A Business Model Built for Change
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“A business model is the story that describes how your business operates, how it creates value, and how it makes money,” Paul explains. “And to prepare the company to keep the pace of change, that story must be flexible enough to adapt to the changing landscape of retail. For legacy retailers, this means that their original story is likely no longer the right one today.”
Doron adds that there are many components that contribute to the story. “Change affects retailers/CPGs on many levels,” he says. “Of course, there are changing consumer demands and behavior that constantly challenge a retailer’s right to exist. But changing technological developments also open up new opportunities to cater to those demands. What’s more, our society – and the regulations that govern it – is changing as well. It’s simply not the same world it was even five years ago.” Coping with all of this change requires a more flexible business model that can adjust and evolve.
Allowing your business model to be adaptable doesn’t mean losing the essence of your business. “Nothing should change about a retailer’s fundamental purpose or core values,” Paul says. “Your company’s dreams and ambitions can remain consistent over the years to help customers stay engaged with the brand.” Doron adds: “It is harder for competitors to influence engaged, loyal customers than it is to influence the habits of your loyal customers.”
What does change, however, is how retailers/CPGs engage with customers. And that’s all about understanding customer needs, and finding a solution that works in their context. Doron reminds us that the key to customers’ hearts isn’t necessarily a digital solution. “Simply launching a bunch of digital gimmicks isn’t the way to win customers,” he warns. “Retailers like Action know how to reach their customers without a strong perceived digital presence. But by exploring the needs and behaviors of a particular audience, retailers can find the solution that connects with those needs and behaviors.”
Simply launching a bunch of digital gimmicks isn’t the way to win customersDoron Dijk, Digital Strategist Cognizant
At Cognizant, finding solutions in the context of the customer takes Design Thinking. Through the Discovery, Ideate & Prototype and Pilot & Scale phases, Cognizant helps retailers find a scalable business model that achieves their objectives.
“We start by reframing a business problem into a human phenomenon, to make sure we are answering the right question. In the initial Discovery phase, we work with that question to think broadly and then narrow our scope,” Paul explains. “Just like with innovative products, an innovative business model begins small, and only gets bigger when success is validated. Along the way, we gather insights and information to help guide growth and development. Validation is key here. To be adaptable, you need to know what you need to learn along the way.”
Doron cites an example of a major magazine distributer who wanted to get closer to its resellers and the end customer. The Design Thinking process led to the development of a supply and demand algorithm by perfectly matching the distributer’s supply to the resellers’ and end customers’ demands. It was a new business model. But by combining insights on end-customer behavior with both internal and external data, a more efficient service and a more profitable process was created, and customer satisfaction improved.
Preparing a retail business for the future requires an examination of your entire organization with a Digital Enterprise approach. A Digital Enterprise requires the development of three core digital capabilities: analytical capabilities, human-centricity and transformation management capabilities across the digital innovation portfolio.
The one thing that likely won’t work, Doron warns, is the status quo. “Around 90% of retailers are still legacy companies using a standard business model and siloed innovation,” Doron says. “This is likely not enough to accelerate the pace of change. Unless innovation and change is part of a retailer’s core business and managed across the enterprise, they are likely to fall behind and stay behind their competitors in the long run.”
Developing such a Digital Enterprise with an adaptable business model is certainly not an easy process. “First and foremost, transforming a business model will require a cultural and mindset change,” Paul says. “This is often the biggest obstacle to overcome.”
Doron adds that many retailers also face a common ROI obstacle. “In a market with narrow margins, it’s hard to justify a major investment in something that may not have an immediate ROI.” But he emphasizes that the long-term benefits of such a transformation will be worth it. “We are talking to, and helping, many retailers. And it is finding that balance between the old model and the new model that can be a real challenge.”
Paul and Doron both acknowledge a third common challenge: the significant investment required to improve the technology stack. Legacy companies often have multiple CRM systems, multiple finance and procurement systems, and outdated technology that slows the implementation of improvements. “But the good news is that improving the technology stack often results in more streamlined processes and serious long-term cost savings, which can then be invested in innovation,” says Paul.
First and foremost, transforming a business model will require a cultural and mindset changePaul de Leer, Digital Partner Cognizant
Overcoming these obstacles requires Enterprise Thinking, as Paul and Doron explain. “I can’t tell you the number of times we’ve been in a meeting to discuss a retailer transformation, and seen colleagues from the same company introduce themselves to each other for the first time,” Paul laughs. “Enterprise Thinking gets everyone in the same room and thinking together about the entire process – from procurement to product development to packaging to shipping. Bringing people together aligns the company’s goals across the entire organization.”
