Joseph Schumpeter’s “gale of creative destruction” has never blown more fiercely.
Emerging technologies and new business models threaten to disrupt market leaders and reconfigure existing value chains at an unprecedented pace and scale.
But what if you could tap into the underlying forces behind these kinds of changes to power new waves of growth for your company? More specifically, what if a company could sense the gale coming early enough to reposition its core? Or, even better, build a wind turbine to harness the gale’s energy to create new growth?
That’s exactly what Scott D. Anthony is coming to Innov8rs Sydney to help us do. As managing partner at growth strategy firm Innosight and co-author of Dual Transformation: How To Reposition Today’s Business While Creating The Future, he has seen first-hand how dual transformation helps companies not just survive the gale, but thrive as a result.
As a sneak peek, we asked him to explain exactly what dual transformation is, what it takes to be successful, and how leaders can use it to turn disruption from their greatest fear into their greatest opportunity.
There’s a lot of talk about dual transformation. How do you define it, and why is it important?
Dual transformation is the process by which a company becomes the next version of itself. Each of the words is important. Transformation means a fundamental change in form or substance. So, it’s not about taking something you’re already doing and then doing it faster, or cheaper. It's about going from something to something else… a liquid to a gas, a caterpillar to a butterfly. It’s about reinvention.
Dual means it's not a single transformation episode. You are simultaneously repositioning today's business while, at the same time, you are creating tomorrow's business. Doing both of those things together allows a company to confront the challenges of disruptive change and turn the threats that exist today into massive opportunities.
Why is it important? I can give you an example. Back in 1975, a 24-year-old engineer named Steve Sasson invented a new technology: the digital camera. He wasn't working for an upstart, he was working for the giant of the industry, Eastman Kodak. And of course we know what happens next: Eastman Kodak invests in and commercializes the technology, but never gets the business model right, and in 2012 it declares bankruptcy.
Ten years ago, in 2007, Steve Jobs famously announces and then launches the iPhone. The titan in the industry at the time is Nokia. Nokia has three times the market share of anybody else, they dominate the industry. In November of that year Forbes puts Nokia’s CEO on its cover and says One Billion Customers: Can anyone catch the cell phone cam? Well again, we all know the answer to that question - Nokia is no longer in the mobile handset business.
This is what’s at stake with dual transformation. The gale of creative destruction has never blown more fiercely. If you don’t respond appropriately, you’ll be the next name on the list.
At Innov8rs Sydney, you’re going to help us solve what you call the ‘transformation equation’. Could you explain what that is?
The dual transformation equation is: A plus B plus C equals a great big massive change.
A stands for transformation A, where you're repositioning today's business. You’re coming up with a new way to solve the problem you have historically solved for customers, often using a different business model. Remember Netflix started out by sending people DVDs through the mail. It transforms by moving to providing streaming content over the Internet. It transforms again when it begins producing original content. It transforms again when it allows people to download everything immediately, creating a new behavior that we call binging. They're still solving the same problem they historically have solved: providing entertainment to customers. But they have totally transformed the way they do it.
The B stands for transformation B, when you're creating tomorrow's business. A great example of this is Amazon.com. A dozen years ago Jeff Bezos commissioned a team to solve a problem: I.T. projects inside the company were taking too long, they were too slow. The team pitched the idea of creating an entirely new business, where Amazon would lease computing capacity to third party companies. Today, Amazon Web Services is the dominant leader in the cloud computing space, producing billions of dollars of revenue for Amazon.
The C, the capabilities link, is the most critical part of the dual transformation framework. It’s important to understand, we’re not talking about unrelated diversification, like going into markets that have nothing to do with what you're currently doing. Rather, it's finding ways to take advantage of the unique capabilities that only you have, so you can take what historically has been the Innovator's Dilemma, that makes it hard for large companies to innovate and grow, and flip it into the Innovator’s Opportunity by doing things that few other companies in the world could do as well as you can.
How important is it to have these two transformations, so an A and a B, going on at the same time?
The important thing, really, is to realize transformation isn’t a monolith - you need to have two connected change efforts going on, one focused on today and one on tomorrow. They usually happen concurrently, but not always completely parallel to one another. In the book we talk about Janssen, the pharmaceutical arm of Johnson & Johnson, who did a two-track transformation. They first changed how they handled drug discovery and development - transformation A - and as that got traction they started exploring how they could intercept diseases before people actually got them - transformation B, and hugely disruptive for a pharmaceutical company.
So you’ll always have two change efforts going on. The question becomes how best to manage them, and that may mean a staggered approach.
That said, the separation into transformation A and transformation B is vital. B will often be wrong about A, and A will often be wrong about B. One of my co-authors, Clark Gilbert, has a lot of experience here and has a mantra that I never forget: ‘A does A, B does B’. What that means is A needs to focus on running the best core business they can run; B needs to focus on creating the business for tomorrow. You don’t cross those streams.
Managing these dual change efforts sounds like a huge challenge. What do leaders need to do, or be aware of, in order to successfully pull this off?
Transformation is the toughest challenge a leader will ever encounter. It’s not easy stuff. The leaders we see who are successfully driving dual transformation tend to follow four key behaviors.
First, they have the courage to choose. You're never going to get overwhelming data suggesting that you have to do this. You’ll never get perfect data describing the opportunities that have the most potential. You need courage. You need to have the willingness to change before it is obvious that you need to change. That’s hard to do.
