The Impact Of Intense Disruption On Business Models And Strategic Alternatives (Part 1)

Nitin Singh

Part 1 of a three-part series

When you are in business, you need to be always prepared for the worst. As the current major economic disruption and uncertainty shows, various uncertainties can cause major disruptions to the entire business.

When we look back at this era, I believe we will identify two distinct economic models: before the current disruption, when economies around the world were growing at a record pace, and after the disruption is over, when the economy gradually comes back to normal.

The pace of recovery will be different for different industries, as the crisis changes the way people consume products and services. This will be driven in part by the differentiation between essential and non-essential needs. Several research papers predict that there will be massive changes in consumer spending patterns, both in the short term as well as in the long term, depending upon the type of products.

For instance, there might be an increase in long-term demand for organic products, cleaning supplies, personalized healthcare, and remote services, and we might see more e-commerce and home-delivery patterns emerging from a variety of industries, wherever it makes sense. It is certain that there will be a push to offer redefined value propositions, such as grocery stores that offer certified hygienic products with premium delivery services.

It’s critical to analyze the impact of these disruptive events on your business model and determine the options to redefine the business strategy to address challenges posed by the unforeseen events.

The long-term changes in consumers’ spending habits will also impact corporations and the way they offer products and services. Careful consideration should be given to analyzing evolving market dynamics, and this is the right time to look at your business model to understand how resilient it is to withstanding ongoing economic disruption and the best ways to prepare your organization for it.

The impact will be different for different industries; for the travel industry, it might be a long time before economic activity can be restored, as people will be extra cautious when planning travel. Airlines, hotels, rental cars, taxis, and restaurants are expected to suffer more in the short to medium term due to a very significant dip in demand.

On the other hand, grocery and medicine distributors might see a higher demand for essential products and a dip in non-essential supplies. Some segments of the healthcare and wellness industries will see sustained increases in demand, such as the organic foods, personalized medicines, and preventive healthcare sectors. People have realized the importance of being safe and healthy; especially since healthy people without preexisting conditions appear to have better chances of surviving illness.

This business situation poses some unique challenges and trends across industries.

Challenges

  • Specific product categories see jumps in demand while others see slumps. For example, cleaning supplies and premium produce might see a jump in the short term, while luxury items might see a slump.
  • Consumer confidence will likely remain low, and maintaining a high level of customer satisfaction will be increasingly difficult due to external circumstances.
  • Distributors will face profit erosion from supply chain disruptions due to factors that are not in their control.
  • There will be capacity constraints on selected sectors and geographies.

Business process adoption trends

  • Logistics processes, such as stock transfers, drop-ships, and vendor consignment, might gain traction.
  • Alternate sourcing strategies will become key ingredients of the supply chain to avoid disruptions.

Business impact

Having examined the high-level business situation, let’s deep dive into one of the industries to understand the unique impacts of the current economic shock and how best to prepare your organization.

Consumer products companies are encountering an interesting mix of scenarios, as some subsectors and commodities are witnessing a rise in demand, while many others are seeing a fall in demand. For better illustration of the impact and approach for risk mitigation, let’s take an example of a reference consumer product company, XYZ, which is in fast-moving consumer goods, including food processing and consumable items.

Let’s first understand the key challenges XYZ is facing in the current situation:

  • Availability of raw materials and ingredients
  • Difficulty to predict demand for products
  • Variability in demand according to commodity type
  • Capacity constraints for essential supplies

The impact on XYZ’s business model

Now let’s look at how these challenges are negatively impacting XYZ’s business model. There could be a need to reassess the value proposition and redefine the category strategy. A business model canvas (as shown below) highlights some of the key business challenges across multiple dimensions.

Under the “Key Partners” and “Key Activities” headings, you can see that, given that the demand for some essential items might grow exponentially and create capacity issues, while demand for others might slow, there is likely to be demand-pattern variability, according to the commodity. Additionally, commodity demand is further skewed depending on geography, creating a challenge of uneven demand patterns for the very same commodity, which are driven by the intensity of the current disruption in different parts of the world or even in different states of the same country.

In this blog, I will focus on resolving the challenge highlighted above in red: Supply chain disruption due to delivery issues. Supply chain disruption for XYZ might be happening due to multiple factors such as closing borders, country-specific lockdowns, a supplier’s factory shutting down, transport providers cannot deliver raw materials due to the virus’ spread, a supplier’s supplier going out of business, etc.

A disruption in the supply chain impacts one key value proposition: omnichannel availability of the products, which in turn impacts customer segments, as goods are not delivered on time or, in many cases, not delivered at all! All of this results in poor customer experience and, in many cases, lost customers as they start looking for alternate products. This example demonstrates how one issue on the Key Partners’ dimension of XYZ’s business model has a cascading impact on many other dimensions in the business model.

Now let’s discuss how to fix this critical issue on the supply side.

The following figure explores some ways to resolve some of the business challenges. The business model plot above showed areas of concern in specific dimensions and how those challenges have cascading effects on XYZ’s value proposition and customer segments. Now we will focus on resolving the Supply chain disruption due to delivery issues factor.

As you can see below, Identifying alternate sources of supply leading to Faster supplier development could be one solution to the challenge that we identified in the leveraging business model canvas method.

This article presented an approach to understanding the impact of unforeseen events on your business model and how the impact cascades through and affects many dimensions. In Part 2 of this series, we will deep-dive into capability analysis to understand which capabilities are required to enable identifying alternate sources of supplies as well as developing new suppliers in an expedited manner.

Join us in our exclusive webinar session on May 19 to get an overview of the SAP Readiness Check tool, which gives a first analysis of your existing SAP ERP application, highlighting key project activities.


Nitin Singh

About Nitin Singh

Nitin Singh works with SAP’s strategic customers as Principal Enterprise Architect to orchestrate the complex transformation programs. He also leads the Practice for Intelligent Enterprise Innovations at Business Transformation Services, SAP America. He is an expert in planning & executing complex digital transformations and has delivered more than 80 engagements with SAP strategic customers over the last 15 years. He speaks frequently at internal & external forums and is an author of a SAP press book.