The chances are that at some point your company will have to undergo transformation in order to respond to shifts in the market, new technologies or disruptive startups.
Writing for Havard Business Review, Clark Gilbert, Matthew Eyring and Richard N. Foster advocate an approach that they claim is “both more practical to implement and more sustainable”. It hinges on the two following insights:
1) Major transformations require two separate efforts working in parallel. The first – “transformation A” – repositions the core business, adapting the current model to the altered marketplace. The second – “transformation B” – is a separate, disruptive business for developing innovations that will become a source of growth in the future.
2) To make both transformations work, it is necessary to establish an organisational process that the authors call a “capabilities exchange”. This allows the parallel efforts to share resources without changing their respective missions or operations.
Gilbert, Eyring and Foster say the objective of transformation A is to identify the strongest competitive advantage that can be maintained by your current model in the disrupted marketplace.
Although it’s highly likely that costs will need to be cut, a “more expansive” look at the business is necessary, and the following strategic questions should be asked: What can still be done better than traditional rivals and upstarts? What must be given up? Why do customers come to you? What is the real need that connects them to your brand?
If growth potential is to be realised, the company must embrace the possibilities of the new marketplace as energetically as the disrupters – which is the purpose of transformation B.
Transformation B involves the establishment of a separate business with its own staff, processes, culture and profit formula. Disruption can then be exploited without the constraints of core business practices, legacy margins or revenue requirements.
The capabilities exchange coordinates the two transformation efforts, ensuring that each has access to the necessary resources without interfering with the other.
The following five steps are necessary in setting up the capabilities exchange:
1) Establish leadership. Although this is the simplest step, Gilbert, Eyring and Foster warn that it’s the one that’s most open to abuse.
2) Identify the resources to be shared. Determine which capabilities the transformation B firm can borrow from the legacy business in order to gain a competitive advantage over rival startups. Branding, marketing, customer data and design are among the resources most commonly shared.
3) Form exchange teams. In a capabilities exchange, the process of deciding ways in which resources might be shared are “carefully confined to a series of teams”. These are created by senior leaders, with a small number of people from both transformation efforts assigned with the responsibility of allocating each resource.
4) Protect boundaries. In order for the dual transformation to be effective, each effort should operate as though it is solely responsible for the future of the company. Therefore, legacy employees should not try to interfere with the new disruptive firm.
Similarly, the core business should not be expected to prop up the new venture financially. Accounting must be completely separate.
5) Scale up and promote the new business. Despite the above, the two organisations should not be treated equally by top executives.