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Business model innovation helps industrial firms move beyond COVID-19

20-04-2020Strategy

The global health crisis brought on by COVID-19 has resulted in business difficulties for many industrial companies. Demand for products has taken a sudden dive and supply chains, production and maintenance have suffered from the global turbulence.

Mika Ruokonen

Vice President, Helsinki

Miikka Laitila

Business Designer

Some companies have been forced to scale down their costs and operations. As of now, it’s clear that there is no quick fix available and that many industrial value chains may be in for a longer period of challenges. Unfortunately, it’s also likely that COVID-19 is by no means the last crisis of its kind.

The current turbulence seems to indicate that some traditional industrial business models are no longer working - or that they cannot guarantee as smooth a ride as they did before COVID-19.

Heavy industrial assets that used to provide an advantage are now a liability, due to lower business volume. Companies that failed to focus on business model innovation before the crisis are now unable to react quickly enough to changes in a marketplace that is gearing for an economic downturn.

Back in 1985, the famous management guru Peter Drucker said, “It is change that always provides the opportunity for the new and different”. This still applies. COVID-19 and the following economic downturn, like all potential crises, can provide an opportunity for some serious business model innovation - even if there’s less available in the way of resources. New business model innovations often emerge from tough times and help companies thrive after the crisis is over.

A useful exercise for an industrial company could be taking the traditional ‘business model canvas’ tool and empowering a cross-disciplinary team of specialists to review all nine boxes by looking at them through the following lenses: before, during and after COVID-19.

Some good questions to ask include:

  • What are the key changes that have taken place in the course of past weeks?
  • What do we see happening right now?
  • What are the plausible future developments in customer behavior or competition in the marketplace?
  • How could innovations in sales, customer relationships, delivery channels, partnerships, activities, and resources help us apply agility in our operations and help make us a higher-performing company?

    Business model innovations

Below we highlight some of the potential business model innovation avenues industrial firms can take:

Digital sales, marketing, service channels, customer relationships and thought leadership

Instead of serving customers face-to-face, moving interactions and relationships to COVID-proof digital channels. Supporting customers in their online buying activities through content, insights and advice.

Pros

  • Opportunity to deliver efficient and scalable digital sales to a wide range of customers e.g. through video and messaging connections
  • Opportunity to apply various remote self-service models
  • Can help salesforce to focus their time on most attractive customers and automate the rest
  • Might lead to permanent high online brand recognition and reimagined customer journeys
  • Resource efficiency through centralisation

Cons

  • Work only when user experience is delightful and the approach is customer-centric across the board
  • Might take time to build and optimize, require continuous investments and development
  • The transition between sales channels important to consider and organize
  • Cannot always fully replace face-to-face interactions e.g. installations or maintenance

New partnerships e.g. in product delivery and servicing

Using new technology and partnerships to broaden offerings and activities in the customer work, e.g. finding local service providers for spare part deliveries. Already happening in B2C, and the models could potentially be used in B2B.

Pros

  • Opportunity to deliver broader service offerings while still focusing on own core activities
  • Potentially better ability to solve customers’ problems quickly
  • Free(mium) delivery models could be a competitive advantage
  • Can even entail robotics and drones in delivery

Cons

  • Less control of customer experience
  • Increasing dependency on external parties
  • The partner closer to customers might take a big share of the value created to customers
  • Feature creep, technology risks and vulnerability

Shift from products to services

Moving from the provision of single products to continuous service agreements, various XaaS models and total solutions that are provided to customers. Moving from selling ownership towards selling access. Various bundles of equipment, software and services.

Pros

  • Recurring and continuous revenue improves predictability and creates a buffer
  • Possibility to create “stickiness” and positive “lock-in” with personalised services
  • Can entail various rental and leasing models, as well as insurance and financing services too
  • Shift was already ongoing in many companies before COVID-19, now accelerating

Cons

  • Requires changes in resources and capabilities, e.g. in sales, customer service, customer training & after-sales
  • Should be built on solid data architecture to ensure optimization of the service operations once implemented
  • Service agreements might bring unforeseeable risks and costs

Outcome-based value propositions

Outcome-based offerings whereby customers can buy based on the value delivered. Data ecosystems to support outcome delivery.

