And how smart businesses still flourish.
Note: This article is from June 2020. The corona crisis as well as the economic landscape have developed since then, so please keep this in mind while reading.
The ongoing corona crisis and the subsequent economic slowdown have had major impact on businesses of all sizes around the world. Years of economic growth have allowed companies to grow and flourish in many parts of the world, sometimes even without a really functioning business model underlying their operations.
The corona crisis has forced companies that have ridden the wave of economic growth to reassess their business model. Even companies that already had good underlying structures beforehand decided to innovate in order to be impacted less negatively by the crisis or to contribute to efforts in defeating the virus.
Historically, large-scale disasters have almost always led to major innovations. For example, the Black Death in Europe between 1331 and 1353 led to a broad change in thinking and many new developments in society and especially medicine. Much more recently, the SARS epidemic of 2002 caused internet penetration and the e-commerce sector to skyrocket in China. There is no reason to believe similar innovations and changes in thinking will not happen as a consequence of the current crisis.
But first, what is business model innovation? A business model consists of four interconnected parts: profit formula, key processes, key resources, and customer value proposition.
The profit formula is the way the company creates value for the customer and themselves.
The key processes are the processes, norms, rules and metrics in a company that make profitable operations repeatable and scalable.
The key resources are employees, technologies, products, distribution channels, partnerships, brand, and whichever other resources a company has in order to gain a competitive advantage and run their processes properly.
And finally, the customer value proposition, which is at the core of business model innovation, requires awareness of who the target customers are, what their needs are and how to fulfill these needs.
A business model innovation can be done by adapting the key processes, the key resources, or the profit formula to better fit the customer value proposition. In the case of the corona crisis, new needs have arisen as a consequence of the virus and the lockdown. At the same time, other needs have decreased or disappeared, and some key processes or key resources of a company may not be useable due to the changed circumstances. Both the disappearance of some possibilities and the appearance of other opportunities lead to a need for business model innovation.
To assess how companies are adapting their business models, we are first going to look at some general shifts in customer behavior. From there, we are going to assess innovations in key resources, specifically channels, products, and employees, and then innovations in key processes.
One main factor in changing customer behavior is the accelerated shift towards doing a lot of day-to-day activities online, like working or shopping. Especially in grocery shopping, there is a major transition happening from physical stores to e-commerce at the moment. Grocery delivery platforms are seeing a strong surge in sales, and once customers try shopping in this way a lot of them are likely to stay. On a similar note, there is also a tendency from just-in-time shopping back to bulk shopping. With many, especially in developed countries, having experienced shortages and delays in supply chains for the first time in their life, consumers as well as retailers are moving towards keeping more supplies in storage.
The lockdown has also caused a shift in working culture. Large parts of workforces worldwide are now working remotely. Through the economic slowdown, many are also working less hours, on short time work schemes, or even fully laid off. Unemployment rates have skyrocketed. All this leads to a few consequences: on the company’s side, employees may not be as available as before, especially if the company was reliant on their physical presence.
Similarly, companies are also discovering that many things long seen as normal or established are actually very ineffective, such as long in-person meetings, excessive business travel or large offices. This may contribute to companies becoming more effective in their processes in the long run. On the employee side, less work or unemployment may mean more time as well as less available income, leading to reduced purchasing power.
Another major factor is the increased need for medical supplies. Hospitals around the globe are in desperate need of ventilators, face shields, masks, hand sanitizer and other supplies. Masks and hand sanitizer are also highly sought after in the general population, as many countries start to require people to wear masks in public.
If we look at key process innovations based on the aforementioned shifts in consumer behavior, a step many companies took is to adapt their channels. This means starting to offer products and services online. From classes to consulting, everything that can be delivered by video or text is relatively quickly changing to do so. But also providers of physical products have moved their distribution even more online. For many companies who already offered their products online beforehand this just means putting more, if not all, focus on online sales and then marketing their online distribution channels more heavily.
Other businesses require a larger shift in their mode of delivery. As an example, we will look at the Austrian startup Druckster, which prints university scripts for students. Before the corona crisis, scripts had to be retrieved physically from a printing location. Rather rapidly after the beginning of the crisis, the possibility of postal delivery was introduced, as all physical locations had to close.
Especially regarding the increased need for medical supplies, many companies have temporarily adapted their products (which can be considered a part of key resources) to fill the current need. This way, they are adapting to changing customer needs and shifting the customer value proposition.
A widely prevalent example is face masks. Many clothing and textile companies quickly moved to sewing face masks, especially in light of the face mask requirements currently in place in many countries. As another example Rogue Fitness, a US producer of fitness equipment, started using their manufacturing plant to produce face shields and masks. The French luxury group LVMH started to produce hand sanitizer in their perfume production plants.
In the technology sector, Chinese technology company Alibaba has developed an AI system that can detect coronavirus in a CT scan of a person’s chest with 96% accuracy, according to the compan. Temporary product innovations like this allow companies to counteract a drip in demand for their products, build a positive image, and contribute to battling the crisis.
Another big part of the key resources are the employees. While many companies are struggling to pay wages and are even forced to lay off workers, other areas like the food retail sector desperately need more people. One innovative strategy to fight this was found by McDonalds and Aldi in Germany. While regulations are preventing restaurants from opening, McDonald’s employees can be redeployed to assist Aldi in sales and logistics. Many smaller companies have employed similar solutions, such as Florida-based supermarket chain Sedano’s in cooperation with local restaurants.
If we look at key processes, a process that is strongly impacted by the crisis is manufacturing. Especially companies that produce physical goods have felt, for the first time ever, the impact of most manufacturing globally shutting down at the same time. Many manufacturing plants cannot run properly anymore as safety measures mean large parts of their workforce cannot work on-site.
