A+B+C = Dual Transformation … reinventing your current business, whilst also inventing your future business

May 15, 2018

Disruption is everywhere – in every industry, threatening to unseat leading incumbents, even those that consider themselves “safe.” Research shows that corporate lifespans are shrinking, and that half of today’s S&P 500 will be replaced over the next 10 years.

But disruptive change can also present the biggest opportunity of a lifetime, all depending on how a company responds. It is not taking a “wait-and-see” approach. Nor is it doubling down on the traditional business.

Rather, the right response is a two-track process to make today’s business more resilient while creating tomorrow’s new growth business.

This is Dual Transformation, the theme of a fabulous book by Scott Anthony at Innosight, and in many ways it is the leadership challenge of our time.

Disruption unfolding right now, today, even if many of us cannotsee it:

Insurance. Driverless cars could be as revolutionary to the insurance business as they are to automakers. Companies like Geico and Progressive make most of their money from auto insurance. What happens to their business models when there are no more car accidents?

Shipping. 3D printers make local, small-scale manufacturing much more cost effective. If you are in the business of ship- ping millions of tons of finished, manufactured goods over long distances, what happens to your business model?

Medical Testing. Implantable medical devices could one day monitor bodily systems and help stop disease processes in their tracks. If you are in the business of testing, imaging, or delivering drug cures, will you still have a market?

Consumer Banking. Telecom companies are offering mobile payments. E-commerce companies are offering escrow-type services. Even Starbucks held more than $1 billion in prepaid card assets as of 2016. How soon before consumers cut the cord with banks, like they are doing with cable TV companies?

Holding onto your lead in a fast-changing market, and building a brand new growth engine for the company, requires foresight, courage and commitment. Many a leader has missed the signals, reacted too late, and succumbed to market-changing competition.

No matter where disruption comes from, or what forces are driving it, the best way to fend off challengers and dominate new growth markets is through Dual Transformation:

Transformation A = Find new possibilities for addressing existing markets

Many successful businesses face a growth challenge in the core markets they currently dominate. At the same time, upstart challengers may be nipping at their heels with cheaper, easier, more accessible solutions. What’s the answer? Preserve your leadership position by:

  • Identifying the unique job to be done you can continue to solve for your current customers—and what no longer matters as much.
  • Innovating your business model to deliver against the job.
  • Determining and monitoring new metrics.
  • Implementing aggressively.

Transformation B = Creating a powerful new growth engine

For successful companies, future growth often has to be found outside their core markets. But looking to new markets, new customers, and new business models is a big strategic challenge that requires new approaches and capabilities. The new business will look very different from today’s. Here’s how:

  • Identify constrained markets, a new problem that a signif- icant group of customers wants to solve but can’t, because of a lack of specialized skills, insufficient wealth, or having to travel to inconvenient/inaccessible locations.
  • Break down the “consumption barriers” that keep cheaper, more convenient solutions out of reach.
  • Iteratively develop the new business model required to serve the new market and power the future.
  • Use partnerships, acquisitions, and new hires to succeed against a new competitive set.

C = Capabilities. Combine unique, difficult-to-replicate assets with internal entrepreneurial energy

The most difficult part of a Dual Transformation is the wise use of the company’s skills and resources: leveraging valuable assets like brand, distribution, and accumulated know-how to build the new growth engine the company needs. This “capabil- ities link” is a bridge from the company of today to the growth leader of tomorrow. The most helpful principles in managing your capabilities link:

  • Stock selectively. Most core capabilities won’t help the new growth initiative. Use only those that truly bring a competitive advantage to the new venture.
  • Manage strategically. Develop systems, create formal exchange teams, and institute transfer pricing to ward off the “innovator’s dilemma” (privileging today’s business over creating the future).
  • Arbitrate actively. Top leadership needs to actively arbitrate the interface between A and B, with a bias to protecting transformation B.

Example: Adobe’s A+B+C “Dual Transformation”

Between 1982 and 2007, Adobe’s Photoshop and Illustrator programs grew to dominate creative businesses like advertising and marketing. And its “PDF” software was ubiquitous the world over. But in its core markets, Adobe lacked a path to significant growth, and disruption was already well underway.

Cloud-based “software-as-a-service” (SaaS) was accelerating rapidly as early as 2004, as Salesforce.com pioneered the business model. SaaS models offered customers greater flexibility and affordability. Then came a catalyst. In 2008 the Great Recession pushed corporate customers toward less expensive “asset light” solutions.

Adobe’s A:

  • Adobe launched Photoshop Express in 2008 to test the SaaS market.
  • In 2011, it introduced the Creative Cloud, a new subscrip- tion-based business model that offered greater revenue predictability, with lower production cost.
  • Adobe stopped shipping physical media in 2013; cloud-based products comprised roughly one-third of revenue by 2014; company profitability was 20% above pre-recession levels.

Adobe’s B:

  • Little growth remained in Adobe’s core (ie mature) creative markets.
  • Its software played a key role in content creation, but no role in the rest of the marketing value chain.
  • Adobe launched a targeted suite of digital marketing solutions—breaking an under-served market wide open.
  • Adobe acquired several leading web analytics businesses—e.g., Omniture, Day Software and Efficient Frontier.

Adobe’s C:

  • Leveraged brand, talent and distribution.

Example: Netflix … adding the leadership courage to change

The Netflix of today bears little resemblance to the company Reed Hastings cofounded 20 years ago. Today’s Emmy- winning and Oscar-nominated content creator and distributor was a simple DVD-by-mail company. But Hastings refused to get comfortable with the company’s leadership position and had the courage to choose new paths, transforming the company even when it looked like he didn’t need to.

Blockbuster declined to purchase the company in 2000. In the subsequent 15 years Netflix made a series of bold moves…

  • Developed a “recommendation engine” that predicted customer preferences—now a key element of the Netflix experience.
  • In 2008, launched a streaming business that added to its advantage over brick-and-mortar stores.
  • Split the streaming and mail offerings, charging separate fees for each.
  • Added original content in 2013 with a long-term goal of delivering 50% original content on its platform—spending nearly $6 billion in 2017.

Within five years of launching the streaming service, revenues hit $6 billion—ten times the revenues of the DVD-by-mail business. But competition is intensifying, with Amazon expected to spend $7 billion on original content in 2017. Hastings and his team need to continue their track record of courageous choices if they want to remain on top.

Minibook: Dual Transformation

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