Schumpeter’s gale of creative destruction is blowing, and even though the wall you built to bolster your core business will increase your resilience, it is type B transformation that create the wind turbine to power the next wave of growth. Yet, it is no quick fix.
In the second part of this two piece series, Ron Immink continues sharing thoughts and lessons from 2 formulas and 8 books, while posing at least 25 questions.
The simplest way to understand whether you’re truly transforming your core business is to ask, how have our metrics changed? If a company is using the same metrics before and after its so-called transformation effort, it really hasn’t transformed in a material way.
Once you understand the jobs to be done, are clear on your business model and your metrics, you require a burn the boat moment and execute quickly, and execute comprehensively, which will always need heavy, hands-on involvement by top-level executives. It will need you to bring in special-purpose talent and almost always, the kind of new business models that power transformation A, requires careful management of sales and distribution.
As explained in Part 1: Transformation and innovation: There is no quick fix, there is no doubt that transformation A is difficult. So difficult that you might be tempted to stop there. However, Schumpeter’s gale of creative destruction is blowing, and even though the wall you built to bolster your core business will increase your resilience, transformation B creates the wind turbine to power the next wave of growth.
Keys to transformation B success
From 1950 to 1980, disruption was indeed dominated by startups. In fact, startups launched about 85% of disruptions during that period. In the past few years, however, momentum has shifted, with roughly 40% of disruptions launched since 2000 driven by large companies. Transformation B is about finding a new way to solve a different problem. Success, therefore, comes from identifying problems that the target customer historically has wanted to solve but can’t, iteratively fine-tuning the business model to best the competition, and using partnerships, acquisitions, and external hires to accelerate the development of capabilities required to win against a new competitive set. Blue ocean stuff.
Which means you have to do some homework. Such as identifying constrained markets, identifying consumption barriers and consumption mapping. I would add developing a good information dashboard. To assess a potential opportunity area, you need to a number of questions.
- Which disruptive trends have the potential to change our competitive landscape?
- What is the new way we will compete in today’s core?
- What old metrics are no longer relevant?
- Which new ones are?
- What are the most exciting growth opportunities that are now options for us?
- Who will be our new competitors?
- What unique capabilities will allow us to win?
- How will we sharpen current capabilities and build new ones?
- If we successfully execute, who will we become?
- What will be different?
- What will be the same?
- What organisational changes will maximise our chances of success?
- Is the what compelling?
- How important and unsolved is the problem you are targeting?
- Is the who sufficient?
- How many people face the problem?
- Is the how believable?
- To what degree is a solution imaginable without any miracles?
- Is the why convincing?
- To what degree does it fit your capability set and market trends?
Iteratively develop the business model
Transformation B is best done through more of an iterative, test-and-learn approach. What’s the difference? Remember, in transformation A the what doesn’t change materially. For transformation B, both the what and the how are changing. With two variables in play, it makes sense to follow a more prudent path to commercialisation. It is critical to discover this path by action and not by analysis. Every idea to create new growth is partially right and partially wrong. The problem is that you don’t know which part is which. “Everybody has a plan until they get punched in the face.” The innovator receives the punch when the plan that looked so good on paper ends up resting on shaky assumptions. No business plan survives first contact with the marketplace. Successful innovators smartly manage risk through disciplined experimentation. Read “Black box thinking“.
Things to do
Clearly define the deal-killers, watch out for the pivot points and the confidence boosters that prove you are on the right path. Also, involve a careful blend of people we dub “aliens” (who will push you in a new direction) and “diplomats” (who will help negotiate bilateral relationships).
Business leaders have two fundamental challenges. They must exploit what they currently have, and they must explore to develop what they don’t have. And both transformation A and transformation B requires a heavy dose of exploration, because, by definition, the precise way to win along either vector can’t be completely certain. There are lessons:
- If you link A and B too tightly, the gravitational pull of today’s business means you end up replicating today versus creating tomorrow.
- Link A en B selectively with capabilities that will truly give you an unfair advantage over current and potential competitors (versus capabilities that either aren’t unique or aren’t meaningful). The fundamental mistake organisations make is to borrow capabilities because they are there and appear to be free. If a capability is not going to create a real competitive advantage, be careful. When you consider key capabilities, recall that they can be things, such as technology, internal experts, brand names, or stores, or they can be know-how, such as product development, manufacturing, or the ability to work with regulators.
- Manage interfaces strategically by using structured mechanisms such as clear decision rules or a formal “exchange team”.
- Actively arbitrate between A and B, standing ready as a leader to demonstrate a strong bias toward transformation B.
- Set up transformation B as a separate entity, with a separate target market and a separate business model. Only after that is clearly established can the B leadership clearly determine which capabilities from A will end up being a comparative advantage to B.
- Innovating faster than the market is next to impossible. Innovating better than the market is not.
- People may be collaborative. But systems are not.
- Robust portfolio management systems are key enablers of dual transformation. It ensures congruence between the stated strategy and the actual work being done in an organisation. It serves as an early warning signal that a key project is falling behind schedule, and it helps to ensure that the right resources make it into the right projects.
- Create a formal exchange team with clear mandates and governance. These small teams are a hand-picked mix of people from A and B. This presents significant challenges because it requires a unique blend of capabilities. Notably, exchange team leaders need to balance the initiative to get people moving and find solutions against the deference to let other people work through challenges and feel their effort is valuable. An exchange team leader needs to artfully compromise, validate the personal and organisational sense of identity in some team members, and defuse heated moments.
- Institute transfer pricing.
- Turf wars and related intercompany squabbling certainly happens, but many of the conflicts are natural results of people trying to optimise different outcomes.
