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……Leadership for a Digital Age: Business and Workforce Transformation

How disruption is redefining leadership

New IMD study looks at “must HAVE” qualities to lead in the digital age

Michael R. Wade

By Professor Michael R. Wade

Imagine that you are an executive overseeing retail banking at a large financial services company. In addition to the normal challenges you face as one of the company’s leaders, you are confronted with a raft of new ones. Your main lines of business, savings accounts, loans, mortgages, payments and currency transactions, are all being attacked by well capitalized Fintechs. New digital giants like Apple, Google, Alibaba, and Amazon, are starting to muscle into your territory. You are trying to get your head around potentially disruptive new digital technologies, like blockchain and machine learning. The desire to become more digital is there, but you are having trouble recruiting the right talent. Speed is important, but your systems and processes are constantly slowing you down. What should you do?

This example is neither isolated nor hypothetical. Disruption today is happening at a scale and speed that is unprecedented in modern history. From banking to retail, media, logistics, manufacturing, education, professional services, and life sciences, digital technologies and business models are upending industries around the globe, and leaders are struggling to cope.

The right leadership is critical for organizations to thrive in the choppy waters of rapid technology and business model change. Yet, how should we define leadership in this environment? Is over 80 years of leadership research still relevant in the face of such disruption, or have things changed?

We believe they have. New research from the Global Center for Digital Business Transformation, an IMD and Cisco initiative, and HR consultancy metaBeratung, shows that certain leadership attributes are particularly important to meet the demands of disrupted business environments. The results also demonstrate that relatively few of today’s leaders possess them.

The report, Redefining Leadership for a Digital Age, presents findings from a global survey of more than 1,000 executives across 20 different industries. The data reveal that even though 92% of leaders reported to be feeling the full force of digital disruption, less than 15% of them claimed to be “very prepared” to guide their companies through the eye of the digital storm.

So, how can leaders set themselves up not only to survive, but also to thrive in the era of digital disruption? The study points to four leadership competencies that are vital for business leaders facing large-scale digital disruption – we call them the must HAVE competencies.

First, successful digital leaders tend to show humility and a willingness to seek diverse inputs — both from within their organizations and from outside. In today’s world of near-ubiquitous Internet and social media availability, employees have equal access to information within a business, and may in fact have deeper specific subject knowledge than those leading them. Encouraging and developing such teams can substitute for a lack of expertise at the executive level — provided they are willing to cede ground to staff. Leaders must be comfortable not knowing the answer, and be willing to admit it. As one UK CEO succinctly put it, “Hire people who are the experts. Trust in them.”

While humility allows leaders to be open to new ideas and innovations, being adaptable is critical in a complex and changing environment. Without it, the capacity to respond to digital disruption is severely restricted. A humble and adaptable leader is willing to change his or her mind, and then communicate that newly minted adaptation to employees and peers. As one leader put it, “You have to be sure that you are able to correct wrong decisions or weak decisions. You have to be able to say: ‘Okay, yesterday, I said left and today, based on this, we are going right.’ It has to not be a weakness for you. It is a necessity of the environment of today.” The global reach of digital technologies has opened up new frontiers for organizations, shrinking divides and erasing traditional boundaries between territories. Dealing with fast changing cultural and business impacts requires adaptability.

For any leader, having a clear vision and articulating it well is a core competency. But in times of rapid technology and business model change, with opportunities cropping up on all sides, it becomes critical. The sheer unpredictability of business today means traditional analytical approaches are failing to provide the long-term definitive strategies which leaders have relied on in the past. In times of rapid change, people need to be inspired by a strong vision. Adaptability without vision can lead to rudderless change. General Electric CEO Jeff Immelt has set out a very clear vision for the company to become the leading global player in the industrial Internet, even though there is no precisely defined roadmap in place for how to get there.

The final competency is to successfully engage with customers, partners, suppliers, employees, and the broader ecosystem. At their core, digital leaders are listeners, with a broad-based desire to explore, discover, learn and discuss with others. They listen to their clients and customers; their teams and staff; and their peers and partners with humility and a willingness to change their minds. They ensure a constant interchange of information and encourage employees to challenge views and opinions, and they set and adjust corporate visions based on these exchanges.

The recent struggles of organizations like Sears, Ericsson, and RadioShack remind us that no company or leader is immune from the force of technological change. Those leaders who can hone humility and adaptability, and articulate their visions successfully through active engagement, will stand a better chance to stand the test of time. We call these people Agile Leaders. Those who don’t will look like an old Polaroid; fading away.

Read the full report here.

Michael Wade is IMD Professor of Innovation and Strategy and Cisco Chair in Digital Business Transformation.

Redefining Leadership for a Digital Age

What does it mean to be an effective leader in an environment characterized by increasing digital disruption?To address this question, the DBT Center undertook a major study along with specialist HR Consultancy metaBeratung. Data was collected from two sources: a survey of 1,042 executives, and in-depth interviews with nineteen digital leaders, all conducted between October 2016 and January 2017.The research revealed that leadership effectiveness in disruptive environments shared many of the same characteristics as leadership in more stable environments, but with a few notable differences. We were able to identify a number of key competencies and business behaviors of Agile Leaders who thrive in this type of environment.

