Business disruption is the new normal. CEOs of well-established companies in matured markets (often known as incumbents) are facing a rapid loss of market share for their profitable product segments to challengers and are forced to contemplate: “Should I be a disruptor or be disrupted?”
CEOs of incumbent companies are constantly wrestling with questions from board members on whether they have an offensive or defensive strategy for disruption. The quintessential response to such a dilemma is whether these CEOs get the innovation before the challengers /disruptors get the distribution (or customers). Strategic agility and consequently, scalability is the deciding factor on who wins the existential battle.
CEOs of incumbent companies perceive that the biggest deterrents for business agility are cultural fear with experimentation, tech debt, and limited resources. TBM helps address these deterrents and provides them the necessary agility to fuel innovation and embrace disruption.
Every CEO must care about growth as it directly affects their equity value. McKinsey analyzed 3000 companies from 1980 to 2012 and reported in April 2014:
- High-growth companies offer a return to shareholders five times greater than medium-growth companies
- Companies whose growth was greater than 60% when they reached $100 million in revenues—were eight times more likely to reach $1 billion in revenues than those growing less than 20 percent
Despite this realization, CEOs and their teams feel paralyzed by certain legacies they inherit.
In today’s times of unparalleled innovation and disruption, companies scale up on their capabilities at software timescale. Usually, the disruptors, or challengers, focus on:
- Unbundling the most profitable segments of the incumbents Challengers such as The Honest Company and Warby Parker can decompose markets into highly customized niche segments and rapidly gained market share through strategic agility and digital distribution from leading businesses like Procter and Gamble and Luxottica such that the incumbents can’t compete on scale alone.
- Capture the distribution via Blitzscaling in software time-scale Fintech startups search for customers, who are served with financial products from traditional firms but are dissatisfied at some point in their journey. The challengers focus on such inflection points in customer’s journeys, where the level of dissatisfaction is so high that the customer is finally willing to switch. The challengers focus on using technology to make the switching costs and experience so seamlessly frictionless that the customers move over. For instance, the Fintech company SoFi uses such inflection points to gain momentum in capturing the distribution of underserved HENRYs (High Earning Not Rich Yet segment). SoFi blitzscaled its distribution through digital means.
An incumbent company’s CEO may take one of the two paths:
- Get on the defensive and protect its own high-profit market segments
- Get on the offensive and get new growth by using innovations such as providing mass customization through Artificial Intelligence (AI)
Incumbents face a threat from the inherently digital-native challengers due to lack of digital agility. This article focuses on how to counter these threats using innovative Business Operations techniques via TBM. TBM helps achieve strategic digital agility via a variety of factors.
TBM provides feedback loops to allow experimentation
Innovation requires experimentation. Accepting failure as a part of experimentation may seem like a counterintuitive concept. I believe that such acceptance is essential if an incumbent company wants to become a disruptor. Most companies avoid failure like a terminal illness. However, embracing failure is a part of the success equation for innovators such as Amazon.
Jeff Bezos, founder and CEO of Amazon, mentioned the following in his 2016 Annual shareholder letter for SEC filings:
To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment. Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there!
The alternative to not experimenting is usually paying a higher cost for it. Stanford Graduate School of Business’s Baba Shiv noted:
If you don’t invest in exploration (experimentation), someone else will, and then you’ll just be licensing or acquiring their know-how.
A key ingredient for successful experimentation is the low cost of failures. On the path of innovation, failing fast, and in early stages, is essential. TBM enables this via based financial transparency in two ways:
- First, the transparency about cost structure (via cost profiling) of the planned experiment presents architecture choices which enable two-way doors, which make failing fast less expensive.
- Second, the adoption of TBM based taxonomy and transparency accelerates Agile adoption as noted in this article by Dean Leffingwell, the creator of Scaled Agile Framework (SAFe).
TBM reduces Tech Debt
Financial Transparency enables decoupling. When I apply First Principles Thinking to the Tech Debt problem, the primary recommendation is to decouple applications from infrastructure, data, and talent.
Decouple Legacy Infrastructure from Applications
When applications are decoupled from legacy infrastructure, strategic agility is enhanced, and resources are freed up. Legacy infrastructure tends to have tightly coupled architectures hindering agility. Moving business-critical applications from tightly coupled to loosely coupled architectures shortens time-to-change thus enhancing strategic agility.
Fig: 1: Prioritize your Business Critical Applications to migrate to loosely coupled systems to enhance the digital agility
One way to achieve this is to adopt the public cloud infrastructure as it takes advantage of economies of scale and provides constant refresh at the highest security standards. When digital transformation and growth are top priorities, a high-performing and elastic technology infrastructure is critical.
