& strategy pressures
TMT business models and strategies have been forced in recent years to accommodate sudden shifts in the macro business environment, including disruptive technological change, geopolitical stresses and a global pandemic.
Risk profiles vary widely within the TMT sector. The risk and uncertainty facing a hugely profitable technology company may look nothing like the risks impacting a media company struggling to reach consumers homebound by COVID-19. But business models will be tested again as new risks emerge and the world works toward the next normal.
What threats may await TMT business models and strategies? TMT executives expect the following:
Threat of financial market instability, including adequate funding and liquidity, potential credit risk and corporate debt-to-equity ratios.
Core business and organizational risks were heightened by the pandemic, especially among telecom and media companies. Long-term strategic objectives suddenly became an urgent priority in a matter of weeks or months instead of years (ie. a direct-to-consumer media strategy). With little time to breathe, the impacts of these changes may yet reveal hidden consequences.
While media and telecom companies largely rose to the occasion, business leaders fret over the next wave of changes likely to emerge from more nimble competitors and start-ups. Business leaders think constantly about satisfying consumers who are continuously on the lookout for new, easily accessible entertainment options, who are not hesitant to move services or change from one brand to another. Remedial steps will continue for many companies, including acquisitions and divestments, as well as embracing new the technologies and talent they need to remain viable.
Macroeconomic risks will grow in coming years as trade and political tensions are expected to continue. Business leaders will find it difficult to manage the domestic/global balance in supply chains while maintaining relations in large and growing markets. Meanwhile, they see the potential for a turbulent ride in the financial markets, with some TMT companies facing new challenges in funding, liquidity, credit risk and gearing.
TMT business models and strategies are changing with greater frequency – and greater risks – as executives pick their way through a complex competitive environment roiled by rapid technological change, shifting consumer expectations, geopolitics and uncertain trends in the global financial markets.
While most executives feel their companies are well positioned, they worry about the threat of disruptive competitors or technology, and their ability to capture the benefits of digitalization fast enough to satisfy key stakeholders.
Today’s business model and strategy pressures reflect a risk megatrend that shares common concerns with previous Willis Towers Watson research. Rapid technological change, shifting consumer expectations and competitive threats are familiar challenges for TMT business leaders. Beyond these core factors, the greatest shift has been the view that business models and strategies need unprecedented flexibility. A business model that once may have guided a company for years, if not decades, now has little value if it can’t shift abruptly to deal with risks and business opportunities arising from any direction – geopolitics, disruptive technology, changing consumer preferences, pandemics, and so on.
Our latest research links business success to a higher degree of engagement at the Board and c-suite levels, where power resides to force effective change throughout an organization. Companies are also left with the task of finding, training and retaining the right talent at the front lines of digital transformation – there is not one silver bullet answer and initiatives that build on meeting these cross-trend challenges will be essential as George Zarkadakis outlines in his change management view. Please also see further insight from Jennifer Kelly on ‘Innovating around talent risk - The role of technology in ensuring an optimal talent/employee experience’ in the global talent & skills race section of this report.
A people-centric, data-driven approach to change management is essential for companies to lead their people along the journey of transformation. Companies need to start by developing a deep understanding of change and the impact it will have on the business as well as their people and their needs. Specific attention needs to be paid to resource ownership and delivery accountabilities.
George Zarkadakis, Willis Towers Watson, Great Britain Leader Future of Work
Shankar Raman - Senior Director, Willis Towers Watson Human Capital and Benefits - Talent & Rewards
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The Change Management Model developed by Willis Towers Watson uses data analytics, behavioral science, digital communications and continuous engagement with stakeholder groups. This approach has a part for everybody to play in shaping and inspiring change.
In any organization there are those who embrace change and are keen to evangelize it. Identifying those “change advocates” early on is important. Change management is not simply a program to be executed. In most cases, company culture is the most decisive factor for successful implementation of change programs. It requires an empathic leadership mindset, transparency, and effective communication of the new value and the new opportunities that change will bring to employees and other stakeholders.
