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“Disruption” might be a cliché, but it’s hard to find a better word to describe the forces at work today. From the start-up insurgency rattling the foundations of business to a stagnating global economy to the political upheavals that have challenged decades of accepted wisdom, corporate leaders are facing deep uncertainties. This trend highlights a governing truth: the digital age rewards change and punishes stasis. But change comes in many flavours. Incremental adjustments or experiments at the periphery, for example, can provide real benefits and, in many cases, are a crucial first step for a digital transformation. But if these initiatives don’t lead to more profound changes to the main business or avoid the real work of re-architecting how the business makes money, the benefits can be fleeting. Companies must be open to radical reinvention, which is a rethinking of the business itself. It requires companies to re-examine, recalibrate and in many cases re-architect their core capabilities to find new, significant and sustainable sources of revenue. How successful companies will be in transforming their core could be the difference between victim and victor in the digital age.
Companies must be open to radical reinvention to find new, significant and sustainable sources of revenue. Incremental adjustments or building something new outside of the core business can provide real benefits and, in many cases, are a crucial first step for a digital transformation. But if these initiatives don’t lead to more profound changes to the core business and avoid the real work of re-architecting how the business makes money, the benefits can be fleeting and too insignificant to avert a steady march to oblivion.
Simply taking an existing product line and putting it on an e-commerce site or digitising a customer experience is not a digital reinvention. Reinvention is a rethinking of the business itself. Companies need to ask fundamental questions, such as, “Are we a manufacturer, or are we a company that enables customers to perform tasks with our equipment wherever and whenever they need to?” If it’s the latter, then logistics and service operations may suddenly become more important than the factory line. Netflix’s evolution from a company that rented DVDs to a company that streams entertainment for a monthly subscription to one that now creates its own content is a well-known example of continuous reinvention.
Reinvention, as the term implies, requires a significant commitment. Knowing that digital success requires not only that investment be aligned closely with strategy but also that it is at sufficient scale. And digital leaders have a high threshold for risk and are willing to make bold decisions. But companies don’t have to wait far in the future to realise those benefits. 60 to 80 percent of total improvement targets can be achieved within about three years while also laying the foundation for future growth.
For all the fundamental change that digital reinvention demands, it’s worth emphasising that it doesn’t call for a “throw-it-all-out” approach. An engine parts company, for example, will still likely make engine parts after a digital reinvention, but may do it in a way that’s much more agile and analytically-driven, or it may open up new lines of business by leveraging existing assets. Apple, with its move from computer manufacturer to music and lifestyle brand through its iPhone and iTunes ecosystem reinvented itself—even as it continued to build computers.
There are many elements of a transformation, from end-to-end journey redesign and embedding analytics into processes to open tech platforms. They require a myriad of capabilities, from artificial intelligence and agile operations to data lakes, cloud-based infrastructure, and new talent. Many of these elements have been written about extensively, and each can absorb a significant amount of executive time. What’s often missing, however, is a comprehensive view of how an organisation sets the right ambition, how to architect the right elements for the transformation, then how to systematically and holistically undertake the change journey.
“Think of your core muscles as the sturdy central link in a chain connecting your upper and lower body.” That was the guidance from Harvard Medical School on how to stay in shape. The authors defined the core as the central set of muscles that helps a body maintain its power, balance, and overall health.
That’s the essence of what is meant when talking about changing the core of the business—the set of capabilities that allows the entire business to run effectively. A company’s core is the value proposition of its business grounded in strategy as enabled by its people, processes, and technology. These elements are so intrinsic that any transformation that doesn’t address them will ultimately underwhelm and fizzle because the legacy organisation will inevitably exert a gravitational pull back to established practices.
Any digital reinvention must address the value the company provides to customers (whether existing or new) through its products and/or services. Inevitably this is based on a clear strategy that articulates where value is being created, shifted, or destroyed. Crucial to getting this right is identifying and evaluating existing assets that are most important and understanding what customers actually want or need. This can be surprisingly difficult to do in practice. The value that Amazon originally provided, for example, wasn’t selling books online but rather providing convenience and unheard-of selection. Understanding the real source of its value allowed Amazon to expand exponentially beyond books.
Of course, talent is important, but a reinvention needs to involve more than just hiring a CDO or a few designers. Talent priorities should be based on a clear understanding of the skills needed at all levels of the business.
This requires investing in building relevant digital capabilities that fit with the strategy and keep pace with customers as they change the way they consider and make purchases. At the same time, targeted hiring should be tied to those capabilities that actually drive financial performance.
