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September 22, 2015

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Businesses need to transform to survive changes

By Cyril Bouquet | September 22, 2015, Tuesday | Print Edition

Google recently surprised the tech world and beyond with its announcement of restructuring into a new holding company called Alphabet. I tend to appreciate Google and its constant efforts to re-invent itself. At the same time, we have seen many industry icons unexpectedly stumble and collapse.

History is littered with examples of hugely profitable companies that once seemed infallible until somehow the future turned on them. One study tracked the 100 companies that had the largest market capitalization in 1912. The findings are revealing: By 1995, nearly half had disappeared, and of those that survived, only 19 remained in the top 100.

Companies must balance three competing imperatives: first, run their operations effectively; second, create new businesses which address future business opportunities; and third, shed activities and practices that might once have been core but now constrain a company鈥檚 ability to grow.

But when I ask executives how much time they actually spend managing the current business versus creating the future, their answers typically fall into the 90/10 bracket. One participant even told me she spends 120 percent of her time managing the present.

While Kodak invented the first digital camera, it wasn鈥檛 exactly sure what to do with this emerging technology until it filed for bankruptcy protection, 36 years later. The reason? Pushing this concept full speed meant targeting a much broader base of customers than before, and developing new competencies in electronics, design, software and display technologies it did not have in house; it also meant trying to earn revenues and profits from low-price cameras rather than from a very lucrative set of 鈥渄isposables鈥 (film, paper and processing chemicals). As many observers have already pointed out, the very same things that made Kodak successful are also those that led to its downfall.

Everybody knows that success breeds competence traps 鈥 including hubris, complacency and fear of trying anything new that might dilute the brand or cannibalize the core business activities. When these pathologies strike, companies like Kodak slowly fall behind the pace of change in their industries. What the Kodak story also makes clear is that successful companies are ultimately victims of their history: Talented executives respond quickly to the most disruptive shifts affecting their market, but they do so by reinforcing the strategies that have worked best in the past. Companies must be able to transform themselves significantly throughout their lifetime if they are to weather the turbulence of change, and remain relevant to their customers, investors, employees, and other stakeholders.

This long-term effort requires two essential capabilities: First, the construction of an institution-building purpose that is primarily geared towards meeting the evolving needs of multiple stakeholders rather than simply serving the short term financial objectives of investors; and second, an adaptive capability that allows a business to deal with the massive changes that occur in its sector.

Cyril Bouquet is Professor of Strategy at IMD.

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