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The impact of the global pandemic, volatile stock markets, and slowed economic outlook across the globe has hurt the performance of enterprises across the world. The scenario has forced leaders to consider undertaking Transformation of their strategy and operations significantly.
The strategy to buy out troubled businesses and determining to fix the issues that upset the target companies has been a focus of Buyers’ senior leadership for the past 2 decades. In the year 2017 alone, 36,000 M&A (Mergers & Acquisitions) transactions were announced globally. Acquisition of troubled businesses hoping to have a Turnaround account for around 50% of all M&A deals.
A Turnaround can be defined as the financial recovery of an economy or an organization after a period of inertia or Downturn. Several issues trigger a Downturn—issues pertaining to technological disruption, regulations, processes, organization’s financial health, management, business model, hierarchy, or competition.
The ratio of success for M&As is, however, not very healthy. Historical data of 61% of M&A deals based on a BCG’s study, carried out on 1400 M&A deals globally between 2005 and 2018, shows a high failure rate (61%), where they remained unsuccessful to show any improvement in financial performance.
The ones that do succeed offer significant revenue growth and profit margins—around 25% positive variance in TSR than unsuccessful M&As. However, buying and fixing a business under the weather isn’t an easy job. This necessitates a meticulous strategy.
In order to materialize a Turnaround, the leadership needs to thoroughly understand the root cause(s) of the Downturn, have a willingness and plan to reform or transform, and rigorously implement the strategy to rectify the situation (Transformation Execution).
Empirical Research demonstrates that the triumph of M&A Turnaround deals is attributable to 6 Critical Success Factors:
- Investment in R&D
- Long-term Horizon
- Clear Purpose
- Investment in Transformation
- Synergy Targets
- Quickness to Action
Deployment of a combination of these CSFs bring about more pronounced outcomes—in terms of positive 3-year TSR and overall Organizational Performance.
A robust M&A Turnaround Strategy—based on lessons learnt from empirical research—revolves around 4 key M&A Deal Characteristics. These M&A deal characteristics have a profound impact on the outcome of the transaction:
- Level of Performance
- Sector Alignment
- ESG Factors
- Deal Size
Knowledge of these key Deal Characteristics allow the senior leadership to ascertain the factors liable to affect the deal outcomes. Now, let’s discuss the first 2 deal characteristics in a bit detail.
Level of Performance
The performance of the Target company during 2 years pre-deal is a key point to consider for a M&A, as it is directly proportional to the deal success rate and Total Shareholder Return. BCG’s research demonstrates that M&A transactions where the target entity had a 2-year TSR decline of lower than 10% were liable to be more successful than deals where target companies were in more distress (a decline of ~30% or more).
Sector Alignment
Senior leaders should not ignore the significance of uniformity of sectors of the target and acquiring company. Based on research, the rate of success for an acquisition transaction involving the buyer and the target operating in the same industry is 5% superior to the rate for transactions involving the companies from different sectors. The reason for this higher success rate is attributed predominantly to similar business models, customers, vendors, and processes in firms of the same sector, which make the Post-merger Integration of the buyer and target a lot easier.
Interested in learning more about the other characteristics influencing the outcome of an M&A deal? You can download an editable PowerPoint presentation on M&A Turnaround Strategy here on the Flevy documents marketplace.
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Business Transformations have become a necessity in the fast-changing technological and competitive business environment. Transformation is characterized by significant and risk-laden Restructuring of a company, with the objective of accomplishing Operational Excellence and changing its future course.
Business Transformation is a priority for many top executives but it is usually a reaction to challenging circumstances rather than being a preemptive measure.
Business Transformation is prompted by a combination of 2 situations:
- Need to address inherent problems causing organizational drag—these problems may be internal and/or external.
- Aspiration by the top management and other senior stakeholders to seize the occasion of addressing these problems, in ways that deeply alter the Business Model of the organization including Value Creation.
Business Transformation entails not just making incremental changes but fundamentally changing all or some of the following:
- Organizational Structure
- Core Product or Service Portfolio
- Systems
- Processes
- People—the way employees work
- Technology
Undertaking such arduous effort requires approaching the task in a structured way. Research shows that quite a few of such undertakings are based on anecdotal beliefs instead of being based on empirical data.
Countering this trend, the Boston Consulting Group conducted an empirical study of financial and non-financial data-set comprising 300 U.S. public companies. The data spanned a period of 12 years from 2004 to 2016. Selection was based on the following criteria:
- Companies that had a $10 billion or more market capitalization between 2004 and 2016.