Enabling that talent to thrive requires a digital culture—customer-centric and project-based, with a bias for speed and continuous learning. In fact, cultural and organisational issues can lead to the squandering of up to 85 percent of the value at stake. Making sure the new culture sticks requires re-building programs that reward and encourage new behaviours, such as performance management, promotion criteria, and incentive systems.
Rewiring the mechanisms for making decisions and getting things done is what enables the digital machine to run. Digitising or automating supply chains and information- intensive processes as well as building new capabilities like robotic process automation or advanced analytics, for example, can rapidly increase the business’ clock speed and cut costs by up to 90 percent.
One temptation is to focus on simply digitising existing processes rather than really rethinking them. Often, the most productive way to tackle this issue is to identify the customer journeys that matter most to the business and then map out the touchpoints, processes and capabilities required to deliver on them—without regard to what is already in place. Re-architecting processes
While digital reinvention is more than just a technology overhaul, technology is crucial. Leaders need to ensure that each IT investment responds to clear and robust business needs and does not devolve into “tech for tech’s sake.” They also need to identify how best to work within an ecosystem of partners and vendors, and assess which legacy systems to keep, which to mothball and, critically, determine how to help legacy technology work in a digital world.
Because of the complexity involved, most reinventions fall short of their original goals. In my experience, extracting the full value from digital requires a carefully coordinated approach across four “Ds”: Discover what your digital ambition is (based on where the value is); Design programs that target profitable customer experience journeys; Deliver the change through an ecosystem of partners; and De-risk the process by thoughtfully sequencing steps.
While this approach may seem self-evident, most companies fall short in the execution. There are myriad reasons for this, but the most common are that the business either underinvests in the capabilities needed or doesn’t drive the transformation program sufficiently across all four of the “Ds.” A company may invest tens of millions of dollars to “Discover” great insights, for example, but if its “Deliver” strategy is inadequate, those insights are for naught.
In this phase, companies develop a clear view of where value is being created and destroyed as the basis for a clear business strategy. That requires an analysis of their business, sector, customer behaviour trends, and the larger economy to identify and quantify both threats and opportunities.
These kinds of digital opportunity scans should be sorted by short- and long-term pockets of value. At the same time, companies need to engage in a sober analysis of their own digital capabilities and resources. Capabilities that build foundations for other key processes and activities (e.g. modular IT and agile technology platforms) are particularly important. And while leadership matters, mid-level talent is the most critical element for a company’s digital success. With this understanding in hand, companies then determine what their strategic ambition is, whether re-tooling the existing business or something more radical, such as plunging into a new market or innovating a business model. They develop a detailed roadmap for addressing capability gaps, and recruiting, developing, incentivising and retaining the necessary talent. The goal is to develop a tight business case for change based on facts.
Actually, acting on a digital ambition can be daunting. Most successful companies start by focusing on the most important customer journeys, then work back from there to design and build out breakthrough customer experiences. Using design thinking and skills, these companies define each journey, looking especially for the pain points and potential missed connections.
The change team can then map out, screen-by-screen, models for a new inter- face. In this phase, the company must avoid getting caught in endless rounds of planning but instead rapidly build prototypes, translating concepts into minimum viable products (MVPs) to test and iterate in the market before scaling.
This phase also includes building out rapid delivery approaches and an IT infrastructure that blends the legacy systems with micro-services and modular plug-and-play elements. While agile IT has become standard, more digital businesses are embracing DevOps (integrated development and operations teams) and continuous delivery so that software can be developed, tested, and deployed quickly to consumers and end users.
On the organisation side, the fluid nature of cross-functional collaboration, rapid decision making, and iterative development means that the business should focus on the enablers for this kind of teamwork. This includes effective metrics and scorecards to evaluate digital performance and incentive structures to drive the right behaviours, mindsets and outcomes. The CDO at one multinational pharma company addressed this issue by establishing a Digital Council, which was tasked specifically with breaking down organisational silos to enable transformational change across all business lines.
Getting the speed and scale necessary for a reinvention increasingly requires an ecosystem of external teams, partners, suppliers and customers. In practice, this means working with a mix of platform players, delivery specialists, and niche players. These are the relationships that companies can call on to provide specific skills and capabilities quickly.
