A Clear Statement of Intent Drives Desired Business Outcomes
Over the past two years, I observed a very distinct pattern between companies that successfully navigate the new digital world and those that fall behind. As it turns out, those who are emerging as the early leaders in the age of digital disruption share one thing in common – a clear statement of intent. In the illustration above, I have summarized what I think a statement of intent encompasses. What follows are some examples that have helped shape my thinking on this issue.
While Steve Balmer was in the last few years as CEO of Microsoft, he and his leadership team talked about the need to figure out how to migrate their offers to the cloud and mobile devices to better compete with Amazon, Google, Apple and Facebook. What they didn’t do was to make a clear and concise statement of intent to prioritize that outcome. As a result, cloud and mobile revenues languished.
On his first day as CEO, Satya Nadella sent an email to all Microsoft employees saying from that day forward “Microsoft is a cloud first, mobile first company.”
Under his leadership, the company began a systematic rebooting of each of their core businesses to catch the new cloud and mobile waves.
Two years ago, they migrated the Office software business which provided an on-device license for personal productivity software including email which was supported by an on-premise Exchange business to run the back end. They diverted the high margin earnings from the current business to fund the launch of Office 365 on a cloud-based subscription model.
As you can see from the chart below, Microsoft’s Azure Cloud business has grown three-fold in the last two years following Satya Nadella’s clear statement of intent. The $14.8 billion from the commercial cloud businesses represents more than 15 percent of the $96.24 billion in overall revenue that Wall Street expects from Microsoft this year. That’s up from a ratio of about 10 percent in the previous year.
Microsoft: Commercial cloud revenue to jump 55% to nearly $15B this fiscal year
Ford vs. Tesla
When Mark Field was installed as the CEO of Ford three years ago, he talked about a variety of new business growth initiatives including electric and self-driving cars. While sales increased significantly over that three-year period, Ford’s stock declined by 40% as the majority of vehicles sold were the traditional cars and trucks the company has always built. What he didn’t do was to clearly declare his intent to make electric and self-driving cars the business growth priority. As a result, he was recently removed as the CEO of Ford.
At Tesla, CEO Elon Musk, has clearly communicated his desire to develop and deliver new software- enabled electric cars that can ultimately drive themselves. While Tesla’s sales are far less than Ford’s, the market rewarded the company with a higher market valuation in part because they believe in Musk’s statement of intent and the results he has produced thus far.
Other CEO’s are Getting the Message
A number of CEOs now see the value and benefit of clearly stating their intentions and business growth goals.
Two years ago, then-Starbucks CEO Howard Schultz said he was transferring all his operating responsibilities to his President so he could “focus solely on all things digital.”
Google’s new CEO Sundar Pichai declared that going forward “Google is an A.I. Company first.”
Facebook CEO Mark Zuckerberg has said that “Facebook will be a video first company.”
Committing to the J Curve
The reason most well-established companies are still struggling with navigating this new digital world is that they don’t have the resolve and discipline to redirect scarce resources away from funding their current businesses in order to launch and scale a new digital business.
Venture capitalists call this investing in the J Curve to catch the S Curve as shown below:
As the Microsoft example above illustrates, in order for the company to migrate its Office business from on premise and on desktop to the cloud and mobile devices meant sacrificing short-term revenues, margins and earnings for the promise of long term competitive gains. But their recent results suggest that if you have the resolve to stay the course the rewards are significant.
In 2013, Adobe Systems embarked on a major transition from a product/license sales model to a cloud -based subscription model. Revenue shrank 8% in the first year and was basically flat in 2014. The skeptics’ and naysayers’ voices rang loud and clear.
Fortunately, the senior leadership team at the company along with the board stayed true to their intent and Adobe’s revenues reached nearly $6 billion in 2016 up from $4 billion in 2013. Eighty percent of those revenues came from subscriptions and other recurring sources.
By contrast, the recent financial performance of IBM, Hewlett Packard, GE and Ford seem to validate how hard it is for well-established companies to free their company’s future from the pull of their past.
Short-term earnings performance vs. long-term competitive advantage
As these examples illustrate, the single biggest challenge facing CEOs and other C-Suite leaders in well established companies is how to find the right balance between funding the businesses they have versus making significant enough investments in next generation businesses so than can deliver material revenues and profits to the company. Said another way, this challenge pits the demand to deliver short-term quarterly earnings against the desire to create long-term competitive advantage.
Making a transition of this magnitude and impact not only requires strong leadership and intestinal fortitude but increasingly a leader willing to put a stake in the ground and make a clear and compelling statement of intent. It will ultimately redefine the winners and losers in the new age of digital disruption.
As always, I am interested in your comments, feedback and perspectives on the ideas put forth in this blog. Please e-mail them to me at email@example.com