- Of these, companies with an annualized deterioration in Total Share-holder Return (TSR) of 10% or more relative to their industry average (2 years running or more) were identified.
Based on extensive analysis—that included use of methodologies like trained proprietary algorithms, prediction models, and Multivariate Regression Analysis—a pattern pertaining to Business Transformation emerged. The pattern depicted the following themes:
- Frequency of Failure
- Impact of Digital Disruption
- Impact of Downturn
- Competitive Volatility
The study also suggested the following 5 evidence-based Critical Success Factors (CSFs) for achieving Transformation Success.
- Cost Management (drives short-term success)
- Revenue Growth (drives long-term success)
- Long-term Strategy and R&D Investment
- New, External Leadership
- Holistic Transformation Programs
Let us examine in a bit more detail some of the CSFs.
Cost Management
In order to launch the Transformation effort on the correct footing, Cost Management is key, in the short term especially. Predictably, empirical analysis suggests that the leading driver for organizations recovering from severe TSR deterioration is a determined Cost-cutting effort during the 1st year of Turnaround. By year 3, Cost Reduction is accountable for the major share of TSR growth as companies divert their portfolios and make available funding for growth investments.
Revenue Growth
Merely short-term operational improvements do not augur well for a sustainable Transformation. There has to be a long-term Growth Strategy put in place. For this to happen, leaders have to challenge the foundations of the company’s Business Model.
Research divulges that Revenue Growth progressively becomes the driver for TSR recovery after year 1 in all the successful Transformation efforts. Revenue Growth overshadows, by far, all the initial drivers for TSR recovery by year 5 of all successful Turnaround efforts.
Long-term Strategy and R&D Investment
Turbulent competitive environments, particularly, require long-term Strategic Planning and investment in Research and Development for fruitful Business Transformations. Empirical research and analysis demonstrates:
- A 4.8% difference between Transforming companies showing above-average long-term strategic direction compared to companies with a below-average orientation.
- More pronounced findings in transforming companies operating in turbulent competitive environments—long-term orientation linked with a TSR increase of 7%.
- Companies with above-average R&D investments had upwards of 5.1% TSR impact in contrast to those with below-average spending.
These CSFs strengthen the odds of success in Business Transformation individually. When used together, most of them produce an impact that is larger than the totality of their individual parts.
Interested in learning more about the 5 Critical Success Factors for Successful Business Transformation? You can download an editable PowerPoint on 5 Critical Success Factors for Successful Business Transformation here on the Flevy documents marketplace.
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“If you don’t transform your company, you’re stuck.” – Ursula Burns, Chairperson and CEO of VEON; former Chairperson and CEO of Xerox
Business Transformation is the process of fundamentally changing the systems, processes, people, and technology across an entire organization, business unit, or corporate function with the intention of achieving significant improvements in Revenue Growth, Cost Reduction, and/or Customer Satisfaction.
Transformation is pervasive across industries, particularly during times of disruption, as we are witnessing now as a result of COVID-19. However, despite how common these large scale efforts are, research shows that about 75% of these initiatives fail.
Leverage our frameworks to increase your chances of a successful Transformation by following best practices and avoiding failure-causing “Transformation Traps.”
Learn about our Business Transformation Best Practice Frameworks here.
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– Roderick Cameron, Founding Partner at SGFE Ltd
Business Transformation is a given in the lifecycle of organizations. If an organization or business desires to continue growing gainfully, it has to keep Restructuring and Innovating with time. Successful Restructuring can be achieved by pursuing a robust 4-phase approach. Each incremental phase paves the way for shaping the next phase:
- Strategic Analysis
- Structural Redesign
- Redeployment
- Renewal
Redeployment is the most critical phase in the Restructuring process. It presents an opportunity to progress towards strategically directed performance goals and establish the foundation for a new Organizational Culture.
Carrying out an efficacious Redeployment, however, necessitates navigating around the pitfalls that threaten the process. These snags include:
- Lack of detailed planning on how Redeployment will be handled
“If you fail to plan, you plan to fail” is an oft repeated adage that has wisdom based on experience of many failures throughout history. The Redeployment plan should be thoroughly discussed and developed at the Redesign stage, giving out details of all aspects of Redeployment.
- Restricted access to information approach
Organizational leadership often try to avoid sharing information due the fear of losing control. During the tumultuous phase of Redeployment, leadership should be communicating with the employees quite frequently to alleviate any concerns and build their trust.
- Failure in immediate and full disclosure of information
Timely and full disclosure of information is absolutely essential for the process to run smoothly.
