Seeing the Iceberg, Strategic responses to Business Disruptors

Titanic image

By the time we see the iceberg, is it always too late to change our course? Business model disruptions often blind  fast growing companies– shareholder  darlings, and result in their precipitous decline.  The impact of the hit is rarely limited, as the wake of the disruption ripples across the globe creating uncertainty in the capital markets.

Last week, Janurary 18  Borders Group Inc appeared as the latest casualty.   Borders Hires Restructuring Lawyers  story reported by the WSJ, corporate management’s decision to suspend book order payments and hire restructuring lawyers.  Top c-suite executives resignations soon followed.  At this point, it appears collapse is their only alternative.   But a year ago, on the 27th of January, their CEO resigned. The interim CEO announced in April a turnaround plan, that in retrospect  failed to keep them afloat.

Is the Border’s case a failure of strategy, leadership or execution?  A full analysis isn’t necessary to realize the price paid by delaying responses to industry disruptors .

I wouldn’t have paid much attention to this story, or been that drawn into the analysis had I not sat with Chicago Booth alumni last Friday and focused exclusively on this issue of business model disruptors.  The Border’s story was coincidental, and though none of us had direct facts or details, we recognized that the leadership team could not have merely been asleep or unaware that trouble was looming.

McKinsey recently published a survey on the value of corporate strategy. Their findings were not surprising and merely confirmed the Booth and Kellogg  discussion participants experiences.

Strategy is hard

Defining the nature of your business proves to be challenging. Borders first and foremost was a bookseller. Their mega-store concept, in  itself an industry disruptor, enjoyed great success until a competitor introduced further industry disruptors. Why were they incapable of applying lessons of their own mega-store disruptive history?  Why couldn’t they switch-up to an online platform and seize the opportunity for more same site sales and avoid square footage overhead?  I leave the case write-up to others.

I wonder whether disruption is inevitable and if so, what if anything can a company facing similar game-changing disruptions do?

It was precisely this question that the monthly discussion of Chicago Booth Alumni considered last Friday.  To frame the short conversation, attendees reviewed in advance three articles with strategic advice and  listed at the end of this post.

Unlike the predictability and regularity of a ticking mechanical clock, the future rarely repeats or duplicates the past.  Our circumstances are always shifting. Some subtly, occurring  as imperceptibly  as the orbital passage of the earth around the sun.  Business disruptors succeed because they are rarely taken seriously by industry insiders early enough.

A single customer may wander; but consumers rarely act en mass abruptly taking their business to an emergent competitor. In reality, the best customers stay loyal  and provide an ongoing revenue stream. This renders the company blind to the departure and slowly increasing exodus of marginal customers who strengthen competitors into a massive menacing iceberg. The small top , poses no visible threat and is thus dismissed as inconsequential.

Most successful business leaders  monitor and report business metrics which they also review with interested stakeholders , e.g. senior management, share-holders,  boards of directors. Rarely do these metrics display the full organization’s capabilities and/or its resilience to withstand disruptive threats.

Clayton Christensen studies corporations facing change  and found management rarely focused on changes in demand as they occur in their marketplace. Resilient companies insure existing resources can successfully meet the evolving needs of their customers.  Their review process is not retrospective, but focuses on the future by assessing what steps in their process and values will  propel, not impede their ability to  innovate.  This choice compromises their ability to win.  In a race with a motorboat, paddling faster, or cutting dead weight won’t help you win; but an innovation in your paddle or changing the contours of the boat might.

Strategic suggestions

Disruptions in your market and Business model are rarely welcomed or predictable.  Several tactical strategies make it possible to bounce back or even advance your market position.We discussed three.

  1. James Ogilvy, writing for Strategy +Business, offered metaphors from philosophy to illustrate how easily management and leadership miss critical cues. He suggests that to avert disaster, create a culture of resiliency, one in which  emboldened employees both speak and act early.  No one predicts the future but present operating decision processes can prepare an organization to be more responsive, helping lay plans for changes no one yet understands, measures or foresees.

