Changing business models

Business models continually evolve as companies react to changes large and small, and as they reposition to avoid emerging risks and seize opportunities. Over time, these accruing changes can transform everything about the business model – that is, how the business invests, how it earns and distributes its profits, and how it deploys its capital. Indeed, the businesses that KPMG member firms work with today are very different from the businesses we advised 10 or 20 years ago.

The most obvious changes are in the way that businesses sell to their customers and the way customers buy, in both business-to-business and business-to-consumer contexts. Part of this change is about digitization, as companies pursue new economic activities in virtual markets online. Also rising is the “Uber-ization” of business, as companies that traditionally sold products now sell services and vice versa, and the line between them becomes increasingly blurred.

Changes happening behind the scenes are equally important. Organizations are being reshaped to fit changing families, longer lifespans and how people plan their careers. Supply chains are being redrawn by changes in macro factors, such as oil prices, economics and geopolitics, and in micro factors, such as changing technology and local tax changes. Shortages of highly qualified staff are forcing companies to hire and locate senior staff wherever they can find them, and technology is being used to connect them as organizations become more virtual.

The way that capital is deployed has changed beyond recognition. In the recent past, the majority of capital was deployed by listed multinational public companies. Now, private equity is increasingly important. As state deployment of resources through state-owned enterprises and sovereign wealth funds rises, the impact of institutional investors is intensifying. The way capital moves around the world has completely shifted as a result.

Another key change is that mergers and acquisitions are now integral to business-as-usual planning, rather than one-off events. Traditionally, companies would grow organically through operating models that made money in profitable markets and invested profits in new markets. M&As would be pursued only when companies needed complementary assets or market scale. Now, inorganic growth through M&A is a way of life, especially in R&D heavy industries. Deals activity is now part of everyday stream of business activity, and businesses are more difficult to categorize, for example, as pure manufacturing operations or intellectual property companies.

Of course, there is a tax dimension involved in remaking business modes. For example:

• As M&A activities become part of the mainstream business, the value of this work needs to be built into transfer pricing practices and the convergence of deal-making and other activities may change how you describe the nature of your business to the tax authorities.
• The rising prevalence of VAT/GST worldwide has elevated indirect tax activities from backroom functions to become key drivers of efficiency.
• Indirect taxes are embedded across supply chains, so Brexit’s reestablishment of borders and changing trade agreements can affect where and how much VAT and customs duties are collected.
• The dispersal of senior staff across jurisdictions can alter the location of decision making authority and value creation, with implications for corporate taxes. The rise of virtual organizations and more frequent business travel creates implications for payroll taxes and tax-effective employee compensation as well as corporate taxes (e.g., in creating permanent establishment issues).

Looking ahead, if the last few years have proven anything, it’s that you have to be prepared for surprises. Advances in artificial intelligence and robotics may move businesses in directions that are difficult to predict. For example, will autonomous vehicles become as ubiquitous as drones and smartphones, or will technical challenges and lack of user acceptance cause them to fall by the wayside? Will blockchain take hold like cloud computing, or will some as-yet unknown technology supersede it?

From uncertain geopolitical currents to extreme weather events, the list of unknowns facing today’s businesses is overwhelming. The stakes are high, and it’s becoming ever more difficult to know where to place your bets. At a pragmatic level, what approach should companies take to avoid surprises and be ready to adapt to whatever might come their way? It’s important for businesses to keep a closer watch on what’s going on around them. Too many companies are inwardly focussed, so they fixate on the challenges they see themselves as having. This can lead them to use yesterday’s solutions to solve yesterday’s problems. For example, in deploying technology, a company with a clunky ERP system may decide the obvious fix is to replace it with a new one. But this company would do well to take a broader view of all available possibilities. If the company was starting from where they are today, would it use the same technology it has used for 20 years or something better, like a cloud-based solution?

Similarly, many companies tend to do their planning based on the structure that involves a headquarters company with various operational functions in various countries. But is this traditional structure really the best way forward? Does it still make sense to locate factories in one country and marketing and distribution functions in another just because that’s the way things have always been done? Or are there cheaper, easier alternatives?

Tax will undoubtedly remain one of the most important factors for companies thinking about business model change. And as companies change their business models – for example, to seize opportunities in the digital domain – policy makers will likely in turn alter their application of taxes to respond to different ways of creating value. With this dynamic, your best bet is to look forward and outward by monitoring developments, anticipating possibilities and preparing your range of potential responses.