What it means
The idea comes from the history of science, where a dominant model of the world is eventually replaced by a very different one. In business the same pattern appears when a new technology or business model changes what customers expect and what competitors must do.
The old rules are not tweaked; they stop applying. Examples are easy to find.
Cash gave way to cards and then to mobile payments, paper ledgers gave way to cloud accounting, and owning software gave way to renting it by subscription. In each case, the firms that kept optimising the old model found their skills were suddenly worth less.
For finance people, the interest is in how it changes the numbers. A new model can alter how revenue is earned, when cash arrives, what assets are needed and how a business should be valued.
A company that moves from one-off sales to subscriptions, for instance, sees revenue spread over time and starts to be judged on recurring revenue and customer retention. Spotting a real change early is hard.
Many announced changes turn out to be fashions that fade, while some real ones look minor at first because early products are rough and the market is small. Investors and managers therefore watch for signs such as falling costs, rising adoption and new entrants that ignore the old rules.
The nuance is that the term is overused. A new product feature, a price cut or a rebrand is not a fundamental shift, and calling it one can lead to poor decisions about spending and strategy.
Managers can prepare by asking a few plain questions each year. Which of our core assumptions would break if a rival offered the same result at a tenth of the cost, and which customers would notice first?
Writing the answers down turns a vague worry into a plan with owners and dates.
In practice
Real-world examples.
Example
A software publisher moves from selling licences for $1,200 each to charging $100 a month. Revenue per customer in the first year falls, but customers stay longer and total lifetime revenue rises. The finance team must retrain investors to look at annual recurring revenue instead of sales in the year. Management reviews the change in its annual strategy session and sets clear targets for the new model.
Example
A regional bank sees customers abandon branches for mobile apps. It closes a third of its branches and moves staff into digital support. Cost per customer falls, but the bank now competes with technology firms that were never part of its market. Treasury updates its cash forecasts to reflect the new pattern of receipts.
Example
A music label finds that income from physical discs has collapsed while streaming grows steadily. It rewrites its contracts, its forecasting and its valuation of catalogues around streams rather than units sold. Analysts revise their valuation models to match the new income pattern.
Case study
Seen in the real world.
Tallis and Moore is an illustrative, fictional accounting practice that had billed clients by the hour for decades. When cloud software began to automate bookkeeping, a new competitor offered a fixed monthly fee for the same work.
The partners first treated the rival as a passing nuisance, but within two years a quarter of their small clients had left. They rebuilt the firm around advisory work, charging fixed monthly packages and using software for routine entries.
In the illustrative outcome, revenue per client rose and the number of billable hours per client fell by half. The lesson was that the firm had to change how it earned money and not only how fast it worked. The partners now review the firm's pricing model every year, asking which part of it a rival could replace with software.
Watch out
Common mistakes.
- Calling every new product or trend a fundamental change, when most are incremental improvements to the same model.
- Assuming the old business will fade at once, when the old model and the new one often coexist for years.
- Judging the new model by the old metrics, such as measuring a subscription business by upfront sales alone.
Questions
People also ask.
Where does the term come from?
It was popularised by the philosopher Thomas Kuhn, who used it to describe how scientific thinking changes, and business writers later borrowed it. The term has since been applied widely to technology, business and social change.
How can a finance team prepare for one?
By testing scenarios in which revenue, costs and asset needs look very different, and by watching leading signs such as falling prices and rising adoption. The main signs to watch are falling costs, rising adoption and new entrants that ignore the old rules.
Is a shift always good for investors?
No, it creates winners and losers, and the companies that benefit are not always the established ones.
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