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).
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. Today, the company is piloting an effort to pivot sales of the product away from a model deeply entrenched in distributor relationships and toward a D2C approach that directly engages with consumers. The company has already enjoyed a revenue bump for the product, and growth in the number of new customers.
Starting with customers (or end customers for B2B firms) helps orient your analysis and increases the odds you’ll find opportunities. Here are three customer-related questions to explore with your team, any of which might prompt your own “aha” moment.
What’s the customer experience? How do our customers become aware of a need? Is it triggered by life events, social interactions? What unmet needs might we spot by studying their experiences more closely?
- What job needs doing? The late Clayton Christensen emphasized the “job to be done” as a way to direct attention away from the specific product or service and toward the reasons customers choose that product or product category.
- What are the pain points? What’s annoying, costly, or time-consuming for customers? Spotting pain points can be a first step toward a business innovation or even a new business model.
Monitor triggers and trends
Broadly speaking, a business model innovation is a maneuver that takes advantage of a changing environment. And how does change happen? To quote Hemingway’s famous description of a character’s bankruptcy: it happens “gradually, then suddenly.”
To prepare for the more sudden changes, you should scan for the catalysts, or triggers, that might arise relatively quickly and create new customer needs that business model reinvention can satisfy. Think of the advent of cloud computing, or how the iPhone’s introduction satisfied powerful needs that customers didn’t know they had. Today’s likely triggers include advances in biosciences, or AI and machine learning, among many others.
If you’re good, lucky, or both, you’ll be the innovator behind one of these triggers. If you’re like most companies, however, you’ll need process and structure to better understand the trends from which triggers arise. Start with the five megatrends that are poised to change the nature of competition itself. These are massive, mutually reinforcing trends that you must grapple with, and a full discussion of them is beyond the scope of this article. But don’t forget that depending on your industry, they could upend your existing business model much faster than you might think.
For example, consider the business model conversations happening around the impact of the megatrends on the insurance industry. Property insurers have already begun reconsidering coverage in light of floods, wildfires, and other climate-related disasters. But what of autonomous vehicles and questions of liability? Who is even being insured should cars become completely driverless? Likewise, in countries that have private health insurance, what happens to traditional health insurers in a world where patients increasingly self-manage their conditions using improved monitoring and AI? We have witnessed conversations like these spin up intriguing ideas—around new broker models, for instance, new asset-management capabilities, insurance of new risks, or plays to actively manage risks rather than just insuring against them. And that’s the point. By making the megatrends tangible for your industry, you can start grappling with them productively—and spot opportunities.
Collaborate to compete
Savvy leaders know that when organizations work with partners in collaborative business ecosystems, they can create value beyond what each company could achieve alone. Indeed, PwC research finds that leading companies are 1.6 times as likely as other companies to leverage ecosystems to gain benefits including access to new customers and markets, privileged insights such as data on customers’ needs, and complementary skills and capabilities.
Therefore, whether you’re changing your business model or not, you’ll need to prepare your company for a future in which ecosystems are a primary mode of competition. Learning how to navigate ecosystems and choose your role in them will be vital.
In the context of business model reinvention, ecosystems and ecosystem thinking are the lens through which you should view important decisions about your value proposition, as well as about how to capture and deliver value.
In that respect, your challenge as a leader is to build the ecosystem you’ll need in the future, even as you operate inside the boundaries of what’s possible today.
That’s a tall order for most organizations, but your understanding of industry profit pools and where they’re headed can help you find your starting point. This was true for a global technology company we worked with—a specialized maker of large-format printers for enterprise use. Company leaders knew they were in a slow-growth industry, and as they sought new alternatives, they started by zeroing in on an adjacent market segment that was large and fragmented and—because of the burgeoning creator community—had ample room for growth. The company explored several potential business models in depth before creating a platform where the company serves as an orchestrator between content providers, end customers, and print service providers. And although the company’s new approach is still in its early days, the platform has already attracted 25,000 partners and counting.
Understand yourself
Now that you’re armed with a better knowledge of the business environment, it’s time to look inward at the capabilities you have, and need. Then look to potential blockers, those existing institutional processes and habits that could slow you down.