This reality has made ecosystem management an important competency, especially understanding how to find and plug into the right mix of complementary capabilities. One national bookseller, for example, built out a digital offer by partnering with a telecoms company for its technology and with a range of retailers to build up a marketplace. This approach allowed it to rapidly hit the marketplace and increase revenue 78 percent in a year. As companies push to scale their digital reinvention throughout the organisation, the crucial role of seasoned change managers comes into focus. These leaders not only play “air traffic controller” to the many moving parts, but also have the business credibility and skill to solve real business problems. They must maintain an accelerated pace of change, and drive accountability across the business. The change leaders will look across the entire enterprise, examining organisational structure, data governance, talent recruitment, performance management, and IT systems for areas of opportunity, making decisions that balance efficiency and speed with outcome. The “agility coach” is an example of this type of role. This person has strong communication and influencing skills, can create and roll out plans to support agile processes across the business, and can put in place KPIs and metrics to track progress.
One of the most common reasons digital transformations fail is that the organization develops “change exhaustion” and funds start to dry up.
To mitigate this risk, it’s important to focus on quick wins that not only build momentum but also generate cost savings that can be re-invested in the next round of transformations. This sequencing approach applies to tech as well. Many companies choose to invest first in “horizontal” components, such as business-process management (BPM) layers or central administration platforms that can be shared across many initiatives, while balancing them with more “visible” elements to provide the proof of concept.
Technology risks, especially cyber security, will also require increased attention as companies digitize more operations and processes. Organizations can mitigate these risks by automating tests on software, establishing systems in which failures can be rolled back in minutes, and establishing build environments in which fixes can be made without putting significant parts of the business at risk. Senior leaders in particular need to focus on the structural and organizational issues—from building cybersecurity into all business functions to changing user behavior—that hamper the ability to manage cyber risk.
One risk senior leaders often overlook is losing ownership over sources of value. These might include the company’s data, customer relationships, or other assets. Having a clear understanding of where the value is coming from allows businesses to navigate ecosystem relationships profitably.
Companies can both rise and fall with astonishing speed as new customer needs are uncovered and new ways of meeting them are developed. Companies that are able to adapt, learn, and find new solutions quickly can do more than just retain market position; they can thrive, whatever disruptions come their way.
You lead a large basic-resources business. For the past decade, the global commodities super-cycle has fuelled volume growth and higher prices, shaping your company’s processes and culture and defining its outlook. Most of the top team cannot remember a time when the business priorities were different. Then one day it dawns on you that the party is over.
Or imagine again. You run a retail bank with a solid strategy, a strong brand, a well-positioned branch network, and a loyal customer base. But a growing and fast-moving ecosystem of fintech players—microloan sites, peer- to-peer lenders, algorithm-based financial advisers—is starting to nibble at your franchise. The board feels anxious about what no longer seems to be a marginal threat. It worries that management has grown complacent.
In industry after industry, scenarios that once appeared improbable are becoming all too real, prompting boards and CEOs of flagging (or perhaps merely drifting) businesses to embrace the T-word: transformation.
Transformation is perhaps the most overused term in business. Often, companies apply it loosely—too loosely—to any form of change, however minor or routine. There are organisational transformations when businesses redraw organisational roles and accountabilities. Strategic transformations imply a change in the business model. The term transformation is also increasingly used for a digital reinvention: companies fundamentally reworking the way they’re wired and, in particular, how they go to market.
What I have focused on here—and what businesses like the previously mentioned bank and basic- resource companies need—is something different: a transformation with a capital T, which is defined as an intense, organization-wide program to enhance performance (an earnings improvement of 25 percent or more, for example) and to boost organizational health. When such transformations succeed, they radically improve the important business drivers, such as top-line growth, capital productivity, cost efficiency, operational effectiveness, customer satisfaction, and sales excellence.
Because such transformations instill the importance of internal alignment around a common vision and strategy, increase the capacity for renewal, and develop superior execution skills, they enable companies to go on improving their results in sustainable ways year after year. These sorts of transformations may well involve exploiting new digital opportunities or accompany a strategic rethink. But in essence, they are largely about delivering the full potential of what’s already there.
Transformations take up a surprisingly large share of a leadership’s and an organization’s time and attention. They require enormous energy to realize the necessary degree of change. Herein lie the seeds of disappointment. The most fundamental lesson from the past dozen years is that average companies rarely have the combination of skills, mind-sets, and ongoing commitment needed to pull off a large-scale transformation.
