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 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,2 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.3
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) and topple-rate shifts (the rate at which companies lose their leadership positions in indices such as the S&P 500) 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.
From Sears to Amazon: The cautionary tale of US retail
In the US retail sector, the chart below shows that the BMR Pressure Index closely anticipated the last three eras of major business model reinvention (note that in the absence of more widely accepted terms, we’ve named these eras ourselves).4 First was the Dot-com Era, which was predicted by spikes in attractiveness and BMR intensity in the late 1990s. Next came the Omnichannel Era, predicted by sharp upticks in innovation and retail-sector regulation in 2006–08. Most recently, the Online-First Era was presaged by a rise in many of the leading indicators together, from 2016.
The shifting fortunes of leading US broadline retailers across these three eras—and the Big-Box Era that preceded them—shed useful light on the importance of timing when it comes to reinvention.
In 1990, the broadline subsector was dominated by three companies, each commanding a roughly equal share of the market: Kmart, Sears, and Walmart. Walmart led the Big-Box Era by building mega-stores that offered much greater economies of scale and convenience, based in part on technology adoption, including barcode scanning capabilities, and the strategic placement of distribution centers to support its growing locations. A decade later, it had doubled its market share and grown its market capitalization tenfold. Kmart and Sears missed the shift to a big-box business model and saw their relative market shares shrink to 15% each.
Next came the Dot-com Era, highlighted by Amazon’s entry into broadline retail and its focus on the customer experience, which offered traditional retailers an opportunity to build their own digital presence and extend their customer reach. After starting with books in 1995 and expanding into the music and video categories in 1998, Amazon established a quick lead as it broadened further into electronics, toys, home goods, and other product categories. Additional retailers followed suit; sears.com came online in 1998 and walmart.com in 2000. Relative to Sears, Walmart made a series of smart moves; for instance, it launched walmart.com as a separate entity, which gave the e-commerce operation greater autonomy from the parent company, even as Sears kept tighter hold of its online operations. And while Sears erred by trying to replicate the breadth of its department store model online, Walmart focused on a narrower initial selection. Walmart’s previous supply chain innovations and expertise, meanwhile, supported more seamless fulfillment and inventory management across its offline and online operations. Both Sears and Kmart, by contrast, struggled with fulfillment and inventory management issues across their online and physical operations.
But Amazon had already gained significant market share. By 2010, Kmart was no longer a competitor, and Sears had seen its relative market share fall to below 10%, just ahead of Amazon’s. Walmart still dominated the market (and remains the world’s number one retailer by revenue today), yet its market capitalization was only 30% higher than it had been a decade previously—while the value of the S&P 500, during that same stretch, grew by roughly 190%.
In the Omnichannel Era, meantime, Amazon powered ahead. Even as Walmart played catch-up in digital services (such as online grocery and delivery), it arguably may have moved too late to reap the full gains available. In the decade from 2010 to 2020, Amazon’s market capitalization grew from US$59 billion to US$1.6 trillion—four times Walmart’s, although Amazon Web Services (AWS, which is itself a business model innovation pioneered by Amazon) clearly made a large contribution to this growth. Amazon’s revenue figures, excluding AWS’s contribution, paint a similar picture, growing from a 7% relative market share to 39% (see chart below).
In the Online-First Era, catalyzed by covid-19, a similar story played out: Amazon continued to innovate its offering, and Walmart made moves to catch up, not only through online grocery and delivery but through other innovations as well.5
Not all reinventions are successful
In PwC’s 27th Annual Global CEO Survey, 97% of CEOs reported taking steps in the past five years to change how they create, deliver, and capture value—with more than three-quarters of them saying they took at least one action that had a large impact on their company’s business model.
But not every company that reinvents its business makes a success of it. Recent and previously unpublished research from PwC, which performed a cross-industry analysis of more than 1,100 global respondents who have extensively modified their firms’ business models over the previous three years, shows wide performance differentials.
The top third of these respondents earned a rich prize: their companies outperformed their industry peers by an average of 71 percentage points of “performance premium”—which refers to the combined effect of profit margin and revenue growth in industry-adjusted terms. The middle third achieved very modest performance gains, and the bottom third underperformed their industry peers considerably (see chart below).
Three broad possibilities might account for what separates the leading companies. Winners choose the right business model, succeed in making the operating (and technology) changes needed to support that new model, and get the timing right. Laggards fall short by missing on any of the three. This article examines how companies can get the timing right for BMR, leaving the choice of business model and the transformations necessary to support it for a different occasion.
Late to the digital party in insurance
Now let’s look at a different sector of the US economy: broadline insurance. The chart below shows that the BMR Pressure Index once again closely anticipated the last four eras of major business model reinvention, to which we’ve again given names.
This sector largely tells a story of reinvention through digitization and the early advantage that accrued for early movers—and persisted. One insurer, which we’ll call Company A, was slow to digitize its business model as it instead diversified elsewhere in financial services. These diversifications exposed the company to more risk when the 2008 global financial crisis hit. The combination of slow technology adoption and ill-timed diversification hit Company A with a double whammy as it went into the 2010s: it was years behind the technology model of its competitors and had fewer financial resources to catch up.
Another insurer, which we’ll call Company B, recognized the potential of technology early on and began investing in its digital transformation in the late 1990s, mostly aiming at the consumer market, where it pioneered the ability for customers to obtain quotes and purchase policies online. Parallel investments in machine learning and data analytics capabilities improved the insurer’s pricing and risk assessment models—in turn enabling it to offer more personalized quotes and more competitive rates to customers. Digital reinvention made Company B’s claims processing more efficient, reflected by its average combined ratio being 9% lower than Company A’s across the eras we studied. Further, the tech, data, and analytics capabilities it developed (for example, through ecosystem partnering and M&A) helped Company B learn to price risk more accurately.