George Zarkadakis, Willis Towers Watson, Great Britain Leader Future of Work A people-centric, data-driven approach to change management is essential for companies to lead their people along the journey of transformation. Companies need to start by developing a ...
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Threats from competing business models are forcing some TMT companies to embrace bigger strategic risks to sustain their business. New or rapidly evolving TMT business models and strategies are having a hard-to-measure impact on revenues, return on investment and other key performance indicators. However, to remain viable, many businesses have few options but to look at alternative ways of doing business.
In a 2020 Ernst & Young survey, the professional services network found that 34% of its media industry respondents said their companies would not survive in five years if they didn’t “reinvent” their business. Half had doubts about their business models and have made major restructuring a short-term priority.
Telecom and media companies in particular, have felt pressure to expand outside their core businesses to diversify revenue streams and look for synergies across different segments. For example, Disney embraced a direct-to-consumer strategy to meet the digital and consumer entertainment preferences that have accelerated with COVID-19, helping to offset the loss of amusement park and traditional movie theater audiences.
Another response has been mergers and acquisitions that continue to reshape the industry. Case in point: Salesforce acquired collaboration software vendor Slack for $27.7 billion, and will look to integrate Slack’s business chat application with its cloud tools.
Other companies have felt pressure to divest non-core business units to improve operational efficiency and margins. Our 2021 research finds that the industrywide shift to cloud IT and software solutions puts significant stress on TMT business models that have been dependent on traditional IT infrastructure and software. Companies in effect have “two-speed” business models as they shift to the cloud while having to rethink investments into existing assets with implications for sales, operations and company culture. Fredrik Motzfeldt unpacks some of these issues for us in his reflections on the cloud’s impact on business model.
Our research has also highlighted the pressure to update, automate and digitize business. This is especially an issue as companies struggle to digitize the consumer experience at a time when consumer expectations are higher than ever and shifting with fears surrounding the COVID-19 pandemic.
Shankar Raman - Senior Director, Willis Towers Watson Human Capital and Benefits - Talent & Rewards The business community’s interest in cloud computing is at an all-time high. Innovations in technology, wide access to high-speed connectivity, and pressing economic ... Read more
The business community’s interest in cloud computing is at an all-time high. Innovations in technology, wide access to high-speed connectivity, and pressing economic considerations are all contributing to the rapid movement of a wide range of IT services to the cloud.
Recent McKinsey research finds rapid growth in the number of companies that are starting to see the real benefits of the cloud, which have been long heralded as a catalyst for innovation and digital transformation. This is largely thanks to the cloud’s ability to increase development speed and provide near-limitless scale.
While the research illustrates the business opportunities that the cloud makes possible, it also shows that companies are only scratching the surface of the potential value at stake. Future upsides are significant.
McKinsey estimates potential added value at $1 trillion of run-rate EBITDA across Fortune 500 companies in 2030 if companies aggressively pursue the cloud opportunity—with early adopters likely to capture a disproportionate share of the total value. The growing use of cloud services already produces massive economies of scale that yield lower costs for cloud customers and efficiency gains when cloud services are deployed on limited budgets.
According to Cuelogic, a software product development company, examples of common marketplace cloud usage include:
Internet as a Service (IaaS): Common tasks include IT facilities, hosting services, services and storage.
Platform as a Service (PaaS): Common tasks include application development, data, workflow, security services (single sign-on), database management and directory services.
The evolution of cloud computing has changed the way many organizations think about IT services. However, the cloud’s potential financial benefits and technological advantages must be weighed against potential risks of information technology housed outside of an organization’s immediate control. The risks include unauthorized access to or leak of information, security defects, inability to set or enforce security policy, tracking or troubleshooting data once it enters the cloud, application or system performance, vendor lock-in, etc.
Companies that rely on a cloud computing model need effective risk management frameworks, metrics and analytics to help guide their decisions.
Another approach applied by TMT companies involves technology “co-opetition,” as seen in Apple’s decision to use Samsung’s screen technology in the iPhone X. A Harvard Business Review analysis concluded that, for Apple, “Getting the best screen was worth bankrolling an already well-resourced rival — at least for a while.” The authors added, “The underlying economic reason that working together was advantageous to both sides was that Samsung had the best screen and Apple had a loyal customer base.” This type of trade-off, however, must be achieved with the understanding that customer and supplier dependencies on a competitor can create inherent risks as companies reorganize and business. models evolve. Understanding the interconnections and the use of scenarios can allow executives to embrace or avoid risks with their eyes wide open.
