Strategic transformation—adapting a core business to disruptive change while also creating new growth around new products, services, or business models—may be the leadership imperative of the 21st century. But it also one of the most the challenging undertakings a leadership team can embark on. Our Transformation 20 research project identifies 20 companies that are achieving the highest impact transformations over the last decade. (See the 20 here.) To better understand what made these transformations so impressive, we analyzed some of the tough decisions made by their leadership teams and identified a shared set of deeply ingrained behaviors that contributed to their success.
1. They create a higher-purpose mission
Leaders embarking on transformation often come up against active opposition from those in the organization who are not comfortable with change, as well as the sheer inertia of the way things have been done in the past.
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Read the full Transformation 20 report.
The #16 company on our list, Ecolab, is a prime example of finding a higher purpose even when the company was not facing an existential crisis. “We had resistance to change within the core organization,” says Ecolab CEO Douglas Baker Jr. “They didn’t like the idea of not being the biggest anymore. So we had to deal with all this unintended emotional stuff.”
In the early 2000s, when Baker became CEO, Ecolab was a 90-year-old firm growing 10% annually by focusing on industrial cleansers and food safety. “Our strategic plan was to sell more of what we had,” Baker says. To grow much beyond its $3.8 billion in revenue, the company could have kept moving into adjacent markets or new geographies, but Baker felt that wasn’t bold enough.
The transformation began by talking to customers, Baker says. The same customers who were buying its core products were also voicing concerns about access to clean water. And they weren’t alone. Projections for the year 2030 showed that 70% of the world’s GDP would be based in water-stressed regions, California and Southern India being prime examples.
In 2011, Ecolab had a $12 billion market cap when it acquired water technology company Nalco in an $8 billion deal. The combined company is now one of the world’s leading suppliers of hardware and software that helps manufacturers and service firms become more efficient users of water. A primary metric driving the organization is how much water is saved by its clients annually, which now stands at 188 billion gallons, against a 2030 target of 300 billion gallons.
“We broadened our mission and our purpose statement changed, to clean water, safe food, abundant energy, healthy environment,” Baker says. The change in the mission—from the previous “to make the world a cleaner, safer and healthier place”—reflects how Ecolab intends to make the world a better place, and the specificity itself has been galvanizing. “As our teams widened their awareness of global issues, our pride has been enhanced,” Baker adds.
Protecting and healing the planet has also proved to be financially rewarding. Ecolab’s market value now stands at $58 billion, placing it among America’s 100 most valuable firms.
The #1 company, Netflix, is another case in point. In 2013, CEO Reed Hastings released an 11-page memo to employees and investors detailing a mission to move from just distributing content digitally to become a producer of original content that could win Emmys and Oscars.
As the memo said, “We don’t and can’t compete on breadth with Comcast, Sky, Amazon, Apple, Microsoft, Sony, or Google. For us to be hugely successful we have to be a focused passion brand. Starbucks, not 7-Eleven. Southwest, not United. HBO, not Dish.”
Since unveiling that new purpose, Netflix revenue has roughly tripled, its profits have multiplied 32X, and its stock CAGR has increased 57% annually, versus 11% for the S&P 500.
In a comparable way, other organizations on the list have transformed by embracing a purpose-driven mission of making people healthier and preventing illness. China’s AIA Group has moved beyond insurance to become a wellness company, whereas Dutch electronics giant Philips has largely divested its legacy lighting business to focus on healthcare technology.
The information technology companies on our list also discovered ways to infuse purpose into their organizations that recognized a need for fundamental change. Tencent Holdings began as an online chat and video game provider catering to the new generation of digital natives in China. Its original corporate objective, according to early annual reports, was simply to harness the Internet opportunity. As of 2005, shortly after its IPO, Tencent defined its purpose in terms of “implementing our Online Lifestyle strategy, which strives to cater to the basic needs of our users.”
Only in subsequent years did founder and CEO Pony Ma Huateng broaden the firm’s outlook by embracing a mission of “improving the quality of human life through digital innovation.” Since 2011, Tencent has invested heavily in new growth areas ranging from education and entertainment to autonomous vehicles and ride sharing to fintech and the industrial internet—areas that together now represent 25% of its $46 billion revenue. This growth helped Tencent become the first Asian company to surpass $500 billion in market valuation.
