Business strategies
Ready or not, today’s organizations are entering a new era characterized by a whirlwind of technological disruption, climate change, social instability, and other long-term megatrends. Some CEOs will look back at the next few years as a formative time when they learned to adapt—and thrive—by radically transforming how they create, deliver, and capture value. Others will see their companies fall behind rivals, destined to play a frustrating game of catch-up. And some will inevitably look back and wonder how their once-thriving organizations became the answers to business trivia questions. Hyperbolic? Consider that 52% of the companies that were listed on the Fortune 500 in 2003 have since gone bankrupt, been acquired, or otherwise ceased to exist. And that 45% of respondents in PwC’s most recent Global CEO Survey said their company won’t be viable in ten years if it sticks to its current path. Finally, consider the wholesale industry reconfiguration necessary to avoid the otherwise irreversible effects of climate change. Against this backdrop, it’s no exaggeration to say that how CEOs and their leadership teams tackle the reinvention imperative will determine their companies’ future. In response, we offer you a practical way of thinking about business model reinvention that helps you better understand the challenges and start taking appropriate action. We also hope to bring a measure of optimism to what can otherwise be a “doom and gloom” examination of the challenges we face. Remember: every problem, every risk, contains the seed of significant rewards if you can identify and seize the opportunities they present (see sidebar, “Let’s take a deep breath,” for more). Let's take a deep breath Moving forward in these turbulent times will require going beyond the usual responses to disruption such as slashing costs or transforming operating models—even though your bigger reinvention journey will likely include these. Along the way, you must get comfortable with challenging long-held assumptions about how your company makes money, even—and perhaps especially—when these assumptions are what brought you success in the first place. Creating value through business model innovation Business model reinvention means radically transforming how a company creates, delivers, and captures value. Or, put another way, it’s how a company fundamentally changes how it makes money, serves customers, or provides new products or services. We use the terms radical and fundamental with intention—both to help clarify how business model reinvention differs from other vital efforts companies make in service of change, but also to remind ourselves of the size and urgency of the challenges ahead. CEOs in PwC’s latest CEO Survey certainly feel them: when they look ahead three years, they cite rising pressure from technological change, changing customer preferences, and competitor moves as key factors driving changes to their business models. When they look ahead ten years, 45% of CEOs don’t think their companies will be viable if they stick to their current path—up from 39% just 12 months earlier. Although there are many reasons for this, one factor is the looming challenge of climate change. In a separate article, our colleagues argue that avoiding irreversible damage from climate change will require nothing less than reconfiguring the industrial system, spurring fundamental changes in everything from how we feed ourselves, move around, build things, make things, and power things, to how we care for ourselves. Change at this scale will create unprecedented opportunities. In response, savvy companies are reinventing themselves now. Consider a power utility we work with. It realized its legacy way of creating value—using large, coal-fired power plants to generate energy and then trade it—was unsustainable in a decarbonizing world. The future would require generating renewable energy closer to where it’s consumed. In response, the utility is reinventing itself, working with its customers to decarbonize and help them generate their own electricity. The utility is shifting to help its large, commercial customers fund the installation of solar panels, batteries, and control systems in their buildings, and then operating those assets for them. Although this bold decision cannibalized its traditional business, company leaders argued that it was better to disrupt the company themselves than to wait for rivals to do so—besides, managing their customers’ assets was an attractive new business opportunity. Look outside your company As the reinvention imperative motivates your company to consider its long-term viability, you’ll be tempted to start by looking at your own strategy or operating model. Resist the impulse. Getting your company ready for reinvention begins with looking outside it. Focus instead on your customers and where their needs are changing, the underlying megatrends and “triggers” that might catalyze innovation, and, finally, your level of preparedness for a world where external collaboration is a competitive necessity and not a nice-to-have. Let’s look at all three in turn. Start with customers Spotting, let alone capturing, potential profit pools requires intentional management conversations about your customers’ future needs. What do they need that you’re not giving them? How are their needs changing? What customers aren’t you reaching at all, but should? That was the approach of a specialized manufacturer we worked with. The company had long relied on distributors, and its capabilities were squarely aligned to a B2B approach. Still, from the few products it did sell directly to consumers, the company knew it could improve on its manual and high-touch sales processes. For one high-potential product, the company estimated it could reduce its cost per order by more than 50% if its systems were more automated. Many companies might stop there and call it a day. After all, improving its sales processes would save money and improve the customer experience. But by looking harder at customer needs, the manufacturer spotted a bigger opportunity. Company leaders recognized that the target customers for its high-potential product were quite likely to be influenced by their younger family members. If the company could automate and digitize its sales capabilities, it might boost growth by tapping this digitally savvy group as a new customer base. The customer insights ultimately proved the catalyst for change.
