COVID-19 : Accelerator for Business Model Innovation in China
Throughout history, terrible crises have given us some of our greatest innovations. GPS, Drones, microwaves, atomic energy… the list goes on. The COVID-19 crisis is no different, and we are already seeing companies rise above their competition by asking themselves the key question at the heart of all corporate strategies : what can we do, right now, that is hard?
Selling to new customers is hard in time of crisis. Switching a company’s value proposition in the space of a few weeks is incredibly difficult, too. As is transforming entire processes quickly, and finding new revenue streams and cost-cutting solutions. These changes, if anything, are the heart of business model innovation. Indeed, in crisis situations, certain limits are abolished and accelerators appear. There is no doubt that while the Covid-19 will put many organizations in a delicate situation, it will also open the door to innovation in a number of areas. At a time when the greatest risk is to sit idly by, the traditional dynamics of fear of failure are no longer valid.
Few understand these imperatives as well as Chinese companies, which often live, survive and thrive in a competitive minefield. As such, lessons in business model innovation we are seeing emerge there can be useful for all businesses, regardless of geographical location or industry. Below are just a few of the hundreds of transformations and innovations currently helping companies to better survive these hard times, and some of the lessons we can draw from them.
1. Social Selling explodes
Traditional Jewelerer Ideal has been a brick & mortar retailer for the past 18 years. However, when COVID-19 forced a shut down, the company was quick to transition online to survive. Using YouZan, a Saas store management solution on WeChat, Ideal developed a digital warehouse visible to its workforce and launched an initiative called “Thousand People, Thousand Stores”. After rigorous training, the brand’s employees (and franchisees) were able to live stream from their homes and sell products tailored to their regions. Each seller manages their own “store”, with each store sharing the brand’s nationwide stock. With commissions of 10% to 50% compared to 3% previously, Ideal now encourages a much more aggressive sale strategy.
But this is only part of the story : the company actually made the effort to design jewelry solely for the online channel, specifically targeted at Gen Z buyers. It also applied a relevant social media strategy to attract and retain those famously fickle buyers, and aim to upgrade their offer as this new generation comes of age.
Indeed, changing a selling process (ex : selling online) is only part of the business model innovation story : also changing the value proposition while targeting new customers makes for a much more powerful combination, as the entire business shifts to face a crisis, thus allowing for a more holistic change.
Lin Qingxuan (Cosmetics)
A cosmetic company named Lin Qingxuan followed a similar path. In late 2019, the company was forced (like many others) to close 40% of its stores due to Covid-19, and lost 90% of its brick and mortar sales. Faced with the chilling prospect of bankruptcy, the company’s founder Sun Laichun decided to redeploy 100+ beauty advisors from the stores to become online influencers. They were tasked with leveraging digital tools to engage customers virtually & drive online sales. With a little help from Alibaba’s e-commerce solutions and DingTalk’s collaboration tools, Lin Qingxuan’s sales in Wuhan achieved 200% growth compared to the prior year’s sales.
Facing such numbers, one may ask if stores are necessary at all, and rethink the entire retail business model.
Cosmo Lady (lingerie)
Cosmo Lady, the largest underwear and lingerie company in China, also created a similar program, based on WeChat’s large appeal. Just as Ideal and Lin Qingxuan did, the company enlisted employees to promote products to their social circles (I’m sure it was captivating…).
Going one step beyond the examples above, the company created a sales ranking among all employees (including both the chairman and CEO), helping “motivate” the rest of the staff to participate in the initiative. Whether the retail equivalent of the Hunger Games is more effective than cash incentives remains to be seen.
The 3 transformations above are no small feat, despite the short time it takes to describe them : both the jewelry, lingerie and cosmetics industries are high-touch, as customers often like to see and try such products. Yet, in these strange times, a 180° on strategy is often needed. With hindsight, we see the brilliance of these strategic moves in the results. Few, if any, Western companies have been able to pull this off at the time of writing.
2. Open Business is finally cool
Baidu (Technology / Artificial Intelligence)
As I’ve previously made abundantly clear, Artificial Intelligence is a big deal in China. Many in the West will also be familiar with the country’s propensity for facial recognition (the one commonality between buying KFC and getting sent to a camp). With this in mind, it’s no wonder that it was the first country to develop facial recognition that works even with masks.
SenseTime (the biggest AI company you’ve never heard of) has developed a system capable of performing facial recognition, analyzing body temperature, checking that a mask is being worn, and that it is worn properly (France is already adapting such an approach in the Paris metro). Facego is going one step further, by actively scanning the face of all employees to ensure attendance. This software, too, now works with mask.
In itself, these technologies are not business innovation per say. How they came about, however, is. Baidu created in mid-February an open-source facial recognition software to identify people who are not wearing protective masks. Foregoing IP for the greater good is the ultimate gangster move, and makes a lot of sense business-wise. Indeed, open innovation ensures that large companies leave some niches unattended, as others in the market will be able to serve it well, hence improving the entire ecosystem. I believe that as we move forward with this crisis, this form of open innovation will become far more prevalent.