Four characteristics distinguish agile from non-agile leaders. Agile leaders are:

  1. Humble: They are able to accept feedback and acknowledge that others know more than they do.
  2. Adaptable: They accept that change is constant and that changing their minds based on new information is a strength rather than a weakness.
  3. Visionary: They have a clear sense of long-term direction, even in the face of short-term uncertainly.
  4. Engaged: They have a willingness to listen, interact, and communicate with internal and external stakeholders combined with a strong sense of interest and curiosity in emerging trends.
THE ACTIONS OF AN AGILE LEADER
In addition, we found that Agile Leaders exhibited three key behaviors helping them to successfully navigate disruptive environments. They are:

  1. Hyperawareness: They are constantly scanning internal and external environments for opportunities and threats.
  2. Making Informed Decisions: They make use of data and information to make evidence-based decisions.
  3. Executing at Speed: They are able to move quickly, often valuing speed over perfection.

We found that Agile Leaders, those leaders who rated highly on the competencies and behaviors mentioned above, tended to significantly out-perform other leaders on measures such as work engagement and leadership effectiveness.

 

Click here to read the full report

Digital Business Agility and Workforce Transformation

Michael R. Wade

By Professor Michael R. Wade, Jialu Shan and Andrew Tarling
Contributors: Jeff Loucks, James Macaulay, Andy Noronha and Joel Barbier
In May 2016, around 80 executives from 42 global organizations attended an IMD Discovery Event hosted by the Global Center for Digital Business Transformation. The aim of the event was to explore how Digital Business Agility (the cornerstone of competitiveness in the Digital Vortex) applies to the workforce.

The Global Center for Digital Business Transformation (DBT Center) introduced the construct of Digital Vortex to  conceptualize the way digital disruption affects firms and industries. It was based on a survey of close to 1,000 executives in 12 industries around the world (refer to [email protected] No. 59: Strategies for Responding to Digital Disruption for more details on the Digital Vortex). The Digital Vortex implies  an  inevitable  move  toward  a  digital center in which business models, offerings and value chains are almost fully digitized. No industry is immune to disruption.

In response, incumbents are beginning to develop agility, a critical capability that is often lacking. Unfortunately, however, many companies focus their transformation efforts on IT and business processes alone, often neglecting people. In fact, a great way for incumbents to fi against digital disruptors and to generate new value for customers is to focus on managing their workforce better. This Discovery Event explored ways of empowering people and transforming the workforce to drive new levels of collaboration, innovation and ultimately the success of the whole company.

What is agility in the digital age?

The three things  that  a  company  needs in order to be agile are hyperawareness, informed decision making, and fast execution (see Figure 1); what the DBT Center refers to as “Digital Business Agility” (DBA). Companies need to develop these capabilities to respond quickly and effectively to emerging threats to their businesses, and to seize new market opportunities. Moreover, while these capabilities can be understood as discrete, they actually form a complex, interacting foundation for the whole enterprise.

Figure 1: Digital Business Agility

Hyperawareness is a company’s ability to detect and monitor changes in its business environment. Companies that are hyperaware are attuned to what is going on around them, particularly to changes that highlight opportunities or threats. Such insights can be captured not only internally from employees, for example, or the organization’s internal operating environment, but they  can  also be obtained from external sources, such as customers, partners and competitors.

Companies like Nestlé are good at gaining insights from customers. Following a huge social media attack on one of its key brands, Nestlé created the Digital Acceleration Team (DAT) to monitor social media. DAT, a leadership training program for digital marketing projects, is a social listening place where Nestlé can find out what consumers are talking about and communicate with them in the right context, enabling them to become ambassadors for Nestlé.

Informed decision making is a company’s ability to make the best possible decision in a given situation. To do this, active decisions must be based on real data, rather than past experiences and shared throughout the organization. To excel in informed decision making, companies must develop mature data analytics capabilities that augment human judgment.

However, despite having the information they need to make the right moves, many companies fail. Often, this is because assumptions held by top management were not tested or questioned. Decisions based purely upon “gut feeling” or past experience have little chance of success.

Fast execution is a company’s ability to carry out its plans quickly and effectively, enabling it to put decisions into practice rapidly, mobilize people and resources dynamically, and continuously monitor options and progress against goals. Unfortunately, large incumbents are often slow to execute due to organizational complexity and reluctance to make changes.

The ability to learn and adapt is the most important for companies to facilitate innovation. Some are not willing to launch innovative new products and services because they think that the potential cost of failure in the digital context is too high. However, a company fails only if it does not learn something from a negative experience. Experimentation and tolerance of failure are important ways of collecting invaluable feedback and are thus essential to success in the Digital Vortex.

DBAs in workforce management

Workforce management is a critical element of any digital transformation effort. DBT Center research has identified six specific “digital accelerators”  that  apply to workforce management and support the capabilities of digital business agility (see Figure2). Two digital accelerators correspond to each of the three capabilities. These combine people, business process changes and technology to give voice to employee insights, apply analytics to thepoint of decision, and identify and allocate talent to execute the decisions as efficiently as possible. By implementing them, companies can take meaningful strides toward transforming their workforces to compete successfully in the Digital Vortex.

