Master these three preconditions to transform your organization and achieve high performance.
Does true success lie outside of your comfort zone? It turns out that when companies dare to move beyond their familiar territory, they enjoy better financial performance.
A recent Accenture survey shows that those companies that generated the most revenues from investments in markets and offerings where they had not previously participated (the “new” business activities) were ones that achieved the strongest financial gains between 2014 and 2017. For one company, new could mean shaking up an artisanal brand by introducing digital technology. For another, it might mean launching and scaling an online marketplace. For a third, it could be a matter of focusing on a new product area with great future potential.
We believe this process of embracing new business activities outside of the familiar territory is best characterized by the term rotation.
When we surveyed 1,440 C-level executives in companies with revenues of more than $500 million, in 11 industries and 12 countries, more than half said they expect new business activities to account for more than half of their revenues and profits by 2021. Through this research, we identified four groups of companies at different stages of their rotation to new businesses. We measured their progress by assessing the contribution of new business activities to overall revenues over the past three years. While most companies were rotating, only 6% of the total sample — companies we call the Rotation Masters — have made substantial progress: They have earned more than 75% of their revenues between 2014 and 2017 from new business activities. Notably, 64% of these 90 companies that shifted into new business activities decisively during this time achieved double-digit growth in sales.
We call these companies Rotation Masters because they did the up-front work that enabled them to launch and manage new businesses effectively. Our findings show that companies wishing to move into new businesses successfully must establish the right preconditions for successful change in three areas: investment capacity, innovation strategy, and organizational synergy.
Build a Strong Investment Capacity
Rotation Masters understand the magnitude of investment required to pursue “rotation to the new” successfully. To build investment capacity, they regularly and decisively reduce costs, divest underperforming businesses, and consolidate tangible assets. As a result of such moves, more than two-thirds of the Rotation Masters in our study believe they hold sufficient investment capacity (capital, talent, infrastructure) to take on activities that will not only revitalize and grow their core business but also help scale up new business activities. Less than half of other companies have the same confidence. (See “Strong Investment Capacity.”)
Many of Novartis’s recent actions illustrate this point. Here’s one: In 2015, as part of reshaping the company to better meet demand from the rising global presence of chronic illnesses, Novartis divested its non-influenza vaccines business to GlaxoSmithKline (GSK), at the same time acquiring GSK’s oncology products. The acquisition boosted Novartis Oncology business net sales by 24% to $13.4 billion in the transaction year and strengthened its ability to renew the product portfolio. In 2017, strong performance of existing and new products more than offset the effects of generic competition on products that have lost patent protection, including its cancer drug Gleevec. The move simultaneously enabled the company to rationalize its own portfolio, revitalize its oncology business (it’s one of the largest global providers of cancer treatments), and increase revenues.
Unlike the Rotation Masters, other companies in our study have hesitated to make radical changes to their core business to create the investment capacity they need to rotate to the new. Around half of the respondents said they were reluctant to consolidate assets or divest select business lines. But 66% said they do plan to consolidate some tangible assets in the next three years.
Key takeaway: Rotation Masters use the financial strength of the core business to fuel investment into new businesses.
Pursue a Concentrated Innovation Strategy
In most of the companies in our study, innovation doesn’t receive central oversight. Instead, small teams in various business units pursue innovation separately, each with its own funding.
Rotation Masters take a different approach. More than three-quarters of them place innovative resources under a dedicated function that handles funding for a cross section of innovative efforts. This gives the company a way to identify ideas with high potential and allocate the resources to turn those ideas into commercial reality.
Only a little more than one-third of other companies have a concentrated innovation strategy today, but that is expected to change by 2021. (See “Concentrated Innovation.”)
To accelerate Audi’s rotation to the autonomous vehicle business, the German automaker launched the Autonomous Intelligent Driving (AID) subsidiary in 2017. AID is charged with developing systems for autonomous driving in urban areas for Audi and for its parent, the Volkswagen Group. The subsidiary leverages the dedicated AID team as well as external partners to solve the tricky challenges of autonomous driving through a combination of machine learning, robotics with route planning, vehicle sensors, and other technologies.
Key takeaway: Rotation Masters design their organizations to innovate with focus, by tying in leadership and funding under a dedicated governance structure. Using this approach, companies can develop and test the most promising ideas quickly — and keep good projects from languishing when they can’t compete for funding.
Create Valuable Synergies
Rotation Masters are not confounded by the inevitable tensions that arise between the core and new businesses. Instead, they are committed to creating synergies — by, for example, using the new business to inject entrepreneurship into the culture of the legacy business or by finding cross-selling opportunities.
Use the new business to influence the legacy business culture: By legacy business, we mean the main revenue-generating business activities that have been in operation for more than five years. Sixty percent of Rotation Masters agreed that the potential to reshape the culture of the legacy business is a critically important factor in deciding to scale new businesses. Less than 30% of the other respondents did. (See “Valuable Synergies.”)
DBS Group Holdings, Southeast Asia’s largest bank, is embracing digital technology while also changing the culture to make it more entrepreneurial. For example, the bank is involving employees in reimagining the customer journey, compelling them to become an integral part of new business activities instead of observing from the sidelines.
To bring about the culture shift, DBS is focused on increasing employees’ digital literacy. It holds hackathons, where participants learn about cutting-edge technologies and human-centered design. Several new solutions, such as DBS PayLah! (a mobile wallet) and DBS Home Connect (a home mortgage app), started as hackathon projects. The bank has also created a digital institute to train staff in technologies such as data analytics and digital marketing. The objective, says Yan Hong Lee, managing director and head of group human resources at DBS, is to change the culture of the bank “to be more similar to that of a tech startup,” with a workforce that is “bold enough to take risks and experiment.”
Read Related Articles
Generate cross-selling between the new and the legacy businesses: More Rotation Masters than others take the potential for cross-selling between the new and legacy businesses seriously when making scaling decisions.
In 2016, Walmart redoubled its efforts to build a substantial e-commerce business through the $3.3 billion purchase of Jet.com. The company has deliberately taken steps to integrate its digital and store businesses so that they support each other. Stores double up as fulfilment centers, and customers are encouraged to order online and collect in-store for free. Walmart has also slowed the pace at which it opens new physical stores, as it redirects resources to ramping up e-commerce infrastructure and services. By doing so, the company can concentrate more thoroughly on developing a seamless shopping experience and thus compete more effectively against other incumbent players and established e-commerce retailers. This approach is paying off: In the third fiscal quarter in 2017, Walmart’s U.S. year-on-year online sales increased by 50%.
Key takeaway: Rotation Masters seek synergies between the legacy business and new businesses; they don’t underestimate the potential for cross-selling, or the power of creating an overarching entrepreneurial culture that is fit for the future.
Companies that set the stage for change by mastering three critical preconditions will be well-prepared to succeed in disruptive times. By creating sufficient investment capacity, taking a focused approach to innovation, and seeking high-value synergies between legacy and new businesses, they can smoothly rotate to the new and carve a path to a stronger future.