The need for and challenge of strategic adaptability and evolution is not going away any time in the near future. Sooner or later, each of us will need to transform our organization in response to market shifts, introduction of new technologies, arrival of new low-cost competition, or in response to state or federal changes. What we have to realize first is that such a transformation is really two transformations, namely Transformation A - the adaptation of the core business to the realities of the disrupted marketplace, and Transformation B - the creation of a new disruptive business that will become the company’s next source of growth.
At the exact same time, both transformations will require the sharing of resources without interfering with each transformation. Clark Gilbert, Matthew Eyring, and Richard N. Foster in their article “Two Routes to Resilience: Rebuilding your core while you reinvent you business model” in the December 2012 issue of the Harvard Business Review calls these shared resources a “capabilities exchange.” Now, we need to remember that individual competencies refer to a specific person’s knowledge and skills required to fulfill specific role requirements. Organizational capabilities, on the other hand, are collective abilities of the firm required to execute the business strategy.
As the above authors note, “The goal of transformation A is to find the strongest competitive advantage your current model can sustain in the disrupted market place.” As they continue, “Too often companies ... focus only on preserving their margins by reducing costs.” Their example of this is Borders closing store after store in response to Amazon, “vainly hoping to hold on to its profits by shrinking.”
A broader view is needed with new strategic questions when dealing with this level of transformation. As they suggest:
- “What can we still do better than both our traditional rivals and the upstarts?”
- “What must we give up?”
- “Why do our customers come to us?
- “What is the real need that connects them to our brand?”
The second transformation has a different focus. As they write, “To realize their fullest growth potential, incumbents need to embrace the possibilities of the new marketplace as energetically as the disruptors do. That’s the purpose of transformation B.” To do this successfully, do not ask this question, “What do we do that customers still want?”, because “that’s the focus of transformation A.” Instead, ask the following new question, “What unmet needs do customers have in today’s environment?” As they explain, Transformation B is about “the construction of a separate business with its own profit formula, dedicated staff, distinct processes, and singular culture.... The idea is to exploit the disruption without being encumbered by the legacy margins,revenue requirements, or practices of the core business.”
Here is where the capabilities exchange concept fits in. “Launching a successful start-up inside a threatened legacy business takes creativity and grit.... Scaling up the new business requires something more - a structure that allows the two organizations to live together and share their strengths.... That’s the role of the capabilities exchange, which coordinates the two transformation efforts so that each gets what it needs and is protected from interference by the other.” The key is to determine which capabilities the B organization can borrow from the core to gain a competitive advantage over independent start-ups.
Here is an example from the aforementioned article. Barnes & Noble sells books and reading devices. “As Amazon’s online sales cut into bookstore profits, the Kindle burst onto the scene in 2007. In three and a half years, e-books sales surpassed bound-book sales on Amazon.com.”
As a result, the authors pointed out that Barnes & Noble repositioned their core into “a chain of retail outlets that are designed to be enriching places to shop for gifts and spend time with children and that focus less on lower-margin high-volume book selling and more on higher-margin children’s books, coffee-table books, and gifts.”
At the same time, Barnes & Noble delivered a new business model: “The Nook e-reader business, which leapfrogged Amazon’s Kindle technology and used the chain’s brick-and-mortar stores to give customers physical access to the product in a way that Amazon couldn’t match.”
The shared resources for Transformation A and Transformation B were the following: “Branding, publisher relationships, customer intelligence, physical merchandising space.”
The results so far have been the following: “B&N’s $7 billion in 2012 revenues came mainly from its profitable chain of 700 retail bookstores. The Nook captured 27% of the e-reader market in two years, growing revenues from $ 105 million to $ 933 million. While the Nook division remains unprofitable, it recently received a $ 300 million equity investment from Mircosoft.” In short, Barnes & Noble is transforming itself from a book-seller to a technology company.
The is a great article and I encourage all of you to read it. Here is the link: http://hbr.org/2012/12/two-routes-to-resilience/ar/1