Changing and evolving business models further drive the need for and pace of digital transformation. TMT companies we spoke to during our research understand the need for digital transformation to compete but are finding major challenges to successful implementation and execution. The concerns are justified. A Boston Consulting Group survey found that 70% of digital transformations fall short of objectives – a big blow to potential earnings. BCG found that earnings grew 1.8 times faster among digital leaders than among digital laggards.
Our TMT respondents tended to agree that the price tag for full digitalization might be a challenge for companies already under margin pressures. Others need to balance the cost of full digitalization with investor expectations of strong quarter-to-quarter financial results at the risk of underinvesting in future operations.
TMT segments exist in the same ecosystem but don’t compete on equal footing. Media and telecom companies usually find themselves at a severe balance sheet disadvantage. Companies with larger balance sheets are usually better positioned to capture new business opportunities with less risk relative to size.
As industry convergence continues, media and telecom companies say they will be obliged to hedge their bets with less room for error as they reshape business models and strategy for the new business paradigm.
Competency varies among companies when it comes to leveraging data for strategic or tactical decision-making. Data may be effectively deployed in certain aspects of the business – for example, logistics or marketing. TMT companies often fall short at applying data to construct more profitable business models and mitigating risk. This can have the effect of squeezing greater revenues and efficiencies from a product or business line but not to design a new business model.
In an examination of data-driven business models, Information Matters underlined the importance of having data tightly integrated into core business operations. “As technology becomes increasingly embedded in domestic and industrial products, new sources of value and, as a result, business models are emerging,” according to the U.K. publication.
In previous research, we found that TMT companies had already detected potential problems with business models based on supply chain concentration. Technology companies depended heavily on Asia for manufacturing prowess and an increasingly wealthy consumer base that was hungry for TMT products and services.
Alongside this international growth, the rise of nationalism created a powder keg of geopolitical risks ready to be ignited as countries looked to secure their own supply chains and industries. The 2016 election of former U.S. President Donald Trump rested, at least in part, on his rejection of liberal trade policies that in his estimation cost America jobs while creating major security risks. Some European countries, facing nationalist trends of their own, had similar concerns about their role and competitiveness in the global economy.
“I’d have to say that mitigating supply chain risk is top-of-mind for all of us right now,” notes one technology executive. “You really need to diversify your supply chain with additional suppliers and add geographical mix in case of reputational risks, regulatory changes and the new geopolitics. COVID-19 complicates supply chain structure and management.”
Microchip design and production offers an interesting view into the complex issues industries must navigate. The Economist finds that “fresh strains” in the microchip industry reflect how the geopolitical fault-lines are widening. America lost its edge in microchip manufacturing, the newspaper notes, as production and expertise shifted to Asia. COVID-19 has further compounded shortage issues as global supply chains were disrupted.
U.S. President Joe Biden, in one of his early executive decisions, ordered his administration to work with industry leaders to come up with solutions for the microchip and semiconductor shortfall and promised to seek a $37 billion appropriation to boost domestic manufacturing. It is also worth mentioning that the President’s American Jobs Plan infrastructure bill includes more than $100BN investment in the industry sector with another $50BN specifically earmarked for the US semiconductor industry. The European Union, China and other countries also are seeking greater self-sufficiency.
While increasing domestic chip production might mitigate geopolitical risk, it creates new risks and vulnerabilities. Severe February weather conditions in Texas halted microchip production at several plants in the Austin area, adding to a widespread U.S. chip shortage. The closings also highlighted the fact that chip production can be overly centralized to capture the intellectual capital of a particular city or region, adding to risk exposures.
These issues highlight the need to move from ‘just in time’ to ‘just in case’, a topic our Willis Research Network has been exploring with the National Preparedness Commission.
