What is business transformation?

Overview

Transformation may include up to five types of changes.

  • Corporate leadership must always be transforming itself.
  • What is driving the need for transformation?
  • Company is not changing as fast as customer and company ecosystems.
  • Decreasing: market size, market share, and customer satisfaction.
  • Business model and corporate leadership not competitively differentiated.
  • Financial results not competitively differentiated.
  • Transformation usually fails.

This article (supported by a one-page slide) is intended to enable discussion and action planning among owners/shareholders, boards of directors, CEOs, and advisory boards. The approach and action plan will be unique to the specific situation of each corporation.  There is no one-size-fits-all answer.

Transformation may include up to five types of changes.

There are five different types of transformation.  Components of each may be occurring at the same time:

Restructuring

The business is under major short-term financial pressure. The actions taken may include: reducing debt, selling assets, selling the company, reducing the number of customers or meeting fewer of their needs, and shrinking the business model.

Turnaround

There need to be fast improvements to processes, people, and technology.  The company remains focused on the same set of customers with the same set of needs.

Operational Transformation

Components of the business model are improved.  This results from the natural evolution within the customer and company ecosystems.1 New technologies, business practices and skills evolve and become commonplace.  Customer needs evolve requiring changes to the customer experience. This continuous evolution requires continuous operations transformation. The company remains focused on the same set of customers with the same set of key needs.  The overall business model improves but is not fundamentally changed.

Business Model Transformation

The business model requires fundamental change.  The focus is still on the same customers, but their needs have changed.

Strategic Transformation

There are new customers with new needs requiring a new business model.  Think of Google.  It started out to be the best search engine.  Now Google produces the Android operating system, smart phones and has been working on driverless cars.

Successful companies are always undergoing some degree of transformation.  Why?  The customer and company ecosystems are evolving (sometimes quickly) and the company must keep pace.  It is hard to be successful if you are addressing the customers’ past needs with historical solutions.

Consider the types of required transformation in the context of both the strategy2 and purpose of the corporation.3   Your short-term actions should always be taken in the context of the longer-term direction.

Consider what type of transformation is required and the scope of your company’s transformation.  Is the scope:

  • Who the target customers are and their unmet needs?
  • The customer experience?
  • The customer value proposition?
  • Some or all of the business model?
  • Corporate leadership?
  • A fundamentally new strategy?

Corporate leadership must always be transforming itself.

Corporate leadership (the board of directors, CEO, advisory board, and C-Suite) must also be continuously transforming.  Stakeholders and third parties are transforming; how they internally operate and interact their ecosystem and their expectations of your corporation. Competitors (both current and new marketplace entrants) are changing.

Corporate leadership must always be learning and aware of developments within the customer and company ecosystems.  Restructuring, turnarounds and strategic transformation may require new leadership, with different values, skills, experiences, and capabilities.

What is driving the need for transformation?

There are two core reasons for transformation:

Transformation may be internally driven by the passion of corporate leadership to stay ahead of the competition.

External changes and poor financial results force corporate leadership to consider transformation.

The following are four external changes forcing transformation.

Company is not changing as fast as customer and company ecosystems.

The customer and company ecosystems are evolving.  Ongoing transformation is required to keep pace.  For example:

  • Customer needs evolve – the millennials may have different needs from retired people.
  • Competitors discover that your customers have some unmet needs and that these needs become more important than the needs your company’s solutions were addressing.
  • Technology is regularly evolving. The internet, big data, Artificial Intelligence, etc.
  • New business processes, practices, and models emerge. Think of the newspaper industry.  In the mid 1800s newspapers did not have advertising and made a profit based on the customer payments.  Then advertising came along and customer payments no longer covered costs.  Then, customers could receive much of their news in a digital format and the advertisers left many of the traditional newspapers.
  • External trends which will disrupt your strategy and business model (shareholders objectives, competitors, suppliers, the economy, regulations, workforce demographics, politics/government, industry consolidation, new entrants, etc.)

Decreasing: market size, market share, and customer satisfaction.

It can be hard to succeed if the overall market size (revenue and profits) is decreasing.  Think about Blackberry and its focus on phones with keyboards.  Decreasing market share can be a warning.  Market share focus is on profits, not revenue or units.  The company with the largest revenue does not necessarily have the largest share of profits. Decreasing customer satisfaction, relative to competitors’, will shrink the company.  In some industries, every company provides poor customer service.  Think about telecommunications services for residential customers.