- Disruption underway is always opaque. By the time it is crystal clear, it is too late to do anything about the disruption.
- We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.
- Go to the periphery.
- Involve outsiders
- Assess the cost of inaction.
- Leaders tend to overestimate the degree of people’s alignment with the future target.
- Companies tend to underestimate the presence of disruptive warning signs.
- Most companies do a fairly good job of monitoring their direct competitors, but they underinvest in monitoring and interpreting telltale signs of future threats from substitutes and existing or yet-to-be-born disruptors.
- When companies make a list of new growth projects, they often create “Potemkin portfolios.” The name refers to the Russian prince who was fond of building villages that were nothing more than facades to fool visiting officials about his region’s prosperity.
- People tend to be wildly optimistic about the returns promised by their current investments in growth. Psychologists call this the planning fallacy. For example, research by one academic found that roughly 75% of ideas fail to return capital to investors.
- Shape the physical environment
- Have a listening function that gets an early look at interesting startups
You will need key leadership mindsets such as
- The courage to choose before the platform burns
- The clarity to focus on a select few moonshots
- The curiosity to explore even if the probable outcome is failure
- The conviction to persevere in the face of predictable crises
- The adoption of a future-back perspective
Read “The new leadership literacies“.
Imagine that you and your leadership team board a time machine. You get out at some future date; as before, that might be three to five years in the future in fast-moving industries, and twenty to thirty years Inexorable trends will have affected everyone in and around your industry. Many of these trends aren’t hidden. And how they’ll affect the industry isn’t a mystery. The question is, When you open the door and walk the halls of tomorrow’s business, what do you and your team want to see? What will be your transformation blurb (a short description of what your company will look like after the transformation)?
- The most likely future environment
- The desired state of the future company
- The most critical strategic initiatives
- The most critical assumptions
- Critical near-term action items to start the journey
The time frames
A future-back orientation helps with the next key to success: thinking concurrently across three-time frames.
- The moonshot frame, where they conceive of and describe an inspirational future state that captures the organisation’s attention
- The lunar module (or launchpad) frame, where they think about the components and building blocks that will move the moonshot from dream to reality
- The Tuesday lunch frame, where they think about the specific thing they will do tomorrow to make sure they’re making progress.
It is not all about the future
As dual transformation begins, it’s easy for leaders to spend all their time talking about the future and about the new directions the company is taking. But you need to make sure to clearly communicate how important the work of transformation A is to enable long-term success. Otherwise, the people in the core business will feel like second-class citizens. It’s also important that the transformation A team do more than fund B. Employees must believe there is a viable path forward for A that is compelling in and of itself, and, most important, that it is going to work. No one wants to preside over a sinking ship.
Commit to the future
A big company, almost by definition, cannot innovate faster than the market. And hitting speed bumps can be very frustrating. But a big company can innovate better than the market if it can find ways to fuse unique capabilities with entrepreneurial moxie. In the early days, transformation B is likely to be small, giving plenty of fodder for the sceptics—and there will be many of them. Further, every successful innovation effort has its fumbles and false starts. The leader needs to be the light of optimism through those dark times, and, through continued support and allocation of resources, demonstrate an unwavering commitment to driving the organisation in new directions.
Leaders need to strike a careful balance. Selectively privileging the new doesn’t require disparaging the old. Both businesses should be valued and respected. The leader needs to keep pulling back and up to describe the overall vision and direction, needs to have confidence in the path, and needs to make sure that there are legitimate milestones that demonstrate progress. And transformation B must deliver results, or else it fans the flames of critics chanting, “Stick to our knitting.” Unfortunately, faith is a scarce commodity among most executives, particularly those who must withstand the withering glares of analysts and investors.
Change is resistance
Remember, transformation involves changing the fundamental form or substance of an organisation. An organisation’s dominant gene is its legacy, its core business—what we’ve been calling A. Even when B has grown to the point that it is clearly on track to become the dominant producer of revenue and profits, that dominant gene casts an abiding shadow. If you don’t have a smart plan to communicate and cement the change, the great sucking sounds of yesterday can subtly but importantly pull an organisation back to what it was trying to get away from. You need a motivation or purpose.
“What business are you really in?” Posing that question continues to be a powerful way to catalyse important strategic conversations. A leadership imperative in dual transformation is to unite the leadership of both A and B around a galvanising purpose that serves as a light during dark times. Grounding your efforts in this kind of shared mission gives reasons for the A organisation and the B organisation to cheer for the success of the other.
A Does A, B Does B. Generally, one of the biggest challenges for leaders driving dual transformation is to simultaneously celebrate the executive doing the hard work of transformation A and the one overseeing transformation B, and to keep them focused on doing their jobs. Transformation A should largely be separate from transformation B, except for the careful management of the capabilities link by select leaders. This isn’t a democratic decision, and there is no point in having the A and B organisations constantly arguing about the future. You’re never going to fully win the argument until you are way down the road. You waste huge amounts of organisational energy on this type of perpetual debate. That creates two problems. First, it creates a lot of energy in the organisation around the conflict and not the solution. Second, the concern about the other group often keeps you from finding more productive solutions in areas of A.
It is a journey
The word journey is important. Look at the length of the stories and examples in the book. It took four years after commercial introduction for streaming video to constitute more than half of Netflix’s revenues. Gilbert spent six years driving dual transformation at the Deseret News. It took seven years at Adobe for digital marketing to become one-third as big as its traditional businesses. Steve Jobs returned as CEO of Apple in 1998. It took more than a decade before the full impact of his work was felt. There is no quick fix.