From the Merriam Webster dictionary: a complete or major change in someone's or something's appearance, form, etc.
Wikipedia: Business transformation is about making fundamental changes in how business is conducted in order to help cope with a shift in market environment.
Business loves its bywords. A popular term today is “transformation.” CEO X plans on a “transformative acquisition” that will propel his company to a higher share price. CEO Y seeks to transform his business by permeating social networks and elevating his brand in the mind of the consumer. CEO Z avidly launches a new product which she anticipates will transform her business into a market leader.
This white paper will note two of the best proven methods for developing a game changing transformation strategy.
2004 was a watershed year for many businesses. It had become clear that the Internet’s pervasiveness and accelerating changes in consumer buying habits threatened to seriously impact the coffers of large multi-national corporations. Boards and CEOs were taking notice and demanding action.
In 2004 Amazon’s market cap was less than 10% of Walmart’s. Microsoft’s revenues were 20 times less than IBM’s. Yet the handwriting on the wall had become clear – tiny companies were growing rapidly and displacing the old time leaders who were seeing their market share slowly deteriorating. Investors were not happy.
This is not a white paper on the history of IBM or Walmart. Needless to say, it dawned on both companies and many other companies, large and small, that the necessity for major change was in the air.
Today, many companies struggle with the new economy. Hence few businesses are immune to the need for transformation in order to survive and thrive.
Transformation Strategy #1 – “Blue Ocean”
Transforming a company’s organic growth path while retaining the fundamentals of the business can be an effective and relatively inexpensive means to shift into high gear.
2004 saw the publication of an important study in the Harvard Business Review. “Blue Ocean Strategy” written by business school professors W. Chan Kim and Renée Mauborgne.
In 2005 the professors published a highly recommended book of the same name (available on Amazon or elsewhere for less than 20 bucks). Here is an executive summary:
“Despite a long-term decline in the circus industry, Cirque du Soleil profitably increased revenue 22-fold over the last ten years by reinventing the circus. Rather than competing within the confines of the existing industry or trying to steal customers from rivals, Cirque developed uncontested market space that made the competition irrelevant.
Cirque created what the authors call a blue ocean, a previously unknown market space. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In red oceans—that is, in all the industries already existing—companies compete by grabbing for a greater share of limited demand. As the market space gets more crowded, prospects for profits and growth decline. Products turn into commodities, and increasing competition turns the water bloody.
There are two ways to create blue oceans. One is to launch completely new industries, as eBay did with online auctions. But it’s much more common for a blue ocean to be created from within a red ocean when a company expands the boundaries of an existing industry.
In studying more than 150 blue ocean creations in over 30 industries, the authors observed that the traditional units of strategic analysis—company and industry—are of limited use in explaining how and why blue oceans are created. The most appropriate unit of analysis is the strategic move, the set of managerial actions and decisions involved in making a major market-creating business offering.
Creating blue oceans builds brands. So powerful is blue ocean strategy, in fact, that a blue ocean strategic move can create brand equity that lasts for decades.”
Transformation Strategy #2 – M&A
In a quest for synergy, size, sizzle and preferably all three, corporate development departments prowl the world seeking a target that will in part or in total transform a business and breathe new life into it, resulting in increased value and happy investors.
“As capital remains cheap and competition increases, more and more corporate finance strategists are willing to take on transformational deals. Unlike absorption deals, in which companies acquire businesses that complement their existing operations, transformational deals involve acquiring new markets, channels, products, or processes in a way that requires significant operational integration. In fact, successful integration is key to realizing the potential value of these deals.”
“Transformational deals need not be big; their hallmark is that they fundamentally reinvent operations and maybe even change the dynamics of the industry. In healthcare, for example, payors are buying providers and creating new shared risk–bearing health networks. In telecommunications, mergers between major Internet and cable television companies could create new, innovative models of content creation and distribution.
In retail, companies are pursuing deals to transform their operations, including supply chains, as they try to get products to consumers more cheaply and quickly than their competitors do. Amazon is busy building physical warehouses throughout the country, while also seeking greater automation and higher productivity through its $775 million acquisition of Kiva Systems, a robotics startup that services warehouses. Meanwhile, Walmart is turning its formidable network of bricks-and-mortar retail outlets into e-commerce assets from which it can quickly fulfill online orders. The company has been on a buying spree to acquire tech startups in social software, mobile apps, and cloud infrastructure, with the goal of reaching consumers in an omnichannel environment: stores, online, and mobile.”
(Source: “Deals That Transform Companies” by Gregg Nahass and Aaron Gilcreast from PwC’s M&A integration practice.)
Generally a brilliant transformational strategy becomes valuable only when it has gained full ownership by every member of the management team. Patience, lots of communication and ultimately achieving active engagement by all is the foundation of successful strategy execution.
Avoid “paralysis by analysis.” Formulate the plan, get buy-in and then set a rigorous timetable for execution. Debug along the way as needed.
Here’s to your success!
“First comes thought; then organization of that thought, into ideas and plans; then transformation of those plans into reality. The beginning, as you will observe, is in your imagination.” ~ Napoleon Hill
Pete Sokoloff is Senior Managing Director of Peter A. Sokoloff & Co., an investment bank specializing in mergers and acquisitions in telecommunications and homeland security. [email protected]