The second key thing that leaders need is the clarity to focus. There are so many things that you could do in the world today. And sometimes people think that's the answer, let hundreds or thousands of flowers bloom. That never works. All that is left is a lot of dead and trampled flowers. Instead you need to place a few chips on strategic moonshots that have the opportunity to move your business in fundamentally different directions.
Third you need the curiosity to explore. This is a bit of a paradox - you need to focus, yet you need to realize that if you are going to create the future you can only discover it through very careful experimentation: when you're trying things, seeing what works, seeing what doesn't, and adjusting appropriately as you go.
Finally, you need the conviction to persevere. Dual transformation is the greatest challenge a leadership team will ever encounter. I can promise that you will face crises along the way. There will be crises of commitment: Are you really serious about it? There will be crises of conflict as your old and new business fight together. There will be crises of identity: Who are we? Who are we becoming? What is the tension between those two? If you don't have the conviction to persevere when bad things happen, your efforts will crumble the second you encounter a roadblock.
You need to have the willingness to change before it’s obvious you need to change - does that mean by the time you realize your industry or market is about to be disrupted, it’s too late?
Not necessarily, although I’d say if you’ve been ignoring the early warning signs then you might be in a precarious position. For example: customer loyalty is decreasing, or margins are stabilizing, or the impact of new product or service launches has decreased. These are all signs that disruption is heading your way.
Ideally, the best time to embark on a dual transformation journey is when everything is going well, and you feel no need to change anything. That’s a paradox - when you feel no need, you feel no urgency. But this is when you have the most freedom to explore and evaluate different options.
We have an example of this in the book, with Aetna. They’re a huge US health insurance company. Mark Bertolini came on as the CEO about seven years ago and everything was amazing: record earnings, record revenues. He made an incredibly brave, and smart, choice to essentially blow everything up and do a dual transformation. First, transformation A, he took their legacy business of selling insurance policies to companies and shifted it to selling health outcomes to consumers. Next, transformation B, he said ‘let’s start a completely new business, where we’re selling health care IT solutions to hospitals and physicians.’
He was able to see that opportunity because he lives at the periphery of his industry. He’s not just sitting inside it, talking to his best customers; he’s talking to startups, to executives in adjacent industries. He’s in a diverse ecosystem, basically, and that lets him see around corners rather than just being stuck executing in the core.
And that’s really the job of a leader, to create tomorrow. If you’re too busy executing, just putting your head down and delivering today, then things are going to get pretty ugly because tomorrow is coming, whether you see it or are prepared for it or not.
So is it ever too late?
If there is a piece of your business that still has viability then no, I don’t think it’s too late. What I would do in that situation is start asking: what do we have that’s unique? What assets, capabilities, skills do we have that are unique, and what can we do with them? What else can we do?
On the other side, the transformation A side, I’d focus on how we as a company could move away from reactive measures, cost-cutting and the like, and instead focus on how we could change our business model to set us up for greater resilience and sustainability.
Are leaders getting better at taking action before things get, as you say, ugly?
I think they are getting better, yes. The whole idea of disruptive change is well known - there is language around it that people are far more familiar with now than they were even, say, two or three years ago. Also, the pace is happening much faster, and people are seeing the fallout. They know the stories, the Blockbusters, the Kodaks. So you’ve got deeper understanding plus a more urgent need, and more companies now are recognizing the opportunity that comes from disruptive changes. Sure, they may not be happy about disruption, but it’s easier now to see that in the long run disruption ends up growing a market, and that they can shift their business model to respond to that and take advantage of it.
I think large companies are also realizing that they have an advantage over startups, mainly access and scale. Yes, they have more bureaucracy and red tape, but they have access to toys that startups can only wish they could play with.
The leaders I see that do well are the ones who really take the time to understand the nuances of their local market, the fabric of the communities they serve. They understand that they have to be comfortable with ambiguity, with experimentation, and they have to be agile.
They also understand and recognise the different ecosystems they need to play in to get things done. In Singapore, for example, you can’t do anything without being involved with the government. The government here is deeply embedded in the business system, they have an investment arm that owns a large stake in many big companies, so you have to be willing and able to play in that arena.
Finally, what’s your best advice for leaders who want to speed up their transformation efforts?
First, recognize that strategy isn’t something you say. It’s something you do. And actions require assets. Make sure that time and money are being allocated towards transformation, and that the people working on it are being rewarded.
Then, remember that while the numbers are important, they’re really just the mathematical relationships between made-up assumptions. Transformation isn’t going to be profitable right away. A venture capitalist looks at options as a methodology for investing - invest a little, figure out what’s going to work, and invest more in that. They will make ten investments and seven of them will return nothing at all. Total flops. Two might have an ok return. But one will hit big, and that’s what they’re looking for. The one that will hit big.
That said, if you want a return quickly then you need to acquire. It’s rare for an initiative to go from nothing to huge. And it’s fine to do that - almost every dual transformation we’ve looked at has a substantial acquisition engine behind it. Just keep in mind that acquisitions aren’t just about buying revenues, but about buying capabilities that you need in order to do new things.
Finally, you need to recognize that transformation, real transformation, is a marathon, not a sprint. It’s not something you’re going to knock out in a quarter, or by the end of your fiscal year. It’s much more likely that it will be a multi-year journey. This seems like an odd thing to offer as advice for people who want to speed up, but it’s important.
Transformation is difficult, and things will go wrong. If you think you have to get it all done in three months or six months, when the first crisis hits you’re going to give up. But if you know you’re in for the long haul, for three or five years, then it’s much easier to accept and deal with crises as just things that happen along the way.