The impact of the COVID-19 pandemic has not been symmetrical across the TMT industry. The pandemic effects still afflict owners of theme parks and movie theaters. However, TMT companies generally adjusted to COVID-19 far faster and more effectively than might have been assumed. We have mentioned Disney’s successful expansion into streaming and other digital businesses. Some tech companies or highly digitalized companies, such as Amazon, have seen sales and profits soar.
Nordic Semiconductor is another example of a company that has been able to benefit as the pandemic drove up demand for chipsets needed in the Internet of Things (IoT). Svein-Egil Nielsen, Nordic’s chief technology officer, says that COVID-19 “kick-started the IoT revolution by helping to remove certain barriers that had previously seemed almost intractable.”
Lucy Stanbrough - Head of Emerging Risk and Geopolitical Risk Research, Willis Research Network
Moving from ‘just in time’ to ‘just in case’ A memorable 2020 reminded us that, even in high-tech societies, we are only human, very vulnerable and prisoners ... Read more
Willis Towers Watson’s research around the business model and strategy risk megatrend have a feature shared by all five risk megatrends addressed in this report – that is, the vital role played by a company’s culture and leadership. This is certainly true around digital transformation.
Digital-savvy leadership can ensure that the organization accepts digitalization as a strategic necessity and are given the resources and structure to leverage data for decision making. This was a success factor in Sinclair Broadcast
Group’s launch of STIRR, a platform designed to help its nearly 200 local stations better monetize digital viewing of newscasts and syndicated programming.
A well-designed and implemented top-down approach also enabled Salesforce to better design and refine Software as a Service (SaaS) products and monetization models based on customer usage data. While these and other success stories are not isolated, we still find that senior leadership at non-tech firms tend to be less comfortable applying technology and data to shape their business models and strategy, including effective risk management.
Business model risks go far beyond leadership and the specifics of data and digital transformation. A business model risk analysis by the Kelley School of Business, Indiana University, identified 28 categories of risk and uncertainty organized into four internal risk categories, including customer risk, value proposition, infrastructure (e.g. supply chains and operational risks) and financial viability.
The Kelley analysis added an external risk category that includes political, environmental, economic and competitive risks, such as those identified in our conversations with TMT business
leaders. The analysis concludes that business model risks “have not been sufficiently addressed”.
Tech companies helped organizations adjust to the global pandemic. Their next big challenge is helping address climate change. In his February 2021 blog, Nick Dunlop provided the following thoughts:
“Climate change is what many of us consider a “grey swan” event. Unlike an unpredictable black swan event, climate change is perfectly predictable. It’s something that we’ve known about for decades — the human role in atmospheric CO2 concentration has been accurately measured since the late 1950s. Yet, despite the existential threat, we as a society are not doing enough to address the climate change problem.”
Moving from ‘just in time’ to ‘just in case’
A memorable 2020 reminded us that, even in high-tech societies, we are only human, very vulnerable and prisoners of our biology. There is a growing sense that the value of risk registers and business continuity plans are undermined unless they are stress-tested properly, and forward-looking projections such as this TMT Futures review are part of that. Resilience needs to be built into the fabric of society, involving not just investing in resilience and preparedness but adopting a cultural shift from a ‘just in time’ philosophy to one of ‘just in case’.
Understanding how preparedness can be measured, benchmarked and improved is among the ambitious and timely objectives of the new National Preparedness Commission launched in the U.K. and chaired by Lord Toby Harris. The commission’s work is expected to shed some light on how resilience can be designed in the fabric of society to better prepare nations and organizations for what appears on our risk registers and even the unthinkable.
Resilience needs to be built into the narrative of boardroom conversations. By resilience we mean an organization’s ability to identify, understand, respond to and successfully adapt to changes or events that may adversely – or favorably – affect it. Willis Research Network (WRN) Director Hélène Galy represents Willis Towers Watson on the commission, and we will look to share WRN best practices from our sector and stress test our own thinking to support our clients.