A robust communications system has to be put in place for dissemination of timely information predominantly in the Redeployment phase as employee apprehensions are at the highest level in this stage.
You can learn more about the pitfalls during Redeployment here in the editable PowerPoint on Redeployment after Restructuring.
Redeployment, in order to be successful, has to go through 7 steps that need careful planning and execution with precise timing. These 7 steps include:
- Continuously maintaining a robust Communications Plan.
- Developing an employee assessment system based on the newly-defined business needs and goals.
- Creating a system of reviews and appeals.
- Deploying an internal placement group.
- Launching a severance plan for those who decide to leave the organization.
- Providing training to employees at all levels for them to be able to develop competencies required to assume the responsibilities in a transformed organization.
- Planning for the renewal phase following redeployment.
Let us delve a little deeper into this second step:
2. Develop an Employee Assessment System based on the newly defined business needs and goals.
The system should assess potential employees against required competencies for the position. A matrix should be created to serve as an assessment tool to structure the selectors’ thinking. Each competency should be assigned a weight and the cumulative score should be the sum of weighted scores of each competency. Input should be based on interviews with candidates, feedback from managers and supervisors. The matrix should be used as a tool only and selection decision should not be predetermined rather based on all aspects, i.e. qualitative as well as quantitative.
The selectors should be trained to ask targeted questions to assess competencies and document them properly. Assessment should be divided into 3 sections:
- Go/No-Go section to assess the candidates’ ability to meet the minimum requirements.
- Evaluation of each candidate against the competencies mentioned for each position.
- Document modification in decision due to absenteeism, affirmative action concerns, etc.
Interested in learning more about the Redeployment Steps? You can download an editable PowerPoint on Redeployment after Restructuring here on the Flevy documents marketplace.
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You can download in-depth presentations on this and hundreds of similar business frameworks from the FlevyPro Library. FlevyPro is trusted and utilized by 1000s of management consultants and corporate executives. Here’s what some have to say:
“My FlevyPro subscription provides me with the most popular frameworks and decks in demand in today’s market. They not only augment my existing consulting and coaching offerings and delivery, but also keep me abreast of the latest trends, inspire new products and service offerings for my practice, and educate me in a fraction of the time and money of other solutions. I strongly recommend FlevyPro to any consultant serious about success.”
– Bill Branson, Founder at Strategic Business Architects
“As a niche strategic consulting firm, Flevy and FlevyPro frameworks and documents are an on-going reference to help us structure our findings and recommendations to our clients as well as improve their clarity, strength, and visual power. For us, it is an invaluable resource to increase our impact and value.”
– David Coloma, Consulting Area Manager at Cynertia Consulting
“As a small business owner, the resource material available from FlevyPro has proven to be invaluable. The ability to search for material on demand based our project events and client requirements was great for me and proved very beneficial to my clients. Importantly, being able to easily edit and tailor the material for specific purposes helped us to make presentations, knowledge sharing, and toolkit development, which formed part of the overall program collateral. While FlevyPro contains resource material that any consultancy, project or delivery firm must have, it is an essential part of a small firm or independent consultant’s toolbox.”
– Michael Duff, Managing Director at Change Strategy (UK)
“FlevyPro has been a brilliant resource for me, as an independent growth consultant, to access a vast knowledge bank of presentations to support my work with clients. In terms of RoI, the value I received from the very first presentation I downloaded paid for my subscription many times over! The quality of the decks available allows me to punch way above my weight – it’s like having the resources of a Big 4 consultancy at your fingertips at a microscopic fraction of the overhead.”
– Roderick Cameron, Founding Partner at SGFE Ltd
“Several times a month, I browse FlevyPro for presentations relevant to the job challenge I have (I am a consultant). When the subject requires it, I explore further and buy from the Flevy Marketplace. On all occasions, I read them, analyze them. I take the most relevant and applicable ideas for my work; and, of course, all this translates to my and my clients’ benefits.”
– Omar Hernán Montes Parra, CEO at Quantum SFE
Product managers, marketers, and designers are often confused as to what they should do to increase the chances of customers’ engagement and uptake of their offering. Changing individuals’ behavior to enhance engagement, productivity, innovation, and happiness isn’t straightforward.
It takes a lot of effort, time, and resources to execute initiatives aimed at transforming behaviors and Organizational Culture. However, most people aren’t interested in changing and like the status quo to prevail. This is where Behavioral Economics can help to know how customers behave, interpret their decision-making methods, and create solutions targeting those behaviors.