2. Constantinos C. Markides and Daniel Oyon writing for MIT Sloan raised five key questions from reviewing ideas presented by Clayton Christenson, Michael Porter and others who have studied the challenges  that impede innovation.  Management  who asks themselves these questions will be in a better place to both assess the potential damage caused by a disruption to its business or industry;and correspondingly, respond to the new competitive threat.

The questions don’t produce the plan of next actions. Instead they form the basis to revisit strategy, which is especially helpful to companies who recognize their current products, services or basic business model is time limited.  The process requires great strength to create something new while managing existing revenue opportunities. Pursuing both tasks simultaneously is fraught with challenges and incongruities;  and thus often proves successful when there is a restructuring of the organization that is equally focused on committing to the new change.

3. A third set of insights appeared in another article from Strategy and Business (How to Win). Authors Leinwand and Mainardi posit that companies who possess execution skills and formulate strategy based on existing capabilities are more successful game changers.  These companies are always outward facing and their strategic focus starts and ends with their customers.  This article written  in 2008 before Facebook and other social media tools proved themselves relevant, prophesized why inexpensive interaction with customers remains a great prescription.  In theory, a prudent strategic approach builds a coherent portfolio of ideas, skills and competencies that mutually reinforce the organization’s overall capabilities.  It’s a theory becasue it proves very challenging to execute.  [note, an older article by Christenson and Ovendov in HBR 2000, outline how to assess and find your core capabilities.]

Closing discussion take-aways

Discussion participants summarized their thoughts at closing as follows:

  • Where are the lessons on how to create culture transformations?  The prescription needs more meaningful or effective details.
  • Organizations and their leadership are not as dumb as they seem; rather blaming inertia, or more specifically its absence, inevitably rolls up into a leadership problem.
  • If you can stop the bleeding, act sooner and change the management team it may help, but critically it is management that needs to change what it does and  navigate a better course.
  • “Viewing your death”, an Ogilve tip, is only as helpful as your perceptions of future and the significance posed by outside possibilities when painted into a future scenario.
  • Remember who your ultimate customers are, not your board, not your leadership. Instead, any change or redirection in your business should be based on the shifting nature of your customers .
  • Keep track of your fundamentals, the organization capabilities.
  • Be wary of the situational leadership conundrum…their path to the top shaped how they read the signposts and drive the organization forward.
  • Best to take a long-term look, overcome the protective instincts that may ultimately undermine your ability to move the product along a more realistic and vibrant future.
  • CEOs are ultimately responsible for strategy and any changes have to come from the top.

The best insurance an organization can carry is regular consideration of outsider’s perspectives,  reality checks on their planning.  In theory, a board of directors consists of people whose own context and operating environment is in sharp contrast to your industry and culture.  The more divergent their views of the future, the greater the value of their contribution to your survival and success.

Source Readings

These  articles  were the basis of the Chicago Booth Alumni Discussion January 21, 2011

What Strategists Can Learn from Sartre
http://www.strategy-business.com/article/03405
By James Ogilvy, Strategy +Business, Winter 2003
Strategic thinking can benefit from philosophy. In this reflective piece, the author explained why in an uncertain world where competitive advantage is insecure, setting strategy must become an existential exercise.

How to Win by Changing the Game
http://www.strategy-business.com/article/08401
By Cesare Mainardi, Paul Leinwand, and Steffen Lauster,
Strategy +Business, Winter 2008
This was the magazine’s first major piece on capabilities-driven strategy, laying the groundwork for Leinwand and Mainardi’s book The Essential Advantage: How to Win with a Capabilities-Driven Strategy (Harvard Business Press, 2010).

What to Do Against Disruptive Business Models (When and How to Play Two Games at Once)

http://sloanreview.mit.edu/the-magazine/articles/2010/summer/51413/what-to-do-against-disruptive-business-models/
By Constantinos C. Markides and Daniel Oyon,  June 26, 2010
Fighting against a disruptive business model by rolling out a second business model is one option for companies to consider. But to make that work, you need to avoid the trap of getting stuck in the middle.

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