Pros

  • Reduce risks for customers
  • Potentially higher revenues and better utilization of company assets & resources
  • Pay-per-outcome models might be a nice differentiating factor in competition

Cons

  • Potentially harder to sell and require more effort from customers
  • More volatile revenues
  • Data ecosystems requiring trust, transparency and contracting among parties

Platform business models

A company acts as a network orchestrator that matches the supply and demand of goods and services in a given industry sector or value chain.

Pros

  • Possibility to provide customers a wider range of offerings thanks to suppliers and partners
  • Less risks and own capital involved as a platform orchestrator
  • Can nicely complement ´physical´ offerings
  • Disruptive opportunity to re-position the firm
  • Winner takes it all opportunity

Cons

  • Hard to set up and attract customers to a winning platform
  • Takes time to build technically
  • Chicken-egg problem with two sides of a platform; might first require subsidising one side to gain scale

Selling data and insights

Understanding what valuable data assets a company has and then identifying existing or new customers that could buy data and insights, then launching data-enabled offerings and revenue models.

Pros

  • Rather easy and quick to implement
  • At best, delivers scalable, stable and recurring revenue streams
  • Ability to reposition in the value chain, increase transparency and drive disruptive new growth

Cons

  • Potential legal, ethical and brand issues related to sales of data
  • Needs a solid data infrastructure as a foundation
  • Might require a culture change towards wider data usage in business

New remote activities

New remote activities, such as remote support and services that are delivered from anywhere in the world where COVID-19 outbreak is not hurting the operations too much in a certain moment of time.

Pros

  • Can entail e.g. remote monitoring repairing and product trainings
  • More efficient with sensors, centralisation and less traveling needed
  • Possibility to deliver value without physical interaction
  • Tapping into a global pool of talent anywhere, anytime

Cons

  • Remote can weaken customer experience and quality
  • Not applicable to everything, e.g. installations
  • Sometimes difficult to ensure remote delivery quality

Automation in operations

Applying automation in plants, warehouses and facilities.

Pros

  • Reduces need for humans in the facilities thus the need for social distancing too
  • Might lead to significant cost savings in the long term
  • Data from automated operations brings significant transparency to business, allowing e.g. preventive measures

Cons

  • Might take time and investments to implement successfully
  • Technology risks and uncertainty

Scalable talent ecosystem e.g. outsourcing

Using more outsourcing, partners and freelancers to create more workforce flexibility, building an ability to quickly scale up & down resources and activities thanks to partnering.

Pros

  • More flexibility to market changes
  • Less heavy assets in use
  • Ability to become a network orchestrator and intermediator
  • Rather easy to set up if contacts to partners already in place

Cons

  • Total costs potentially higher than when using staff in payroll
  • Harder to onboard and commit the team to work
  • Increasing dependency on external parties
  • Vendor risks similar than before COVID-19 and not going away

In conclusion

While all of the business model innovations presented above are not completely new, their strategic importance and business criticality and urgency to be implemented might be higher than ever before, given the new, unfamiliar and extraordinary market conditions.

As the COVID-driven economic downturn looms, bringing with it challenges to many industrial firms, it is the proactive and nimble companies that are best positioned to increase their market share as the stiff, slow and passive ones run into trouble. Now is the perfect time for industrial firms to re-think what really creates value, what is critical to clients right now, and what the resilient post-COVID business, offerings and capabilities will look like. Leading companies will not merely adapt to shifting customer needs and market conditions - they will proactively shape the needs and the market to match with their strengths, innovations and business model configurations.

Business model innovation is the key to winning under these circumstances. The ability to innovate, validate, launch and scale new business models should be a critical core competence at all industrial firms. Being able to creatively re-think and re-configure business is vital for building a resilient company and bouncing back from any future adversities.

For more information, please contact Mika Ruokonen:

mika.ruokonen@futurice.com +358 41 447 5652

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