It’s true that across the economy as a whole, “creative destruction” has been a constant, since at least 1942, when Joseph Schumpeter coined the term. But for individual organizations and their leaders, disruption is episodic and sufficiently infrequent that most CEOs and top-management teams are more accomplished at running businesses in stable environments than in changing ones. Odds are that their training and practical experience predominantly take place in times when extensive, deep-rooted, and rapid changes aren’t necessary. For many organizations, this relatively placid experience leads to a “steady state” of stable structures, regular budgeting, incremental targets, quarterly reviews, and modest reward systems. All that makes leaders poorly prepared for the much faster-paced, more bruising work of a transformation. Intensive exposure to such efforts has taught us that many executives struggle to change gears and can be reluctant to lead rather than delegate when they face external disruption, successive quarters of flagging performance, or just an opportunity to up a company’s game.
Executives embarking on a transformation can resemble career commercial air pilots thrust into the cockpit of a fighter jet. They are still flying a plane, but they have been trained to prioritize safety, stability, and efficiency and therefore lack the tools and pattern-recognition experience to respond appropriately to the demands of combat. Yet because they are still behind the controls, they do not recognize the different threats and requirements the new situation presents.
The most important starting point of a transformation, and the best predictor of success, is a CEO who recognizes that only a new approach will dramatically improve the company’s performance. No matter how powerful the aspirations, conviction, and sheer determination of the CEO, though, experience suggests that companies must also get five other important dimensions right if they are to overcome organizational inertia, shed deeply ingrained steady-state habits, and create a new long-term upward momentum. They must identify the company’s full potential; set a new pace through a transformation office that is empowered to make decisions; reinforce the executive team with a chief transformation officer; change employee and managerial mind-sets that are holding the organization back; and embed a new culture of execution throughout the business to sustain the transformation. The last is in some ways the most difficult task of all.
Targets in most corporations emerge from negotiations. Leaders and line managers go back and forth: the former invariably push for more, while the latter point out all the reasons why the proposed targets are unachievable. Inevitably, the same dynamic applies during transformation efforts, and this leads to compromises and incremental changes rather than radical improvements. When managers at one company in a highly competitive, banking industry were shown strong external evidence that they could add £250 million in revenue above what they themselves had identified, for example, they immediately talked down the proposed targets. For them, targets meant accountability—and, when missed, adverse consequences for their own compensation. Their default reaction was “let’s under promise and over deliver.”
To counter this natural tendency, CEOs should demand a clear analysis of the company’s full value-creation potential: specific revenue and cost goals backed up by well-grounded facts. It would be helpful for the CEO and top team to assume the mind-set, independence, and tool kit of an activist investor or private-equity acquirer. To do so, they must step outside the self-imposed constraints and define what’s truly achievable. The message: it’s time to take a single self-confident leap rather than a series of incremental steps that don’t lead very far. In our experience, targets that are two to three times a company’s initial estimates of its potential are routinely achievable—not the exception.
Experience has demonstrated, that it’s essential to create a hub to oversee the transformation and to drive a cadence markedly different from the normal day-to-day one. This hub is called the transformation office.
What makes this work? One company with a program to boost EBITDA by more than £200 million set up an unusual but highly effective TO. For a start, it was located in a circular room that had no chairs—only standing room. Around the wall was what came to be known, throughout the business, as “the snake”: a weekly tracker that marked progress toward the goal. By the end of the process, the snake had eaten its own tail as the company materially exceeded its financial target.
Each Tuesday, at the weekly TO meeting, work-stream leaders and their teams reviewed progress on the tasks they had committed themselves (the previous week) to complete and made measurable commitments for the next week in front of their peers. They used only handwritten whiteboard notes—no PowerPoint presentations—and had just 15 minutes apiece to make their points. Owners of individual initiatives within each work stream reviewed their specific initiatives on a rotating basis, so third- or fourth-level managers met the top leaders, further increasing ownership and accountability. Even the divisional CEO made a point of attending these TO meetings each time he visited the business, an experience that in hindsight convinced him that the TO process was more crucial than anything else to shifting the company’s culture.
For senior leaders, distraction is the constant enemy. Most prefer talking about new customers, M&A opportunities, or fresh strategic choices—hence the temptation at the top to delegate responsibility to a steering committee or an old-style program-management office charged with providing periodic updates.
When top management’s attention is diverted elsewhere, line managers will emulate that behavior when they choose their own priorities. Given these distractions, many initiatives move too slowly. Parkinson’s law states that work expands to fill the time available, and business managers aren’t immune: given a month to complete a project requiring a week’s worth of effort, they will generally start working on it a week before the deadline. In successful transformations, a week means a week, and the transformation office constantly asks, “how can you move more swiftly?” and “what do you need to make things happen?” This faster clock speed is one of the most defining characteristics of successful transformations.
