The Strategy Confidence Gap

The Confidence Gap: The Desire – But Not the Ability – to Transform

Transformation can be defined as changing your core product offerings or business model over time. An example is how IBM over a period of 15 years reshaped its computer hardware business—which faced severe disruption and decline—while it scaled up its services business to become a majority of its revenue. The result is a transformed and highly successful enterprise that doesn’t look like the old IBM.

An overwhelming majority of respondents agreed on the need for transformation, with about 85% stating that they agree or strongly agree that their organization needs to transform. Among large enterprises (those with $1 billion or more in revenue), the result was about the same, 83%.

QUESTION: Our organization recognizes the need for transformation in response to rapidly changing markets

We also asked executives “how confident are you that your organization is prepared to change in response to disruptive trends?” We posed the question over different time frames to see if their confidence levels increased or decreased over time. Among all respondents, 42% were “very confident” or “confident” that they are prepared to transform within a 5 to 10 year time frame. That percentage was just 36% percent among respondents at large enterprises. A significant percentage (27%) of those at big companies said they are “not at all confident.”

Individual responses revealed a range of reasons why the prospect of transformation is so challenging at large enterprises. “We have the information but not the impetus,” said one executive. Another said that “innovation is limited to small changes in existing product lines.”

But there are some bright spots, at least anecdotally. One executive said: “We are in constant transformation, and we are tackling new trends in emerging markets.” Said another: “We have been aggressively pursuing change and tracking the way the market is headed in order to position ourselves to be a continued leader.”

A Struggle to Keep Pace: A Sense of Falling Behind the Market

The pace of disruptive change can seem overwhelming at times, and strategic confidence levels could be affected by how executives perceive their organization’s ability to keep pace with shifts in the market.

To probe more deeply into how companies assess their ability to change, we asked a series of questions about the pace at which companies believe they can respond to disruptions and new growth opportunities. Since measuring the pace of change within a company is difficult, the survey instead asked executives to benchmark their organization against the overall market.

The results suggest that few organizations believe they are moving faster than their competitors or the overall market. About 30% of companies of all sizes say they are “changing at about the same pace as the market.” Another 30% reported that they are “changing somewhat slower than the market.”

QUESTION: Please describe the pace at which your organization is currently able to respond to marketplace disruption.

But large enterprises (again, those with over $1 billion in revenues) report an even more difficult time keeping pace, with 48% saying they are responding to marketplace disruptions “somewhat slower” or “much slower” than the market. In a related question, 44% said that they are responding to new growth opportunities “somewhat slower” or “much slower” than their competitors.

Only 21% of big companies say they are changing “much faster” or “somewhat faster” than the overall market in response to disruptive change.

These results show how difficult it is to capture competitive advantage in a world where customer needs and expectations often shift at the same pace that technology is advancing.

Respondents raised big questions about how rapid change affects their firm’s ability to compete: “How can we transform culture at a time when customer expectations are undergoing rapid change?” asked one. “How can we establish an entrepreneurial culture in a large, risk-averse organization?” asked another.

Many executives pointed to cultural issues at their organizations: “We have high institutional rigidity and resistance to change,” said one executive. “Rapid technology changes (i.e. mobility and cloud) are impactful before they are understood,” said another.

Strategy Shortfall: Growth Plans Focus on Near-Term

To understand how companies plan for innovation and growth, we asked companies to describe the time horizons of their growth strategies.

A surprisingly low percentage of organizations reported having a long-term strategy for growth. According to our survey, only 12% of organizations have a formal growth strategy with at least a 5+ year time horizon.

Click here for a PDF of the executive briefing.

The remaining 88% say they either have no growth strategy or that it’s shorter term, with a full 29% saying they have only an informal growth strategy.

One senior leader who understands the importance of investing in long-term, new growth businesses—the kind that typically require five or ten years to pay off—is Jeff Bezos of Amazon.com.

QUESTION: Which choice best describes your organization’s growth strategy?

Bezos recently showed a concept video of unmanned drones delivering packages to doorsteps. When pressed how long it would take to get there, he said more than five years. While drones may seem like a far-out idea for a retail business, that kind of innovation and strategy horizon is no different than the many other disruptive ventures that Amazon has invested in and launched over its history. For instance, the company is now a dominant force in cloud computing services, even though that business was a non-core area five years ago.

