When is the right to reinvent your business?
A set of indicators could provide advance notice of impending periods of business model change in sectors and industries.
It’s a perennial strategic dilemma: when is the right time to reinvent your business? Move too soon (or too late) and you’ll likely destroy value. Maybe a lot of value.
Blockbuster. Kmart. BlackBerry. These are just a few of the corporate titans that were slow to rethink their business models and were overtaken by nimbler competitors. Less well-known are the firms that reinvented their business models too soon.
One such company was Iridium, which boldly recast itself as a voice and data communications company in the late 1990s, investing US$5 billion in the launch of more than 60 satellites and a range of handsets. But it was at least a decade too soon: outside scientific and military circles, there were few takers for Iridium’s bulky, pricey technology. Burdened with significant debt and operational challenges, the company filed for bankruptcy in 1999. The consumer satellite business model has since been proven profitable.
Getting wrong-footed is hardly the exception. In recent PwC research, only 58% of companies said they modified their business model at the right time; the others said they moved either too early or too late.
The good news is that mistiming your business model reinvention (BMR) once doesn’t foreclose the opportunity to get the timing right the next time around. Sectors never stand still—and companies that miss out or jump too soon in one era (even if they destroy billions of dollars of value or leave it on the table) can find themselves back in the game during the next. Iridium, for example, survived its initial misstep, successfully restructured, and has reemerged as an innovative player. Walmart, which we discuss below, was slow on the draw during the Dot-com Era but later came around to making strongly innovative moves. The obvious conclusion is that strategic agility remains critical at any stage of sector or company evolution.
That said, every company will surely want to address the timing risk inherent in BMR. To help with that challenge, we have conceptualized six sector-level measures, including industry performance, regulation, and innovation, that could together act as bellwethers of impending business model reinvention. We tested these against 30 years of business model change in the United States, the UK, and Germany (among other selected countries) for the telecommunications, insurance, utilities, technology, aerospace and defense, and construction and engineering sectors, as well as others, and found a close correlation: when the indicators rose, an era of BMR soon followed.
When companies are wrestling with timing risk in a fast-moving world, these indicators might help them choose the right moment to begin reinventing their business. To simplify the discussion, we describe them below as they played out in the US retail and insurance sectors.
Introducing the BMR Pressure Index
Our index, which can be applied to any sector, brings together six leading indicators of BMR that we list here along with a rationale for how they might increase pressure for the reinvention of businesses.
Performance: Faced with declining industry returns, companies feel pressure to find new ways to ensure their survival. For this indicator, we calculated the market share–weighted sum of the return on capital1 Except for financial services, where we used return on equity. for the companies in that sector
Attractiveness: Increasing industry attractiveness drives new entrants and incumbents to seek emerging value. Here, we simply counted the change in the number of firms active in any given sector.
Innovation: Emerging innovations and new technologies enable companies to capture new sources of value. The proxy for this metric is the growth-adjusted share of sectoral venture capital (VC) investments, as VC firms typically seek to be ahead of the curve on business reinvention. Note that we looked at these investments at the industry level, not the sector level, to capture the cross-pollination of innovation between sectors within the same industry.
Shocks: Global shocks rapidly put pressure on companies to adapt to new conditions. Our proxy for this indicator was sectoral recessions—any period in which the total real revenue growth (inflation adjusted) of the sector is negative.
Regulation: Changes in regulation prompt companies to adapt to shifting sources of value in their sector. Here, we constructed a qualitative measure of regulatory intensity by incorporating major regulatory and policy introductions taking place each year, Because regulatory changes are often planned and discussed years before implementation, we’ve factored in a build up and cool-down of each regulation before and after its implementation date. scoring their intensity according to their impact on the economy and customer segments, as well as on companies’ geographic activity and product mix.
BMR intensity: The expanding adoption of new business models within an industry puts pressure on others in that industry to follow suit. The redistribution of market share between companies is an indication that BMR is occurring within a sector. Those with more successful business models win market share, while obsolescing business models lead to erosion of market share. We measured this movement of market share between companies within a sector using a three-year rolling average, recognizing that the effects of BMR intensity persist as pressure into future years. We acknowledge that this measure may over-or underestimate the effect of BMR intensity in some situations. For example, it may overestimate it when there are changes to market share for reasons other than BMR such as with acquisitions. Or it may underestimate the effect for example, if a company were to change its business model in order to remain competitive and not improve its market share as a result, but nonetheless avoid a loss in market share it would have otherwise suffered had it not made the change
As a test case, we applied the BMR Pressure Index to all public companies in five US sectors: retail, insurance, banking, telecommunications, and technology. To do so, we looked back over the past 30 years at the combination of market share changes (as described by the BMR intensity factor above) to identify roughly when business model reinvention had occurred. We found that our pressure index, composed of the six leading indicators above, correlated well with the periods just before such reinvention occurred in each sector.
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