Figure 2: Digital Accelerators

Hyperawareness for workforce transformation

The two digital  accelerators  that  relate to hyperawareness in the workforce are “behavioral awareness” and “situational awareness.” Their function is to harvest data about the internal and external business environment from the workforce, customers and the operational environment. This includes, for example, gleaning insights about what customers value from frontline sales associates, monitoring manufacturing facilities, or capturing frank assessments of corporate strategy from the people who see their effects on a daily basis.

To enable “behavioral awareness,” effectively collecting data from a workforce consisting of thousands (even tens of thousands) of employees and contractors, companies need technological assistance. For example, apps such as Waggl provide an easy way for employees to give anonymous feedback in real time. This fosters a “listening culture” that  can  help  to  bring  “valuable” negative feedback to the surface.

Other tools can help to uncover hidden patterns of work, revealing exactly how organizations operate, and  enabling benefi   changes to be made. A company’s employee  productivity  and  organizational simplicity can be hugely improved simply by analyzing its communications data.

“Situational awareness” means sensing changes in the marketplace – including the company’s customer base, competitors and partner ecosystem – that are relevant to an organization’s mission. It also includes sensing the operating environment – monitoring changes in physical assets such as oil rigs, manufacturing plants, vehicle fleets and facilities that companies use to deliver the products or services they sell.

An  example  of  complete  situational awareness and control is Dundee Precious Metals, which uses data analytics to save lives. It operates mines in harsh environments with multiple hazards to humans and physical assets. By connecting the entire mine environment, including personnel, conveyors, haulers, lights and blasting equipment to one connected “smart mine system,” it not only improved worker safety but also quadrupled production.

Informed decision making for workforce transformation

Informed decision making in workforce transformation entails not only improving big, strategic decisions that shape a company’s future but also the millions of smaller decisions that employees make every day. The  “augmented  decision making” digital accelerator incorporates “ubiquitous analytics,” which embeds analytics and informed decisions directly into the work process, providing both executives and employees with the tools to make  the  best  decisions  in a  given context. It also includes “automated or fast decisions,” whereby technology helps accelerate the speed of decision cycles through automation and analytics.

Proctor & Gamble, for example, use “business spheres” and “decision cockpits” to augment decision making. These are connected meeting spaces equipped with intuitive data visualization walls enabling the use of real-time data during the decision-making process. The outcome provides more than 50,000 employees with real-time actionable data and insights through desktop dashboards.

Informed decision making is also about ensuring that decisions are  influenced by employees with the right expertise, diversity of background and cognitive perspectives. Companies that excel at bringing experts and diverse perspectives into the decision-making process are more successful innovators. The “inclusive decision making” digital accelerator taps into and connects the shared intelligence of the workforce while giving voice to diverse viewpoints and expertise.

New tools enable high-speed, data-driven  decision making in a group environment using proprietary algorithms – driving collective decision making through multi- criteria voting. Research so far indicates a potential 70% saving in decision-making process time.

Informed decision making also includes state-of-the-art augmented reality appli- cations that support employees at the point of operation. Giant logistics fi DHL has been experimenting with head-mounted displays using augmented reality glasses to provide real-time task information  on the picking process in its warehouses. This customized support for front-line staff helps employees to plan their own activity more effi with the outcome indicating a 25% productivity increase from a pilot group.

Fast execution for workforce transformation

The workforce plays a huge role in ensuring that a company executes with speed and excellence. Fast execution for workforce transformation hinges on two fronts: resources and processes.

Dynamic resources are a company’s human, financial and technological capital – acquired, deployed, managed and shifted rapidly, as business conditions dictate. They can be divided into two types of resources: 1) agile talent – the ability to find workers with the necessary skills and knowledge and to assemble teams with speed and precision; and 2) agile technology – the ability to obtain technology resources quickly and to use technology infrastructure to meet emerging business needs.

An important part of allocating talent is ensuring that employees are engaged in valuable and interesting work. Underutilizing valuable employees has two major downsides: less value from them, and the probability that they will quit. Software solutions, such as Workday, can leverage internal HR data and external data sources to identify employees at risk of attrition.

Dynamic processes are the structured activities by which organizational goals are  accomplished. They are also made up of two components: 1) rapid intervention – the ability to adjust day-to-day operations and capture value that is time-bound; and 2) rapid enablement – the ability to create new organizational capabilities quickly across a broad spectrum of activities including marketing, customer support, commerce and application development.

Optimal staffing is extremely hard to achieve, but aligning staffing levels with changing traffic patterns avoids lost sales and improves profitability. Software company Percolata uses dynamic processes to provide optimal staffing. Retail store sensors capture video and audio from real-time traffic, and the location of shoppers from their smartphones. This is integrated with the store’s point-of-sale data. Percolata  uses this to forecast future store traffic which automatically generates schedules for retail associates using machine-learning technology. The system also adapts schedules to changes in store traffic, helping stores to quickly allocate their staff. This is fast execution.

Economic Value

Ultimately, transformative efforts are targeted at creating value – economic value for the organization and value for the customer through cost, experience and platform. It not surprising to find that people are the key to this – in fact, research indicates this is becoming even more pronounced with 64% of digital value coming from people-centric applications – a rise of 9% since it was first tested in a 2013 analysis.

