Digital Transformation must go BIG!
Business transformation programs, in the past, used to focus primarily on productivity improvement— using the “better, faster, cheaper” philosophy. Made sense because disciplined efforts raised productivity, accountability, transparency, execution, and the speed of decision making. It provided quick results to improve the bottom line. We, at 3nayan, have run many such transformation efforts.
‘All in’ transformations that address the company’s performance as well as its portfolio yield the highest odds.
In case you haven’t noticed, that isn’t enough. Tech-enabled disruptions are gutting industry after industry, pressuring incumbent companies to eke out stronger financial returns and also reshape their identity as organizations. The thought of fixing bottom line, and reshaping (to redo the company’s portfolio) to impact the top-line is, rather, sobering though possible. Over the last couple of years, we have been suggesting and prescribing this “all in” approach to our clients and our experience shows that this approach improves the transformational odds. These capabilities, in fact, seem to be complementary in nature and can be used in synch.
For a company of size to move from its gradual state of evolution and jumping from one “S-curve” to another contiguous one takes a recipe of effort, risk taking and five factors (see below). Without these, it is easy to remain plateaued or even start sliding down the tail of the “S”. In any case, making at least one of those moves, either performance enhancing, or portfolio reshaping, is better than standing still.
Performance Enhancing Moves
These are changes which cause better margins and new fit-for-purpose business models.
- Productivity improvements, always a favourite, though to qualify as a big move, need to (relatively speaking) outpace the competition by 70-75%.
- Innovation in products, services, and business models would cause Differentiating Improvements. For this to transform the company, the gross margin must put the company must deliver 25% more improvement than the industry median.
the size of the move must be the size of at least the quarter of the company or its market capitalisation for it to qualify as a big move, and for it to make that large an impact
Portfolio Reshaping Moves
These are movements that change the product mix, the way to reach customers, open up new products in new markets etc.
- The first type would be if the company shifted greater than half of its capital spending across its businesses over a sustained period, say at least five years. This active resource reallocation could create then, 50% value greater than competitors that shift resources slower.
- The second type is inorganic growth through programmatic M&A. For this to be big enough, there must be acquisitions every year for at least five years amounting to at between 25-30% of the company’s market capitalisation.
- For other capital programs to be considered a big move, capital expenditure vs sales ratio must be at least 1.5 times that of the industry median for a sustained 5 years.
Now the question of which of these five initiatives and sustained programs to run. Each of these, singly will bring in benefit. When combined with another (of the five), the benefit multiplies in a non arithmetic progression. Transformation, however, becomes radical and yields the highest when all the moves are considered and implemented in varying combinations over a sustained constancy thus addressing both a company’s performance and its portfolio.
However, the world is not economic theory where all other conditions are constant. Competition exists, market varies, consumer behaviour is fickle and regulations change at the least.
For a company closer to the tail of one S-curve, its chances of starting to slide backwards (after a while) are high because of the dynamic eco-system. For these companies, and the ones which might have started sliding backwards (on their own, or being part of declining industries), just throwing money at problems or just good performance won’t be enough. This is when applying most of the five moves (above) becomes pertinent.
While other companies which are just below the upward movement, the chances are better and capital expenditure (with improved performance) improves chances.
Out experience says, there are two things to consider. Do not stand around and admire the problem, and most situations justify giving the large ‘all in’ push.
Where is your company compared to the rest of your industry? Or how is your industry doing on the whole? We will be able to help you make targeted advances. We would love to hear from you.
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