Collaborating with senior leaders across the entire business, the TO must have the grit, discipline, energy, and focus to drive forward perhaps five to eight major work streams. All of them are further divided into perhaps hundreds (even the low thousands) of separate initiatives, each with a specific owner and a detailed, fully costed bottom-up plan. Above all, the TO must constantly push for decisions so that the organization is conscious of any foot dragging when progress stalls.
Managing a complex enterprise-wide transformation is a full-time executive-level job. It should be filled by someone with the clear authority to push the organisation to its full potential, as well as the skills, experience, and even personality of a seasoned fighter pilot, to use our earlier analogy.
The chief transformation officer’s job is to question, push, praise, prod, cajole, and otherwise irritate an organization that needs to think and act differently. One CEO introduced a new CTO to his top team by saying, “Bill’s job is to make you and me feel uncomfortable. If we aren’t feeling uncomfortable, then he’s not doing his job.” Of course, the CTO shouldn’t take the place of the CEO, who (on the contrary) must be front and centre, continually reinforcing the idea that this is my transformation.
Many leaders of traditional program-management offices are strong on processes but unable or unwilling to push the CEO and top team. The right CTO can sometimes come from within the organisation. But one of the biggest mistake’s companies make in the early stages is to choose the CTO only from an internal slate of candidates. The CTO must be dynamic, respected, unafraid of confrontation, and willing to challenge corporate orthodoxies. These qualities are harder to find among people concerned about protecting their legacy, pursuing their next role, or tiptoeing around long-simmering internal political tensions. What does a CTO actually do?
Consider what happened at one company mounting a billion-dollar productivity program. The new CTO became exasperated as executives focused on individual technical problems rather than the worsening cost and schedule slippage. Although he lacked any background in the program’s technical aspects, he called out the facts, warning the members of the operations team that they would lose their jobs— and the whole project would close—unless things got back on track within the next 30 days. The conversation then shifted, resources were reallocated, and the operations team planned and executed a new approach. Within two weeks, the project was indeed back on track. Without the CTO’s independent perspective and candour, none of that would have happened.
Many companies perform under their full potential not because of structural disadvantages
but rather through a combination of poor leadership, a deficient culture and capabilities, and misaligned incentives. In good or even average times, when businesses can get away with trundling along, these barriers may be manageable. But the transformation will reach full potential only if they are addressed early and explicitly. Common problematic mind-sets encountered include prioritizing the “tribe” (local unit) over the “nation” (the business as a whole), being too proud to ask for help, and blaming the external world “because it is not under our control.”
One public utility provider was paralyzed because its employees were passively “waiting to be told” rather than taking the initiative. Given its history, they had unconsciously decided that there was no advantage in taking action, because if they did and made a mistake, the results would make the front pages of newspapers. A bureaucratic culture had hidden the underlying cause of paralysis. To make progress, the company had to counter this very real and well-founded fear.
Influence models, a proven tool for helping to change such mind-sets, emphasizes telling a compelling change story, role modeling by the senior team, building reinforcement mechanisms, and providing employees with the skills to change. While all four of these interventions are important in a transformation, companies must address the change story and reinforcement mechanisms (particularly incentives) at the outset.
Most companies underestimate the importance of communicating the “why” of a transformation; too often, they assume that a letter from the CEO and a corporate slide pack will secure organizational engagement. But it’s not enough to say, “we aren’t making our budget plan” or “we must be more competitive.” Engagement with employees and managers needs to have a context, a vision, and a call to action that will resonate with each person individually. This kind of personalization is what motivates a workforce.
Incentives. Incentives are especially important in changing behavior. With many previous experiences, traditional incentive plans, with multiple variables and weightings—say, six to ten objectives with average weights of 10 to 15 percent each—are too complicated. In a transformation, the incentive plan should have no more than three objectives, with an outsized pay-out for outsized performance; the period of transformation, after all, is likely to be one of the most difficult and demanding of any professional career. The usual excuses (such as “our incentive program is already set” or “our people don’t need special incentives to give their best”) should not deter leaders from revisiting this critical reinforcement tool.
Non-monetary incentives are also vital. One CEO made a point, each week, of writing a short hand-written note to a different employee involved in the transformation effort. This cost nothing but had an almost magical effect on morale. In another company, an employee went far beyond normal expectations to deliver a particularly challenging initiative. The CEO heard about this and gathered a group, including the employee’s wife and two children, for a surprise party. Within 24 hours, the story of this celebration had spread throughout the company.