Product designers and marketers aspiring to drive acceptance of their products can make use of the 3 Bs of Behavioral Change to change understand consumer behavior. The 3 Bs of Behavioral Change classify the 3 elements essential to change behaviors, i.e.:
- Behavior
- Barriers
- Benefits
Understanding and employing these 3 Bs helps the designers and product managers instill change, inspire design and strategy-related decisions, increase the acceptance of new products / features and product engagement levels, and build new behaviors in people.
Let’s discuss the first 2 elements in detail.
Behavior
People have an inherent tendency to maintain the status quo. Behavioral change necessitates:
- Identifying individuals’ existing attitudes.
- Assessing and tackling psychological biases affecting individuals’ decisions.
- Carefully tracking behaviors that need to be changed.
- Ascertaining the most important desired behavior and exact action that is imperative to drive results.
- Getting the buy-in from all stakeholders on the key behavior.
- Deciding if the behavior should be permanent or transient.
Examples of key actions to change behaviors include spending 30 minutes thrice weekly doing cardio exercises and consuming salad at lunch daily to stay healthy.
Barriers
Understanding the barriers in behavior adoption assists in creating effective solutions to improve uptake of key behavior. The second step to induce behavioral change is to reduce barriers in its adoption.
- Every decision that a product user has to make, no matter how negligible, increases resistance in the likelihood of completing a specific behavior.
- These actions and decisions an individual has to take in order to achieve the desired behavior create points of friction in embracing key behaviors. For instance, people often find it difficult to decide when presented with complex choices. They tend to procrastinate or become a victim of decision paralysis.
- Removing the points of friction and resistance from any key behavior necessitates documenting and streamlining all decisions. The path of least resistance leads to desired key behaviors.
Examples of barriers include the thought process involved in the decision to select where to have dinner. This thought process is, in fact, a psychological barrier in actually going out and having dinner. Likewise, the decision to walk or drive to a restaurant is a logistical barrier and a point of friction that warrants making a decision.
To eliminate these barriers, we can either remove barriers entirely or just simplify the decision. For instance, elimination of a non-critical, open text field from a sign-up form—that probed the users about their business, which requires significant time to think and answer—can increase page-over-page conversion. In case choices are helpful for the users and cannot be eliminated, then it is best to simplify the decision process by giving fewer options instead of many, or by suggesting “recommended option” to the users.
Interested in learning more about the details of the 3 Bs of Behavioral Change? You can download an editable PowerPoint presentation on 3 Bs of Behavioral Change here on the Flevy documents marketplace.
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Mediocre people occupying senior Leadership positions is one of the chief reasons for the fiasco and humiliation that organizations like Enron and WorldCom faced. The practice of recruiting average people at the top is omnipresent and often goes unnoticed until the results begin to surface, which is typically too late for any intervention.
Smart people decisions matter a lot in achieving profitability. Research indicates that a return on average human asset of 5% is typical in many industries. However, a senior executive selection of 2 standard deviations below the average yields -15% return on asset. An executive selection with 2 standard deviations above average causes 25+% return, which is 5 times the average. Increased investment in finding and hiring the best senior executives fetches returns to the magnitude of 1000%.
Attracting and selecting the best people for senior leadership positions isn’t a small feat. The future of organizations depend on it. However, not too many organizations succeed in getting the right people at the top. The reason for this failure is attributed predominantly to 3 critical obstacles that hinder in making the right recruitment decisions at such a crucial level. Wrong Executive Selection decisions due to these 3 obstacles bring about losses and negative returns:
- Obstacle of Rarity
- Obstacle of the Unknown
- Obstacle of Psychological Traps
Let’s talk about these obstacles in a bit of detail.
Obstacle of Rarity
The first barrier to finding outstanding executives for senior positions is their scarcity, as excellent executives are a rare breed. Sophisticated skills that make an executive standout aren’t common. They are distributed in a given sample.
Outstanding people perform at a much higher level than that of their peers, particularly at the top positions. A blue-collar executive with 1 standard deviation above the mean translates to 20% more productive individual than an average executive. With increasing complexity of job, the difference between the top performer and an average performer increases considerably.
Appointments at the senior positions do not go without assessment errors, which can prove to be extremely costly. Even an accuracy level of 90% in executive assessment isn’t satisfactory. This results in a number of mistakenly categorized top performers and rejection of outstanding candidates.
Obstacle of the Unknown
Another barrier to the Executive Selection process is the predictive assessment of candidates on the skills and attributes required and the actual delivery capabilities of the individuals. It is difficult to assess the unknown.
