Reinvention on the edge of tomorrow

Business model reinvention requires a total rethink to reveal potential value. From how you do business, through to which customers you serve and what products/services you provide; this rethink involves capitalising on all-pervasive global megatrends. 

Some CEOs are reframing super disruptions (technological disruption and climate change) as untapped opportunities to create, deliver and capture value.  

Value creation through technology starts with CEOs looking at where they’ve differentiated in the market, where they’ve experienced real success through technology investment and ask, ‘Can we monetise that?’. Opportunities like the creation of Software as a Service (SAAS) can span industries and geographies. 

Every business has the chance to become a ‘tech’ company – regardless of their industry of origin. That is business model reinvention in action.

Creating value from sustainability requires a different challenge in thinking for CEOs and their top teams; how to bring climate-friendly products, services and technologies to market. This opportunity will increase as economies decarbonise. 

CEOs should take a hard look at their company’s resource use and energy consumption to tackle the so-called energy trilemma: simultaneously ensuring a reliable energy supply, reducing emissions and trimming costs. Value is in motion across the world’s energy systems, as many organisations start to play the dual role of producer–consumer. These energy ‘prosumers’ might still purchase electricity from the grid - but they also produce their own electricity, store it and sell it.  

One further action item: implement a data strategy for sustainability. This will enable your company to meet new reporting requirements while also providing leaders throughout the business with accurate, fact-based insights to inform decisions.  

PwC has established a clear link between reinvention and productivity growth. Dynamic resource allocation (at scale) can dramatically improve productivity. This can be done two ways; by reallocating existing talent or capital to the most promising areas, or by adding new capabilities via mergers and acquisitions (M&A).

Businesses must be agile when it relates to shifting talent and capital to new priority areas. Digging into the data, active reallocation of people is associated with higher profitability, and the difference in profit margin between low human resource allocation (less than 10%) and high reallocation (30-40%) is more than 2 percentage points. 

There is also a strong link between higher levels of resource reallocation (both financial and human resources) and the amount of revenue coming from distinct new businesses – underlining that reinvention and dynamic resource reallocation go hand in hand.

However, our survey finds Australian companies do have room to improve. About one third of local CEOs reallocate 10% or less of financial resources from year to year. Almost half reallocate 10% or less of human resources.

Why don’t companies reallocate resources more actively from year to year when the evidence in favour is so consistent? Cognitive biases are at work. These include anchoring (an over-reliance on arbitrary benchmarks - such as last year’s budget numbers) and naive diversification (the tendency to allocate resources equally across available options instead of weighting investments strategically).

For CEOs, the solution lies in budgeting practices that minimise the impact of these psychological factors on resource allocation. For example, power dynamics can be reduced by holding project review meetings with small groups of stakeholders with a high degree of independence. Also consider ranking projects company-wide by profitability or return on capital, to create a common fact base for discussion.

The speed with which businesses need to move to keep up with disruptive forces makes capability acquisition through strategic M&A a valuable solution to supercharge resources. Organic capability building can take too long.

Australia’s CEOs are alive to M&A opportunities, with around six in ten planning to make at least one acquisition in the next three years, in line with the global average.

Leading a company during a period of great change requires decision-making that is well-informed, disciplined, and unbiased. Reinvention is, by definition, decision-making in uncertainty, as a company looks for new products and services beyond the current business model. Relying on existing processes and practices based on experience won't work.  This makes it even more important to have rigorous, unbiased decision-making processes that avoid traditional psychological pitfalls (for example, confirmation bias).

Yet many CEOs tell us that their company’s strategic decision processes are inconsistent at best. There’s untapped potential around decision-making quality.

Proven practices for countering confirmation bias include making decision criteria transparent in advance, deliberately canvassing alternate points of view, and intentionally seeking out information that contradicts the investment hypothesis. Only around half of all companies usually employ these techniques for strategic decisions. 

Currently, around 70% of Australia’s surveyed CEOs judge the quality of strategic decisions by the outcome rather than the process. Around one third fail to evaluate whether they’re missing any important opportunities. 

At first glance this makes perfect sense. CEOs are results-oriented and take pride in it. The snag is that outcomes are often determined by factors beyond the control of the decision-makers, including luck. The only thing they can fully control is the quality of the decision-making process.

Our survey results suggest that CEOs are leaving money on the table by not following these best practices. Companies with higher-quality decision processes for strategic decisions report higher profit margins (as always, this is after controlling for industry, geography, company size, and other factors that might skew the data). 

When making strategic decisions how often do you take the following actions?*

To address this, CEOs need to prioritise data-based, process-driven decision-making for consistent and unbiased outcomes. Decisions sometimes need to be made quickly, before every box has been ticked. But there is compelling evidence that stronger decision-making processes typically result in better decisions - especially under conditions of uncertainty, when intuition and experience are unreliable guides. 

Our research found no evidence that paying attention to decision-making processes leads to slower decisions or analysis paralysis. In fact, global CEOs reporting higher-quality decision processes are taking more reinvention actions, underlining that strong decision processes can support a bias to action. This is particularly true in high-stakes situations when emotions run high. On climate change, for example, CEOs will remain under scrutiny by customers, employees, investors, and even family members. The same goes for GenAI, and questions relating to the future of legacy businesses in the face of industry reconfiguration. 

While they’re quick to recognise the potential benefits of AI for efficiencies and profitability, Australia’s CEOs also expressed measured caution. Personally, just one in three has a high degree of trust in having AI embedded into key processes in their company. This is indicative of broader sentiment towards AI, and PwC’s Voice of the Consumer 2024 survey of 20,000 consumers globally reveals a similar opinion.

How can CEOs foster trust in AI? A crucial step is ensuring transparency in AI processes. Users may struggle to understand how a GenAI chatbot reaches a specific answer, even if they know how to prompt it effectively. To address this, businesses need to educate stakeholders by providing explainability about the processes beneath the surface of user interactions.

At the same time, organisations can foster trust with consistent ethical AI use within the organisation, and by showcasing the value of AI. This means clearly communicating the benefits to the business, as well as how risks are mitigated.

Business model reinvention is a continuous journey. It requires leaders – CEOs and boards – to take a long-term “through-tenure” perspective. However, most local CEOs expect to hold their current role for five years or less. Currently, one in three (37%) local CEOs have been in their current role for less than two years. 

This length of tenure puts even more emphasis on the role of boards to make sure businesses embark on reinvention, and drive this ongoing process.

This data raises an important question for corporate boards: in light of the long-term reconfiguration of industries now in progress, are you doing enough to encourage a “through-tenure” perspective across your top team? 

Our survey reveals CEOs with long expected tenure are more likely to:

• Be taking multiple actions to reinvent their company’s business model (which is in turn associated with higher profit margins) 
• Report profitability gains from investment in GenAI and have higher expectations for the technology in the year ahead
• Use a range of techniques to ensure the quality of strategic decisions.