Transformations typically degrade rather than visibly fail. Leaders and their employees summon up a huge initial effort; corporate results improve, sometimes dramatically; and those involved pat themselves on the back and declare victory. Then, slowly but surely, the company slips back into its old ways. How many times have frontline managers have stated things like “we have undergone three transformations in the last eight years, and each time we were back where we started 18 months later”?
The true test of a transformation, therefore, is what happens when the TO is disbanded and life reverts to a more normal rhythm. What’s critical is that leaders try to bottle the lessons of the transformation as it moves along and to ingrain, within the organization, a repeatable process to deliver better and better results long after it formally ends. This often means, for example, applying the TO meetings’ cadence and robust style to financial reviews, annual budget cycles, even daily performance meetings—the basic routines of the business. It’s no good starting this effort near the end of the program. Embedding the processes and working approaches of the transformation into everyday activities should start much earlier to ensure that the momentum of performance continues to accelerate after the transformation is over.
Companies that create this sort of momentum stand out—so much that to view the interlocking processes, skills, and attitudes needed to achieve it as a distinct source of power, one called an “execution engine.” Organizations with an effective execution engine conspicuously continue to challenge everything, using an independent perspective. They act like investors—all employees treat company money as if it were their own. They ensure that accountability remains in the line, not in a central team or external advisers. Their focus on execution remains relentless even as results improve, and they are always seeking new ways to motivate their employees to keep striving for more. By contrast, companies doomed to fail tend to revert to high-level targets assigned to the line, with a minimal focus on execution or on tapping the energy and ideas of employees. They often lose the talented people responsible for the initial achievements to head-hunters or other internal jobs before the processes are ingrained. To avoid this, leaders must take care to retain the enthusiasm, commitment, and focus of these key employees until the execution engine is fully embedded.
Consider the experience of one company that had realised a 40 percent bottom-line improvement over several years. The impetus to “go back to the well” for a new round of improvements, far from being a top-leadership initiative, came out of a series of conversations at performance-review meetings where line leaders had become energised about new opportunities previously considered out of reach. The result was an additional billion dollars of savings over the next year. Nothing about this suggested approach to transformations is especially novel or complex. It is not a formula reserved for the most able people and companies, but experience shows that it works only for the most willing. A key insight is that to achieve a transformational improvement, companies need to raise their ambitions, develop different skills, challenge existing mind-sets, and commit fully to execution. Doing all this can produce extraordinary and sustainable results.
Executives and entrepreneurs from all over the world have investigated the successful tech start-up stories to learn the secrets of success. But in numerous conversations with executives about what they’ve learned as a result, a tendency to focus on superficial elements rather than on the root causes of companies’ success. Of course, Speed and boldness are important, but what is it about the culture of these companies that cultivates them?
Here are some examples that have struck most:
The kind of innovation that creates new markets always goes against the grain. But boldness by itself is a penny-store commodity. What stands out in these companies is the day-to-day determination to see something through despite near constant failure. Identifying people at all levels to be especially level-headed about failure and comfortable with the inherent messiness of experimentation. The magic for them is not something’s initial lightbulb moment but the commitment to assessing, refining, and reintroducing the systems that will make the thing work.
The leaders who are shaking things up combine a palpable vision with tenacity and the ability to build an organization that attracts other top thinkers. They have a single- minded determination to make their vision happen. Yet while that kind of leadership is crucial, it’s the ability to tap the collective minds of the organization that drives the business. “Collaboration” is a term that’s been in vogue recently, but the best companies make it happen by investing in an environment that fosters collaboration.
It’s more than open office plans and Ping- Pong tables — it’s a culture where teams self- organize; people from various functions come together to work on specific projects by habit, not by exception; and good ideas gain momentum organically by attracting talent from around the business. As projects advance and coalesce, new teams form to gather the skills and priorities needed. Managers act more as enablers and connectors, providing regular feedback and tracking progress.
The strongest founder-led organisations recognise what really motivates their people. Mission-driven employees naturally expect competitive compensation, but more important is the opportunity to shape the path of innovation, to play a meaningful role in growing the business, and to develop their own leadership chops
The more autonomy employees have to be resourceful and make decisions, the more likely they will be to stick around. Artificial constraints, such as formal organizational hierarchies and belabored consensus-building processes, create waste and dampen motivation. The most innovative companies set clear expectations around goals and investment risk but let employees define the best way to meet them. If that means being open to flexible work schedules and letting people bring their dogs or bikes to the office, so be it.