Freshippo Supermarket is doing something that may not look like Open Innovation, but smells like it. At the start of the year, the retailer found itself short-staffed because of the COVID-19 crisis (some workers chose not to come to work, were sick, online orders required more hands on deck…). At the same time, restaurants were shutting down, and contemplating laying off workers. Putting 2 and 2 together, Freshippo offered to collaborate with restaurant to “share” employees willing and able to work, creating a win/win scenario.
This sounds like a logistical nightmare until you realise that Freshippo is owned by Alibaba, which specialises in nightmares.
As of February 14th, more than 40 restaurants (but also hotels and cinemas) have signed the agreement with Freshippo and sent 2,700 “shared employees” to work in the retailer’s stores. Online to Offline players, including Ele, Meituan, Alibaba’s Hema, and JD’s 7Fresh followed lead by also borrowing labor from restaurants.
In many ways, this is the natural continuation of where the gig economy has taken us. I wouldn’t be surprised if we saw such a concept grow in the western world, given the economic hardships ahead.
3. Autonomous vehicles bring new opportunities
2020 was supposed to be the year of the autonomous cars. That’s not looking so good right now. However, plenty of less ambitious ideas have been put to the test in the past few months, especially in China. It’s easy to understand why : due to the epidemic, technology companies are accelerating contactless initiatives to prevent the spread of the virus.
In January, as the epidemic began to hit China, the government called on tech giants to find solutions to keep people safe and secure food and health supplies. One of the responses was the deployment of autonomous vehicles for last mile delivery. These solutions had been tested for several years in China by the likes of Alibaba and JD.com but had so far been unauthorized by local governments. But times, they are a’changin’. JD.com, deployed semi-autonomous robots in mid-January to ensure the delivery of medical equipment to hospitals and people in quarantine. In Wuhan, JD.com was able to fill 70% of its orders by robot and declared a 10% increase in sales between January and March 2020. Other tech companies, such as Meituan Dianping, and Jingdong have followed suit.
One might see this as the logical next step in e-commerce, and a step away from the over-reliance on expensive labour.
SF Express (delivery services)
Since mid-February, SF Express has been using drones instead of tiny cars to transport medical equipment to various hospitals. Each drone can supposedly carry 10 kg over a distance of 18 km, ushering a new age in transport. Antwork, a robotic technology start-up, did something very similar, and claims that this delivery method would be 50% faster than road transport.
Once again, the technology itself is not revolutionary, but how we use it to change models might be. Using drones means reaching new customers who could not travel as far or who are impaired. It means improving a variety of process within the supply chain, and offering brand new services. It can also bring about a new range of services, specifically in the B2B sector (lighting, security, crowd management...).
That, if anything, is the core of innovation.
4. New ways of working emerge
Virtuos (video games)
I mentioned it a few times : technological innovation is nothing without process innovation (among other things), as technology alone is often a simple tool to optimise rather than innovate. It is however possible to have true process innovation without technology : all that’s needed is a catalyst to make the jump.
The Covid crisis offered such a catalyst to Virtuos, a Chinese/Singaporean video game developing company. In order to protect its staff, Virtuos divided its employees into 2 teams with deferred schedules to reduce the density in the offices. To their surprise, an increase in productivity of around 10% compared to the pre-virus period was measured, even as the actual presence schedules were reduced by an average of one hour per day.
Though this is not a business model innovation per say, it shows that innovation and improvements can come from even the seemingly smallest changes, with great results.
XCMG (heavy machinery manufacturing)
XCMG has been taking incremental steps toward automation for a while now, enabling one employee to operate up to ten machines simultaneously. It saw the results of its hard work in early 2020 : their work resumption rate was over 90% on 22 February, nearly two times higher than the national average. Going in a completely different direction than Virtuos, XCMG has proven how automation can play a key role in increasing business model resilience against external, disruptive events like the COVID-19 outbreak. This shows that there is always more than one answer to disruptive issues, and that one size does not always fit all.
In order to truly progress on the innovation path, companies will have to make risky and difficult decisions for which not everyone is necessarily prepared. In normal times, results take precedence and those who take risks are not always rewarded. But the challenge now is to rise to the occasion: businesses must find a way to leave behind the fear of change and ignore the barriers that hinder traditional strategies.
The impact of the changes produced by the COVID-19 crisis will continue to affect all sectors in the long term, sometimes radically transforming processes. Many of these changes will be irreversible. Therefore, instead of focusing on failures or potential risks, companies will need to take advantage of this historic opportunity to introduce new models that will keep them at the forefront of their industry. The sooner they have the ability to adapt to this new reality, the faster they can turn this reality into an opportunity and protect themselves from the global crisis.