This is not to say we haven’t made progress. Many financial institutions and other companies increasingly understand their exposure to climate risks and are reducing their carbon footprint. The pace will pick up as more companies find themselves in a four-way squeeze among:
Even in countries where there is skepticism about the effects of climate change, companies must contend with these four issues. Regulations are unavoidable. Stakeholder expectations can no longer be ignored. And the protection gap looms as sea levels rise and flood risks grow, fires burn out of control, and demand explodes for breaking down environmental risk in ways that are more understandable and manageable.
Regulators, initially among the Group of 20 (G-20) countries, have come to view climate change as a systematic challenge to the financial system. Many are asking insurers and other financial institutions to identify and quantify their exposure to climate change, devise a reporting framework and develop risk mitigation procedures.
While not in itself a body of regulations, the intent behind many regulatory efforts reflects the 2017 recommendations from the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). TCFD recommendations cover corporate governance, organizational strategy and financial planning, climate-related risk management and metrics used to assess and manage climate-related risks and opportunities.
In a recent call to action for financial regulators, a Harvard Law School Forum on corporate governance noted that climate-related systemic risks threaten to destabilize capital markets with significant consequences for financial institutions and the larger economy. It cited studies indicating that the U.S. economy alone could contract 10% by 2100 with unmitigated climate change. The Forum concluded that the insurance sector is “particularly vulnerable” as well as banks and financial institutions that have lent to carbon-intensive companies.
Investment and sustainability professionals at Willis Towers Watson prepared a paper, Sustainable Investing: Show Me the Evidence, which identified extensive research suggesting that sound sustainability standards can lower a company’s cost of capital and improve operational performance.
Superior performance would catch the eye of any investor, but many asset managers and investment advisors have taken things a step further by reducing or eliminating investments in companies that fail to apply environmental, social and governance (ESG) principles and to develop more sustainable, climate-resilient portfolios.
In a 2020 letter to its clients, BlackRock, the world’s largest asset manager, said climate change has become a major investment factor in terms of how the asset manager considers both physical risks and risks associated with transition to a low-carbon economy. In a 2020 letter to CEOs, Larry Fink, BlackRock’s chairman and CEO, summarized his thinking this way: Climate risk is investment risk.
Mr. Fink believes investment risks presented by climate change are set to accelerate a significant reallocation of capital, which will in turn have a profound impact on the pricing of risk and assets around the world. The company is actively reducing its ESG exposures as in, say, coal production. Vanguard, Morgan Stanley and other investment managers and advisers are taking similar steps.
Consumers are becoming increasingly influential by buying products from companies that apply sustainability principles. They are voting with their money to align with businesses that demonstrate a more thoughtful, multi-stakeholder approach to capitalism.
Boston Consulting Group, in a recent survey, found that leading consumer companies intend to preserve their sustainability focus even as they wrestle with the devastating effects of COVID-19. They know that consumer pressures will not vanish because of the pandemic and conclude that walking away from sustainability now would pose significant future business risks.
Nielsen, the analytics company, has estimated that the consumer market for sustainable products will exceed $150 billion in 2021. A study cited by the Harvard Business Review found that “sustainability-marketed products” grew faster than conventional options in more than 90% of categories among consumer-packaged goods.
Climate change is happening on a scale that conventional risk management practices are unable to address. Financial institutions and other companies best positioned to identify, measure and manage climate-related risks typically have a collaborative approach that involves broad company involvement across multiple disciplines.
Risk management basics come into play, of course. Risk managers have valuable experience in property risks, for example, that are likely to grow in magnitude as the planet warms, weather patterns change, and sea levels rise. But protection gaps may arise if a company fails to adopt a broader approach that should include: Heightened use of risk analytics and modeling, climate risk audits and stress testing, ESG-based asset analysis investment strategy and implementation and talent and rewards strategies to support climate-related organizational objectives.
Technology companies have a massive role to play in addressing climate change. Consider Planet Labs Inc., which is using microsatellites, machine learning and other technology to reveal flood risks. In a demonstration using such techniques as a high-resolution satellite base map and machine learning, the company identified where construction would be especially susceptible to flooding in a climate-changing world. Planet Labs envisions how this may lead to such innovations as new forms of microinsurance, climate-resilient municipal bonds and other financial instruments. Big data will be playing an increasing role, too. If any subject needs crunching enormous amounts of data and developing insights linking science and finance, it’s climate change. Big data and analytical know-how are essential for helping financial institutions and organizations build risk and pricing models. It’s a monster job.