(Re)consider your capabilities
It’s one thing to draw up a business model on a PowerPoint slide and describe what you want the future to be. It’s another thing to identify, and harness, the underlying business capabilities you need to make the new model work. Focusing on the right capabilities is critical.
Whether—and how—you buy, rent, or build these capabilities is a function of factors unique to your situation. The key in any event is identifying the handful of capabilities that will be most critical to develop first, in order to get the new business model up and running. For the power utility we described earlier, bringing its new business model to life meant a huge shift for the company; it needed to move from managing a handful of assets to managing thousands of sites distributed across the country, with massive implications for every aspect of the business—from workforce to controls, from go-to-market approach to back-office capabilities, and from balance sheet to income streams.
Similarly, a technology company we worked with was grappling with how to reinvent itself as a XaaS (anything as a service) company, while moving away from its roots as a hardware manufacturer. The company had moved into XaaS through acquisitions, but its stakeholders and even employees still viewed it as a manufacturer, and products still accounted for a relatively large share of revenues. In management discussions, company leaders realized they needed to go “all in” if they were to truly change the business model, make XaaS central, and ultimately meet the leadership team’s goal of commanding the higher valuations associated with other XaaS tech players.
Capability-building was vital to the effort, and through a series of rapid scenario-planning exercises, the company identified a handful of urgent capabilities that would be most visible to customers and most differentiating. Among these were customer experience and design capabilities (to create a less confusing product array), and an end-to-end architecture (from “lead to cash”) to manage customer interactions more efficiently.
As the company moved ahead with these and the other prioritized capabilities, it began to see positive results, including accelerated sales cycles, increased average deal size, and, yes, a much-improved market valuation.
A quick, last word of caution about capabilities. Your company’s capabilities are far more tied to your organizational culture than you may realize. Pursuing a new business model that requires more innovation, for example, might be strategically necessary—but it won’t be organizationally possible if your culture prizes risk aversion and you don’t address this head on.
Confront inertia
The status quo exerts a powerful tug on people and organizations. The very idea that your company is “organized” means its behavior demonstrates a day-to-day dependable repeatability. When your business model is working well, this inertia is a source of stability and continuity. When it’s time for a change, inertia itself becomes a problem. (This is one reason we recommend you consider housing a new business model separate from the rest of the company—a subject we will discuss later.)
The sources of inertia are varied, but important to recognize given the stakes involved. Here are some causes for inertia you should watch for.
Confidence in the status quo. Your success creates a tendency for people to become attached to the current approaches. The environment changes; you can’t.
Costs of change. Change has costs, including hidden ones like product cannibalization.
Power plays. Your leaders are reluctant to jeopardize their positions or dismantle their departments when changes are proposed. Infighting impedes progress.
Skills gaps. The large gap between the skills your company has, and needs, slows or deters new endeavors.
Stepping back, there are two organizational manifestations of inertia that are particularly toxic to business model innovation, and thus worth a closer look. The good news is that they are both areas where management attention can solve the problems when leaders put their minds to it.
Don’t take resource allocation for granted. It should go without saying that successful business innovation requires concentrating, not spreading, resources. You’ll capture new profit pools only if your team is aligned—and then acts—on the capital and resource allocation implications of your strategic decisions.
Yet, too many management teams fall short of effective, dynamic resource allocation. We saw some evidence of this in our CEO Survey, where nearly two-thirds of respondents reported reallocating 20% or less of resources (including people) from year to year, and almost 30% of CEOs cited resource reallocation of 10% or less. Higher levels of annual reallocation in the survey were associated with both greater levels of reinvention and higher profit margins.
And as you consider how to mobilize your resources in search of higher profit margins, don’t undermine your gains by overlooking the importance of tax-related considerations. By paying attention to tax, you improve the odds of seeing more profit move from the top line to the bottom line, which allows more to be reinvested back in your business (see sidebar, “Don’t forget tax,” for more).
