GE Aircraft Engines (GEAE) recognized that the profit model had shifted. It repositioned itself in the value chain from a pure product company to one of the largest value-creating partners for airlines. GEAE’s new business model included building a highly profitable aftermarket services business. Today, GEAE is growing in large part because of its third-party engine overhaul and maintenance business. Still, the questions for GEAE are, What will the next profit model be? Alternatively, how can the current profit model be transformed to allow GEAE to win in the next round? How can the organization mobilize its full capabilities to support this new strategic position?
We call this semi-continuous process strategic business transformation. It has two components: the options horizon and the adaptation round.
The Options Horizon. This stage begins with defining what we call the company-forward perspective. This requires using the traditional tools of strategic analysis — gaining insight into the economics of competition in relation to the fulfillment of customer needs, searching for opportunities to reduce costs, choosing the right technologies, and determining appropriate levels of vertical integration.
At the same time, the company must adopt a “future-back” perspective, understanding what is likely to create value in the future within its broadly defined value-chain enterprise, and where valuable options may lie for the firm. The future-back perspective scans the horizon for areas of significant potential discontinuity that might redefine the value of customer needs, and drives the current strategy toward creating options that are likely to accrue value as the future evolves toward those dislocations. It also positions the company for near-term success.
Through the company-forward and future-back analyses, the firm settles on the next games. This analysis identifies the central customer segments or customer needs and how they will be addressed in a way that is dramatically different from the current strategy. Once this is clear, the appropriate future value proposition, business model, and economics of value capture can be defined.
The Microsoft Corporation is an extreme example of a company positioning itself along an options horizon. Its strategy is to have its hands in as many options as possible. In addition to its core Windows operating system and Office suite, Microsoft has options in enterprise software, game consoles, ISP networks, and broadband communications, to name only a few. Aided, admittedly, by a large store of cash, Microsoft continually scans the horizon for its next pot of gold, in both the medium term and longer term.
The Adaptation Round. Once the next games are defined, the company must adapt to win them, navigating the path from now to then while protecting the value of the existing franchise. In today’s volatile business environment, this process of objective-driven change must remain flexible in regard to both the objective and the path. The organization must be prepared to develop new capabilities and rely on entrepreneurial decision making deeper in the organization than used to be the norm.
Transforming the organization to occupy a new strategic position is not usually accomplished when driven only from the top. Instead, implementation success means devolving authority within the organization, and managing incentives and decision rights appropriately. The key elements include a full understanding of the strategy by line management; aggressive targets for each division; the cascade of the change process into the organization; regular review by senior management; and a focus on capability-building for future rounds, as well as on near-term profit improvement.
Finally, since transformation requires navigating new territory, strategic learning is necessary. We see the need for a sensing network that keeps track of both present and future opportunities. The sensing network must be tuned to activity in three critical areas — customers, business-model evolution, and the economics of value capture — as it attempts to gauge answers to such questions as: Are customers satisfied? Are we creating perceived customer value? Are there opportunities we have previously ignored? What changes will improve the value proposition? Is our business model efficient? Are all the elements of the enterprise value chain competitive? How are competitors modifying their business model? Are there business-model opportunities we have previously ignored? What changes internally or within the extended enterprise will improve the business model? What is our profitability by business, customer, or market segment? Is the area profitably scalable? What is the apparent profitability of competitors by business, customer, and market segment? What changes within the extended enterprise will improve value capture?