Competencies at the junior levels are easier to define, but it gets difficult to pinpoint the skills required at the top level. The skills required at the top keeps on changing due to the evolving political, technological and economic landscape. The skills required today get obsolete over time. In case the exact requirements for a position are fully known, it isn’t certain whether a candidate meets the requirements in their entirety.
Accurate assessment of the candidates’ behavior and competencies is difficult but worth investing efforts and resources. “Soft” skills—e.g., leading people, coaching and developing teams, teamwork, and managing Business Transformation—are what differentiate the senior leaders, but gauging these skills necessitates thorough evaluation and considerable time, which is difficult at senior levels.
Obstacle of Psychological Traps
A number of psychological traps are associated with cognitive biases in humans that hinder the decision making abilities in people and incapacitate the hiring process. 8 types of psychological traps are most common in individuals:
- Procrastination
- Assuming incorrectly
- Impulsive judgment based on first impressions
- Discounting the warning signs
- Covering mistakes
- Bonding with familiarity
- Emotional anchoring
- Tendency to follow the majority
For more information on selection and hiring “the best of the best,” take a look at the Fiaccabrino Selection Process (FSP). Download a free primer on FSP here.
Interested in learning more about the 3 critical obstacles that hinder right Executive Selection? You can download an editable PowerPoint presentation on Executive Selection here on the Flevy documents marketplace.
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Changing industry ecosystems and competition today demand from the organizations to undergo strategic shifts. The purpose of a company is undergoing Business Transformation from serving the interest of shareholders to serving all stakeholders that influence the organization.
Shareholders are often considered the only stakeholders that invest in a business. Senior management needs to be cognizant of the importance of shareholders as well other stakeholders who create value for the organization. They should work on building a collaborative Organizational Culture and paying heed to the welfare of all those groups that play a role in organizational growth.
This warrants a thorough evaluation of all stakeholders, their long-term interests, and Value Creation—or Value Destruction—potential for the organization. But first, this calls for finding answers to the following key questions:
- Who creates the most value for the organization?
- Who among the stakeholders typically secure the best deals from the organization?
- Who is the victim of having the worst deals from the organization?
- Who among the stakeholders is potentially untrustworthy?
- Are there any intermediaries or stakeholders fulfilling their personal agendas?
Answering these questions is critical for the executives, otherwise they may risk falling into Shareholder Value Traps. Recognizing and understanding stakeholder value traps while the managing stakeholders‘ various interests helps executives achieve shared and individual long-term goals. These 5 common traps prevent stakeholders’ interests to get integrated with the interests of the organization and destroy the value of a company if overlooked:
- Ignoring cash-flow driving stakeholders while distributing cash
- Miscalculating reaction from stakeholders
- Supporting under-performing units
- Conceding to willful vulture capitalists
- Misjudging intermediaries role in transactions
Let’s discuss 3 of these stakeholder traps individually.
TRAP 1 – Ignoring cash-flow driving stakeholders while distributing cash
Shareholders are often treated as the critical drivers of long-term cash flows. However, they are often short-term cash flow generators, whereas other stakeholders who provide their input for the organization in the form of their competencies and experience deliver long-term value. These real contributors should be given top priority when distributing cash on earnings. Underestimating or failure to identify the real long-term cash-flow generators can be a fatal value trap for an organization.
TRAP 2 – Miscalculating reaction from stakeholders
Another trap that most executives fall victim to is discounting potential backlash from weak stakeholders upon unfair distribution of cash / incentives. Mining value from these victims to support shareholder disbursements can be equally detrimental, as annoyed stakeholders—with the help of social media and NGOs—, legal battles, and financial penalties can devastate a firm’s reputation and financial health.
TRAP 3 – Supporting under-performing units
Senior executives and boards at some organizations foster free riders—stakeholders that sap more benefits from the enterprise than the business they generate—at the expense of long-term value shareholders. Free riders include an under-performing department close to the board, or a dwindling business unit that is part of a profitable section and whose financials are not categorized separately.
Continued support to these free riders is often at the cost of allocating resources to other potentially more profitable ventures, and this practice has led many companies to losses and even bankruptcies.
Interested in learning more about the Stakeholder Value Traps, types of organizational stakeholders, and strategies to stay clear of the Stakeholder Value Traps? You can download an editable PowerPoint on Shareholder Value Traps here on the Flevy documents marketplace.
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Transformation from a product-based model to a platform model is a dream for many executives. More and more product companies are now shifting into a platform model. The drive behind such a shift is the huge success of platform companies—e.g., Amazon, Google, and Apple. These organizations started out as a retailer, search engine, and iPod manufacturer respectively, but later transformed into platform models.