This can be measured by looking at what powers the digital world: machine-to-machine (M2M), person- to-machine (P2M) and person-to-person (P2P). In previous analysis, people-centric connections (P2P, P2M) drove 55% of the estimated “value at stake” for the private sector. Now, the contribution of people- centric connections to private sector “digital value at stake” has grown by 9 percentage points – to 64%. This increase reflects the greater ability of many organizations to optimally match the “people” and “process” elements of digital business with the “things.”

Given this centrality of people to creating value, it is clearly vital to success in a disrupted business environment to engage, retain and efficiently deploy a high-performing workforce. Re-imagining a business to take best advantage of its most valuable asset, its “workforce transformation,” is at the heart of digital business agility and drives success in the turbulent world of the Digital Vortex.

 

Millennials and Building Digital Talent

Employees are human! An obvious statement, but Professor Martha Maznevski’s work strongly emphasizes that it is the people who enable digital business transformation – not systems. Her work makes clear that central to the transformation agenda is the coming generation of “millennials” whose aspirations, ambitions and motivations need to be understood if organizations are to successfully transform.

So who are the millennials and what characteristics might they bring to the workforce? Generally speaking the definition is those born between 1982 and 2004 – proposed by William Strauss and Neil Howe in their defining book on the subject, Millennials Rising: The Next Great Generation. The precise boundaries though are less important than the fact that millennials are now the largest single generation in the global workforce.

Stereotypically, millennials have been cast as the “me, me, me” generation – denigrated as self-centered, spoiled and lazy. But this of course is not how they see themselves, nor how they should be treated in the workforce. What they bring, almost inevitably, is a familiarity with technology which has been with them since their teenage years. But alongside their growing up with ubiquitous technology, they have seen huge upheavals and global change – as Professor Maznevski puts it: “Millennials are even more familiar with uncertainty than they are with technology.” And this in part has led to a number of defining characteristics that impact their integration into a digital workforce:

  • The assumption of uncertainty means millennials align well with digital organizations.
  • Millennials are loyal to principles, not necessarily to people or institutions.
  • Millennials assume power is distributed, and control requires permission.
  • Millennials see boundaries and roles as fluid and permeable.
  • Millennials learn through experience: real or simulated.

There is a strong correlation between these tendencies and the organizational behavior of transformed businesses. Hyperawareness, informed decision making and fast execution fit well with principles such as anticipating uncertainty (which fosters agility), loyalty, diverse decision making and corporate inclusion, plus “fail fast” approaches, which require learning through experience. In fact, millennials come ready for digital business, no transformation is needed! The assumption should be that they are ideally suited to the needs of digital business agility.

 

Strategies for Responding to Digital Disruption

Michael R. Wade

By Professor Michael R. Wade and Jialu Shan with Lindsay McTeague
Contributors: Jeff Loucks, James Macaulay and Andy Noronha
 

In February 2016, around 70 executives attended an IMD Discovery Event hosted by the Global Center for Digital Business Transformation. The purpose was to shed light on strategic responses to digital disruption, including analyzing the three value drivers and how to create “combinatorial disruption.” In a dynamic exchange, all the presenters stimulated an interactive and energetic discussion of the opportunities and challenges of digital disruption to all businesses, not just “traditional” tech companies. 

www.imd.org/dbtcenter

 

Few businesses today can refuse to “go digital” – the internet, social media, mobile solutions, big data and other innovation technologies have rapidly transformed entire industries and continue to do so. Digital, according to the Global Center for Digital Business Transformation (DBT Center), is the convergence of multiple technology innovations enabled by connectivity. And digital disruption refers to the effect of digital technologies and business models on a company’s current value proposition and its resulting market position. It not only affects start-ups but also has the potential to overturn incumbents and reshape markets faster than perhaps any force in history.

In a recent DBT Center survey of 941 business leaders in 12 industries around the world, respondents reckoned that an average of 3.7 of today’s top 10 incumbents in each industry by market share will be displaced by digital disruptors in the next five years. Nevertheless, in about 45% of the companies surveyed, digital disruption was not seen as worthy of board-level or CXO-level attention. Only 25% were actively responding by disrupting their own business in order to compete. The remainder either did not recognize or were responding inappropriately (43%), or taking a follower approach (32%). Event participants had rather more positive views.

Understanding the impact of digital disruption

The Digital Vortex is a graphic way to show how digital disruption is redefining industries. An industry’s position relative to the center reflects the extent of potential competitive disruption that a firm in that industry will face within five years as a result of digital technologies (see Figure 1). Of the 12 industries surveyed, the number one spot is occupied by technology products and services. Industries on the periphery of the Digital Vortex are more asset-intensive, as opposed to the data-intensive industries close to the center, and are therefore likely to experience the most time before digitization becomes disruptive to their industry. But this does not mean that they are safe.