Clearly major insurers and reinsurers are scientifically all over this, and are now making serious decisions on what to insure and where to invest. While some insurers will struggle with this challenge, we’re also seeing an interest in learning more about the implications of climate risk as insurers are starting to make strategic decisions to manage their ESG profile.
The CEO of a global company once said businesses that don’t pay attention to ESG won’t be around in five years’ time”. His comment was eye-opening but feels about right to the authors of this report. The speed with which we see climate risks develop can be quite alarming. If you’re not immersed in the subject of climate change, you will be in for a desperately bad shock when it comes upon you. (Mr. Dunlop’s comments above are taken from his Willis Towers Watson blog, “After COVID-19, climate change is the next challenge”).
Artificial Intelligence (AI) is a key technology of the Fourth Industrial Revolution. Digital transformation programs are investing heavily in data and algorithms in order to deliver exponential economic value, unprecedented efficiencies and personalized services to customers.
AI will contribute trillions of dollars in global growth over the next decade and will significantly impact business models with resulting pressures on strategy. AI is a wide-ranging tool that enables organizations to rethink how they integrate information, analyze data and use the resulting insights to improve decision making. The following excerpts from the white paper by Pragna Kolli, Associate Director for Outreach at the Mack Institute and Saikat Chaudhuri, Mack Institute Executive Director is included here to highlight some of the potential risks associated with AI deployment for TMT organizations.
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Pragna Kolli and Prof. Saikat Chaudhuri - Mack Institute for Innovation Management
Unlocking the strategic potential, avoiding pitfalls, and getting the organization ready. AI has led to transformations in many industries and continues to spawn solutions that were previously inconceivable. In their 2021 white paper, Pragna Kolli and ...
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Unlocking the strategic potential, avoiding pitfalls, and getting the organization ready
AI has led to transformations in many industries and continues to spawn solutions that were previously inconceivable. In their 2021 white paper, Pragna Kolli and Prof. Saikat Chaudhuri from the Mack Institute for Innovation Management exemplify the business value that AI-based solutions bring and the massive potential the technology holds in furthering these transformations. However, as with any emerging technology, AI too comes with its share of challenges, both technological and organizational.
Through extensive research and interviews with experts and practitioners, we identify seven key AI pitfalls that organizations should avoid and provide direction on how to address the challenges that lead to these pitfalls.
Three key areas that decision-makers need to actively address are:
Further, for any emerging technology to bring value to an organization, its implementation has to be supported by both organizational and technological capabilities.
The Mack Institute paper offers a handy framework to evaluate a firm’s organizational and technological readiness for AI adoption in a specific use case. Building a culture of innovation and an openness for experimentation and education form the foundational stones of building an AI-ready culture. Similarly, talent management practices and robust customer relationships are essential to create and implement AI solutions. Simultaneously, technological readiness of the organization can be gauged by evaluating the robustness and relevance of the organization’s data, its infrastructure capabilities to support AI-related solutions, and the availability of enabling technologies for customer adoption of the solutions. Understanding the organization’s ‘current state of play’ and the technology’s potential allow leaders to map the domains where AI can be best put to use and, therefore, leveraged fully.
The authors recommend that the risk of ignoring AI’s potential has to be compared and contrasted with experimentation and education – the two necessary ingredients of innovation that incumbents tend to dismiss due to their risk aversion.
Besides, the spill over effects of pursuing new technologies, such as AI, will include the creation of new knowledge in the firm and the result may be seen in existing products and processes either through lowered costs or enhanced attractiveness. Experimenting with a new technology to enter modest markets and then using that as a springboard to target other markets and domains can be a disruptive strategy for an incumbent.
AI is both an art and a science and to leverage this high-potential technology, organizations should understand their capabilities well. Making long-term investments in training and reskilling employees is key.
View the white paper along with answers to a multitude of questions one should ask before considering adaptation of AI within the organization.
