In the New Digital World, Catching the Next Wave is a Necessity

Last July, I suggested that well-established companies could no longer sustain competitive advantage through using their size and market reach as barriers to entry. The unprecedented assault of new waves of digital disruption have enabled companies of any size to penetrate some portion of well-established companies’ value chains. Taken together these disruptions are making what was scarce and expensive now ubiquitous and cheap as the chart below illustrates. Simply put, companies must now find totally new ways to compete or risk a major wipeout.

Unfortunately, it’s not as easy as it looks

Over the past several decades, a number of America’s very best and well-established companies were not able to catch the next wave. There are always a myriad of excuses for industry-altering events like these but I think there is one common reason that transcends them all. They didn’t have a thoughtful and disciplined process to assess the maturity of their current products and services and thereby get a head start on developing their next generation of products and services.

The Business Maturity Lifecycle assessment: A good place to start

To help build a compelling business case for the need to catch the next wave, start by assessing the performance (revenues, margins and profits) of your different lines of business over the past three years and see where they fall on the business maturity lifecycle shown below. If those metrics are growing at 15% – 30% then it is in category B; if it is growing at 5% – 10% then it is in category C; and, if they are flat to declining, then it is in category D. The results of this business maturity assessment will enable companies to prioritize which businesses are prime candidates to try and catch the next wave.

Most well-established companies who conduct this assessment will discover they have multiple businesses that are candidates to catch the next wave. Because critical revenue and profit-generating resources must be diverted from current businesses to fund the launch of the new digital business, you can only undertake one business model transformation at a time. As such, you need to have complete agreement and alignment across the organization to support the business you choose.

How Microsoft is catching the next wave

In many cases, the source of declining performance is the result of the business being impacted by one or more of the new digital disruptive technologies. In my brother, Geoffrey Moore’s, recent book Zone To Win he prescribes a process and set of steps to take on this challenge.

By way of example, let’s look at Microsoft, long the dominant player in enterprise computing, and how it has responded to competitive disruptions to the revenues, margins and profits of its three core businesses – on-premise servers and tools by Amazon’s cloud-based web services; Office desktop software by a myriad of cloud software offers; and, their Windows desktop PC operating systems by Apple and Google’s mobile devices operating systems.

Under the leadership of new CEO, Satya Nadella, the company began a systematic rebooting of each of their core businesses to catch the new cloud and mobile waves. You will note that they are tackling this challenge one business at a time.

They started with their enterprise servers and software business which sold its high margin products and services on an on-premise license basis. They diverted a large percentage of the earnings from that business to invest in building out the Azure cloud business on a lower margin pay-as-you-go subscription model.

They then moved on to 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. Here again they diverted high margin earnings from the current business to fund the launch of Office 365 on a cloud-based subscription model.

In both these examples, Microsoft made the conscious decision to sacrifice short term margins and earnings in order to gain longer term growth and market share from catching the new waves of digital disruption.

As you can see from the results below, this new approach is beginning to deliver improved operating performance and better financial results. Needless to say, Windows is next in line for its transformational reboot.

Failure is not an option

Let me be perfectly clear that catching the next wave is not for the faint of heart. CEOs, Board of Directors and executive teams across all industries must now confront this leadership challenge and take bold steps to address it some of which I’ve listed below:

• It requires total commitment to the business model transformation initiative from the top to the bottom of your organization.
• It requires steadfast resolution not to give into to the pull of short-term performance over the gains of long-term growth.
• It requires that discretionary performance compensation incentives must be heavily tied to the success of catching the next wave.
• It requires the tacit understanding that transforming your company into a digital enterprise is, in all likelihood, the single most important decision you will make in your career.

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 pdmoore@woellc.com