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A set of indicators could provide advance notice of impending periods of business model change in sectors and industries.

Our index, which can be applied to any sector, brings together six leading indicators of BMR that we list here along with a rationale for how they might increase pressure for the reinvention of businesses.

  • PerformanceFaced with declining industry returns, companies feel pressure to find new ways to ensure their survival. For this indicator, we calculated the market share–weighted sum of the return on capital11 Except for financial services, where we used return on equity. for the companies in that sector.
  • AttractivenessIncreasing industry attractiveness drives new entrants and incumbents to seek emerging value. Here, we simply counted the change in the number of firms active in any given sector.
  • InnovationEmerging innovations and new technologies enable companies to capture new sources of value. The proxy for this metric is the growth-adjusted share of sectoral venture capital (VC) investments, as VC firms typically seek to be ahead of the curve on business reinvention. Note that we looked at these investments at the industry level, not the sector level, to capture the cross-pollination of innovation between sectors within the same industry.
  • ShocksGlobal shocks rapidly put pressure on companies to adapt to new conditions. Our proxy for this indicator was sectoral recessions—any period in which the total real revenue growth (inflation adjusted) of the sector is negative.
  • RegulationChanges in regulation prompt companies to adapt to shifting sources of value in their sector. Here, we constructed a qualitative measure of regulatory intensity by incorporating major regulatory and policy introductions taking place each year,22 Because regulatory changes are often planned and discussed years before implementation, we’ve factored in a buildup and cool-down of each regulation before and after its implementation date. scoring their intensity according to their impact on the economy and customer segments, as well as on companies’ geographic activity and product mix.
  • BMR intensityThe expanding adoption of new business models within an industry puts pressure on others in that industry to follow suit. The redistribution of market share between companies is an indication that BMR is occurring within a sector. Those with more successful business models win market share, while obsolescing business models lead to erosion of market share. We measured this movement of market share between companies within a sector using a three-year rolling average, recognizing that the effects of BMR intensity persist as pressure into future years.33 We acknowledge that this measure may over- or underestimate the effect of BMR intensity in some situations. For example, it may overestimate it when there are changes to market share for reasons other than BMR, such as with acquisitions. Or it may underestimate the effect—for example, if a company were to change its business model in order to remain competitive and not improve its market share as a result, but nonetheless avoid a loss in market share it would have otherwise suffered had it not made the change. Despite these potential over- and underestimations, our statistical model demonstrates, through statistical significance, that the pressure index is indeed predictive of BMR, and that any idiosyncratic effects are captured in the error term.