Business model and corporate leadership not competitively differentiated.

The business model and corporate leadership may have been competitively differentiated at one point, especially at a time when the company was growing and beating the competition.  Corporate leadership may have made decisions to not enhance the business model (“If it isn’t broken, don’t fix it”).  The values and capabilities of corporate leadership may not have kept pace with the competition.  Corporate leadership can actually deteriorate if succession is not carefully planned and executed.

Financial results not competitively differentiated.

As the above three reasons are occurring, your company’s financial results will eventually be impacted. If your financial results are not competitively differentiated, some or all of the above three will have already occurred.

Transformation usually fails

  • Major changes almost always fail. 12% of change programs succeed; 38% produced less than half the expected results; 50% diluted the value of the company.4
  • Efforts to recover a poor business (i.e. transformation) typically fail. Fortune 500 (1998-2013). 33% of the companies grew; 35% went bankrupt or were acquired; 32% stalled.  Only 10% of the stalled companies recovered.  Of the recovered companies, 75% returned to the core business and 25% redefined their business model.5
  • Only 30% of mergers and acquisitions increase shareholder value.6

Will your transformation deliver long-term, sustainable change?  Corporate leadership transformation is critical to enable sustainable change.

What do you do if you are SME (Small Medium Enterprise)?7

An established SME will have challenges additional to those noted above.  A successful SME undergoing rapid successful growth risks corporate leadership: losing touch and understanding of customers, losing focus on the key points of competitive differentiation, changing the vision to something employees and customers cannot relate to, losing focus on cash management, increasing bureaucracy and making decisions slower than the competition.

SME risks arise when a successful SME tries to look and act like a traditional large company.

Conclusion

Transformation is inevitable for every corporation.  Corporate leadership must determine when to transform.  Major transformation driven by customers deserting the corporation or financial distress often often fail.  Ongoing transformation may well succeed.

Your next steps

To enable discussion with your board of directors, CEO, and advisory board download the following one page slide.

What is business transformation?

What are the facts regarding your current situation?

This is the first of three phases:  Phase 1 What are the facts regarding your current situation?  Phase 2 What are the implications?  Phase 3 What is the action plan?

Phase 1

  • What is your strategy?
  • What is your plan to achieve your strategy?
  • Assemble historical facts and current forecasts (or scenarios) regarding market size and market profitability.
  • Understand the customer via active questions, including after each interaction. Survey the customers to determine: whether or not they would recommend your company; their satisfaction relative to competitors and degree to which needs are being met relative to competitors. Tools such as Survey Monkey are low cost or free.
  • Understand the customer via data analysis of customer interactions.8
  • Assemble key historical financial results information and analyze for factors such as growth rates.
  • Compare financial results to competitors. SMEs can find financial benchmarks at Industry Canada (ic.gc.ca/smeresearch)

Footnotes

1 A business ecosystem is the network of people and organizations, including stakeholders and third parties directly and indirectly involved in the delivery of a specific product or service through both competition and cooperation. The idea is that each entity in the ecosystem affects and is affected by the others, creating a constantly evolving set and nature of relationships in which each entity must be flexible and adaptable in order to survive, as in a biological ecosystem.

2 Strategy: What your successful company will look like in the future. What does future success look like to: customers, shareholders, other stakeholders, third parties, and society? What will be the future business model?

3 What is the purpose of the corporation and why does it exist? Is the only purpose of the corporation to create wealth?  Is there a higher purpose, either to a community or to society?  Or you may conclude the only purpose is to create wealth for shareholders and the C-Suite.   Peter Drucker said: “Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

4 “It’s 8-1 against your change program”, Bain website, Managing Change Blog, 2017 June 23

5 “The Founder’s Mentality”, by Chris Zook and James Allen, 2016, page 105

6 “Why most acquisitions fail”, KPMG Webcast, 2017 January 31

7 Industry Canada definitions: Small business: < $5 million in revenue, < 100 employees, Medium business: between $5 million and $20 million in revenue, 100 to 499 employees.

8 “How to get customer feedback without asking the customer”, James Allen, Bain website, 2018 May 4

Further reading

“What Do You Really Mean by Business “Transformation?” Harvard Business Review, 2016 February 29