However, bringing this transformative vision into reality is anything but straightforward. Research into successful platform businesses reveals that this necessitates a robust approach comprising the following 4 critical phases:
- Attractive Product and Customer Base
- Hybrid Business Model
- Rapid Conversion
- Identify and Seize Opportunities
Let’s dive deeper into the first two phases of the approach, for now.
Attractive Product and Customer Base
A platform model is not a remedy to resuscitate products that are on a downward slide. It necessitates an attractive product that offers a significant customer base and value to help improve customer loyalty and resist rival offerings. The critical mass of customers also allows the platform company to create value for—and attract—third parties that are crucial for the platform to flourish.
Qihoo 360 Technology, a large internet firm in China, commenced its operations in 2006 by selling an antivirus software, 360 Safe Guard. To build a broad user base and to gather customers’ feedback on improving the product, the company started giving away the product free. The company maintained a list of malware as well as a “whitelist” of programs that were safe for the users. The critical mass of customers allowed Qihoo to:
- Quickly identify viruses on scanning computers
- Improve the antivirus
- Introduce new products
- Attract new customers
- Create new platforms
- Attract 3rd-party software companies to make Qihoo a channel for reaching customers.
Hybrid Business Model
The notion that an organization has to embrace either a product-based or a platform-based business model is far from reality. Although, both the product-based and platform-based business models need a framework to assign dedicated resources and manage operations, however, Business Transformation from a product-based model to a platform-based model gets simplified utilizing a hybrid approach. A product-based business model calls for organizations to have differentiated products catering to customers’ needs, to create value. Whereas, a platform-based business model creates value by linking users to 3rd parties and charging fees for using the platform. The focus of Platform models is on:
- Inspiring mass-market acceptance
- Increasing the number of interactions rather than meeting specific customer needs
- Connecting users and 3rd parties to create competitive edge instead of relying solely on product differentiation (product model).
For example, Apple converted itself from a product model to a platform model within a year after the launch of the first iPhone. Initially, Apple reacted defensively to any hacking attempts and precluded 3rd party apps on the iPhone, but then decided to create an open platform, and launched the App Store. The hybrid model and platform mindset created additional income streams and significant revenue for Apple.
Rapid Conversion
To make a product and business model profitable, the conversion of product users into platform users is of utmost importance. To enable this, an organization needs to develop its platform in such a way that it should present enough additional value for the customers to adopt it and become its users. Three key elements are critical to accomplish this:
- Deliver adequate value
- Launch connected products consistent with the brand
- Allow 3rd parties to perform upgrades
If the platform does not offer adequate value for the customers they are not going to embrace it the way they do to a great product. Similarly, addition of new offerings that are coherent with the brand has a strong correlation with new platform adoption. New offerings gain traction from a firm’s image and strengthen the brand further. Likewise, allowing 3rd parties to make upgrades, improve product offerings, and develop the platform further helps in rapid conversion, additional revenue, and growth.
Interested in learning more about the phases of the approach to Products-to-Platforms Transformation? You can download an editable PowerPoint on Products to Platforms Transformation here on the Flevy documents marketplace.
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Scalability is defined as possible meaningful changes in magnitude or capacity. In business terms, it’s the capability of a system to enhance productivity upon resource augmentation. Scalability provides an organization the capabilities to develop compelling value propositions—that are hard to imitate by the rivals—and achieve profitable growth even in the wake of external threats, cut-throat competition, stringent laws, or financial downturns.
Today’s challenging business ecosystems and economic outlook demand from the enterprises to develop novel and Scalable Business Models that are able to leverage positive returns on investments. To accomplish this, leaders need to identify and eradicate any capacity issues, enhance collaboration with existing partners, build new partnerships, or develop platforms to work with their opponents.
Executives should invest in scaling options only when they are sure to boost returns. They have to be quick to exit a business when returns on investment to scale backfire.
5 Patterns of Business Model Scalability
Benchmarking a number of successful organizations reveals that their Business Models were flexible enough to sustain internal and external pressures. Business Model Scalability hinges on aligning the strategic partners and Value Propositions to serve the customers.
To drive Business Model Innovation (BMI), leading organizations consistently display 5 critical patterns of Business Model Scalability:
- Operate with multiple distribution channels
- Eliminate typical capacity limitations
- Outsource capital investments to partners
- Allow customers and partners assume multiple roles in the business
- Create platform models
Operate with multiple distribution channels
Successful businesses achieve scalability by selling through multiple distribution channels. Well-known businesses—e.g., Google and Apple—have extensively studied and implemented adding additional distribution channels. By avoiding cannibalization of sales through existing channels, this has allowed them to spread overhead costs and profit from increased sales. Additional channels help businesses expand clientele and uncover new opportunities.
