Challenges and constraints are driving radical change as EU CEOs rethink their business models

  • April 12, 2023

Complacency is no longer an option. With nearly 40% of EU CEOs saying that their businesses will not survive more than ten years without radical change, there is a palpable sense of urgency amongst European business leaders about the scale of the challenge that lies ahead.

By Andrew McDowell, Partner, PwC Luxembourg

In particular there is growing recognition that traditional resource-intensive business models are no longer fit for purpose as the sources of competitive advantage rapidly change. Business models across all industries are running up against two natural environmental and social constraints which are forcing them to radically rethink the way they operate.

The first constraint is people. The shape and nature of the available labour force in Europe is undergoing significant changes as demographic change, political and social limits on immigration and the growing importance of work-life balance, redraw the capacity of available talent. These constraints mean it is already getting harder for businesses to hire the kind of people and skills they need to drive growth, and it is going to get progressively more difficult. PwC's survey shows that nearly six in ten EU CEOs think skills and labour shortages will significantly affect their profitability over the next ten years.

The second constraint is physical resources and environmental limits. Businesses across a wide range of industries are running into resource constraints for energy, commodities and other raw materials as it becomes clear that the old business model of 'extract, use, throw away' is just not sustainable. Achieving greater resilience against geopolitical risks is also forcing a reconsideration of supply chains and dependencies. PwC's survey shows that 46% of EU CEOs think transitioning to new energy sources will significantly impact their profitability over the next ten years, while nearly half are investing in adopting alternative energy sources over the coming year.

Businesses across Europe can therefore no longer rely on the two key elements that have traditionally driven their growth in the past; instead they need to completely reinvent the way they operate in order to compete and survive. That's a pretty fundamental shift, and it is going to require an equally robust response to fix the problem. There is no way round the pain however as the CEOs who continue to ignore these restraints will quickly find their businesses shunned by stakeholders.

At a glance

37% of EU CEOs believe that their organisation won't survive more than ten years unless it undergoes radical change

75% of EU CEOs have completed, or have in progress, programmes aimed at reducing their company's emissions

66% of EU CEOs will deploy advanced technology like AI this year

70% of EU CEOs are investing in upskilling their workforce this year, 30% are not

How should EU businesses adapt to the challenges posed by environmental and social constraints?

The businesses that successfully adapt will be the ones that recognise that innovation and digitisation are going to be the key - and possibly only - sources of future growth for businesses. Simply adding more inputs is not going to work; so the secret to success will be in using existing inputs more efficiently and with more creativity to produce better outputs. That might mean better use of technology and digitisation, and a willingness to embrace new tools and ideas, such as generative AI, for example.

Investment in relevant skills also needs to be a priority, both for businesses and for the EU as a whole, something it is already recognising with the designation of 2023 as the European Year of Skills. Quite simply, none of the changes that society and the economy need to see happen, such as digitisation and energy transition, renewables and clean transport, will be able to do so without a radical improvement in the quality of people's skills. Tackling climate change alone will require a whole suite of green and digital skills that many businesses don't yet have - to take just one example, making electric cars and internal combustion engine cars require a different kind of work force. Yet the findings of PwC's survey suggest that while CEOs are aware of the labour shortages they are not yet making sufficient investment to fill the gaps; while 70% are investing in upskilling their workforce this year, 30% are not.

It is also vital to have the right kind of public policy framework in place to support the kinds of radical transformations needed, something which the EU has taken a global lead on for many years. The US Inflation Reduction Act (IRA) is a timely reminder of the importance of public policy in shaping the business environment and determining the degree to which companies, and indeed industries, have a competitive advantage. In my opinion it is no exaggeration to say that the IRA has caused a seismic reassessment by EU CEOs and policymakers of how the US is thinking, with concepts such as globalisation, free trade and access to new markets now replaced by watchwords like local industrial policy, national security and strategic autonomy. While the scale of the subsidies and the potential for market distortions has been the main focus of commentary in Europe, equally noteworthy has been the Act’s requirement for qualifying businesses to invest in workforce training in the US.

The next few years are not going to be easy for either EU CEOs or policymakers as they seek to create a bold new path to resilience and success against a backdrop of global turmoil and uncertainty. But by facing in the same direction and working towards a common purpose they will be able to amplify each other's efforts and ensure that the eventual prize is more than worth it.

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Andrew McDowell

Andrew McDowell

Partner, PwC Luxembourg

Tel: +352 621 332 034