The C-crisis as a structural break to BUSINESS MODELS

The current crisis is ‘a structural break’, i.e. it changes the sources of competitive advantage as a result of thorough reshaping of certain industries. McKinsey (12.2008): The wrong way forward in a structural break during hard times is to try more of the same. The break and the hard times are sure indications that an old pattern has already been pushed to its limits and is destroying value.

 ‘And it isn’t just an economic shock: it is a shock to customer behaviours and business models too.’ McKinsey (04.2020)

McKinsey (04.2020): The extraordinary constraints and imperatives brought on by the COVID-19 crisis have rapidly thrust businesses into challenges they could never have envisioned. Many have had to innovate new capabilities for remote operation almost overnight, complete digital transformations in weeks rather than months or years, and launch new products in a matter of days.

McKinsey (12.2008): Consider an analogy. When oil is cheap and plentiful, we create a vast infrastructure that works well if oil remains cheap and plentiful. When it becomes expensive, we wish we had a different infrastructure. Similarly, when economic opportunities abound, we invest in a management infrastructure that harvests them very well. When the field of opportunities becomes less verdant, we must change our management infrastructure.

McKinsey (12.2008): In the years since, most companies have indeed grown. They have also spent money on increasingly complex overhead structures to address the diversity of products and geographies and the demands of employees and governments. Now, in hard times, scope and variety will be cut, but costs won’t automatically follow. The costs of managing scope and variety have been baked into the infrastructure—IT systems, sourcing systems, and processes for designing and marketing new products.

So during structural breaks in hard times, cutting costs isn’t enough. Things have to be done differently, and on two levels: reducing the complexity of corporate structures and transforming business models. At the corporate level, the first commandment is to simplify and simplify again. Since companies must become more modular and diverse, eliminate coordinating committees, review boards, and other mechanisms connecting businesses, products, or geographies. The aim of these cuts is to provide lean central and support services that don’t require business units to spend time and energy coordinating their activities. Break larger units into smaller ones to reveal cross-subsidies and to break political blockades.

Then start reforming individual businesses. There is a large and useful body of knowledge about how to go about doing so, and this is not the place to reprise it. In general terms, the first task is to understand how a business has survived, competed, and made money in the past. Don’t settle for PowerPoint bar charts and graphs. If the business is too complex to comprehend, break it into comprehensible parts. Once you gain this critical understanding, you can start the work of reshaping. There is no magic formula. Reforming a business always takes insight and imagination.

Shift from product to product + service

Businesscloud (18.03): “The difference now is that the customer no longer needs your product. He has to be persuaded of its value.”

A shift in real estate companies from product to service-based is another industry shift the roundtable agreed on.

Rental and Subscription Models

Unissu (13.04): 

Mete Varas says, ‘The 2008 crisis gave us a new business concept; private shopping. An online private shopping web site is a members-only shopping club, where members can buy goods at high discounts. The business model became so successful that almost every country had one or two local players next to a couple of global players. Consumers enjoyed fashion and luxury goods at desirable pricing (50–70% off) whilst brands have a direct connection with heavy buyers and a clever way to minimize their inventory. 

I expect that the Covid-19 crisis could trigger other new online business models that were taking baby steps in recent years; which will include some form of rental and subscription revenue streams. There are several companies providing designer dress and accessory rentals. As an alternative, some startups launched “Airbnb for closets” type of businesses for almost unlimited inventory. Several brands (even Nike) launched their rental services too. Thanks to changing habits, affordability issues and blurred lines between online/offline shopping, we might witness more brands launch their rental services while native rental companies will likely gain more traction in the coming era.’

McKinsey (04.2020): ‘One notable feature of the COVID-19 crisis is a radical shift to distance business models… As a result, should you now accelerate your investments in a digital business model? Do you need to scale back your capital-investment plans focused on increasing your physical footprint and instead secure bandwidth to host your virtualized business?’

► Virtual customer engagement

McKinsey (04.2020): ‘As the COVID-19 crisis wore on in China, the real estate market, like other sectors, suffered a rapid decline as the buying public sequestered itself at home. The Evergrande Real Estate Group, China’s second-largest real estate developer, responded by creating a digital-only experience, allowing customers to engage entirely online and make refundable deposits on properties, overturning long-held assumptions about the need for in-person meetings. Evergrande saw sales soar by 118 percent in February after it launched the new application. Along with others, the firm is pushing on how much of the customer journey can be handled remotely and how much data can be shared.’

Six early archetypes of post-crisis business builders

McKinsey (04.2020) have identified six early archetypes for post-crisis business builders. 

  1. The remote service provider.
  2. The collaboration platform.
  3. The dynamic talent deployer.
  4. The high-touch digital retailer.
  5. The data visionary.
  6. The resilient and flexible but not redundant operator. 

What each one archetype means, see here

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