Sooner or later, your company will probably need to transform itself in response to market shifts, groundbreaking technologies or disruptive startups. Some strategists suggest doing this quickly and aggressively, by making a clean break from the past and turning your firm into something entirely new. In our experience, though, organisations built for legacy markets rarely pull this off. It can take years for an innovative initiative to become large enough to replace the revenue an incumbent has lost to disruption. And if your company completely abandons its old model, it throws away any advantage it still has.
We propose an approach that’s both more practical to implement and more sustainable. It rests on two insights:
First, major transformations need to be two different efforts happening in parallel. Transformation A should reposition the core business, adapting its current business model to the altered marketplace. Transformation B should create a separate, disruptive business to develop the innovations that will become the source of future growth.
Second, the key to making both transformations work is to establish a new organisational process we call a capabilities exchange, through which the parallel efforts can share select resources without changing the mission or operations of either.
Dividing the effort allows leaders to develop a new strategy for the core that doesn’t need to make up for all the business lost to disruption. It also gives the innovative new operation the time it needs to grow. What one transformation effort could rarely accomplish alone, two together have a better chance of achieving.
Transformation A: Repositioning the legacy business
The goal of transformation A is to find the strongest competitive advantage your current model can sustain in the disrupted marketplace. Too often, companies take a narrow view of the potential left in a business. They focus only on preserving their margins.
While costs will almost certainly have to be cut, incumbents need to take a more expansive look at their business. That requires asking foundational strategic questions: 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?
Transformation B: Building the future
To realise their fullest growth potential, incumbents need to embrace the possibilities of the new marketplace as energetically as the disrupters do.
By now it’s accepted wisdom that companies should address the changing market the way startups do – asking not “What do we do that customers still want?” but “What unmet needs do customers have in today’s environment?” They must conceive a business model that can fulfill those needs profitably and carefully implement and evolve it, testing essential assumptions first and quickly adjusting the model as they learn.
Transformation B, therefore, is 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.
Generating full value: the capabilities exchange
Launching a successful startup inside a threatened legacy business takes creativity and grit. But scaling up the new business to become the company’s growth engine 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.
Setting up this exchange is a five-step process.