Pressure to reinvent business models is increasing

Using an index called the Business Model Reinvention (BMR) Pressure Index, we map out how the external pressure to adapt business models is developing. The higher the pressure indicated by the BMR Pressure Index, the greater the need for companies to reinvent themselves in preparation for the future. Our study analysed twelve sectors according to the BMR Pressure Index. 

Business model reinvention is necessary, but also an opportunity to increase productivity

In our latest CEO Survey, an annual global survey of CEOs about their expectations, 45 percent of respondents said they doubted whether their company would still exist in ten years if they were to continue on the same path. CEOs recognized that they would have to change or even reinvent their business model.

'We will publish the next edition of PwC's CEO Survey at the end of January, but it is very likely that business model reinvention (BMR) is still on CEOs' agendas,' says Veronique Roos, member of the executive board at PwC the Netherlands and transformation expert. 'Moreover, as we stated in our recent study, Reinvention as a resilience strategy, BMR is not only a necessity but also an opportunity that can increase productivity growth from 1.5 to 8.5 percent'.

Companies already intuitively experience the pressure to adapt their business model

The pressure for companies to reinvent their business model is linked to the five megatrends that continuously challenge companies to look at the way they operate. These are climate change, technological disruption, demographic shifts, geo-economic fragmentation and social instability.

'In addition, there are also short-term challenges, such as the economic cycle, high energy and housing prices and changing regulations,' says Veronique Roos. 'In this tangle of changes, CEOs must constantly consider whether and when to change course.

The BMR Pressure Index helps them do this. The higher the pressure indicated by the index, the greater the need for companies to reinvent themselves in preparation for the future.

Our method for quantifying pressure 

Our analysis is based on an earlier study by PwC, in which a BMR Pressure Index was developed for the United States, the United Kingdom and Germany, among others. This study showed that in many sectors in those countries, the pressure for companies to reinvent themselves is at its highest in 25 years. Moreover, it showed that the BMR Pressure Index coincides with the periods just before companies actually adapted their business models. This adjustment is derived from the changing market shares of those sectors in the economy.

In the Dutch study, we quantified the BMR Pressure Index for twelve sectors in the period from 2011 to 2022.¹ We follow the same methodology as the analysis mentioned above, with some adjustments due to data availability. We used six factors to construct the index.² 

After measuring the six factors, we normalized each of them across all sectors so that the minimum value of the historical series was 0 and the maximum value was 1. We then averaged the six factors to calculate the total BMR Pressure Index for each sector. In case of missing data, we used the last or the next available measurement. We did this for all sectors and the final results are shown in the graphs.³ 

The six factors used 

• Performance: Faced with declining returns, companies feel the pressure to find new ways to secure their survival. For this indicator, we calculate the return (weighted for market share) on capital in each sector. We assume that lower returns indicate higher pressure.
• Attractiveness: Increasing the attractiveness of a sector forces new entrants and established firms to search for new value. Here we approximate attractiveness with the number of active firms, excluding independents, in each sector.
• Innovation: Innovations and new technologies enable firms to tap into new sources of value. Here we express innovation as the growth-adjusted share of venture capital in the sectors. Venture capital typically aims to be at the forefront of corporate innovation. 
• Shocks: Global ‘shocks’ or unexpected events put pressure on firms to adapt quickly to new circumstances. We measure the number of shocks with the number of sector recessions; a recession occurs if the total real turnover growth (adjusted for inflation) of the sector is negative in a period. If the turnover growth of the sector is positive and stable, we give it a value of 0.
• Regulation: Changes in regulation force firms to adapt their business model and reconsider their position in the supply chain. Due to the lack of reliable data on regulatory pressure at the sector level, we use an indicator for the Netherlands as a whole, assuming that regulatory pressure is the same in each sector. This indicator is constructed as the average of regulatory pressure indicators from the Global Innovation Index 2024: the ‘regulatory environment,’ which measures the quality of regulations, and the business climate, which concerns regulatory pressure.⁴ 
• BMR occurrence: The increasing adoption of new business models within a sector puts pressure on firms in that sector to do the same. BMR occurrence is therefore the pressure that arises from competitors adapting and innovating their business models. We measure this by comparing the relative revenue growth of the sector with all other sectors. Furthermore, since we assume that BMR pressure can take between one and three years to take effect, we take the average of this value for the last three years. 

Results at sector level: BMR Pressure Index higher since 2017 

Baarsma: 'In many sectors we see that the pressure to innovate business models has increased. Many sectors have experienced increasing BMR pressure since 2017 and especially around the COVID-19 pandemic, which has been disruptive to business models in most sectors.' 

Over the entire sample period, sectors such as manufacturing, water supply and waste management, information and communication, and rental and other business support have experienced relatively stable but increased BMR pressure. In several sectors that previously experienced low BMR pressure, it has increased significantly over the past five years. These are mining and quarrying, wholesale and retail trade, energy supply, construction and specialist business services. Hospitality, transport and storage stand out due to the major impact of the Covid-19 pandemic, which led to rising BMR pressure in the aftermath after a dip in 2020.

The graphs below show the results at sector level

_{¹We used the A-S industries of the Standard Business Classification 2008. We excluded industries A, K and L because of limited data availability and industries O, P, Q, R for which business model reinvention is not entirely applicable.
²We used CBS data for all factors, except for Innovation, for which we use Capital IQ data and regulation, for which we used the WIPO Global Innovation Index data.
³Regulation: We replaced 2011 and 2012 observations with 2013.  Shocks: We used 2021 observations for 2022. Only for Mining and Quarrying as there is no data for 2013, we skipped 2013 and used 2012 to 2014 growth rate. Innovation: We used 2021 observations for 2022. Attractiveness: Only for Other Services we used 2020 observations for 2021 and 2022.
⁴In the Global Innovation Index 2024, regulatory environment is constructed from sub-indices of 'regulatory quality', 'rule of law index' and 'the cost of redundancy dismissal', and the business environment is made up from 'policies for doing business' and 'entrepreneurship policies and culture' indices.}