Understand yourself
Now that you’re armed with a better knowledge of the business environment, it’s time to look inward at the capabilities you have, and need. Then look to potential blockers, those existing institutional processes and habits that could slow you down.
(Re)consider your capabilities
It’s one thing to draw up a business model on a PowerPoint slide and describe what you want the future to be. It’s another thing to identify, and harness, the underlying business capabilities you need to make the new model work. Focusing on the right capabilities is critical.
Whether—and how—you buy, rent, or build these capabilities is a function of factors unique to your situation. The key in any event is identifying the handful of capabilities that will be most critical to develop first, in order to get the new business model up and running. For the power utility we described earlier, bringing its new business model to life meant a huge shift for the company; it needed to move from managing a handful of assets to managing thousands of sites distributed across the country, with massive implications for every aspect of the business—from workforce to controls, from go-to-market approach to back-office capabilities, and from balance sheet to income streams.
Similarly, a technology company we worked with was grappling with how to reinvent itself as a XaaS (anything as a service) company, while moving away from its roots as a hardware manufacturer. The company had moved into XaaS through acquisitions, but its stakeholders and even employees still viewed it as a manufacturer, and products still accounted for a relatively large share of revenues. In management discussions, company leaders realized they needed to go “all in” if they were to truly change the business model, make XaaS central, and ultimately meet the leadership team’s goal of commanding the higher valuations associated with other XaaS tech players.
Capability-building was vital to the effort, and through a series of rapid scenario-planning exercises, the company identified a handful of urgent capabilities that would be most visible to customers and most differentiating. Among these were customer experience and design capabilities (to create a less confusing product array), and an end-to-end architecture (from “lead to cash”) to manage customer interactions more efficiently.
As the company moved ahead with these and the other prioritized capabilities, it began to see positive results, including accelerated sales cycles, increased average deal size, and, yes, a much-improved market valuation.
A quick, last word of caution about capabilities. Your company’s capabilities are far more tied to your organizational culture than you may realize. Pursuing a new business model that requires more innovation, for example, might be strategically necessary—but it won’t be organizationally possible if your culture prizes risk aversion and you don’t address this head on.
Confront inertia
The status quo exerts a powerful tug on people and organizations. The very idea that your company is “organized” means its behavior demonstrates a day-to-day dependable repeatability. When your business model is working well, this inertia is a source of stability and continuity. When it’s time for a change, inertia itself becomes a problem. (This is one reason we recommend you consider housing a new business model separate from the rest of the company—a subject we will discuss later.)
The sources of inertia are varied, but important to recognize given the stakes involved. Here are some causes for inertia you should watch for.
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Confidence in the status quo. Your success creates a tendency for people to become attached to the current approaches. The environment changes; you can’t.
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Costs of change. Change has costs, including hidden ones like product cannibalization.
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Power plays. Your leaders are reluctant to jeopardize their positions or dismantle their departments when changes are proposed. Infighting impedes progress.
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Skills gaps. The large gap between the skills your company has, and needs, slows or deters new endeavors.
Stepping back, there are two organizational manifestations of inertia that are particularly toxic to business model innovation, and thus worth a closer look. The good news is that they are both areas where management attention can solve the problems when leaders put their minds to it.
Don’t take resource allocation for granted. It should go without saying that successful business innovation requires concentrating, not spreading, resources. You’ll capture new profit pools only if your team is aligned—and then acts—on the capital and resource allocation implications of your strategic decisions.
Yet, too many management teams fall short of effective, dynamic resource allocation. We saw some evidence of this in our CEO Survey, where nearly two-thirds of respondents reported reallocating 20% or less of resources (including people) from year to year, and almost 30% of CEOs cited resource reallocation of 10% or less. Higher levels of annual reallocation in the survey were associated with both greater levels of reinvention and higher profit margins.