While “user-cantered design” has become an increasingly popular term, Silicon Valley lives and breathes it in a way that senior executives elsewhere can’t imagine. In start-up companies all levels of the business, from the CEO to coders to cross-functional teams, are hardwired to look at problems from the perspective of the user in order to figure out what sets of processes would create the smoothest, richest experience. They obsess about the customer; everyone is expected to solve customer and user problems whenever and wherever they find them.
Gone are the days when venture capitalists were merely an elite cash dispensary. Innovation can have a short shelf life, so entrepreneurs with great ideas but little business experience need coaching and infrastructure as much as cash. VCs have evolved from being financing arms and proxy boards to providing entrepreneurs with everything from lab space and equipment to a small army of programmers and coders.
Start-ups need money, too, of course. But in the same way that they focus on building platforms that scale by connecting people and businesses, the best start-ups look for VCs that can plug them into broader ecosystems to provide additional leverage and extend their vision. That “vision” part is crucial: Not all networks are created equal and understanding how the nodes of a network align with the start-up’s vision can be the difference between a good idea and a good idea that scales in the marketplace.
Large companies looking for new talent and capabilities have long used acquisitions but doing them well is tricky. Too many incumbents are flat-footed in their approach; more than just finding great talent, timing is what really counts. The time to move is not in the early stages, when start-ups are small and need freedom, nor in the late stages, when start-ups have established a reputation, but rather in the middle, when the start-up has a proven concept and is ready to scale.
What this means for companies looking to acquire is that they need to develop a detailed market analysis that demonstrates where value is already being created (i.e., the business is proven and not relying too much on fanciful projections) but also identifies the growth that’s possible when the technology or business is scaled.
Large companies can also be too controlling after acquiring a start-up, layering on rules and practices that don’t jibe with the unstructured gestalt of the recently hatched business. That’s often because incumbents look at how best to use assets rather than focusing on culture. Established players need to know when to lead and when to let their young partners set the pace. This point bears emphasising given how crucial culture change is for companies that are transforming their organisations. In many cases elements of the acquired business’ culture can become a model for the acquiring company. As these lessons show, for all the technological advances in successful tech start-ups, it is the longstanding leadership in business model innovation that offers the deepest and most transformational insights
A supply-and-demand guide to digital disruption. The digitization of processes and interfaces is itself a source of worry. But the feeling of not knowing when, or from which direction, an effective attack on a business might come creates a whole different level of concern. News-making digital attackers now successfully disrupt existing business models—often far beyond the attackers’ national boundaries:
No wonder many business leaders live in a heightened state of alert. Thanks to outsourced cloud infrastructure, mix-and-match technology components, and a steady flood of venture money, start-ups and established attackers can bite before their victims even see the fin. At the same time, the opportunities presented by digital disruption excite and allure. Forward-leaning companies are immersing themselves deeply in the world of the attackers, seeking to harness new technologies, and rethinking their business models—the better to catch and ride a disruptive wave of their own. But they are increasingly concerned that dealing with the shark they can see is not enough—others may lurk below the surface.
Today’s consumers are widely celebrated for their newly empowered behaviours. By embracing technology and connectivity, they use apps and information to find exactly what they want, as well as where and when they want it—often for the lowest price available. As they do, they start to fulfill their own previously unmet needs and wants. Music lovers might always have preferred to buy individual songs, but until the digital age they had to buy whole albums because that was the most valuable and cost-effective way for providers to distribute music. Now, of course, listeners pay Spotify a single subscription fee to listen to individual tracks to their hearts’ content.
Similarly, with photos and images, consumers no longer have to get them developed and can instead process, print, and share their images instantly. They can book trips instantaneously online, thereby avoiding travel agents, and binge-watch television shows on Netflix or Amazon rather than wait a week for the next installment. In category after category, consumers are using digital technology to have their own way.
In each of these examples, that technology alters not only the products and services themselves but also the way customers prefer to use them. A “purification” of demand occurs as customers address their previously unmet needs and desires—and companies uncover underserved consumers. Customers don’t have to buy the whole thing for the one bit they want or to cross-subsidize other customers who are less profitable to companies.
