis. Holding on to the old fashioned business model hinders a business from reaping the benefits that come with new business models. In fact, in business the bigger the risk involved in a venture the greater the rewards and lesser the risks the lesser the rewards.

Someone may even safely argue that it is riskier in business not to risk than to risk. So that those who shun risking new business models may end incurring greater losses in the long run especially in case of a global or a normal financial crisis.

Contrary to what is held by some organizations like Airdrie bank financial innovations have greater rewards economically for individuals and businesses alike (Sanchez 2010; Rannenberg 2010; Low 2004). Sanchez argues that financial innovation enables business organizations to lower their cost of capital, encourage greater effectiveness and efficiency and enhance the leveling of utilization and investment decisions with substantial profit for families and businesses.

In fact, Sanchez asserts that financial innovation is not the cause of crisis per se but the failure of players to put up strict regulation and risk measurement methods when experimenting with new ways of doing business. Therefore, organizations that opt to stick to old fashioned business model may loose benefits which accrue from financial innovation and which may act as a shield against the extreme effects of a global financial crisis.

Sticking to an old fashioned business model may makes business organization be unable to provide a superior customer service which is a perquisite for its overall success. During global financial crisis, clients’ tastes and preferences are bound to change and in case you business model lacks what is needed during such times to take of their changing needs you inevitably face the risks of losing you customers to other organizations with models that are able to cater for their needs in the face of hard financial times.

The inability of you business model to respond to their needs during times of financial crisis may make them loose trust in the previously accepted old fashioned familiar ways. Winning their trust back thereafter may be impossible especially if you chose to continue with old fashioned business model (Holtsnider & Jaffe, 2009; U K Stationery Office, 2009; Arup, 2006).

An organization’s competiveness is dependent on its ability to maintain a firm customer trust without which it is bound to perform badly in a highly competitive market. A large part of that trust is founded on an organization’s business model and especially its ability to respond to their changing needs. The rigidity of an old fashioned business model may therefore be unresponsive to the changing needs the customers during global financial crisis (Marien and World Future Society 1985; Simchi-Levi 2003; Pycraft 2000).

Conclusion

There is a close relationship between an organization’s business model and its ability to continue making profits and remain solvent. This fact is anchored on the premise that its business model determines how well the customers are served and thus their levels of satisfaction.

Therefore, irrespective of the benefits that an organization may derive from an old fashioned business model, it should ensure that its business model has the ability to respond satisfactorily to the needs of the customers always including times of global financial crisis. Financial innovation should not be feared provided the necessary regulatory and risk assessment methods are in place for without innovation human progress can not be achieved at all (Sanchez 2010; Delimatsis 2011; Ellis & Vertin 2003).

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