In 2019, the company refined its mission once again, in response to the growing global backlash against technology’s dominance in our lives, boiling it down to: tech for social good.
“Rather than the techno-optimism of the past, people are becoming increasingly cautious of technology,” the company announced. “We should make careful choices instead of being blindly optimistic.”
This sense, that there is a higher purpose besides growth itself, is a common thread among the T20 companies. As Ørsted’s Poulsen concludes, “It has been important to drive purpose inside the company. It’s been turbulent but the new mission is what has guided us.” The result is somewhat counter-intuitive: Focusing on purpose, rather than growth, is precisely what drives growth, while also keeping employees engaged in executing a worthy mission.
2. They’re not afraid to let go of the past
To focus on the future, you often need to leave the past behind. Intuit founder and executive committee chairman Scott Cook explains it this way: “We stopped doing a bunch of things on the theory of ‘do less better.’”
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The Intuit leadership team concluded that redeploying talent and capital to the new growth business mean that it had to make tough choices of which businesses to exit. “We sold off five divisions and product lines including our oldest franchise, Quicken, which was the original business of the company. We sold it off, and we also stopped all investment in our non-cloud platforms.”
Doing less better was also the mantra for other companies on the list. A.O. Smith completely exited its historic core of auto parts & motors to concentrate its investments on innovating its commercial and residential water heaters as well as entering the global water treatment market. “It’s all about water,” the company says, and that focus required jettisoning parts of its past that didn’t fit that mission.
In a similar way, Ørsted exited its historic fossil fuel business, divesting eight of its 12 divisions, to embark on offshore wind farming, part of its mission to become the world’s greenest energy company. Microsoft and Adobe have nearly completely phased out its once lucrative packaged software businesses to focus on subscription services for the cloud.
In 2014, Siemens launched its Vision 2020 plan, which involved phasing out traditional businesses in serving oil & gas companies and industrial manufacturing, so that it could build new business divisions and transform into a digital services company for some of the same manufacturing companies that also needed to transform themselves.
This was not a small decision for Siemens, as electric power was a core business for 140 years and had generated $30 billion and employed 80,000 people. “It’s the right thing to do,” Siemens chairman Jim Hagemann Snabe told Reuters. “It’s necessary and courageous to trigger the planned changes when the company is doing well.” The spinoff gives Siemens the resources for investing in its Digital Industries (DI) and Smart Infrastructure (SI) divisions as the core of the new Siemens.
3. They leverage a core capability to enter new growth markets
One of the biggest lessons from successful transformation efforts is the ability to take advantage of being the industry incumbent, with assets such as brand, customer relationships, distribution, and other core capabilities.
Siemens was struggling with what it means to be a cross-sector conglomerate in an age where each industry has focused players. Siemens USA CEO Barbara Humpton says the key was finding new growth opportunities where Siemens could bring its brand clout and technological know-how to the world’s “global megatrends,” from smart cities to climate change to health care for an aging population, while also building new capabilities for its move into the Internet of Things and data analytics (see video).
Once upon a time, Fujifilm Holdings was in the same boat as Eastman Kodak, enjoying a near-monopoly market position in photographic film. But Fujifilm’s more expansive view of its business has been enormously successful, whereas Kodak failed, filing for bankruptcy in 2012.
Fujifilm invested heavily in medical imaging, leveraging existing chemical technology and know-how that the firm used in photographic film, launching a full product line of diagnostic equipment for hospitals and other healthcare providers. The company also developed and marketed pharmaceutical drugs using existing chemical compounds. While its revenue has declined, profits have turned from losses to healthy margins. As of 2010, the company didn’t break out healthcare as a separate business, except for noting that its X-ray film technology has been a mainstay of the company since the 1930s. Currently, 18% of Fujifilm’s $22 billion in revenue comes from healthcare.
In a similar way, Schneider Electric leveraged its ability to create tech platforms to move into creating an Internet of Things data analytics business for energy management. Finland’s Neste seized on the market for renewable biofuels using some of the same industrial processes that it honed for refining oil & gas.
