Almost all CEOs face the challenge of maintaining relevancy in the markets they serve. More specifically, what keeps many CEO’s awake at night is the realization that something is materially changing in their company, in their markets, or within what was once a marquee product line. Yet, the rank and file just can’t see it. And if they do see it, they aren’t responding fast enough. Maybe our CEO can’t fully understand it. But their instincts tell them that it’s more than a seasonal blip; it’s something systemic that could rock the company off its foundation. In many instances, the problem boils down to the company not innovating fast enough. The world is seemingly passing it by. Relevancy is lost.
Often, a firm’s business model, that was created years ago, that once aligned departments so efficiently, continues to be focused on products or services that customers are becoming less enamored with. Yet the language in meetings is so focused on pushing product X or service Y and a downward dip in the sales projections has to mean that sales and marketing aren’t doing their jobs. While this might be true, the larger problem is, or will be, that something is happening in the market that is changing the game and the company is slow or reluctant to see it. And by the time it is seen, it’s often too late. Why is this?
Let’s travel back in time. When companies are formed, someone had a brilliant idea. They could see a gap based upon what existed at a point of time. In B2B markets, there was a problem to be solved and the entrepreneurial founder connected the dots that existed in that reality and created something that solved that problem like no other. Whether by happenstance or creative experimentation a business model was discovered that connected the value proposition with customers and routes to market and it worked. Fast forward and the model works and the company is growing and becomes profitable. Professionals are hired to execute the model and policies and procedures are established to assure that it is executed as efficiently as possible. The great news in the short term is that employees earn their bonuses and the company is listed as one of the best places to work by local publications. Everything looks great. But there is a metamorphosis at work.
In most markets, things don’t stay static. The dots that you relied upon that defined your differentiated value proposition, your ideal customer, and your routes to market may change. Making it even more complicated, competitors, assuming you’re not a monopoly, have been attracted to the market and using their insight, creativity, and their own new clay to work with have added new dots, perhaps some violently colliding with your own. The market responds and if the cost of switching isn’t enormous, customers move on and buy from your competitor. Loyalty counts but it can only go so far. It may not even to be a feature-for-feature comparable product to yours but instead, introduces a whole new way of doing something that also addresses the problem you were out to solve. As a simple example, think of how pagers were used by sales people twenty plus years ago. Enter the cell phone followed by the smart phone with functions becoming increasingly integrated in a digital world. Or, just think about open source software and how quickly that has driven integrated functions (E.g. Machine Learning) and broadened accelerated innovation. Companies that fail to innovate, that is, challenge the ways that the dots are connected, or even introduce new dots (E.g. new technology) may find themselves in trouble, hence our CEO laying in bed at 2am staring at the ceiling thinking, “what is happening”!?! So given this, why can’t companies simply spend more time innovating? The answer is that it’s simply not that easy.
The reason why companies have such a difficult time innovating is because they’ve built a gigantic flywheel that has so much inertia around it, centered on a business model that has served them well. The organization by this stage has difficulty with ambiguity; time is precious after all and one needs to execute against the game clock. The quarterly cadence is well defined. The CFO is conditioned to post growth, and understands the levers to pull and buttons to push that have historically delivered results. The “business model” is broken into % of revenue by function and everything is synced. Keeping engineering spending at 14% of revenue and marketing and sales at 18% with the belief that everything should work, trickling down to operating profit of 15%. This again, was not the model when the company was incorporated and chances are, going forward, won’t be the model long-term. Aspects of the business model, other than the financial model are easily forgotten when the firm experiences some success. For example, does the all important core value proposition still resonate with today’s and tomorrow’s customers?
Market forces and technology shifts can introduce significant changes but it’s the innovative companies that create havoc with these changes on existing paradigms and views of reality. How did Amazon transform itself from being an online book reseller to supplying Cloud infrastructure and transforming the cost of computing? The answer is that Amazon reconnected the dots and even created new ones. It has been in a state of constant innovation while leveraging a business model that can scale in different directions while taking advantage of many of its core competencies. Building Amazon Web Services I would argue was not at all orthogonal to building out its huge merchandising business. The latter took advantage of the gains made in computing, including the cost model. Did Amazon anticipate when it was founded the advent of Cloud computing and what it could mean? I doubt it, but it sure capitalized on it.
Given these challenges, how do companies ensure that they aren’t the victims of their own early success? How do CEOs enable their companies to innovate? Here are some simple steps to consider:
“You will come to a place where the streets are not marked.
Some windows are lighted. But mostly they are darked.
A place you could sprain both your elbow and chin!
Do you dare stay out? Do you dare go in?
How much can you lose? How much can you win?
And IF you go in, should you turn left or right…
or right-and-three-quarters? Or, maybe not quite?
Or go around back and sneak in from behind?
Simple it's not, I'm afraid you will find,
for a mind-maker-upper to make up his mind.”
In summary, CEOs need to feel comfortable with the fact that the formulation of strategy isn’t always a straight line. There is often ambiguity outside the four walls of the company that the CEO and their team must navigate through to maintain relevancy. Over time, especially in our accelerated world, it’s a challenging task to maintain relevancy through mindful and constant innovation. Innovation often means connecting dots in new ways, taking the CEO and their team outside of their comfort zone, to a state once enjoyed and celebrated by the company’s founders. The conundrum of balancing efficiency in executing today’s operating plans with innovating for tomorrow is real and challenging. Fortunately, it doesn’t need to be an either A or B scenario when the right forethought is applied.