In a speech entitled “Strategy under Uncertain Times” in Fudan University, Martin Reeves, Senior Partner and Managing Director of Boston Consulting Group (BCG), Chairman of BCG Henderson Institute (BHI), a BCG’s think tank on business strategy, shared his theory on how companies survive disruption by undergoing successful transformations.
After studying hundreds of companies in fourteen industries, BCG found five factors that differentiate between companies that survived disruption and those didn't:
1. The first factor is self-disruption, or pre-emptive disruption. Companies which survive disruption positively embrace the change at a fairly early stage. In the airline industry, the disruption of low cost airlines was a huge problem for many airlines, but the ones that embraced it fairly tended to be advantaged. Take Qantas, the Australian carrier, as an example. Instead of resisting the attack from low fare, low cost airlines, Qantas decided at a very early stage of the process to set up its own low cost airline to compete with itself.
2. The second factor is adapting the organization accordingly. Usually embracing disruption involves self-contradiction, separating an incumbent model from a new model, or running a new business which may undermine the old core business. This means a profound change in the organizational structure, which is often hard and painful, especially when the company is very big and complicated.
3. The third one is to take multiple bets and sufficient bets. You may think that companies that survive disruption will be doing different things from the ones that didn't. But actually that's not really the case. Usually the people in the large companies are pretty well educated and they lead well. When there is a disruption, everybody in the industry will be talking about the disruption and every company does experiments. But what really discriminates the successful and the unsuccessful companies is the sufficiency of the bet. So the question is not “are you doing something about disruption”, but “are you doing enough about the disruption to create a billion dollar business?” And that often involves something which is very hard to do, which is taking resources away from a business that is still performing and putting them in a new bet – something which is not only unknown, but which is designed to undermine the thing which is successful. All the accounting metrics will tell you that's a crazy thing to do, but nevertheless, that's what disruption requires.
4. The forth is about how do you pay for that. Plausibly, you might imagine that it's like jumping off a sinking ship onto a new ship. But actually, that genuinely isn't the case. What happens is, the companies that successfully survive disruption over-perform in their core business; at the same time, they invest in bets which will replace or cannibalize the core business. So actually, it's not walking away from the core business. It's more like embracing schizophrenia – embracing the contradiction of investing in the incumbent business and the new business.
5. The last factor we should underestimate is how to actively manage the investors. Typically a company that's been around for a hundred years will be like a bond – investors are not necessarily looking for high growth or high devotion; they're looking for predictability of a dividend stream. So imagine that you're an investor, you own a bond, effectively a bond to share in a large corporation that has very predictable dividend growth. Then one day the CEO says to you: I've got a great idea. Instead of giving you the cash, we're going to keep the cash and invest in innovation, even though we have no tracked record of this innovation. And I'm going to do that with a fairly large amount of money – usually the CEO will not survive that proposition. So that's the art of earning the stripes: showing over-performance, showing baby steps, having a plan B, tracking the right metrics for the innovation plan… That's a pretty hard thing to do – maybe the hardest thing among the five.
In the U.S., at any given time, about a third of companies are having major change programs underway to strategically reorient the company. It's a pretty big bet, because the difference in net present value of the company between the successful and unsuccessful transformations is roughly the enterprise value of the company. And only 25% of the companies succeed in major large change transformation efforts.
In spite of this, the theories behind successful transformations are not based on evidence, but on plausible assertions. And one of the things BCG has tested is that pre-emption is valuable. It’s almost transforming before you can see the effects of disruption in your financial or competitor results, transforming while you are still a successful company.
BCG found that not only is pre-emption important, but actually it's the most important factor. The research team monitored a whole bunch of factors – leadership change, emphasis on costs, long term thinking, etc. – and revealed that the biggest single predictor of success in transformation is when do the companies begin the transformation.
