Last Wednesday we held a Webinar on corporate transformation. It drew on the Harvard Business Review article “Two Routes to Resilience” (in which Gilbert detailed his first-hand experience driving transformation as CEO of Deseret News) and Innosight’s field experience guiding corporate clients around transformation.
The Webinar had three main messages:
- Transformation involves two components, not one. Gilbert described how he refashioned the legacy print business (“Transformation A”) into one focused on six specific content areas while also creating new digital growth businesses (“Transformation B”).
- Transformation B requires distinct management and governance approaches, and in many cases requires investing in outside talent.
- The CEO has to spend a tremendous amount of time and energy working the talent and shaping the culture.
Transformation is a huge organizational challenge. Almost half of Webinar participants reported that their companies are changing slower than the marketplace, with only five percent claiming to be well ahead of marketplace change.
A common root cause that some audience members highlighted is the challenge in making the case to invest in transformation before the data is obvious. Waiting too long is risky, often leading to drastic cost cuts, highly risky acquisitions, or, in some cases, bankruptcy.
One way to make the case for change is to highlight early warning signs that disruption is taking root. Disruption typically starts innocently, with a lower-cost or simpler solution taking root among undemanding customer groups, or among people whose lack of expert skills or sufficient wealth kept them out of the market. The pattern of disruption means that these humble beginnings can lead to cataclysmic change, so even the smallest development should be watched carefully.
Then, quantify the cost of inaction. A comprehensive analysis done by one industrial company we advised highlighted that the company faced a $20 billion revenue shortfall in 15 years. The size of the gap surprised leadership, and drove substantial investment in transformation. Companies that take a hard look at their growth plan almost always come to the realization that there is more risk in the core business than they thought given the increasing pace of change in today’s markets, and that they haven’t invested in enough new growth efforts given the anticipated failure rate of those types of projects.
While fear is a powerful motivator, balance scarce tactics by painting the opportunity that transformation presents. Delivering against today’s plan helps a company to maintain its stock price; increasing it requires producing growth the market doesn’t expect. Going into new markets or following new models is at least one way to deliver this “upside surprise.”
All companies have to transform eventually. Acting early allows companies to drive transformation from a position of strength rather than from a position of crisis.
Once there is organizational buy-in, the next key issue is ensuring that both transformations focus on the right activities.
For Transformation A, that means thinking beyond simply hacking costs. In any industry where disruption is afoot, the core business has to transform into a way that maximizes its resilience in a post-disruptive world. For Deseret that certainly involved cost cutting, but it also involved investing in original content in selected areas.
For Transformation B, the biggest challenge is selecting the right ideas and managing them in the right way. Unfortunately, the tools used to manage the current business can unintentionally screen out or sub-optimize the highest-potential growth opportunities.
Companies need to approach new growth with a mix of art and science. They should look for areas that intersect an important problem that customers have historically struggled to solve, a unique capability that allows the company to develop a unique solution to that problem, and underlying trends that either make new solutions technologically feasible or promise to change customer habits or preferences.
Because these “strategic opportunity areas” typically are nebulous and emerging, companies need to govern investments in them like venture capitalists, giving small teams funding to go and learn around critical assumptions, measuring progress by learning rather than falsely precise financial metrics. For example, IBM historically has used different metrics for what it calls Emerging Business Opportunities. As a recent Harvard Business Review article co-authored by IBM’s former head of strategy noted, “Mature businesses typically measure such things as unit volume, revenue, and earnings in relation to their P&L plans. In contrast, early-stage businesses should employ metrics that track their progress in understanding customers’ problems and learning how to solve them.”
A final common challenge Webinar attendees reported was figuring out how to deal with the complexity of sharing capabilities across Transformation A and B. While this is a real challenge, this is a feature, not a bug of corporate transformation. It is by definition impossible for a company to innovate faster than the market in which it participates. But a company can innovate better than the marketplace if it smartly utilizes difficult-to-replicate assets.
Of course, that requires understanding the truly unique assets a corporation has that can enable new growth. For Deseret that was a trusted brand that opened doors, some areas of content, and parts of its sales force. Remember the dual-aspect principle of accounting: every asset has a corresponding liability. Borrowing a core asset does create complexity, which can slow efforts. So, as Innosight Fellow Vijay Govindarajan notes, borrow only assets that provide true strategic advantage.
Finally, consider the ideal mechanism for sharing the asset. In some cases it might be simple decision rules; sometimes there needs to be formal transfer pricing mechanisms; sometimes there needs to be a team that governs asset sharing. Leadership plays a critical role in managing the interfaces between the two transformations. Gilbert has done everything from leading formal “exchange teams” to creating simple mechanisms to ensure that the core business receives appropriate compensation for supporting transformation.
We’d be happy to answer any further questions about this important topic of driving corporate transformation.
Scott Anthony is the managing partner of Innosight. Clark Gilbert is the CEO of Deseret News.