Skyrocketing customer expectations amplify the effect. Consumers have grown to expect best-in-class user experiences from all their online and mobile interactions, as well as many offline ones. Consumer experiences with any product or service—anywhere—now shape demand in the digital world. Customers no longer compare your offerings only with those of your direct rivals; their experiences with Apple or Amazon or Sky are the new standard. These escalating expectations, which spill over from one product or service category to another, get paired with a related mind-set: amid a growing abundance of free offerings, customers are increasingly unwilling to pay, particularly for information-intensive propositions. (This dynamic is as visible in business-to- business markets as it is in consumer ones.) In short, people are growing accustomed to having their needs fulfilled at places of their own choosing, on their own schedules, and often gratis. Can’t match that? There’s a good chance another company will figure out how.
When these indicators are present, so are opportunities for digital transformation and disruption. The mechanisms include improved search and filter tools, streamlined and user-friendly order processes, smart recommendation engines, the custom bundling of products, digitally enhanced product offerings, and new business models that transfer economic value to consumers in exchange for a bigger piece of the remaining pie. (An example of the latter is TransferWise, a London-based unicorn using peer-to-peer technology to undercut the fees banks charge to exchange money from one currency into another.)
On the supply side, digitization allows new sources to enter product and labour markets in ways that were previously harder to make available. As “software eats the world”—even in industrial markets—companies can liberate supply anywhere underutilized assets exist. Airbnb unlocked the supply of lodging. P&G uses crowdsourcing to connect with formerly unreachable sources of innovation. Amazon Web Services provides on- the-fly scalable infrastructure that reduces the need for peak capacity resources. N26, a digital bank, replaces human labour with digital processes. In these examples and others like them, new supply becomes accessible and gets utilized closer to its maximum rate.
These indicators let attackers disrupt by pooling redundant capacity virtually, by digitizing physical resources or labor, and by tapping into the sharing economy.
“Software is eating the world,” a digital entrepreneur quipped a few years back. Today’s boards are getting the message. They have seen how leading digital players threatening incumbents and say that their business model will be disrupted in the next five years.
There’s a new class of problems, where seasoned directors’ experiences managing and monetizing traditional assets just doesn’t translate. It is a daunting task to keep up with the growth of new competitors (who are as likely to come from adjacent sectors as they are from one’s own industry), rapid-fire funding cycles, the fluidity of technology, the digital experiences customers demand, and the rise of non-traditional risks. Many boards are left feeling outmatched and overwhelmed.
To serve as effective thought partners, boards must move beyond an arms-length relationship with digital issues. Board members need better knowledge about the technology environment, its potential impact on different parts of the company and its value chain, and thus about how digital can undermine existing strategies and stimulate the need for new ones. They also need faster, more effective ways to engage the organization and operate as a governing body and, critically, new means of attracting digital talent. Indeed, some CEOs and board members argue that the far- reaching nature of today’s digital disruptions—which can necessitate long-term business-model changes with large, short-term costs—means boards must view themselves as the ultimate catalysts for digital transformation efforts. Otherwise, CEOs may be tempted to pass on to their successors the tackling of digital challenges.
At the very least, top-management teams need their boards to serve as strong digital sparring partners when they consider difficult questions such as investments in experimental initiatives that could reshape markets, or even whether the company is in the right business for the digital age. Here are four guiding principles for boosting the odds that boards will provide the digital engagement companies so badly need.
Many boards are ill equipped to fully understand the sources of upheaval pressuring their business models. Consider, for example, the design of satisfying, human-centred experiences: it’s fundamental to digital competition. Yet few board members spend enough time exploring how their companies are reshaping and monitoring those experiences or reviewing management plans to improve them. One way to find out is by kicking the tires. At one global consumer telecoms company, for instance, some board members put beta versions of new digital products and apps through the paces to gauge whether their features are compelling, and the interface is smooth. Those board members gain hands-on insights and management gets well-informed feedback. Board members also should push executives to explore and describe the organisation’s stock of digital assets— data that are accumulating across businesses, the level of data-analytics prowess, and how managers are using both to glean insights. Most companies under-appreciate the potential of pattern analysis, machine learning, and sophisticated analytics that can churn through terabytes of text, sound, images, and other data to produce well-targeted insights on everything from disease diagnoses to how prolonged drought conditions might affect an investment portfolio. Companies that best capture, process, and apply those insights stand to gain an edge. Digitization, meanwhile, is changing business models by removing cost and waste and by stepping up the organization’s pace. Cheap, scalable automation and new, lightweight IT architectures provide digital attackers the means to strip overhead expenses and operate at a fraction of incumbents’ costs. Boards must challenge executives to respond since traditional players’ high costs and low levels of agility encourage players from adjacent sectors to set up online marketplaces, disrupt established distributor networks, and sell directly to their customers.
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