Company B’s digital reinvention—and the failure of Company A to keep pace—drove enormous shifts in market capitalization. Company A lost roughly 80% of its market capitalization from its previous peak, while Company B grew its market cap more than 14 times (see chart below).
Getting the timing right
We’re used to thinking about strategy in terms of where and how to compete, but executives mustn’t lose sight of the fact that when to compete can be equally important. Although our BMR Pressure Index can help sort out some of the relevant factors, companies can also build their own capabilities in this regard. Below are a few brief suggestions for executives looking to deal with tricky timing questions and their related risks.
Monitor and analyze. Market trends, new technologies, shifts in the momentum or relevance of existing technologies, changes in customer preferences—these and other emerging patterns could all help companies identify the catalysts, or “triggers,” of BMR early in the game. Triggers tend to surface relatively quickly, creating the new customer needs that BMR can address. Companies can learn to monitor, process, and structure their response to these triggers, starting with the five megatrends that are poised to change the nature of competition itself.
Experiment and learn. No amount of monitoring and analyzing can create certainty. Therefore, approaches that are deterministic, linear, and rigid have been evolving to become more probabilistic, continual, and multidimensional. Today, the use of AI and advanced analytics can help companies take a learning-focused approach to strategy, without distraction, wasted effort, or strategic confusion. This involves making small bets, testing assumptions, and adapting based on the results. Gaming and deep learning can help pave the way for more dynamic and resilient business models.
Find your “arenas.” Columbia Business School Professor Rita McGrath, in her book Seeing Around Corners, introduces the concept of arenas to identify, categorize, and prioritize future growth opportunities—rather than simply continuing to compete in existing markets. Arenas are defined by the evolving needs and preferences of customers, without being constrained by traditional industry boundaries. This approach helps organizations focus their efforts and resources on the most promising opportunities.
Bolster leadership and change. When it comes to BMR, leaders must foster a culture of openness to new ideas and perspectives and challenge their own long-held and often implicit beliefs and assumptions about how money gets made in their industry. Recent PwC research shows that respondents at top-quintile companies are far more likely than peers at lower-performing companies to say their leaders recognize opportunities and threats across a broad business landscape—and to say those leaders spearhead initiatives that address them.
Get reinvention-ready. No matter which way you reinvent your business, there are some no-regrets moves you can make to get ready for business model change:
Tackle the “sludge” created by organizational inefficiency. In PwC’s 27th Annual Global CEO Survey, CEOs said 40% of time spent on activities including emails, meetings, and administrative processes is inefficient in their organizations. That’s a significant drain on money, morale, and time that could be better directed toward transformation, business model reinvention, or just about anything else.
Reduce technical debt. Retiring legacy IT infrastructure, systems, and apps is one of the hallmarks of outperforming companies.
Improve decision-making. Decision science is key to value creation, but many executives still rely far too much on intuition, even as they mistakenly assess the quality of decisions by their outcomes (which can be affected by luck), rather than by the quality of the decision-making process itself.
“All glory is fleeting,” George C. Scott said in Patton. And business models are, too. Sears made a towering BMR in the late 19th century, with the introduction of the Sears mail-order catalog, but the company set the stage for its own collapse when it failed to respond in a timely way to the rise of the Big-Box Era in retail. Similarly, Walmart initially missed a crucial opportunity to continue dominating the Dot-com and Omnichannel Eras that followed the Big-Box Era, behind which Walmart had been the driving force.
As these and numerous other examples suggest, timing may not be everything when it comes to BMR—but it’s an essential element. And the prize is big. Companies that drive effective business model reinvention at the right time can deliver seismic revenue gains, as PwC’s work on ecosystems shows. Although there are myriad reasons big companies struggle to reinvent themselves, getting the timing right needn’t be one of them.
The authors would like to thank Josh Rosenberg and Ayrton da Silva for their contributions to this article.
Notes
- 1 Except for financial services, where we used return on equity.
- 2 Because regulatory changes are often planned and discussed years before implementation, we’ve factored in a buildup and cool-down of each regulation before and after its implementation date.
- 3 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. Despite these potential over- and underestimations, our statistical model demonstrates, through statistical significance, that the pressure index is indeed predictive of BMR, and that any idiosyncratic effects are captured in the error term.
- 4 Note that although the actual names we chose for the eras were subjective, the identification of the eras was not. First, we defined a variable called BMR intensity, which measures the extent to which business models are changing in the sector; then, having observed that this variable is cyclical, we named the eras to correspond to the peak periods in that cycle.
- 5 These innovations included Walmart Data Ventures and Walmart Luminate (which leverages first-party consumer data for insights and analytics to help suppliers and merchants make the most of customer journeys and product performance); Walmart Connect, a retail media platform through which advertisers can reach Walmart shoppers both online and in stores (a move bolstered by the subsequent purchase of Vizio); and Walmart Adaptive Retailing, which integrates on- and offline channels for personalized shopping. Walmart also purchased Jet.com in 2016 to strengthen its digital operations and broaden its customer base—all while continuing to invest in its physical stores and store experiences.
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About the author(s)
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Global Advisory Thought Leadership, Director, PwC Portugal
Tel: +351 933 355 020
Lang Davison
Global Advisory Thought Leadership, Managing Director, PwC United States
Tel: +1 458-262-7803
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Asia Pacific Business Model Reinvention Leader, Partner, PwC Australia
Tel: +61 3 8603 2315