Figure 1: The Digital Vortex
The automobile industry (No. 8) is an example from the periphery that will see unprecedented change in the next five years, with increasingly connected cars – including battery technology, connected tires, selfdriving cars, and the like. Already, major tech companies such as Google, Apple and Tesla are working hard to build driverless vehicles. And if this evolving technology is widely adopted, it is not only the auto industry that will be disrupted.Industries in the traditional automotive value chain, such as automobile manufacturing, auto repair and parts, public transportation and taxis, will obviously be affected. Some adjacent industries, such as package delivery, hotels, airlines and parking garages, will also feel the effects. Seemingly unrelated industries could also feel the pinch: insurance (with accidents projected to be down by 90%, demand may drop); retail (e-commerce will benefit from ease and low cost of delivery); energy; and media and entertainment (the driver no longer needs to pay attention to the road). Finally, unexpected industries may also be impacted, including real estate, healthcare, law enforcement and education. Selfdriving cars could trigger serious upheavals for many industries, which will have to shift strategy in order to compete.

Three categories of value drivers and combinatorial disruption

Digital disruptors create value for customers in at least one of three ways, and each of these has five different business models (see Figure 2). The three drivers are:

• Cost value – competing by offering the customer a lower cost or other economic gains

• Experience value – competing by offering the customer a superior experience

• Platform value – competing by creating network effects that benefit customers.

Figure 2: Three value drivers with their respective business models
The strongest digital disruptors – Amazon, Google, Uber and others – do not focus on just one type of value. They employ combinatorial disruption, which is so potent because the three values are mutually reinforcing. For example, Starbucks is not successful because it has better coffee – it is selling a superior experience, beyond the coffee. And now it is trying to provide platform value with its own pre-pay mobile app, which has $1.4 billion of coffee drinkers’ cash earning interest.The DBT Center has identified two competitive realities facing firms today – the value vampire and the value vacancy.

Value vampires

A value vampire delivers value to customers but sucks the profit pool dry. It is a disruptive player whose competitive advantage shrinks the overall market size, leading to lower revenue and margins, or both. It always leads with extreme cost value, offering low cost or even free products or services. It combines this with a great experience and platform value, which provides exponential scale and rapid adoption. Incumbents’ offerings suddenly become uncompetitive and customers demand a “new paranormal” – there is no going back.

Amazon is a value vampire. It thinks of the digital value it wants to deliver to customers, not of the value chain. Take Amazon Prime – for $99, members obtain extreme cost value, including free two-day shipping, unlimited streaming of movies and TV shows, free e-books and so forth. Amazon is expanding into more areas to build experience and platform values. Amazon Echo, an internet-connected speaker that listens and talks, for instance, is useful and makes for interactive fun. Amazon is indeed building the casino you never want to leave. As a result, it is sapping the strength of Walmart, once a cost and supply chain champion, which is now closing hundreds of stores.

Value vacancies

Digital disruption is not always bad news for incumbents, however. A value vacancy is a market opportunity that can be profitably exploited via digital disruption. These market opportunities can be found in adjacent markets, in a digital enhancement (e.g., adding a sensor to a product) or in entirely new markets. Often they are short-lived because of the competitive dynamics of the digital vortex.

Incumbents need to focus on value vacancies because this is where the growth is. WeChat, owned by Tencent Holdings, is a messager app based in China with 600 million users. Sensing a value vacancy in the consumer financial services market, an entirely new market, WeChat launched a new service – Weilidai (“tiny loan” in English) – offering consumer loans of up to $30,000 via its app, with approval in minutes. The decision is based on analysis of personal information provided by the user, a credit check, plus WeChat’s own data. This new service fills a value vacancy by combining the three value drivers: first, it offers cost value by providing advantageous loan terms, such as not requiring collateral; second, it offers significant experience value, since customers can obtain a loan in minutes without going to a bank; and lastly, it offers platform value because users can easily access the service on the same app. In fact, WeChat has integrated many other types of functionality, including payments and food ordering, so users can benefit from a larger platform – a “one-stop shop.”

Digital response strategy playbook

For incumbents, the question now is how to compete with digital disruptors. The DBT Center has developed a multi-step strategy playbook for managing amid digital disruption. The four competitive strategies encompass defensive strategies (red in Figure 3) and offensive strategies (green). Defensive strategies are used to fend off value vampires and modest disruptive threats, and to maximize the lifespan of businesses under attack. Offensive strategies are associated with the pursuit of a value vacancy. They all dictate how a firm creates new customer value through digital means and how it maximizes revenues and profits.

Figure 3: Digital response strategy playbook

Harvest

This is a defensive strategy aimed at blocking disruptive threats and optimizing the performance of threatened business segments. It is intended to make the best of a bad situation, optimizing the margin that can be extracted during the period of decline. Most would consider Netflix a digital disruptor, but before the company became a video streaming player, its main business was renting DVDs by mail subscription – and even today its DVD-bymail offering serves over 5 million members in the US, accounting for 23% of US profit in the latest fiscal quarter, although this is down from a peak of 20 million in 2010. As part of a harvest strategy, and to maximize DVD subscription revenue, Netflix optimized the business by streamlining and digitally automating the warehouse. Although Netflix has transformed itself into a global streaming service, it can still harvest its DVD operation – the question is, for how long?