Clean up your sludge. The second common form of inertia involves transaction costs, or what Richard Thaler and Cass Sunstein deemed “sludge.” In PwC’s CEO Survey, respondents admitted to large organizational inefficiencies across a range of administrative activities and processes—noting that on average, fully 40% of time spent in meetings, on email, and addressing tech issues, to name just a few, was inefficient.
Imagine trying to mobilize, not to mention energize, your company around a critical reinvention initiative when 35% of the time you spend in decision-making meetings is inefficient? Reducing sludge makes companies more responsive and better able to do just about everything, including working more productively with ecosystem partners. Tackling sludge is particularly important as you reinvent, because levels of inefficiency that seem tolerable now may prove debilitating as the new model takes hold.
Take action
Much of the business reinvention journey takes place in what you might think of as a mist of uncertainty—about fast-changing tech, market conditions, questions about the capabilities you’ll need, and much more besides. It’s not at all clear where you should go, but it’s imperative you go somewhere. For many companies, the environment is changing so quickly that the status quo is untenable. (And as our colleagues argue, the same is true of your own leadership approach, which will be challenged like never before.)
What, then, to do? Charge ahead boldly into the mist, and you might reshape your industry—or fall off a cliff. Wait for the mist to clear, and the landscape will be occupied by competitors who pushed their way through to new opportunities. By spending too much time thinking, you’ll lose to the people who are doing.
Our experience suggests that the best way to proceed is to treat reinvention as a series of learning steps. We recommend using an MVP (minimum viable product) approach that lets you pilot changes to your business model that you can learn from, adapt, and scale. Moreover, a pilot approach often helps begin generating revenues quickly, which seeds future moves. With some small variation, all the companies we’ve described in this article used an MVP approach to turbocharge their reinvention efforts.
Implicit in the concept of an MVP pilot is the idea that it allows you to employ a minimum consistent design—a model that has all the elements needed for its relevant parts, partners, customers, and suppliers to start gaining increased value, but without being overly elaborate. Don’t forget, these pilots aren’t just some exercise in optimization. These represent big potential changes, and you must be ready to move resources decisively in order to turn little bets into big ones, and to make adjustments if things don’t work out.
The graphic below shows six examples of winning business model designs that companies have used in recent years—and still use—to reinvent themselves. Seeing how companies have innovated in the past and present can serve as a useful starting point for substantive debates about your company’s future. But look beyond these. Innovative business models are emerging continually, and your evaluation of the triggers and trends (as described earlier) should inform your thinking. For example, how might the pressures of climate change and sustainability spark a new business model? Or could the massive training sets required by large language models enable still other business models? Where might a timely systems or process breakthrough catalyze reinvention?
Finally, while a business model’s source of competitive advantage may be due to its sheer novelty, additional forces—think of them as enhancers—can deepen the strength of your position. Examples include economies of scale, scope, and speed, as well as network effects and even reputation-based advantages, among others. As you iterate, test, and learn in your pilots, determine which enhancers are available to you. Seek them out as leverage points where moving faster or bigger or both at once could dramatically separate your efforts from those of rivals.
The challenges facing your company in the next decade will range from the substantial to the existential. By embracing business model reinvention and the opportunities it affords, and taking action now, you will increase your odds of success. And as you proceed, be intentional—in shaping your strategy based on the profit pool shifts and trends you see, in harnessing the existing and new capabilities you’ll need, in fighting the inertia that saps progress, and in nurturing the pilot projects and MVPs that may flourish and prove to be your company’s future.
The authors wish to thank the following people for their contributions to this article: Christopher Gilbert, Michelle Lambert Davis, Richard Rumelt, Sonal Amin, Juneen Belknap, Sahil Bhardwaj, Tom Casey, Scott Constance, Tyson Cornell, Christopher Cullen, Romit Dey, Nilkanth Kakadiya, Susmitha Kakumani, Nadia Kubis-Fettes, Manoj Kumar, Diarra Lamar, Rory McDonald, Ally Millar, Pallavi Moogimane, Marissa Mumford, Rian Oosthuizen, Rohan Patel, Russ Rasmus, Christina Scherma, Gopal Sreeraman, and Aparna Venkataraman.
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