IN THE FACE OF INDUSTRY DISRUPTION, business leaders often present themselves with a false choice: Should they cling to the stability of their legacy business and risk missing new opportunities? Or should they abandon the legacy model in a proactive dash for the new? Finding the right balance between these two extremes has become one of the central leadership challenges of our time.
The companies that thrive amidst disruption are able to shift with speed and confidence into new markets and activities — constantly re-inventing themselves in an effort to make their business relevant to the future. However, in a recent Accenture survey of 1,440 C-level executives, we found that only six per cent of companies have embraced this challenge decisively. For the other 94 per cent, common factors that prevent progress include capital-intensive infrastructures, contractual agreements, outdated technology and relentless devotion to legacy products, services and brands.
Our survey, which spanned 11 industries and 12 countries, revealed that 54 per cent of large companies optimistically expect new business activity to generate more than half of their revenue within three years. In reality, around 70 per cent of companies currently generate less than half of their revenues from new business activities. We define ‘new business activity’ as new investment and venture activities that tap into previously unexplored markets and offerings that the company has not yet explored at scale.
In our report, “Make Your Wise Pivot to the New” (available online), we recommend that companies follow the lead of the high-performing six per cent. We refer to this group as ‘Rotation Masters’, and they differ substantially from the other companies we studied, both in the percentage of revenue they have generated from new business activities in recent years and in their financial performance. Most notably, 64 per cent of them achieved double-digit growth (above 10 per cent) in sales, while 57 per cent achieved the same growth results in EBITD.
In addition to impressive financial performance, these companies stand out from the pack by creating three preconditions to help reinvent their organization.
1. Build Sufficient Investment Capacity for Change
Rotation Masters understand the level of investment required to drive change, so they fine-tune their existing business activities by reducing costs, divesting non-core businesses and streamlining assets. It’s no surprise that 70 per cent of Rotation Masters have the investment capacity needed to scale their new businesses, in comparison to 46 per cent of other companies. Canadian companies fared slightly better in our survey: 56 per cent said they have sufficient investment capacity to scale new businesses and reinvigorate their core business.
Pursuing new business opportunities does not have to come at the expense of your legacy business.
Rotation Masters are also more likely to make investment decisions that create a deep-seated readiness for change. Our study found that they focus on enhancing internal efficiency by building external networks. These activities include new or improved strategic alliances, migration of technology infrastructure to the cloud, increased workforce efficiency and cost reductions. In contrast, other companies lagged behind and hesitated to consolidate tangible assets or divest select business lines.
In the next three years we expect the gap between Rotation Masters and other companies to close in, as the latter group has told us it intends to follow many of the steps taken by the masters. We also found that companies with profitable core businesses are more likely to generate and sustain strong investment capacity. Those who reported better EBITD performance had a stronger focus on decisive restructuring of core business lines and operating assets. Clearly, companies must continually replenish their investment capacities by creating healthy cash flows through their existing business operations. A strong core business is crucial
in order to fuel investment for a shift to new business opportunities.
2. Enable the Entire Organization to Innovate
Most companies recognize that they need access to a continuous stream of big ideas, but Rotation Masters foster innovation throughout the organization and purposefully identify and commercialize the best ideas effectively. Compared with their peers, they are more deliberate about structuring their organizations to innovate by design and get the most out of their innovation efforts. How? By concentrating innovation capabilities under a strong leadership team, with dedicated investment and a discrete structure that enables them to embed innovation into their corporate DNA.
Most Rotation Masters will have adopted concentrated innovation strategies three years from now, and 63 per cent of other companies will follow suit. This approach secures a clear advantage: The ability to spot promising innovations, prototype, test them and then commercialize them far faster than their competitors.
For example, U.S.-based Ecolab has been an early pioneer in driving innovation through digital technology, introducing its 3D Cooling Water Technology. This technology combines chemistry, remote services and sophisticated monitoring/control to improve a range of industrial operations. Using connected sensors, nearly 30 billion data points are collected and analyzed across 36,000 systems at customer sites annually. The data is used to make adjustments to the ‘dose’ of chemicals needed to keep the water clean and owing efficiently.