Eliminate typical capacity limitations
Scalability necessitates finding ways to overcome capacity limitations that hamper various industries. Well-known companies achieve scalability by overpowering any limitations that constrain various businesses. Successful companies are not inhibited in any way by physical or material constraints—including deficiencies related to manpower, capital, warehousing, systems, technology, or capacity. For example, managing costs related to creating R&D facilities and innovating new products that often impede the entire pharmaceutical industry.
Outsource capital investments to partners
Top businesses achieve scalability by transferring or sharing cash flow and working capital requirements with the partners. They optimize their capital and cash flow limitations and prioritize their crucial investments. They adopt Business Models geared toward creating open platforms that allow them to shift these expenditures to their strategic partners.
Allow customers and partners assume multiple roles in the business
Scalable businesses work in conjunction with their strategic partners and customers. They offer multiple roles to them and leverage mutual resources for growth of their businesses. They collaborate with each other through joint ventures or through informal mechanisms—e.g., core platforms—which they utilize to share distribution methods, loyalty programs, and resources. They have a “laser” focus on the factors that are of value to their customers, and develop (and enrich) their value propositions based on that.
Create platform models
Top businesses build platform-based Business Models that work on the principles of partnership and scalability. They use their platform-based Business Models to foster relationships with and convert their rivals into partners—by letting them share their platform and generate incremental revenues, for instance, through benchmarking data and “ease of use” sales. Visa Inc. is an example of how businesses connect with shoppers using Visa’s credit card platform.
Scalable Business Models are more likely to generate rapid returns. However, these Business Models demand utilization and alignment of capabilities that the organization, its strategic partners, and customers possess. Execution of the patterns of Business Model Scalability involves categorizing key resources and initiatives required to enable synergistic collaboration and superior product / service offerings.
Executives can make use of these 3 potential levers to achieve Business Model Scalability that provide an implementation roadmap for both novel or revamped Business Models:
- Determine potential strategic partners
- Brainstorm a scalability plan
- Select viable and scalable Business Model options
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Survival of a business in this digital age largely depends on its ability to timely embrace Digital Transformation. Digital Transformation entails using Digital Technologies to streamline business processes, culture, and customer experiences.
In order to compete today—and in future—and to enable Digital Transformation, organizations should work towards fostering a culture of continuous learning, since Digital Transformation depends on learning and innovation. The organizations that holistically embrace this culture are called “Next-Generation Learning Organizations.”
The next generation of Learning Organizations capitalize on the following key variables; Humans, Machines, Timescales, and Scope. These organizations incorporate technology in enabling dynamic learning. Creating Next-Generation Learning Organizations demands reorganizing the entire enterprise to accomplish the following key functions to win in future:
- Learning on Multiple Timescales
- Man and Machine Integration
- Expanding the Ecosystem
- Continuous Learning
Learning on Multiple Timescales
Next-Generation Learning Organizations make the best use of their time. They appreciate the objectives that can be realized in the short term and those that take long term to accomplish. Learning quickly and in the short term is what many organizations are already doing, e.g., by using Artificial Intelligence, algorithms, or dynamic pricing. Other learning variables that effect an organization gradually are also critical, e.g., changing social attitudes.
Man and Machine Integration
Rather than having people to design and control processes, Next-generation Learning Organizations employ intelligent machines that learn and adjust accordingly. The role of people in such organizations keeps evolving to supplement intelligent machines.
Expanding the Ecosystem
The Next-generation Learning Organizations incorporate economic activities beyond their boundaries. These organizations act like platform businesses that facilitate exchanges between consumers and producers by harnessing and creating large networks of users and resources available on demand. These ecosystems are a valuable source for enhanced learning opportunities, rapid experimentation, access to larger data pools, and a wide network of suppliers.
Continuous Learning
Next-generation Learning Organizations make learning part and parcel of every function and process in their enterprise. They adapt their vision and strategies based on the changing external environments, competition, and market; and extend learning to everything they do.