As Bezos explained recently, “The long-term approach is rare enough that it means you’re not competing against very many companies. Most companies want to see a return on investment in, one, two, three years. I’m willing for it to be five, six, seven years. So, just that change in timeline can be a very big competitive advantage.”

When organizations lack a long-term strategy that guides day-to-day work, executives can often experience frustration. A common set of struggles are suggested by these statements from respondents: “We’re kept in the shortterm focus trap,” said one. “Putting out fires is our main challenge,” said another.

In some cases, changes in leadership can result in abandoning long-term strategies. “A good strategic plan was developed two years ago, but then the executive changed, and he didn’t see the value in the existing strategic plan. The result: demoralization, no new ideas, no strategic focus, conflict, low performance.”

Process Shortcomings Undermine Long-Term Planning

More than 60% of enterprise executives surveyed said that they do not use scenario planning or other strategy tools to identify trends 7 years or further into the future.

The most common reason for not doing scenario analysis was, somewhat surprisingly, not an organizational bias toward the short-term but the lack of a reliable tool for long-term planning: 41% of respondents said “we don’t have a good process for confidently envisioning the future.”

QUESTION: You’ve indicated that you do not use scenario planning or long-term planning tools. Please explain why.

This response was twice as popular as the next most common answer, where 19% of respondents said that the market was too unpredictable to spend time doing scenario analysis. Meanwhile, 15% said “we spend most of our time fighting fires and don’t have time to think about the future.” Another 14% said “our leadership doesn’t have a long-term focus.”

Of those who do use these kinds of strategy tools, about 38% reported that they are “incredibly useful” and 56% said they are “moderately useful.” This suggests that while the process might be difficult, more robust and precise tools typically do improve outcomes.

Moreover, companies that use these tools report greater confidence to respond to longer-term marketplace disruptions. Fully 50% said they were “confident” or “very confident,” compared with 37% who don’t use planning tools.

Technology and Changing Consumer Preferences Expected to Be Most Disruptive

Markets can be disrupted by a number of different but inter-related forces, including new technologies, changing consumer behaviors, globalization, and lower cost solutions.

When asked to assess how strongly these forces would affect their business in the next 5 years, 93% said changing “disruptive, lower cost solutions” would have significant to moderate impact. That was closely followed by 92% of respondents who said “new, enabling technologies” would have significant to moderate impact.

QUESTION: When you consider the drivers of change and disruption, please give your best assessment of their likely impact on your organization in the next five years.

Interestingly, commodization and globalization are expected to bring the least amount of change. 75% of respondents said commodization would have significant to moderate impact, while only 68% said globalization would. Meanwhile, a full 32% said globalization would only have minimal impact. (Respondents to this question were able to choose all answers that apply.)

These trends were fairly consistent across different size companies, though there were a few interesting differences. For example, respondents from large companies showed more concern about commodization than any other size company, with 44% of those respondents saying it would have “significant” impact, compared with 35% from the next highest group (companies with revenues between $500 million and $1 billion).

In some cases, failures to anticipate and plan for disruption can be catastrophic. “Failure to detect global changes and connect the dots is critical,” said one respondent. “In our case the company collapsed into bankruptcy.”

No Lack of Ideas, But Difficulty Getting Through Innovation’s “First Mile”

Since the ability to innovate reliably and repeatedly is critical to achieving sustainable growth, we wanted to understand the innovation bottlenecks inside organizations. Asked what their company’s biggest innovation challenge is, only 11% cited “developing ideas.”

Meanwhile, about 20% cited “commercializing ideas” while 22% cited “scaling new ideas in the market.”

QUESTION: What is your company’s biggest innovation challenge?

These were the two most popular replies, which is consistent with what we’ve found working with corporations throughout the entire innovation life-cycle. The most critical stretch of that life-cycle is what we call the “the first mile,” where an innovation moves from being an idea on paper into the market. In general, companies that adopt an approach of trial-and-error experimentation do a better job of navigating the financial, human capital, and business model challenges that make this stage of innovation so complex, says Scott Anthony, Innosight’s managing partner, who explores this topic in his new book from Harvard Business Review Press.

In our survey, other hurdles also stand in the way of innovation efforts, including gaining “leadership support for innovation” (11%), “securing funding for innovation” (14%) and “getting the right innovation talent and resources” (16%).

Different companies have different innovation strengths and weaknesses. But any one of these bottlenecks can slow down or block an innovation initiative. Taken together, all of these challenges are important parts of a complete innovation system that organizations need to put in place if they aim to reliably produce new products and business models that lead to growth.