Retreat

Aimed at strategic withdrawal from threatened business segments, this is a defensive strategy that should be adopted when the opportunity costs of maintaining a business exceed the benefits. Retreat mainly involves market exit, but possibly also targeting a market niche to serve a small subset of existing customers with unique needs. The vinyl record business is a good example of a niche with an appealing margin without major investment. Against the general trend, vinyl records have been enjoying positive sales growth in recent years. According to Nelsen Soundscan, 9.2 million vinyl albums were sold in 2014 in the US, a 52% jump on the previous year. Yet these sales accounted for only 6% of total album sales in 2014. It is still a niche market, as its main customers are DJs and audiophiles, but there is nevertheless a profit to be made.

Disrupt

This is an offensive strategy when a value vacancy is detected, aimed at disrupting one’s own core business or creating new markets. It focuses on creating any one of the value drivers or a combination of the three for customers using digital technologies and business models. Unlike Netflix, most incumbents are unwilling to disrupt themselves, especially if they are currently successful. This is probably one of the biggest roadblocks for incumbents in becoming disruptors.

Occupy

This offensive strategy aims to sustain the competitive gains associated with disruption. It focuses on maximizing the market opportunities and extending a company’s occupancy of the value vacancy. Often, a company differentiates its disruptive offering to extend the cost value, experience value and platform value it delivers for customers. Because this strategy requires incumbents to manage both declining and growing businesses simultaneously, it brings complexity challenges, such as operating outside the normal arena. Ultimately, most occupy plays evolve into harvest plays as the market continues to evolve.

Never-ending story

In the era of digital disruption, value vacancies do not endure and there is no lasting market supremacy. Start-ups and incumbents alike must constantly create innovations that blend cost value, experience value and platform value for customers. That is why we see Google, in addition to its core search business, investing heavily in self-driving cars; WeChat, apart from its disruption in communication, enhancing its financial presence; and Axel Springer, one of Europe’s biggest media companies, investing in digital companies such as AirBnB that leverage new technologies. These companies have successfully designed strategies that disrupt and occupy the value vacancy over and over again. Is your company ready to do the same?

 

Value Vampires and the Music Industry

In the late 1990s, the music industry was riding high, with global revenues reaching $28.6 billion. CDs cost $15 to $20, even though many felt this was overpriced. In 1999 Napster, a peer-to-peer file sharing service, was launched. Its original aim was to connect music fans so they could share and download music, but it quickly disrupted the whole industry for several reasons. First, the service was free, providing strong cost value for customers. Second, it delivered experience value by unbundling the song from the CD, so customers could download only the tracks they liked. Finally, it offered platform value by connecting fans with one another, and peer-to-peer sharing allowed it to quickly scale the number of songs and albums.

Most music retailers were afraid of Napster’s business model, but did not think of adapting their strategy. HMV sued Napster, which was ultimately blocked. The value vampire disappeared, but people still wanted digital music. HMV rested on its laurels, but other players such as Microsoft (Zune) tried to disrupt this market and occupy the value vacancy created by a disruptor that failed. iTunes finally won by combining cost value – $0.99 per song; experience value – well-designed devices; and platform value – as an all-content provider. HMV, reluctant to change its value chain, was finally forced to retreat to a niche in a declining market, focusing on vinyl and CDs.

iTunes was supremely disruptive, but occupancy of such a value vacancy does not last. New value vampires Spotify and Pandora are pushing iTunes to harvest. In response to the new digital disruptors, Apple launched the subscription service Apple Music to disrupt itself. Although it will be losing revenue, it sees this as a necessary step to try to occupy the value vacancy and build a new platform. Who will be the next winner?

 

Beware of the Value Vampires

Companies like Amazon are creating a “new paranormal” and sucking profit pools dry

Michael R. Wade

By Professor Michael R. Wade
Have you ever wondered how companies like Uber, Amazon and Spotify can offer such low prices, make such low profit margins but still continue to operate? You’re not the only one.In our work at the Global Center for Digital Business Transformation (an IMD and Cisco Initiative) studying hundreds of digital disruptors, three value drivers were identified that we believe underpin how a disruptor disrupts: Cost value, experience value and platform value. We further identified five business models associated with each value driver. For example, a Buyer Aggregation business model, like that practiced by Groupon, is an example of cost value. Similarly, Crowdsourcing is an example of a business model that builds platform value.In the course of our work, a few examples of digital disruptors that managed to combine all three value drivers and multiple business models into one exceedingly challenging package were identified. We have a special name for such companies: Value Vampires.Value Vampires are so named because when they enter a new market they do so with the intention of sucking the profit pool dry. They have been known to shrink the overall market size within a sector, leading to lower revenues, margins, or both.Value Vampires always lead with cost value, offering extremely low prices, or even free products or services. They then add great user experiences through an intense focus on customer satisfaction. Building on this cost and experience value, they eventually construct robust platforms upon which to leverage scale and rapid adoption.

The net result of these efforts is a “new paranormal” for incumbents. Fortunately, we did not encounter many Value Vampires in our study of disruptive marketplaces, but let’s look at a couple of prominent examples.

Amazon is a prototypical Value Vampire. It offers extremely low prices, a great user-experience, and an increasingly robust platform. Amazon focuses on the digital value it wants to deliver to customers, not the overall value chain. Take Amazon Prime – for $99 a year, members receive extreme cost value, including free two-day shipping, unlimited streaming of movies and TV shows, free e-books and more. Amazon is expanding into more areas to build experience and platform values. Amazon Echo, for instance, is a useful, interactive and fun internet-connected speaker that listens and talks. Amazon Web Services, meanwhile, is fast becoming the dominant cloud solutions provider.

