My previous Blog, “Want to be a Victim of Digital Disruption?,” examined why 78% of CEOs are concerned a digital startup will disrupt their organization. That fear is well-founded. Business disruption is real and it’s accelerating. It seldom comes hard and fast, like Uber. Instead, it targets segments of a company’s products and services and presents itself as death by a thousand cuts. More than 90% of CEOs respond to that threat (or opportunity) by launching a formal digital disruption program and appointing a VP of Innovation to lead it. But 84% of these initiatives fall short of delivering any meaningful business impact. This blog explains why successful business transformation is so difficult.
Transformation occurs when an enterprise launches a new business model, accompanied by new products and services, into an existing or new market. It most often takes the form of a startup within an established business.
Everyone knows that starting a new business is challenging. Most startups are unable to secure funding. Even when they do, 90% of them still fail. If you think those are bad odds, they get much worse when the new venture is launched within an existing enterprise. Rubicon Intelligence reports that 4% of such ventures will ever reach $1M in yearly sales. And only 0.4% will ever reach $10M. That doesn’t even begin to move the bar for a large corporation. With all of the resources available within a large company (funding, resources, market presence, global coverage, etc.), why aren’t the odds better? Shouldn’t that support make it easier? It’s just the opposite. Rubicon reports that the success of a new venture is inversely proportional to the amount of corporate help it receives. Understanding each of the five phases of the business transformation process provides some answers.
In my experience, business transformation has five distinct phases. It begins with Engage. That includes both deciding to change, and building commitment across the senior management team. The Engage phase ends when senior management understands why change is necessary and commits to following the long and difficult path towards achieving it.
In an HBR article, John Kotter explains why deciding to change and building commitment is difficult:
“Sometimes executives underestimate how hard it can be to drive people out of their comfort zones. Sometimes they grossly overestimate how successful they have already been in increasing urgency. Sometimes they lack patience: ‘Enough with the preliminaries; let’s get on with it.’ In many cases, executives become paralyzed by the downside possibilities. They worry that employees with seniority will become defensive, that morale will drop, that events will spin out of control, that short-term business results will be jeopardized, that the stock will sink, and that they will be blamed for creating a crisis.”
Innovate is the next phase. That’s where breakthrough ideas are generated and validated. It’s where the executive team creates a vision that embraces those ideas, and where the assumptions a vision is based on are tested and de-risked. The Innovate phase ends when the vision can be succinctly communicated across the enterprise, and when there is a plan to do that – over and over again.
Innovate is challenging because it is hard to generate real breakthrough ideas. You cannot ‘focus group’ or ‘yellow sticky’ your way to a new, enterprise-transforming business model. And if you do uncover a breakthrough idea, it’s even more difficult to protect it from premature burial.
Business models are entrenched in large enterprises. Managers immediately look for flaws in new ideas rather than tease out their potential. I have been in too many leadership team meetings where questions are asked, or assertions are made, that have the unintended (or perhaps intended) consequence of killing very innovative ideas. During this phase, it is important to add substance to the idea, test it and validate it to prevent current stakeholders from prematurely crushing it.
Invent is the third phase. Long ago, a professor explained the difference between innovation and invention. He said, “Innovation is turning cash into ideas. Invention is turning ideas into cash.” Invent is where enabling technologies are harnessed to build new products and services. It’s where questions around IP, security, privacy, and data are resolved. Invent ends with a minimum viable product.
Invent is difficult because it’s where most of the heavy lifting is done. This requires dealing with uncertainty, often for very long periods of time. Successful startups embrace uncertainty. They have an intense sense of urgency and can pivot quickly. They don’t have to follow a lot of rules. They have an experienced team with an unwavering commitment, and believe failure is not an option. Startups within large enterprises have none of these advantages.
Next comes the Launch phase. Here, the management team forms, defines the organization structure, builds the communication strategy, establishes governance and creates their operating and go-to-market plans. The Launch phase ends when the new business model is introduced to the market. Typically, the management team for the new venture is selected from the ranks of the enterprise, and has no startup experience. That, combined with the challenges outlined in the Invent phase, are what makes Launch especially difficult.
The final phase is Evolve. All new businesses must pass through several stages of growth, and each brings its own set of challenges and risks. Knowing when and where to anticipate landmines is key to avoiding critical mistakes and surviving to achieve success.
Gerald Ross, CEO of Rubicon and former Dean of the Desautels Faculty of Management, the business school at McGill, has focused his career on understanding why the Launch and Evolve phases are difficult for large enterprises. His blog series begins next week on Side B, with a post on “Crossing the Valley of Death – Why Only 1 in 40 Technology Ventures Succeed.”
Although the boundaries between each business transformation phase are not hard and fast, all five are required for a successful business transformation effort. And all five are difficult. My next blog, “Imagine,” will look closer at the Innovate phase, and suggest an approach that will increase your odds of uncovering that breakthrough idea.