Transforming the Business
As innovation and globalization continue to increase, companies are finding that shrinking in order to keep margins healthy is not a viable solution. Management must look at their value propositions to address what exactly is their competitive advantage and where does the company have opportunities to expand into new markets. Both of these changes can occur simultaneously or separately all the while sharing similar resources. A recent Harvard Business Review article, authored by Clark Gilbert, Matthew Eyring, and Richard N. Foster, explores a number of strategies as responses to the risk of disruption.
Adapting the Core Business Model
The first transformation involves breaking down the company’s existing business. Managers must address the competitive advantages that they believe can stand up to systemic forces such as globalization. It is common for businesses’ focus to be too narrow when articulating their value proposition. For example, Barnes & Noble simply shifted their bricks and mortar component from high volume, low margin stores to niche, high margin stores. This involved the ability of Barnes & Noble to articulate its core customer base—moms with strollers. The result, B & N reported $7 billion in revenues in 2012 predominately from their retail channel (as opposed to the Nook).
In response to pervasive market disruptions, many look to costs as the answer. This is exacerbated when the company undergoes across the board cuts. Cost cutting can equalize a company suffering from a hit to their business models, but it has to be targeted and strategic. In addition, qualitative factors (e.g., customer base) should be considered in conjunction with specific cost functions to successfully respond to significant changes in the market.
Innovating a New Growth Model
While stabilizing the existing legacy business component, to remain relevant, managers must also consider their own innovative business initiative that makes disruptions in the market. However, this cannot be a haphazard process. Similar to start-ups, expanding business into new markets can be resource-heavy and time consuming. It is important to note that even though the two transformations are seen as separate businesses, management should consider if and how the new model is impacting the legacy business and resource allocations.
Following the previous example, Barnes & Noble successfully accomplished this dual-business initiative by hiring e-commerce executive William Lynch. Lynch’s team eventually developed the idea for the Nook. While the Nook product line is still experiencing losses, it has received a $300 million investment from Microsoft and has captured 27% of the market.
The Process of Capabilities Exchange
Creating a structure whereby existing business is reinvigorated and another is developed separately, is risky. However, the authors suggest that if companies share resources between them, in a balancing act they coin as “capabilities exchange”, much of the risk can be mitigated to acceptable levels. The process involves the following 5 distinct steps:
- Establish leadership
- Clearly identify the resources that both business components need and are able to share
- Confine the responsibility of brainstorming ways that resources can be shared by creating exchange teams
- Ensure that each business component has boundaries and that they only overlap with respect to resources allocation
- As the legacy business becomes self-sufficient, ramp up and promote the innovative model
As major disruptions become the norm, companies need to shift paradigms from attempting to recreate what made them successful to harnessing and leveraging disruptions to gain competitive advantages. Having two separate businesses, one that is repositioned and another that is entirely new, will shield an enterprise from the exposure of changes in the market and capitalize on upside risk.
Visit the Harvard Business Review website to purchase the full article.
Link: Harvard Business Review
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