Wharton@Work

June 2018 | Innovation

Business Model Innovation: Changing the Game with Existing Products and Customers

Inditex, a Spanish trailblazer, has disrupted the retail industry with its fast fashion concept through its Zara brand. While other retailers have been closing stores, Zara continues to open new stores across the globe. What does Zara do that its competition has struggled to replicate? The fashion retailer has turned conventional industry wisdom on its head by listening to its customers.

Instead of having corporate planners and designers decide what styles to offer — making assumptions about customers’ tastes up to a year in advance, like other fashion companies do — Zara gave that decision to those who know their customers best: store managers. This global network of on-the-ground store personnel send daily updates to a 600-strong design team in Spain on what is selling and what isn’t. Based on this sales intelligence, Zara can rapidly produce new designs and get them to market.

Zara’s business model innovation has had implications for cost structures, management processes, and manufacturing arrangements, because not only did they want to offer clothing better aligned with customer preferences, but they wanted it in their stores faster than their competition. They worked to avoid what Swedish retailing giant H&M, another purveyor of fast fashion, announced in its most recent quarterly earnings report: it had $4.3 billion in unsold inventory in its stores.

Wharton professor Serguei Netessine, a global thought leader in business model innovation, says executives in different industries can draw inspiration from Zara’s example. “Business model innovation doesn’t require an R&D department or a risky investment in a new product, service, or technology. And you don’t need to be an engineer or have a black belt in algorithms. Anyone with business training anywhere in the firm can do it.”

Netessine is academic director of a new Wharton program called Business Model Innovation in the Age of AI, which is designed to help business leaders understand and apply a framework for business model innovation. “Managers analyze financial statements and other metrics regularly. But in most firms there is no systematic process for analyzing and transforming business models,” he says. “It should become a discipline that gets repeated routinely.”

In the program, participants will learn the language of business models, what they are, and how to describe and analyze them. They conduct an audit of their current business model and identify weak spots (which, Netessine says, are a given if that model hasn’t changed in many years). Then, Wharton experts in artificial intelligence, digital disruption, big data, and ecosystems offer multiple ways to consider business model innovation. Participants will come away with a systematic, repeatable process that can be employed anywhere in their organization.

“By making seemingly small modifications to your current business models in a programmatic way, you can create significant, and even game-changing, competitive differences,” Netessine says. ”It can be especially powerful for companies in industries where other types of innovations often fail, such as service and commodity businesses.” Other industries that are particularly well suited for innovating their business model are banking, pharma, retail, food and beverage, and transportation.

“Established businesses in particular need to embrace business model innovation to hedge against the possibility of losing ground to a disruptive upstart,” says Netessine. “Common wisdom indicates that it’s better to disrupt yourself than to be disrupted by someone else, but most businesses aren’t good at self-disruption. Business model innovation is a powerful tool for changing that track record.”