December, 2012, Volume 10, Number 4
CEO Strategy: Charting "Dual Transformation" at Xerox and Barnes & Noble
Ursula Burns, Xerox
William Lynch, Barnes & Noble
Xerox and Barnes & Noble are two notable companies that have recently faced potentially fatal disruptions and survived. In each case, their CEOs can be credited with a sustained strategic response by leading corporate reinvention efforts. Those efforts are in keeping with the "dual transformation" methodology that our Innosight authors detail in the new issue of Harvard Business Review. We interviewed Xerox CEO Ursula Burns and B&N CEO William Lynch for the article. Here are the five common insights that they shared with us.
Strategy point #1: Harness the disruption.
Innosight: Can you describe the challenge Xerox faced in the year 2000?
Ursula Burns: We were in trouble. We were faced with a challenge of profitability and the ongoing economics of our business and whether or not we can make it run. I [then the VP of manufacturing] had to actually figure out a way to lower costs. Thanks to advances that were external to Xerox, I saw that I could actually increase productivity, decrease cost, and gain scale by outsourcing my manufacturing to a third party manufacturer, and that's what I did. We moved our manufacturing to Flextronics and did our first internal transformation.
Innosight: When you joined Barnes & Noble in 2009, the company was facing what Clayton Christensen would term a classic disruption in the market, where the core needed to be repositioned at the same time the future needed to be invented. How did you first look at the problem and frame it?
William Lynch: Clearly, with the emergence of the Kindle in 2007, we knew that our business was under threat and that the growth was going to be in the digital area. Yet we had no capabilities in the organization in that area. We needed to figure it out: How do we become relevant and get a footing in where the growth was going to come from—while we continue to preserve the stores as one of the leading retail destinations in their communities?
Strategy point #2: Find the essence of the brand and reposition around it.
Innosight: What were some of the key assets you could build on?
Ursula Burns: We have a brand that actually means something to people. It means copying, but it also means being around for long time, it means innovation, it means being global, it means being trustworthy. Before I became CEO [in 2009], when I was president, one of the things that I had the benefit of doing was stepping back and saying: how could we use these assets differently? How could we repurpose them? Then we had the confidence to step up and say: we're willing to build on our brand but switch our investments.
Innosight: We have a hypothesis that can't just cut cost in the core but you need to fundamentally reposition it around the "jobs-to-be-done" of your customers. Do you feel like there is truth to that?
William Lynch: Yes, what we really spent time doing is defining who we are and what we do for a living. At the end of the day, we are a purveyor of copyrighted content and we create an amazing experience for the consumption or browsing of that content. So it's not just books. We always need to ask: who is coming into our stores and why do they come in? We have always been a destination for families. There is a reason our aisles are so big, to accommodate double strollers. So we thought about the merchandise mix, and hence we have really elevated educational toys and games. We have definitely elevated the gifting area, and we have increased the real estate dedicated to technology.
Strategy point #3: Protect the new venture from the corporate parent.
Innosight: Xerox launched its Global Services business around 2001, but it was small, almost like a start-up. How did you grow that culture?
Ursula Burns: I was actually part of the leadership team then, and it was about making the decision to protect it. Big normally gets more attention than small, established gets more attention than less established. We had to say: this portion of the business will get a disproportionate level of attention in relation to the immediate impact. That was a conscious decision. We allowed it to grow. We actually made decisions about very simple things, like how do we count success in Services? In the past, our business was built by transactions, by selling machines. We had to say, for Services, we can't do that any more. That allowed us to grow a business from zero to about $3 billion. But it look a long time, and it was not growing fast enough. That's why we acquired ACS [Xerox bought Advanced Computer Services for $5.5 billion in 2009]. To accelerate the growth in what we call Business Process Services.
Innosight: Tell us about how you organized to innovate. In launching new ventures, one of the things that often gets bungled is not separating out the new business from the parent.
William Lynch: I think you guys are right on about that. The problem with being in New York is that New York is Barnes & Noble's town, and we're known here as a retailer. In setting up our digital division with an entrepreneurial staff, we didn't want to be beholden to this massive retail operation. We wanted the new business to be unencumbered by any of that. In my view, we had to be in Silicon Valley. We needed to fish where the fish are from a talent perspective.
Strategy point #4: Share capabilities between the 'A' and the 'B' organizations.
Innosight: Since the incumbent organization has resources that provide an advantage versus startups, we found that it's important to share just some of those resources. What kind of capabilities did you share?
William Lynch: The publisher relationships, clearly. Publishers continue looking at us as one company. Today, a third of the unit sales for this company is in digital and that's big economics for the publishers. So we went in with one voice together. We also shared the real estate—the marketing and sales channels of not only the physical retail stores but of bn.com. Those are some of the most heavily traffic channels in all of U.S. retail.
Innosight: Ursula, you talked about your three big assets – your R&D, your brand, your global presence. How did you go about sharing those assets or bringing them from Technology to Services? How does that happen?
Ursula Burns: With teams of people. When we were starting the services business, it was on a smaller scale. But when we bought ACS, for example, we had to form a special office of people that we pull out of their regular jobs. We actually have them manage the interaction between this big company called Xerox and this big company called ACS. R&D was easier to do than anything else. Sales was harder by the way. We have five research centers around the world, (including the best-known ones in Palo Alto and Grenoble, France). These two centers were doing ethnography, how people interact with processes and documents. They did analytics. So, this was like, oh my God, I finally had a place where I can really apply this stuff.
Strategy point #5: Saddle up for a long journey, not a quick fix.
Innosight: Ursula, your transformation process has been more than a decade in the making. How will you know when you’re done?
Ursula Burns: We’re about halfway through. We need to expand even further into business process outsourcing and IT outsourcing. It’s a $500 billion industry and so we have a long way to go before we tap that market. We’re showing proof points as we go along. But you can’t be confused about the reality. It’s all about managing this transition, so that you don’t fall in love too much with the future to the point where you hate the past.
Innosight: So we talked about the two transformations happening at once. Can you talk about the financial metrics that you look at for the core business transformation and the Nook business transformation?
William Lynch: In retail, our comparable stores sales have done extremely well as Borders has gone out. If you drive that added volume through the fixed cost of the retail model, good things happen, but it doesn’t change the overarching piece, which is that the physical book is declining and it's become a smaller and smaller part of our business. In digital, we’re now 27% of the e-book market. We have grown faster than we thought, but it’s also been more expensive than we thought [to compete against Amazon]. Transformation and change are really hard. It's hard financially and it’s hard culturally. But there is no longer a worry about our survival.