Wharton@Work

April 2021 | 

Staying Ahead of Disruptions with Your Business Model

Staying Ahead of Disruptions with Your Business Model

Stockpiling products, acceptance of new brands and higher prices, and insistence on touchless experiences: these are just a few of the dramatic consumer behavior changes that took hold during to the pandemic. Companies had to scramble, virtually overnight, to keep up. They also had to rush to deal with new rules around remote work, supply chain upheavals, and regulations that kept them closed or operating at lower than optimal capacity for months.

“These changes naturally affected business models,” says Wharton’s Dhirubhai Ambani Professor of Innovation and Entrepreneurship Serguei Netessine. While most of those business-model adaptations were reactive — made in survival mode — “now is the time to understand those changes, determine which ones are here to stay, and be proactive and intentional about innovating around them.” That describes the focus of the Business Model Innovation in the Age of AI program, which Netessine directs.

He continues, “Any kind of crisis offers you new opportunities for innovation. Some companies embrace them, and others don’t.” Citing Amazon, whose spectacular growth in 2020 has sparked both envy and contempt, he says success even in “normal” times depends on meeting a “constant need for proactive innovation.” Netessine, who works part-time in the CORE AI group as an Amazon Scholar, says that focus is why Amazon was ready when COVID first hit.

“Meeting the needs of consumers who feared in-person shopping was an opportunity open to everyone,” says Netessine. “Some brick and mortar companies were responsive, improving their online channels and introducing curbside pickup to deal with the new situation. But others sat back, waiting to reopen while complaining about a lack of sales.”

If you were in the former group, you had to change your business model. Your efforts might have come late, you may not have had an established process for innovation, you may have had to move at a pace that felt dangerously quick, and/or you may have had financial constraints. But, Netessine stresses, “None of those are reasons not to do something.”

A New Way of Thinking about Innovation

Even for companies that involuntarily evolved their business model in the face of drastic disruptions, the idea that what they did qualifies as innovation may be an unfamiliar one. Innovation, so the thinking goes, is about big changes that start with a select creative team working within an R&D budget.

That was certainly true for Frank Filippo, an executive vice president at Dow Jones who attended Netessine’s program. “Business model innovation is a novel idea. You typically think of innovation in the form of technology or products. Serguei Netessine challenged that. It’s important for my company…. We know it is mandatory that we innovate, not just with new initiatives and digital, but throughout the company.”

Netessine says this form of innovation includes a number of advantages. “Research shows that the return on R&D is decreasing over time,” he explains. “You might get lucky with your investment, but do you really want to make that kind of bet? Innovating your business model costs less and is more certain.” It’s also faster and harder to copy, because it focuses on adjustments that leverage existing products, markets, and infrastructure.

Getting Started

The Business Model Innovation program begins with learning how to audit existing business models. Participants examine them in light of current changes in consumers, industries, technology, and geopolitical forces. Netessine cites Wharton as an example: “In early 2020, there was apprehension about moving instruction online. Some professors said they would never do it. Now everyone is teaching online, and the benefits are obvious, including relieving stress on our facilities — there is never enough classroom space — and delivering to students who can’t travel to Philadelphia and want online learning.”

The example highlights a key distinction: at first, business model innovations may be made under stress (the phrase “innovate or die” comes to mind), but over time it becomes clear that certain changes and new preferences are here to stay. Then, the question becomes how to intentionally build in your responses.

Innovation Starts at the Top

A major takeaway from the program is that managers and senior-level executives must take ownership of the process: it won’t happen without their engagement from “the very first moment. It can’t be passed off to R&D, like tech or product innovations, and there is no Chief Business Model Innovation Officer,” says Netessine.

“It is the job of all managers rather than an R&D department, in part because they best understand the current business model and what is working. Finance, sales, operations, and marketing must also be involved. And since it must be accepted throughout the organization, creating a sense of urgency, explaining how and why you will innovate the business model, is critical.”

That means a big part of the process is about organizational change. The program leverages organizational behavior experts, who use simulations and other active learning exercises to help participants learn how to introduce the process and change a company that can be set in its ways. This is particularly challenging in organizations that are doing well.

“There is already talk about preparing for another pandemic,” says Netessine. “But we don’t know what new reality is in the future. Now is the time to build the capability to change and adjust business models regularly for whatever comes next. Most successful companies are already doing this. If their competitor copies their model, they are already working on the next one. The truth is, if you don’t change your business model, your competitors will change it for you — and that will be much more unpleasant.”