Out with the Old and in with the New: The Fundamentals of Reshaping a Business
A number of industries are at a tipping point, whereby traditional models of creating value will not be viable in 10 years. For example:
TRANSPORT - The sharing economy has the potential to drastically disrupt the automotive industry (e.g. Uber; Mobike). Enabled by technology, there is now a genuine substitute to owning a car that is considerably more cost-effective. Layer on increased governmental concern for the environment and the impending rise of electrical and driverless cars – it appears unlikely that the production of petrol/diesel vehicles will remain the lucrative industry that it was throughout the 20th century. Jaguar Land Rover’s plan to cut £2.5bn of Overhead indicates that the change is well underway.
RETAIL - Several categories of store-based retailing have already passed this tipping point thanks to the rise of ecommerce and online streaming. HMV’s collapse into administration in December comes even after it outperformed the physical music sales market as a whole. The financial results in recent months from Debenhams, John Lewis and others suggest that the same fate is in store for footwear and clothing companies who fail to shift their business online.
LAW - Artificial Intelligence and Machine Learning has the potential to significantly reduce workload and improve the output of law firms. AI could support in reviewing contracts, conducting legal due diligence and forecasting legal outcomes. Traditionally the bread and butter of the highly paid graduate, these tasks would as a result be done more cheaply and efficiently, driving a more profitable business model.
So, in a number of cases the need for businesses to evolve is clear. The question is how to transition. Or more accurately, how to protect the value that the business currently creates, whilst moving to a model that is sustainable and aligned to the industry’s macro trends. The challenge can appear in many guises: products, consumers, distribution channels, business operating models, but the fundamental issue of balancing old and new is the same.
There is no “one size fits all” solution. Businesses are complex; every strategy and change programme needs to be a tailored response to a unique set of internal and external challenges. However, there are a few key success factors to ensure you approach it in the most effective way possible.
1. UNDERSTAND YOUR FUTURE MARKET
Invest the time and resource needed to develop a clear picture of your future operating environment. In some cases (as above), you are likely to have a strong idea of what that looks like, but if not – consider using war-gaming and/or scenario planning to help define it. Either way, the key is to ensure that the business’ leaders are aligned from square one on the industry’s direction. Clarity at this stage enables focus, reducing the investment needed to explore solutions to the emerging challenge.
2. DEFINE A CLEAR VISION OF THE BUSINESS’ END STATE, AND THEN WORK OUT THE STEPS TO REACH IT
Once you’ve identified the environment in which your business will operate, start from future state and work backwards. Ask yourself and your colleagues: given what we know about the direction of the industry, what is the ideal version of our current business? Implicit in this question is another decision to be made – what attributes define our organisation? What is so core to our identity and success that we cannot part ways with it? In committing to a “smoke-free future”, Phillip Morris International, the largest producer of tobacco in the world, has taken the bold decision that they are not defined by the product that has enabled them to reach Net Revenue of $29bn. Driven by twin ethical and business concerns, the headline slogan is a galvanising articulation of their strategic endpoint, underpinning and guiding future plans.
3. MANAGE TRANSITIONS PRAGMATICALLY
Within your long-term vision and strategic framework, there is a need to be tactical too. Develop a rock-solid understanding of your sensitivity to the various elements of your current business model. Armed with this knowledge, it’s possible to translate your vision into a year-by-year plan that builds the business of the future, while not jeopardising business as usual. The PMI example is again relevant here. Despite their ambitious and visionary direction, the business will not miss out on the commercial opportunities that conventional cigarettes present over the next 5-10 years.
4. ARTICULATE A CLEAR VISION TO SHAREHOLDERS
Year after year in his annual letter to CEOs, Larry Fink of Blackrock – the largest Asset Management company in the world – pleads with management to take a long-term approach to value creation. Maximising short term results, he says, inevitably comes at the expense of long-term growth and profitability. In developing a strategic plan, it is critical to actively engage investors. Re-focus their attention away from quarterly results to the few key metrics that really display the long-term health of the business. Reframe investors’ assessments of risk, too. “It’s too risky” is the classic reason for dismissing challenging and unconventional strategies. However, risk-reward analyses are all too often not conducted holistically. Invert the question and ask, “what is the risk of not doing this?”
5. DRIVE A CULTURE OF HIGH PERFORMANCE THROUGH THE BUSINESS
Change in large, complex organisations simply does not happen unless it is enabled by the right culture. Our clients often recognise this and add a ‘cultural change’ element to their plans. However, it is constantly pushed to the bottom of the priority list. At the end of the 5 years, no meaningful cultural progress has been made. Unilever’s vision “to make sustainable living commonplace” has been well documented and rightfully applauded. But what really makes it powerful are two simple, tangible actions to ensure the business shares and delivers on the ambition. Firstly, they have taken employees with them, through simple and inspiring communications. Secondly and more significantly, they have backed this up with their financial incentive programme; management bonuses are directly linked to achievement versus sustainability targets.
The pace of change, driven by technology, regulation and social attitudes, is greater than ever before for businesses. The number of global patent registrations per year, a useful measure of innovation, is now increasing at 11%. Within this environment, almost paradoxically, it is the companies that define clear visions and plan for the long term that will win.
 PMI 2017 Annual Report
 The Economist