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The Covid-19 pandemic caused a massive shift in consumer habits with a wholesale shift towards digital. People who swore they would never have groceries delivered because they needed to “see and touch” products now blithely order online. Mobile payment options have been discovered by those who don’t want cash. Even professors who once said they wouldn’t teach online are doing it.
Some estimates show that nearly half of all consumers shop online now more than they did before the pandemic. How have companies responded? The crisis has offered a laboratory experiment in “innovate or perish”, with a fresh focus on the importance of “business model innovation”.
This approach involves figuring out new ways to deliver goods to customers. It is typically not costly or high risk. It is not like traditional innovation, which involves the creation of new ideas using a full-blown research department and a large investment of resources and time.
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Uber, on the other hand, is a company built on business model innovation. Uber didn’t invent the systems it uses. This includes the internet, smartphones GPS, cars and the concept of transporting people. Instead, Uber delivers the same service — a taxi — to the same customers, but in a different way.
Many companies failed to innovate in the face of the pandemic, and many have failed to survive. Restaurants and retailers closed because their owners wanted to wait for the right time to reopen. However, other businesses rose to the occasion by switching to or ramping up their digital offerings.
Starbucks is a good example. Starbucks quickly implemented a mobile ordering system that allowed customers to pick up their coffee from a salesperson outside. This eliminated the need to wait in crowded stores. The company quickly integrated the service into its mobile app, which gained popularity and made it more popular, resulting in loyal customers.
Target and Best Buy are two other retailers that offer kerbside pickup. This reduces infection risk and solves parking problems. It also helps families with small children, people with limited mobility, and families with young children. After the pandemic, it is likely that people will continue to order in advance and visit a store to collect their items.
In general, business model innovation can be used to help labour-intensive sectors like food service. In a 2019 paper in Management Science, I and my colleague Tom Fangyun Tan of Southern Methodist University’s Cox School of Business showed that when restaurants provided customers with digital ordering technology (iPads on the tables), customers spent more and vacated tables sooner. Overall, sales productivity increased by approximately 11 percent. This approach could be used by companies without any risk or cost. A chain that has 1,000 outlets could prove its worth in a handful of locations.
Restaurants have adopted QR code ordering to make it as simple as possible. Customers can scan the code on their phones and order from the restaurant.
Implementing business model innovations is not without its challenges. It is relatively easy to test new delivery methods, but it is much more difficult to implement them. At some point, significant investment must be made in order to make it a reality. One of the biggest stumbling blocks is corporate culture — it is difficult to foster innovation in large organisations.
My Wharton executive education course on business model innovation focuses on how to make companies more open to new ideas and less risk-averse. Top management should regularly audit the business model, gather ideas and discuss them with their proposers. Lack of feedback is the biggest obstacle to innovation.
It should be made clear that innovation is a responsibility of every manager, not just those in R&D. The initiative for culture change must come from the top, with the chief executive stressing openness to and celebration of experimentation and possible failure, supported by some funding that is easy to access. As Amazon’s Jeff Bezos once said: “If you double the number of experiments you do per year, you’re going to double your inventiveness.”
The pandemic was a lesson in business model innovation. Businesses tend to change their approach only when they are faced with disaster. They may not be able to compete in a crisis if they aren’t prepared. They need to have a process for regularly reviewing their current approach to safeguard against gaps and vulnerabilities, and to create a culture of experimentation within the company.
While Covid-19 is considered by many to be a “once-in-a-generation event”, other unforeseen events that occur more frequently can disrupt any business. Think about the financial crisis and the dotcom bust. Other unforeseen events can also disrupt supply chains. Not least the March cargo ship that got stuck in the Suez Canal. The ability to experiment — and the acceptance of new business models in a company — will be critical for responding well to future crises.
Serguei Nettesine is vice-dean of global Initiatives, Dhirubhai Professor of Innovation and Entrepreneurship, and professor of Operations, Information and Decisions at the Wharton School of the University of Pennsylvania