The fact that many companies rely on offshore manufacturing and are now susceptible to international travel restrictions and safety regulations in their offshoring countries just exacerbates this problem. A way for companies to combat this is to introduce automated domestic manufacturing. We are very likely to see an increase of companies deciding to produce in their own country again, but with a heavy reliance on automated processes and machinery.
An example of a company that has already implemented this strategy and now benefits immensely from it is the Chinese technical company Hytera Communications. Because they were using intelligent manufacturing solutions before the crisis already, relying on flexible production lines and automation, the company was able to continue production throughout the crisis and adapt their production line to produce face masks in response to the global shortage.
Another key process that can be innovated to better deal with the crisis is product development. Many companies are starting to work together openly on a never before seen level. For example, Ford started cooperating with United Auto Workers, GE Healthcare, and 3M to design and produce ventilators using seat fans from their F-150 pickup trucks, battery packs and 3D-printed parts.
Similarly, truck maker Scania and the Karolinska University Hospital have partnered to create mobile testing stations out of their trailers. This shift towards open innovation is likely to stay and continue after the crisis, as companies realize the benefits of closer cooperation and a bigger focus on innovation.
On a similar note, some organizations are also increasingly sourcing innovative ideas from their employees. As an example, NASA recently launched a call for ideas in battling coronavirus on its internal innovation platform NASA@WORK. Specifically, they are incentivizing employees to come up with ideas on how to design effective personal protective equipment sterilization systems, build simple ventilation devices, and forecast future developments of the pandemic. Organizations innovating their development processes by sourcing ideas with employees can benefit from a wider variety of innovative ideas, and the employees themselves can gain a sense of purpose in these uncertain times.
While the crisis has undoubtedly caused untold harm on a global level, every cloud has a silver lining. As with many crises before, the ongoing pandemic and economic slowdown is forcing companies to innovate. Shifts in consumer needs, disruptions in global supply chains, and changing workplace cultures require new and innovative solutions. While some companies will certainly perish, others will flourish. Especially companies that react to problems quickly, that have agile and robust processes, and that embrace innovation will come out of the crisis stronger than ever. Maybe this is unwarranted optimism, but I believe the business landscape will be permanently impacted for the better, with companies running more effectively, innovation being more widespread on all levels, and employment being more flexible and less focused on purely putting in the hours.
Sources:
BIPA (2020). BIPA Local Heroes: Mund- und Nasenschutz aus Österreich für Österreich. [online] Available at: https://www.bipa.at/localheroes/jetzt-teilnehmen.html [Accessed 28.6.2020]
Businesswire (2020). Business as Usual at Hytera’s Intelligent Manufacturing Center Amid COVID-19. [online] Available at: https://www.businesswire.com/news/home/20200324005461/en/Business-Usual-Hytera%E2%80%99s-Intelligent-Manufacturing-Center-COVID-19 [Accessed 28.6.2020]
Dahlander, L. and Wallin, M. (2020). Why Now Is the Time for “Open Innovation”. [online] Harvard Business Review. Available at: https://hbr.org/2020/06/why-now-is-the-time-for-open-innovation [Accessed 28.6.2020]
Druckster (n.d). Company website. https://www.druckster.at/ [Accessed 28.6.2020]
Johnson, M.W., Christensen, C.M. and Kagermann, H. (2008): Reinventing your business model. Harvard Business Review, December 2008, pp. 51–59.
Kroupenev, A. (2020). What Will Manufacturing’s New Normal Be After COVID-19?. [online] IndustryWeek. Available at: https://www.industryweek.com/technology-and-iiot/article/21129334/what-will-manufacturings-new-normal-be-after-covid19 [Accessed 28.6.2020]
Martin, K. (2020). Sedano’s, Local Restaurants Work Together to Keep Staff Employed. [online] Winsight Grocery Business. Available at: https://www.winsightgrocerybusiness.com/retailers/sedanos-local-restaurants-work-together-keep-staff-employed [Accessed 28.6.2020]
Mehta, K. (2020). Why Coronavirus Will Stimulate Innovation. [online] Forbes. Available at: https://www.forbes.com/sites/kmehta/2020/03/09/why-coronavirus-will-stimulate-innovation/#504fa1d02283 [Accessed 27.6.2020]
NASA (2020). NASA Taps Workforce for Innovative Ideas for Coronavirus Response Efforts. [online] Available at: https://www.nasa.gov/directorates/spacetech/nasa-taps-workforce-for-innovative-ideas-for-coronavirus-response-efforts [Accessed 28.6.2020]
Nikkei Asian Review (2020). Alibaba says AI can identify coronavirus infections with 96% accuracy. [online] Available at: https://asia.nikkei.com/Spotlight/Coronavirus/Alibaba-says-AI-can-identify-coronavirus-infections-with-96-accuracy [Accessed 28.6.2020]
Origin Maine (2020). Recon face covering mask. [online] Available at: https://originmaine.com/recon-face-covering-mask/ [Accessed 28.6.2020]
Rogue (2020). Rogue COVID-19 Status. [online] Available at: https://www.roguefitness.com/covid-19 [Accessed 28.6.2020]
Springer, J. (2020). Aldi, McDonald’s Make Staff-Sharing Deal in Germany. [online] Winsight Grocery Business. Available at: https://www.winsightgrocerybusiness.com/retailers/aldi-mcdonalds-make-staff-sharing-deal-germany [Accessed 28.6.2020]
Verdon, J. (2020). Will Coronavirus Drive Permanent Shifts in Shopping Behavior?. [online] U. S. Chamber of Commerce. Available at: https://www.uschamber.com/co/good-company/launch-pad/changes-in-consumer-buying-after-coronavirus-pandemic [Accessed 27.6.2020]