One of the enduring fallacies of business transformation is that the big disrupted corporation didn’t see the upstarts that upended their business model coming at them, argues Scott Anthony, managing partner of Innosight, an innovation and growth consulting firm and co-author of the book “Dual Transformation”.
Kodak, for example, not only saw digital photography coming, but came very close to creating its own Facebook and Instagram when it acquired Ofoto in 2001. But instead of turning it into a vibrant social network, it focused on trying to get more people to print more pictures. Even though it invested heavily in digital photography, it was never able to shift its business model, and as silver halide film began to decline, so too did the company. Kodak filed for Chapter 11 bankruptcy in 2011.
“The failure is not in failing to see the disruption coming,” adds Anthony, “but in [failing] to … rethink the business model. Fundamentally, when disruption is on the horizon, businesses need to reimagine who you are and what you do to offer value.”
Two strategies are better than one
The key to success, Anthony says, is in maintaining dual transformation, rather than a singular one. Dual transformation, he says, is the art of creating a second business model that will likely succeed the existing core, but at the same time streamlining and adapting the core so that it thrives in parallel.
Too many companies think business transformation is doing better, faster and cheaper what they’ve been doing, while ignoring the disruptive market that is coming at them.
“Fundamentally, when disruption is on the horizon, businesses need to reimagine who you are and what you do to offer value.”
Hilti Group, a Lichtenstein-based maker of fasteners, construction tools and equipment, has extensive operations throughout North America, including many store locations. It saw its future sales in existing lines showing signs of tapering off and developed new lines of business in fleet management and services related to its core. Today, the company designs and makes technology, software and services which power professional construction. It transformed itself into a one-stop shop for building worldwide and operates in 120 countries with more than 25,000 employees.
Aetna also is a good example of a major company that not only saw disruption coming but acted to create a new business model when the existing one was still thriving and healthy. Its CEO Mark Bertolini launched a radical change in 2010 when the company was at the top of its game having emerged relatively unscathed from the 2008 financial crisis.
The Affordable Care Act had the potential to put pricing pressure on pharmaceutical companies and medical device makers, and it looked like a gift to insurance companies. After all, a key provision of the law was that every American was compelled to buy insurance. Yet in the face of all this, Bertolini and his team decided to reinvent the company by shifting it from one that sells health insurance policies to businesses, to one that sells insurance to consumers, and in so doing has become a provider of IT solutions to health providers. Bertolini made big bets, ranging from the half-billion-dollar acquisition of Medicity to its attempted acquisition of Humana.
The need to do this was far from obvious at the time, but inexorable forces would lead to long-term industry transformation. Consumers were increasingly arming themselves with information from sources like WebMD and related sites. Wearable technology and big data analytics promised to change the face of prevention.
The right time to start
The time for leaders to undertake dual transformation is when you don’t have to. “When disruption is at your doorstep,” says Anthony, “you have fewer options and greater pressure from your board and from your team. So-called burning platforms are not good places to make major changes.” The other key learning is not to be distracted by the emerging new business model one is creating. It is human nature for people in the organization working at the core business to begin to feel like second-class citizens. The core business must continue to throw off cash to help the company invest in the future, but leaders should never take their eye off the main ball.
Bertolini says that the CEO plays a critical role in making choices: “The CEO’s responsibility is to create a stark reality of what the future holds, and to begin to build the plans for the organization to meet these realities.”