Typical examples include moving business-critical systems such as ERP systems from traditional on-prem infrastructure to Public Cloud. For instance, Bristol-Myers Squibb (BMS) Company transformed its deployment strategy for SAP software by moving its on-premise business warehouse to Amazon Web Services (AWS). Such a move enabled strategic agility and made them responsive to changes in the market.
Asurion has almost all of its new spending on infrastructure and change-the-business activities on Microsoft’s Azure. Their primary goal was invigorating innovation and speeding up the time-to-market.
Scotia Bank sought to modernize their infrastructure by adopting Google Cloud while maintaining a strong focus on Open APIs, DevOps, and a Cloud-based architecture all supported by Machine Learning and other analytics capabilities in Google Cloud Platform (GCP). Such an adoption provided business agility and thus, accelerated the speed to market for strategic business objectives.
Digital agility helps the incumbents get on par with the digital-native challengers. In this process, talent and capital are the key resources which are freed up for utilization towards other critical business outcomes.
Fig 2: Legacy infrastructure replacement releases capital for strategic business imperatives
Decouple Data from Apps
Successful sustainable innovation is an exercise in serial problem solving, which requires data. In traditional incumbents, due to tech debt, most of this data is stuck in functional silos, making it difficult and expensive to discover, query, and analyze data across these silos.
Incumbent companies with tech debt must manage data as a corporate strategic asset and measure the Return on Data.
A proven strategy for this is a unifying approach such as data aggregation in a Data Lake (using open source components such as Hadoop, Spark, and Hive) without the overheads of traditional data warehouse designing and implementation. Goldman Sachs, a prominent leader in investment banking, empowered their employees by decoupling their data from the applications, accrued over decades of growth. They achieved this by building a platform, Goldman Sachs Data Lake, which helped them effectively break down the information silos. This unifying approach allowed Goldman Sachs employees to conduct self-service exploratory as well as confirmatory analyses and turbo-charged innovation.
Enabling data-driven culture via such decoupling (as Data Lake) results in catalytic thinking. Companies with tech debt must decouple data from applications to unshackle insights.
Decouple Talent from Apps
When talent is decoupled from systems, it creates a win-win situation. First, it allows an opportunity to redeploy the talent based on skills and not based on which systems they work within. Second, it provides the talent an opportunity to advance their career. Last, such a re-deployment of talent is relatively less expensive affair than trying to seek it from outside for every new strategic program.
TBM enables business outcomes-based approach in Technology Resources allocation
TBM allocates technology resources to the most relevant business priorities. It helps align budgets to desired business outcomes and use business value as the driver for resource allocation (capital and talent). Budgeting transparency provides insights into financial impact, business value, and desired outcomes.
Further, during execution, TBM helps executives focus on Business Management KPIs to measure IT value by monitoring expenditures, rationalizing portfolios, and optimizing cost and performance.
Fig 3: Use of TBM for various Growth-Share positioning of products
The suggestions in Fig 3 are elaborated in the following table.
Table: Role that TBM plays in various scenarios for the Market-Growth matrix
The incumbents can build upon these guiding principles to simplify the approach to Corporate Strategy.
Success breeds complacency. Complacency breeds failure. Only the paranoid survive.
Even though (incumbent) CEOs have the distribution to their advantage, they cannot compete on scale alone. They are better off focusing on increasing the strength and resilience of their moat by investing in innovation. If incumbents become complacent, they will face existential threats. Steve Jobs once stated, “Innovation distinguishes a leader from a follower.” Incumbents must shed any complacency, which may arise from distribution advantage, and innovate to defend their market segments or face the inevitable downward spiral from digital-native challengers.
CEOs who aspire to become market disruptors must enable strategic agility through TBM-enabled Digital-Native Capabilities. CIOs supporting such CEOs must use TBM to enable prudent resource allocation and provide a level playing field.
Manik Patil was a Global Senior Director at American International Group (AIG)*, a Fortune 100 Global Insurance Company, where he led Technology Business Management efforts. He collaborated with top leaders in Product Management, Operations, Marketing, and Finance to develop strategy, set priorities, and drive strategic initiatives. He is about to start in his new role of Modernization Evangelist at AIG. Manik combines his Business Operations expertise with a deep understanding of strategy, AI/ML-driven analytics, and governance to help CxOs plan and manage business transformation. He holds a Masters degree in Management from Carnegie Mellon University and is a principal member of the TBM Council.
*Note: The views and opinions expressed in this article are those of the author and do not represent that of his employer.