In the digital world,

Transformational leadership is about freeing your company’s future from the pull of its past

In a recent McKinsey Global Survey of 2,190 companies, two thirds of those companies in pursuit of transforming their businesses into digital enterprises said that they were “just treading water, taking no decisive action, and consequently achieving little or no success.”

To be clear, making a fundamental change in a company’s business model is no easy task. It requires total alignment and commitment from the C-Suite and Board all the way down into the day-to-day operations of the organization.

The scope and speed of disruption from digital technologies is forcing companies to discover new ways to engage with their customers, employees, supply chain partners, and even their competitors. But most importantly, it takes the courage and commitment to be a transformational leader not a transactional leader. There are no winning formulas in the traditional approaches to creating sustainable competitive advantage in the face of unprecedented waves of digital technology disruption.

Disruptive change not only increases stress, uncertainty, and risk but it also enables leaders to retreat to what they know rather than explore what they don’t know. Ed Catmull, long time head of Pixar Studios, put it this way, “Our natural tendency is to avoid or minimize risks. This instinct leads executives to choose to copy previous successes rather than try to create something brand new.”

Shantanu Narayen, CEO of Adobe, says that “if you can connect the dots between where you are today and where you think things are going, you’re probably not being aspirational enough. You have to plant this flag of ‘why can’t we do this?’ and give your employees freedom to amaze you with their ingenuity.”

In implementing this approach at Adobe, new product development teams are given “a license to be curious.” They can basically go off and explore any good idea that creates powerful features that large numbers of customers will happily pay for. Adobe has built an enterprise-wide culture that “takes a lot of pride in being a company that has to reinvent itself constantly.”

In order to free your company’s future from the pull of its past, it requires transformational leadership that inspires, encourages, and motivates employees to envision and create the changes necessary to shape the future success of the organization.

Are you creating the last best version of your old business model or the first best version of your new business model?

A good starting point to successfully free your company’s future from the pull of its past is what Satya Nadella did when he took over as CEO of Microsoft in 2014. He clearly stated that the company was going to pivot from its current business model (on premise on desktop) to its new business model (cloud first mobile first). This gave unfettered permission to all Microsoft employees to develop and deliver a series of new products and services along with a new operating model, businesses processes, and go-to-market gameplan that delivered one of the greatest business turnarounds ever.

Another way to make this transformative shift is to move from imitating best practices to creating next practices.

The Executive Next Practices Institute, a think-tank of hundreds of top executives and thought leaders, have described the differences this way:

• Best practices are past-driven, repetitive formulas for tactical business problems.
• Next practices are future-driven, strategic solutions that enable you to better anticipate and respond to disruptive issues that have embedded uncertainties, risks, and variables.

In my work with C-Suite Executives, we have developed our own descriptions of the difference between best and next practices as shown on the chart below:

Some next practices to help you successfully explore what you don’t know

In working with different companies over the past several years to help them explore what they don’t know, I have seen a series of next practices that increase the odds of success.

• You need to gain cross-enterprise alignment and support for a digital-first business growth strategy and implementation plan.
  • The competitive landscape is changing so fast that anything less than an all-in approach will likely fail.
• You need to create a culture of continuous learning and experimentation and be willing to fail fast and learn fast.
• You need to be able to leverage data and analytics to identify and create entirely new customer services and experiences.
• You need to be able to construct and orchestrate business partner networks and ecosystems that leverage the competitive benefits of assets you don’t own and directly control.
• You need to have the resolve to sacrifice short term revenue and earnings in order to create sustainable long term competitive advantage.

The market rewards transformational leadership and penalizes transactional leadership

One of the biggest drivers in how the market rewards companies and drives their stock prices higher is how well they can sustain innovation and invest in that innovation. Across industries, as companies successfully innovate, valuations tend to move higher.

A McKinsey study documented that those companies who aggressively pursue business innovation through digital technology have a 12% ROI vs. those who just invest to protect their core business who have a 6% ROI.

A Harvard Business School study showed that leading digital companies generate better gross margins, better earnings, and better net income than organizations who have not yet adopted a digital-first business growth strategy. Early digital adopters delivered a three-year gross margin of 55% vs. 37% for digital laggards.

From Intel Inside to Intel on the Outside

One compelling example of how hard it is to free a company’s future from the pull of its past is the dramatic decline in the market dominance of Intel in the computer chip design and manufacturing market.

Starting with the rise of the personal computer industry in the 1980’s, Intel chips running Microsoft software was the dominant solution for decades. This long period of success created a company culture that believed it was impervious to competitive threats.

Fast forward to the last several years, and the story takes a different turn. In 2021, they appointed Pat Gelsinger the new CEO and challenged him to restore Intel’s leadership in chip manufacturing technology. By focusing on their core products, Intel missed the opportunity to become a leader in the design and development of new AI chips. Their corporate culture worked against the company as they tried multiple times with different AI chip designs and products – all of which failed. By default, they resorted to falling back on their traditional chip manufacturing products.

Today Intel’s stock price is 50% off its 52-week high and 60% lower than when Pat Gelsinger took over as CEO. He recently stepped down from that position.

What makes transformational leaders successful?

In my work with true transformational leaders, I’ve seen first-hand what it takes for them to be successful. Here are some characteristics I have observed that were common among them:

• They know the right balance between dealing with current developments and getting out in front of future developments.
  • They seize the narrative at the outset, being very clear about what is known, what is not known, and what needs to be done to learn more.
• They recognize that a crisis ruled by unfamiliarity and uncertainty requires decisions and responses that are largely improvised.
  • They promote an environment of “psychological safety” that allows people to openly discuss ideas, questions, and concerns without fear of repercussions.
  • They distribute decision making authority and information sharing.
• They mobilize their organizations by setting clear priorities and empowering others to discover and implement solutions to achieve those priorities.
  • They unify cross-functional teams behind mission critical outcomes and realign incentives for them to achieve those outcomes.
• They understand that “competence precedes comprehension” which puts a bias on taking action and iterative learning to make necessary adjustments in real time.
• They act with resolve and visible decisiveness.
• They know that their ultimate goal is to “make a positive difference in people’s lives.”