China’s Ping An leveraged its know-how and industry relationships as a traditional health insurance company to launch an online healthcare ecosystem platform called Good Doctor. The advantage of incumbency paid off, as Good Doctor signed up over 3,000 hospitals, 1,000 health clinics, 500 dental clinics and 7,5000 pharmacies. This critical mass has attracted more than 265 million registered users, enabling Ping An to stage an IPO of the platform as a separate company, raising over $1 billion from global investors.
4. They seize the digital opportunity via new platforms and business models
For DBS Bank, the transformation has been along many dimensions, from a national bank to a regional and global bank, and from traditional banking services to new kinds of fintech business models. But the common denominator to all these efforts has been building new digital platforms, says Paul Cobban, Chief Data Transformation Officer. “We went public with an economic model that would determine the value of our digital strategy,” Cobban says. “So we can measure how much value we’re getting out of this approach.” Some powerful results: In 2019, DBS became the first bank to simultaneously hold the titles “Bank of the Year” (The Banker), “Best Bank in the World” (Global Finance), and “World’s Best Bank” (Euromoney).
One of the keys to that success was not just going digital but opening up a digital platform that others can play on, taking part of the playbook from companies like Apple, Adobe and Amazon. DBS launched the world’s largest application protocol interface (API) protocol, where financial and retail partners can invisibly integrate DBS’s capabilities into their systems. By late 2018, DBS demonstrated that digital customers are at least twice as profitable as traditional customers.
Netflix mines audience data to create an astonishing range of new shows. Not only does Netflix use data to drive the compelling customer experience (e.g. even tailoring the images they use for each show to match customer preferences), they have fundamentally changed the way that they make decisions about which shows to pursue based on the data they collect on viewing behavior. For example, there are numerous stories of potential showrunners (e.g. The Crown) arriving to meet Reed Hastings thinking they were there to pitch the show only to discover that Netflix had used data to already make the decision about pursuing the show based on their own analytics.
AIA Group’s transformation has taken the Hong Kong-based life insurance company into a new global growth area, with its digital Vitality platform providing wellness and prevention knowledge, tools, and motivation to AIA members, leading to a business representing 10% of total revenue and growing at an 85% rate last year. Other T20 firms have also reaped benefits of invested heavily in new digital platforms for its customers. Cisco has cultivated customer relationships to find smart niches for new value-added digital subscription services. Ecolab has created new digital platforms for water analytics and distribution.
5. Innovation isn’t isolated to a department but is a strategic capability
Jeff Bezos of Amazon.com has famously led the organization to obsess over the customer, rather than competitors, leading to the Internet retail to take its internal cloud technology to customers. Amazon Web Services is now a $26 billion business that provides a lion’s share of the company’s profits.
In a similar way, Alibaba has always made innovation the key to everything, enabling it to expand beyond its roots as an e-commerce and Internet services company into new growth areas ranging from digital platforms for financial services to digital media to AliHealth and AliSports.
At Microsoft, CEO Satya Nadella has built a different kind of culture of innovation, less technological and more customer-focused, than the company led by his predecessors.
This was accomplished largely by shifting its culture away from one of competition, where managers were told to rank the value of each employee from 1 to 5. Nadella came up through the organization by growing its Azure cloud business by asking questions about customer needs. “We went from a culture of know-it-alls to a culture of learn-it-alls,” says Chris Capossela, Microsoft’s chief marketing officer.
These cultural traits of curiosity and customer obsession are hallmarks of innovative organizations, and it’s precisely this behavior that helps a large organization pivot to a growth mindset.
By many accounts, this has served the organization well as it moved away from its obsolete mission of “a computer on every desktop,” which was technology-focused, to its current mission of “empower every person and every organization on the planet to achieve more,” which is customer-focused.
Ørsted’s Poulsen encapsulates this innovation mindset like this: “We didn’t want to have a corporate innovation department or R&D group but to have innovation out in all the business units, so we can innovate offshore wind as a technology, in the supply chain; in the way we design, operate and maintain, to innovate every aspect, including our partnership business model.”