In Value Vampire-like fashion, Amazon is trying to build the casino you never want to leave. As a result, it is sapping the strength of established competitors like Walmart, which – once a Value Vampire to main-street retailers – is now closing hundreds of stores.

In response to the threat Amazon poses, Walmart recently purchased another Value Vampire: Jet.com. Jet.com built its business model on offering prices even lower than Amazon on top of a fast and responsive ecommerce platform. The company made no margin on the products it sold, and had no ambitions to turn a profit for at least five years. Walmart needs to beef up its online marketplace to take on Amazon, and by acquiring Jet.com it is hoping to do just that.

A second example of Value Vampires can be taken from the music industry. In the late 1990s, the music industry was riding high, with global revenues reaching $28.6 billion. CDs sold for $15 to $20 apiece, to the frequent complaints of consumers who felt 20 bucks was too much when they often only wanted a single track on the album. Enter Napster, a peer-to-peer file sharing service, in 1999. Its original aim was to connect music fans so they could share and download music, but it quickly disrupted the whole industry. First, the service was free, providing strong cost value for customers. Second, it delivered experience value by unbundling individual songs from the CD, so customers could download only the tracks they liked. Finally, it offered platform value by connecting fans with one another, and peer-to-peer sharing allowed it to quickly scale the number of songs and albums.

Most music retailers were afraid of Napster’s business model, but did not think of adapting their strategy. HMV sued Napster and won, and Napster was eventually shut down. The Value Vampire was destroyed, but consumers had developed a taste for digital music. Thus, while HMV rested on its laurels, other players, including Microsoft (Zune), rushed in to try to occupy the space vacated by Napster.

ITunes initially won that battle by combining cost value – $0.99 per song; experience value – well-designed devices; and platform value – as an all-content provider. Because HMV had been unwilling to disrupt its own value chain, it was forced to retreat into a declining market niche, focusing on vinyl and CDs.

Although iTunes was supremely successful at disrupting the music industry for a while, their occupancy of the value vacancy did not last. New Value Vampires, focused on streaming media, like Spotify and Pandora have been further reducing the profit pool in the music industry. Apple, in response to these new threats, launched its own subscription service, Apple Music. It remains to be seen how successful this service will be.

Value Vampires are destructive forces within industries. They often do not have short- or even medium-term aspirations for profitability. They enter a market with a scorched-earth strategy to drive out the traditional competitors, hoping that they eventually can raise prices, once they have control of a market. Value Vampires can appear anywhere, but are more likely to succeed in markets suffering from a dearth of innovation, where customers frequently express dissatisfaction with product, price or service levels, and where incumbents have become complacent and used to high margins over a long period of time.

Take a look around you. Are you at risk?

IMD Professor Michael Wade is author of the new book Digital Vortex: How Today’s Market Leaders Can Beat Disruptive Competitors at Their Own Game. He is Director of the Global Center for Digital Business Transformation and co-Director of IMD’s new Leading Digital Business Transformation program (LDBT).

Digital Disruption – Beware of the success trap

Is your company living on past breakthroughs and not creating the platforms for future success?

Knut Haanaes

By Professor Knut Haanaes and Martin Reeves

The hardest type of corporate renewal, by far, is that of transforming the successful firm. Despite the fact that we live in times of fast change and frequent competitive and technological disruption, many successful firms are unable to change in spite of fully knowing that current recipes won’t cut it a few years down the line.

Recent business history is full of stories testifying to the risks of success. Why did Kodak fail to navigate digital disruption in spite of actively planning for it, while Fuji managed to navigate into new businesses? Why did Blockbuster stick to the old video rental model while Netflix went with new self-disrupting delivery models? Why did both Blackberry and Nokia fail to capitalize on their incumbent positions by becoming smartphone leaders when it was the obvious next step?

These firms in different ways fell into the success trap. In the near future many current industry leaders will be faced with precisely the same challenge.

The challenge of the success trap

The success trap implies too much exploitation, in other words being too satisfied for too long with the returns on using present knowledge, products and technologies. Current success tempts firms to continue using today’s recipes at the expense of exploring for new solutions. Blackberry stuck with what worked well despite the acknowledged need for change. While smartphones with large touch screen displays emerged, Blackberry seemed more preoccupied with protecting its current position. Actually most big businesses and government organizations relied on their great security, push email and functionality – and their Messenger had even become fashionable among young people. BlackBerry dominated in North America, which was clearly the launch pad for cool new mobile products. They felt like they were in a good place and wanted the world to remain the same… Of course it didn’t. It never does.

For long term success, exploration is necessary. In the short term doing more of the same may not seem risky, but in the medium term not changing is detrimental – and especially during times of disruption. As the Swedish playwright August Strindberg notes in A Dream Play: “What people call success is only preparation for the next failure”.

