Mismatch between CEOs and investors could hold back transformation efforts

12 January 2018 Consultancy.uk 5 min. read
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In an era of digital disruption, long-time market incumbents are constantly looking over their shoulder as they come under pressure from new challengers leveraging innovative technology to eat into their market share. While traditional businesses are aware transforming their own operations to meet disrupters head on is key to fighting off this new competition, CEOs remain torn between staying the course and overhauling their practices – as many believe that investors are weary of change. However, a new report finds that investors are more open to risk than CEOs believe.

Rapid and substantial shifts in customer demand, as well as in ways of satisfying demand and business models, have, in recent decades, given rise to various market disruptors. Technology has allowed companies to deliver similar services at a fraction of the cost, or the same service, in a considerably more convenient manner – from Netflix to bitcoin.

While disruption can be difficult to predict, companies, particularly incumbents affected by digital transformations, are increasingly on the lookout for disruptors – whether as part of their own efforts to improve their market position, or to identify incumbent or start-up competitors. Levels of divestment in technology for carve outs have been previously valued at more than $100 million. Divestment deals in the ‘mega’ class included Hewlett Packard Enterprise’s carve out of its software and services businesses, Softbank divestment of its 72% stake in Supercell and Dell selling its IT services unit to Japan's NTT Data. According to research at the time, the need for digital transformation by buyers was cited by 48% of sellers as their top reason for a deal.

Despite transformation rapidly being adopted as a keystone tactic for many businesses, however, many CEOs remain hesitant to the idea, expecting such measures to be perceived as a risk by investors. To better understand how companies can meet the challenge of disruption going forward, EY interviewed 5000 CEOs. The results, highlighted in the firm’s ‘How can you be both the disruptor and the disrupted?’ report, show that in fact, companies and their investors have different perspectives – with the perception of investor sentiment differing from the reality of the matter. Disruptive factorsAwareness of the threat of disruption is widespread across most industries, with some, more than others, being concerned about the potential effect of rapid changes on their market, and their market share. CEOs and investors have somewhat different opinions about the factors most likely to result in disruption over the next five years. For instance, CEOs are much more concerned about technological innovation than investors, at 80% and 57% respectively. Investors, meanwhile, are more likely to cite new business models as likely to disrupt their businesses compared to CEOs, at 46% and 36% respectively. Regulatory changes are equally feared by both parties; however, changes in customer behaviour are more often cited by CEOs (52%) than investors (37%) as issues.

The rise of disruption has led some companies to transform their operations in ways that take advantage of new capabilities. In a bid to understand the current trends regarding transformation efforts, researchers at EY defined three categories relating to how active organisations are in relation to disruption: caterpillars, chrysalises or butterflies.

Caterpillars are defined as companies that continue to optimise current business models and do not feel an urgency to change; chrysalises organisations are companies that feel disruption at their heels and are undergoing change; while butterflies are companies that have already undergone transformation and drive digital competitiveness.Institutional vs. CEO resultsConsiderable differences were noted, particularly in the number of companies generating new revenue sources (20% for caterpillars and 50% for butterflies) and the optimisation of current business model revenues (60% of caterpillars and 22% of butterflies). CEOs were found to be relatively important in terms of ‘owning’ the corporate disruption agenda at butterfly businesses, at 78%, while at chrysalises and caterpillar businesses CEO ownership stood at 52% and 47% respectively.

Risk averse

In the face of a potentially disruptive future, institutional investors and CEOs varied somewhat in what they viewed as business transformation priorities. CEOs, the study found, are torn between dealing with a potentially disruptive landscape and managing the current business. This is expounded further by the CEOs’ perception of institutional investors, with Executives expecting them to be risk-averse and are weary of investing in potentially disruptive transformations.

However, contrary to this perception, a large number of institutional investors (67%) said that companies should undertake potentially disruptive innovation projects that are risky and may not deliver short-term results. Another 55% asserted that companies should invest in exploiting potentially disruptive business models – suggesting companies could be missing out on important changes to their operations due to a mismatch between the beliefs of CEOs – that investors are risk-averse – and investors’ actual thoughts on digital disruption.CEO ownership

Uschi Schreiber, Global Vice Chair of EY’s Markets Committee, said, “Our world is in transition from a model of business we are familiar with to one that is in many instances still undefined. The pace of change is unprecedented. Too many CEOs and boards are still focused on only one thing: short term efficiency and productivity improvements. But what’s needed is also a focus on the medium term and on building the future. This requires not just the use of up-to-date technology, it also means investing in innovation and being prepared to take some risks. Thinking and operating in duality can help corporations to seize the upside of disruption by focusing on their current success and growth as well as building the foundations for growth in the future.”