As of March 2018, the company had more than 1,600 R&D personnel (scientists, engineers and technical specialists) in 19 global technology centres, developing highly specialized solutions that improve product quality, safety and efficiency while simultaneously reducing energy and water usage and waste. In five years, Ecolab expects to generate more than US$1.2 billion in total annual revenues from products and services in its 2017 pipeline.
3. Create Synergies Between the Old and the New
Pursuing new business opportunities does not have to come at the expense of your legacy business. Rotation Masters seek synergies between the two. For example, they are more than twice as likely as other companies to recognize the potential of their new business activities to reshape the culture of their legacy business; they cross-sell between their legacy and new businesses; and they are almost twice as likely to collaborate with third parties to expand into new markets.
CVS Health has a long history of pursuing growth strategies and building new businesses alongside its strong core pharmacy business. Established as a discount health and beauty store in 1963, CVS added in-store pharmacy departments four years later. The company pursued a steady transition of its business model in subsequent years, which accelerated in 2006 with the acquisition of MinuteClinic, the pioneer of in-store health clinics. This move created a highly innovative network of in-store walk-in clinics offering affordable non-urgent, acute healthcare with extended hours.
Expanding into new businesses demands a strong appetite for collaboration.
Change at CVS Health is a continuous and deliberate journey. Notably, through the transformative merger with Caremark Rx, Inc. in 2007, the company created CVS Caremark, the nation’s leading Pharmacy Benefit Manager. Furthermore, it rebranded itself as pharmacy innovation company ‘CVS’ in 2014, and the committed investments show that its change journey continues. In September of that same year, it became the first pharmacy retailer to stop selling tobacco. In addition, the company has invested substantially in digital technology and analytics tools across the enterprise to help facilitate patient care. coordination and improve health outcomes.
Expanding into new businesses clearly requires access to investment, but it also demands a strong appetite for collaboration, particularly when seeking synergies to build on the strengths of a legacy business. Rotation Masters know how to leverage the power of external networks, such as innovation consortia, collaborative partnerships and joint ventures. Such collaborations matter, because they enable these companies to innovate at higher speed. Nearly 80 per cent of Rotation Masters consider it essential to support innovation activities with a wide network of partners and customers.
Consider the collaboration between biotechnology innovator Biogen, 1QBit (a quantum software company) and Accenture Labs. The early phases of drug design and discovery require comprehensive molecular comparisons to predict the likely effects of a new drug. This process depends heavily upon intensive computational methods. To support that, each partner brings unique and vital capabilities to the relationship — such as pharmaceutical research and development, quantum computing capabilities, business optimization and application development.
In just over two months, team members designed, tested and developed a new quantum-enabled application that generates molecular comparison results with unique, deep insights about how, where, and why molecules match. The collaboration markedly reduced costs and time-to-market while accelerating drug discovery for complex neurological conditions (such as multiple sclerosis, Alzheimer’s, Parkinson’s and Lou Gehrig’s disease).
As Govinda Bhisetti, head of Computational Chemistry at Biogen, notes: “Collaborating with researchers at Accenture Labs and 1QBit made it possible to pilot rapidly and deploy a quantum-enabled application that has the potential to bring medicines to people faster.
Among executives, ambition to accelerate a shift into new businesses over the next three years is high. By focusing on setting up the three pre-conditions discussed herein, a company will be more likely to successfully make a ‘wise pivot’ — and have a real chance to get ahead of disruptors and embrace the future on its own terms.
(Rotman MBA ‘92) is the Managing Director, Accenture
Strategy Canada. Accenture is a global professional services company
with 4,000 employees in Canada. The full report, “Make Your Wise
Pivot to the New,” can be downloaded online.
This article appeared in the Winter 2019 issue. Published by the University of Toronto’s Rotman School of Management, Rotman Management explores themes of interest to leaders, innovators and entrepreneurs.
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