With the constantly-evolving technology landscape, organizations will require different capabilities and structures to sustain in future. A majority of the organizations today are able to operate only in steady business settings. Transforming these organizations into the Next-Generation Learning Organizations—that are able to effectively traverse the volatile economic environment, competitive landscapes, and unpredictable future—necessitates them to implement these 5 pillars of learning:
- Digital Transformation
- Human Cognition Improvement
- Man and Machine Relationship
- Expanded Ecosystems
- Management Innovation
1. Digital Transformation
Traditional organizations—that are dependent on structures and human involvement in decision making—use technology to simply execute a predesigned process repeatedly or to gain incremental improvements in their existing processes. The Next-generation Learning Organizations (NLOs), in contrast, are governed by their aspiration to continuously seek knowledge by leveraging technology. NLOs implement automation and autonomous decision-making across their businesses to learn at faster timescales. They design autonomous systems by integrating multiple technologies and learning loops.
2. Human Cognition Improvement
NLOs understand AI’s edge at quickly analyzing correlations in complex data sets and are aware of the inadequacies that AI and machines have in terms of reasoning abilities. They focus on the unique strengths of human cognition and assign people roles that add value—e.g., understanding causal relationships, drawing causal inference, counterfactual thinking, and creativity. Design is the center of attention of these organizations and they utilize human imagination and creativity to generate new ideas and produce novel products.
3. Man and Machine Relationship
Next-generation Learning Organizations (NLOs) make the best use of humans and machines combined. They utilize machines to recognize patterns in complex data and deploy people to decipher causal relationships and spark innovative thinking. NLOs make humans and machines cooperate in innovative ways, and constantly revisit the deployment of resources, people, and technology on tasks based on their viability.
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Supply Chain Management is getting more and more complex. The pressure on the Supply Chain information to be made public is also increasing day by day. With the popularity and widespread use of social media, it has become more and more difficult for organizations to hide information pertaining to supply chain practices, employees’ treatment, suppliers’ processes, or waste materials generated that could affect the environment. Social media often publicizes negative reports on companies’ supply chain practices—its best to have a robust information disclosure strategy before anything like that ever happens.
Executives must appreciate these external forces and information transparency demands, and react proactively to build and maintain competitive advantage for their organization. They need to be able to, first, accurately predict the data requirements of various stakeholders and then unanimously decide on the type and frequency of the information to be shared. A reactive information disclosure strategy is less time and planning intensive, but it does limit the chances of first-mover advantage over competition.
Supply Chain information can be classified into 4 categories:
- Critical
- Strategic
- Non-critical
- Optional
Critical Information
Organizations using this information category know that they have certain glitches in their Supply Chains that could potentially be a source of criticism from NGOs and the media and may bear adverse effects on their reputation. This includes information concerning unhygienic or inferior quality products; unfair supply chain practices; or environmental problems.
Strategic Information
Even though stakeholders do not ask for this information, this information category is considered strategic as disclosing this data can boost brand value and product differentiation. The strategic information category is high value to the organization but is low on risks for the supply chain. For example, in the beauty, fashion or food products industry, sharing information about organic ingredients may be instrumental in achieving product differentiation and brand reputation.
Noncritical Information
Disclosure of this information category is typically un-called for and has negligible effects on brand value. This information category has low value for the company and has low risks for the Supply Chain. For instance, needlessly sharing child labor data in regions with actively enforced child welfare laws.
Optional Information
This information category is a matter of internal supply chain consideration and has no bearing on the customer. The optional information category is low value to the organization and is actually highly risky for the Supply Chain. For instance, potential quality issues and defects in the supply chain that are identified and resolved during quality control, and do not affect the finished product.
There isn’t a one-size-fits-all strategy that organizations can adopt to ensure a viable and high-quality Supply Chain Information Disclosure. However, the approach needs to be evolving based on individual circumstances. Senior executives should promptly respond to public inquiries, ensure fair treatment of employees, and guarantee compliance with basic human rights to protect their organizations’ reputation. Experts suggest the following 8-phase approach to address and improve Supply Chain Information Disclosure.
Appreciate the criticality of Supply Chain information disclosure
The first step is to analyze the forces that demand increased supply chain transparency and ascertain the importance and priority of information for the stakeholders. Once it is established, the leadership must take actions to address the information requirements of key stakeholders.
Appraise Supply Chain data collection abilities and resource requirements
The next step is to assess the competence of the organization—and that of the suppliers—to gather quality supply chain data. The executives should also evaluate the costs and resource requirements to enable improved information disclosure.
Determine the existing and desired levels of Supply Chain information
The third step is to ascertain the existing knowledge of supply chain information among the executives and suppliers. The leadership needs to identify the desired levels of supply chain data collection and sharing capabilities, and invest to fill any gaps between the existing and desired supply chain data collection and sharing competencies.
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