Transformation and innovation, 2 formulas, 8 books, at least 25 questions and lots of lessons

There is a lot of asymmetry in managing innovation and transformation. You need the loonshots to ensure the future (read “Loonshots“), but you also need to keep the day to day routine of making money while one of the loonshots pay off. Managing both streams in the business is difficult. And there is no quick fix.

Dual transformation

“Zone to win” suggests you have to manage three time-horizons. “The day after tomorrow” suggests you should manage it as solid, fluid and superfluid and “Dual Transformation: How to Reposition Today’s Business While Creating the Future” suggest you manage two streams transformation A and transformation B.

Winter is coming

The argument is that it not only about innovation but ongoing transformation. That winter is coming. It isn’t only winter, that’s coming to your boardroom. It is disruption. Disruption is coming. And it is coming at an unprecedented pace and scale. Kodak’s digital disruption took almost forty years to fully play out. Newspapers had about a dozen years of life after the internet shock. Nokia and RIM had only five years before great businesses painfully built over decades were ripped apart. And thus the innovator’s clock accelerates. 

You are running out of time

Due to the hastening pace of disruptive change means leaders have precious little time to respond. The time when leaders need to be most prepared for a change is right at the moment when they feel they’re at the very top of their game. In response to the coming disruptive shocks, executives must simultaneously reposition their traditional core organisation while leading a separate and focused team on a separate and distinct march up a new hill. 

7 signs

Keep your eyes open for the seven early warning signs of disruptive change: decreases in customer loyalty, spikes in venture capital investment, policy changes, fringe entrants, changes in customer habits, the formation of new business models, and a shift of financial focus from revenue growth to margin protection. 

Create impact

You could create a spin-off company with completely separate staff, systems, and structures. But if you are going that far, why not simply give the capital to a venture capital firm to invest? In reality, almost any new growth businesses launched by an established company will feature some point of interface between today and tomorrow or transformation A and transformation B. If you manage transformation A and B well, you will have created a large company that combined assets of scale and entrepreneurial behaviour to drive massive impact.

Formula

There is a formula A + B + C = Δ 

A = transformation A. Reposition today’s business to maximise its resilience. 

B = transformation B. Create a separate new growth engine. 

C = the capabilities link. Fight unfairly by taking advantage of difficult-to-replicate assets without succumbing to the sucking sound of the core. Carefully select critical capabilities, strategically manage the interface between the core and the new, and actively arbitrate when disputes arise. 

(D × F × A × E)L > C

“Reinvention” has another formula. (D × F × A × E)L > C

Dissatisfaction (D): Ensuring there is a strong and powerful internal felt need for change.

Focus (F): Ensuring there is a compelling and articulated desired future state that generates forward movement and staying power.

Alignment (A): Ensuring appropriate infrastructure is installed. I think companies underestimate the importance of organisational design. You should read this.

Execution (E): Ensuring a comprehensive game plan with clear milestones is in place; installing a high-performance culture that executes well and fast.

Leadership (L): Ensuring exceptional leadership (self-leadership for individuals; organisational leadership for organisations) is exhibited; ensuring the change quotient is in place and high accountability to the game plan.

Cost of Change (C): The true and perceived costs of change relative to the reinvention effort (physical, social, financial, emotional, and mental). Disrupting the status quo can be painful.

Whatever formula you pick there are some fundamental lessons and question.

What business are you in?

Separating the unique roles of transformation A and transformation B requires, first, a clear and consistent definition of today’s business—a seemingly simple step that is easy to skip. It is easy to describe what a company sells. And the reality is that the customer rarely buys what the company thinks it sells. Products and services don’t define a company. Rather, what a company does (or the problem it solves for customers) and how it uniquely solves that problem—these are what define a company. 

Driving Transformation A

The essence of transformation A is changing the “how” and finding more effective and efficient ways to address customer needs to maximise the resilience and relevance of your historical core business. First, you must understand—at a detailed level—the jobs to be done that customers consider unique and meaningful. Nobody pays for a ‘product. What is paid for is satisfaction. You need to understand the fundamental problems facing customers, as well as the progress they’re seeking to make in overcoming them. Here are some suggested questions to find out the jobs your product is doing:

1. Why have people historically bought from us? 
2. What do we provide that they really care about? 
3. What is the disruptive shift in our market? 
4. What used to matter to them but doesn’t really anymore? 
5. What do they wish we could do that we don’t?

Then you innovate your business model to deliver against those jobs, measure and track new metrics that reflect the new model and implement aggressively. You need to redesign your core business model so that you create the right value for customers, deliver that value as efficiently as possible, and capture sufficient value to fund investment in future innovation. 

Business model

Pay particular attention to key business model elements:

• Production. What did we do that we can now outsource? What did we use to outsource that we should do?
• Distribution. Can we go direct? Use a different distribution channel?
• Customer support/ Can our customers support themselves?
• Revenue model. Can we wrap services around our product? Products around our service? Could a “freemium” offering drive usage? Can we shift from a one-time purchase to a subscription model?
• Pricing model. How frequently should we charge for our offering? How should we charge?

Cost and excellence

Transformation A is likely to will require significant, perhaps painful, cost cuts, to the point that some companies brand transformation A as a “cost transformation.” However, the goal isn’t simply to cut costs but to reposition the business model to increase long-term competitiveness. Second, you need to identify, business model component by business model component, who in the world does the best, most innovative job of delivering excellence in that area. You should read “Breaking bad habits“.

Metrics

Over time the companies have developed rules, norms, and metrics designed to perpetuate how they create, capture, and deliver value. Many companies that are embarking on so-called digital transformation are simply doing what they used to do digitally. 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. 

Execute

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. 

Transformation B: 

There’s 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.

Homework

Which means you have to do some homework. Such 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. 

1. Which disruptive trends have the potential to change our competitive landscape?
2. What is the new way we will compete in today’s core?
3. What old metrics are no longer relevant?
4. Which new ones are?
5. What are the most exciting growth opportunities that are now options for us?
6. Who will be our new competitors?
7. What unique capabilities will allow us to win?
8. How will we sharpen current capabilities and build new ones?
9. If we successfully execute, who will we become?
10. What will be different?
11. What will be the same?
12. What organisational changes will maximise our chances of success?
13. Is the what compelling?
14. How important and unsolved is the problem you are targeting?
15. Is the who sufficient?
16. How many people face the problem?
17. Is the how believable?
18. To what degree is a solution imaginable without any miracles?
19. Is the why convincing?
20. 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). 

Lessons

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

Leadership

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“.

Time machine

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)? List:

• 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.

1. The moonshot frame, where they conceive of and describe an inspirational future state that captures the organisation’s attention
2. The lunar module (or launchpad) frame, where they think about the components and building blocks that will move the moonshot from dream to reality
3. 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. 

Balance

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 or motivation purpose.

Motivating 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.

The mantra

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.