This year may well be remembered as the year of the retail apocalypse, with iconic brands including Thomas Cook and Mothercare succumbing. However, it’s not just the retail sector that’s felt the pinch. Across every business segment we are seeing giants of industry failing to respond quickly enough to market forces, leaving shareholders paying the ultimate price.
Herein lies the challenge for all established companies – how to manage these external changes when everything within the organisation is geared towards maintaining business-as-usual. As futurist Ray Kurzweil outlines: "we won't experience 100 years of progress in the 21st century — we'll experience 20,000 years of progress." Unfortunately, static business models don’t marry well with these exponential market dynamics.
There needs to be a fundamental shift in how firms approach their business transformation programmes. Of course, you can’t neglect the core business - the cash cows that feed today’s profit margins must be maintained and optimised - but there must also be a recognition that these cash cows will eventually be put out to pasture. We therefore need to be actively managing our portfolio to search and develop the next generation of business models to drive growth.
So often the term ‘innovation’ is seen as a tick-box exercise or a nice byline in the annual report, and sometimes it deserves its negative baggage. Let’s be honest, a co-working space where people write on a wall is just theatre.
True business transformation requires a scientific and strategic approach, where progress is incentivised in a much different way to how it’s measured along business-as-usual lines.
Teams within a large corporation typically spend 12 to 16 weeks putting together a business case. Usually these aren’t based on real-world tests that deliver relevant customer data and evidence, which means more often than not the ROI that was promised in the back of the business case is rarely realised, or if it is then it’s normally within double the time initially forecast.
The problem isn’t necessarily the failure rate. After all, according to Harvard Business School professor Clayton Christensen, there are over 30,000 new products introduced every year, and 95 per cent fail. The problem is that they aren’t failing quickly enough, and resource and confidence is being wasted.
In order to successfully de-risk the development of new business models, corporates need a system in place where they strategically identify what areas they want to test, mechanisms to test them and then a framework to measure the impact. They need regular milestone metrics that identify whether it’s something to double down on with extra funding, or whether they need to kill it. Validation needs to be reduced from years to weeks. And the employees involved in these initiatives need to be rewarded differently – performance-related pay doesn’t work when failure rates outweigh success.
Identifying areas to test is one area in particular that many corporates get wrong. Often digitisation is seen as the holy grail, yet automating parts of the business won’t stop a start-up taking your market share, because they have generally identified a market that is addressing untapped customer customer needs.
Instead, companies need to be looking at the wider macro trends in their industry and where the venture capital money is going – investors will be looking at spaces where they see potential for high growth and high returns in the value chain where new business models are emerging.
We can expect innovation budgets to increase in 2020. However, extra money and people are not the main factors that will determine the success. The crucial components will be systematic frameworks to scale processes rapidly and the cultural shift - enabled by C-suite buy-in - whereby transformation is treated on a par with business-as-usual, with its own distinct measurement criteria and reward mechanisms.
With a different playbook, companies can expect to live a long time. Market leaders can capitalise on their established position, which brings advantages in data, customer relationships and brand awareness, to take on new markets and geographies intelligently, rather than being blindsided and having their market share eaten by companies that didn’t even exist two years ago.
Chris Locke is CEO, Corporate Innovation, at venture development firm Rainmaking
Image adapted from Tim Green/Flickr (Creative Commons)