Let’s look at the data. Along with some colleagues from BCG, I helped quantify the success trap through analyzing a sample of 2500 listed companies. We found that fully one third of firms fall into the success trap during a five year period, and that only one in five manage to escape. In the same study we found that while returns can be sustained in the short term through cost reductions and share buybacks, in the longer term over-exploitation was detrimental to growth, profitability and eventually to survival. In the long run, the best performers are firms that, in addition to being efficient today, explore and create future growth options. This is shown in the figure below.

So why do firms fall into the success trap? And, more importantly, what can they do to avoid or escape the success trap?

Reasons why firms fall into the success trap

The figure below shows some reasons why companies fall into the success trap – all could be classified as “self-inflicted pain”.

Some reasons why forms fall into the success trap:

  • One reason is complacency. “We are doing well, why change? We built a successful business model and just want to make good better”. Only exploiting current success is understandable, but very risky. Complacency is built on the hope that the world won’t change.
  • Another reason for falling into the success trap is our commitment to current competences. “We are so good that we don’t want to change”. Who wants to move towards something they are less good at?
  • Another reason – an even more fundamental one – is that our competences sometimes make us blind. Facit didn’t fully realize the power of the electronic calculator despite using it in their own product development of mechanical calculators!
  • There are other reasons for falling into the success trap too, for example current management being stuck with past models of success because that it what made them successful as individuals. Or, current executives may be vulnerable to failure, as Sydney Finkelstein describes in the book “Why Smart Executives Fail”. Do we have sufficient incentives and openness among our top people to change what they built? Or, have we become more blinkered and restricted by the spoils of success, like more people, more structure and a fancy new head office? Linked to that is bureaucracy and organizational complexity, which is usually the antithesis to exploring and adapting to uncertain and changing market needs.

How to avoid the success trap

Understanding why we fall into the success trap can helps us avoid it. For example, we need to ask ourselves constantly whether we have sufficient diversity in management, whether we are too bureaucratic, and whether our competitive advantages are fading, in spite of current performance. These questions are relatively easy. More difficult are the following:

First, do we have the right balance between exploration and exploitation investments in our firm? And, are we dedicating the right amount of time to both? In short, do we have the right balance between the short and the longer term? There are many strategies for finding the right balance, but most firms are not explicit about how that balance will help with running and reinventing the business. Here are three examples of strategies to achieve this balance: First, most good private equity firms take a “freeze time” strategy where exploration needs to pay off in a 3-5 year window. Second, some firms give freedom to employees to explore from the bottom up, like 3M. Or, on the other extreme, venture capital firms who think “win stay/loose shift”, simply do more of what works and cut loss quickly on what doesn’t.

Second, do we have the right aspirations and are we ambitious enough? Are we too satisfied just living on past breakthroughs and not creating the platforms for future success? If we do not set aspirational goals we will tend to encourage people “to not lose” instead of playing “to win”. It is important for firms to set stretch ambitions not to fall prey to complacency.

Third, do we have an organizational platform and a culture for experimentation and exploration? Too much focus on success can produce a fear of failure, so we need to ensure that there is a secure base on which our people dare test out new ideas – and even fail. Another important element for organizational exploration is the network of external linkages and ideas.

Fourth, is our attention sufficiently externally focused? Or have we gradually become too introverted? Do we see ourselves through the eyes of our customers? Do we worry enough about disruptions and are we moving sufficiently on inevitable trends such as digital? Having studied how companies communicate, we find that firms that fall into the success trap tend to use words such as “risk reduction”, “short term performance”, “internal” and “established solutions”, whereas explorers are characterized by terms such as “innovation”, “customers”, “opportunities”, “ecosystems”, “agility” and “disruption”.

Getting out of the success trap

Finally, if we already see that we are in the success trap – how do we get out? The answer is not so different in principle to avoiding falling into the success trap. But it is overlaid with the additional challenges of urgency and the need to free up resources to support not only declining short term performance but also growth and innovation. Moving out of the success trap requires a two-step approach of first driving down cost and complexity and then, once in position to reinvest, stepping up future oriented investments, involving exploration and innovation. In other words, companies need a two-step approach to “transforming” their performance and repositioning themselves for long term success.

Lego from 2003 to today provides a good example of this. In 2003 The Lego Group had a budget deficit of more than USD 200m causing the CEO to be replaced. In the following year large cuts led to almost one thousand layoffs, as well as cuts in other expenditures, disposal of amusement parks and the closing of a factory in Switzerland. This lead to a turnaround of results and in 2011 they were back to profits. Product development took off. The new brand Lego Ninjago became the company’s biggest product introduction ever. 2012 saw a 25% rise in revenue over the previous year. More than half of its profits were now through new product launches such as Lego Friends, Lego Elves and Lego Creator.

Summary

Avoiding the success trap and securing against an uncertain future requires exploration, which is a rational investment if we take a long term perspective. Despite exploration being is easier to drive when we are successful, because we have the resources, the “gravitational pull” of the success trap tends to bind us to the status quo. Leadership needs to force the firm to change before change is necessary, to explore when it is uncomfortable and to reinvent when we have the dangerous lure of running with the present solutions!

Knut Haanaes is an IMD professor of strategy.

Martin Reeves is Senior Partner in The Boston Consulting Group and Director of the BCG Henderson Institute.

They are co-authors of Your Strategy Needs a Strategy.

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