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Published: January 1, 1997

 
 

How to Stop Bad Things from Happening to Good Companies

Creative under-investment in the old design aggressively questions the logic of capacity additions for that design. It causes less to be invested, and it redirects investment from capacity expansion toward cost improvement and demand generation.

Acquire the relevant new capabilities. Mapping your industry's value migration process helps illuminate what new capabilities will be essential for continued viability and success. Broadcast networks need to develop cable programming positions and expertise. Makers of mechanical equipment need to acquire electronic and electromechanical capabilities. Strategy consulting firms must learn implementation. The issue is not just building on core competencies but understanding what new competencies and capabilities must be developed to be successful in the next phase of the customers' needs cycle.

Creative under-investment in the old business design helps fund the acquisition of new capabilities. Usually, however, the issue is not money but mind-set. "We stick to our knitting," the philosophy goes. Fair enough, unless knitting is becoming irrelevant and customers will no longer permit you to profit from it.

Protect your new businesses. New capabilities can come from skilled professionals or from new businesses. Many successful organizations, however, have a powerful aversion to new business designs, which often look different, reflect different norms and values and succeed in different ways. If a new business is commingled with the existing structure, it may be drawn into the gravitational pull of the old ways of doing things and be crushed.

Astute C.E.O.'s have gone out of their way to protect new business designs, keeping them separate from the base organization until they reach critical mass and can then be integrated into the company's overall structure. One pharmaceutical company kept its nascent biotechnology unit outside the boundaries of its traditional R.&D. organization so it could move at the rapid pace set by leading biotechnology rivals. In a printing company, the C.E.O. kept a new service delivery unit separate until it was strong enough to be a partner, rather than a servant, of the base organization. In each case, the company's overall position with customers improved dramatically, given its broadened spectrum of skills for solving the customers' problems.

5) At transition time, move quickly. As we have repeatedly stressed, the transition from equilibrium to value outflow can happen very quickly. I.B.M. made $6 billion in 1990 and lost $5 billion in 1992, for example. Although traditional organizational approaches may argue for gradualism, in many value inflections the external rate of change is so discontinuous that gradualism can be fatal. Better to say "the game has changed, perhaps abruptly, and we must change with it," than to debate and incrementalize your way into stagnation or oblivion.

Rapid action is of the essence in managing value migration for several reasons. There is usually not enough room in the new value "space" to accommodate all the traditional players plus the new competitors. The first mover also gets the lion's share. What's more, the odds of implementing a successful new business design are far higher for a company if it begins its transformation as value migration is just starting to accelerate. With a large market capitalization, companies can insure the financing required to move in new directions and acquire the resources and capabilities needed to thrive in the new environment. After customer value migration has begun, however, market value shrinks, financing is more difficult and expensive to obtain and competitors are likely to have already staked out strong positions in the new areas of profit growth. Eventually, a company crosses the point of no return; it is unable to create a new business design that can achieve profitability and heads either for bankruptcy or long-term stagnation.

 
 
 
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