But be sure to also invite the right experts to the table, as well, Paul warns. “To make a real impact, think about having a few true experts at the table, instead of a large group of non-experts. It’s the difference between a hundred kids and three professional footballers,” he says.
Doron adds that leadership should also occupy a seat at the table. “Real business model transformation is about more than operations. It’s about more than ROI. You need strategic support from leadership.” And that means leaders who put their money where their mouth is. “Meanwhile, a Chief Digital or Chief Innovation Officer and an innovation team can help capture learnings, accelerate innovation and manage their own budget to ensure that great ideas are implemented with speed and accuracy.”
And when those great ideas come, testing is the best way to validate and ensure they meet the stated goals. Paul describes a transformation project with a major seed distributer who sells directly to farmers. “The company’s value proposition was to ‘help feed the world’, which is broader than just selling seeds. So the question became: how do we improve the farmer’s yield? During ideation, we discovered that water management was one of the most difficult – and most expensive – challenges for farmers.”
So the team at Cognizant developed a platform that used satellites to measure water density in soil. “At first, farmers used the accommodated app in huge numbers, but then those numbers tapered off,” Paul recalls. “So we dug deeper. Up front, they told us they need more data, but it turned out that farmers didn’t have time to use data during the busy growing and harvest season. It took only a few adjustments to make the tool more prescriptive, so that farmers could utilize it also while harvesting. Today, more than 30,000 farmers are on the platform, and are using roughly 17% less water.”
Then, one more unexpected benefit appeared. “The seed distributer was planning on selling the app as an add-on service,” Paul says. “But it began collecting so much valuable data from the farmers, it now offers it for free. Instead of a new business model of simply adding extra revenue, it is helping the company with detailed data on how well the seeds grow in the fields, with real-life weather conditions. This is extremely valuable data. More than added revenue. It shows what works, where and why.”
Most of us have heard the adage, ‘Data is the new gold’. But simply having a lot of data isn’t enough. The insights you extract from that data are key. To be able to reap the benefits of data, retailers and CPGs need to develop analytics capabilities.
Doron points out an example in which a large brand needed help with its Direct-to-Consumer strategy. It had spent millions trying to boost sales with price offers. “Within two days after data analysis began, we discovered that around €2 million of the budget was spent on customers who would never come back,” he recalls. By gaining deeper insights into customers, retailers and CPGs will be able to target a specific customer, and significantly increase customer lifetime value.
“Insights are not only a description of what happened, or about having advanced dashboards,” Paul says. “As a Digital Enterprise, you want to predict what will happen (perhaps with the help of external data), and analyze scenarios. And it’s not just for customer behavior predictions. Data analysis can be useful everywhere else, like in the supply chain.”
We are helping companies to develop strong analytics capabilities that help them to be prepared if something unexpected happensDoron Dijk, Digital Strategist Cognizant
But retailers and CPGs need to be prepared for the long game. “In my experience, becoming data-driven can easily take more than two years,” Doron says. “Thus, catching up to competitors will take a while. And that can potentially have serious implications. Retailers and CPGs don’t need to be at the most advanced level right away, but do need to start and go on that journey.”
Tip 7: Don’t disrupt. Evolve.
“Everybody talks about disruption, but most retailers don’t live in a disruptive world,” says Paul. “Don’t focus on getting to that one disruptive idea. The key is to maintain continuous, incremental innovation. And make innovation part of your core.” Doron adds: “There are many different business models, but one of the characteristics that they have in common is their ability to use existing client relationships, industry knowledge and technology to continuously evolve in small ways.”
Take grocery retail giant Ahold, for example. Since nearly 43% of Dutch people shop at their stores, Ahold could leverage that market share by educating their customers about wine, creating a bigger market, and selling more wine. At the same time, innovations like self-service checkout and dynamic pricing keep this legacy company ahead of the pack – by serving customer needs in big and small ways. “Ahold keeps evolving,” Paul says. “Transforming from a Digital Legacy company towards a Digital Enterprise.”
Got your business model and value proposition set up for the future? The next step is to examine your Organizational and Operational model. Stay tuned to The Click for more insights.
For more information, please reach out to our authors Paul de Leer or Doron Dijk.