Time is almost always an essential factor when looking at business transformations, but moving preemptively may be the best way to prevent collapse.
Leaders are often reluctant to change when their companies are in a comfortable position because transformations are costly, may create instability amongst the staff and take away management attention from other areas of the business.
“If it ain’t broke, don’t fix it,” is an adage that could almost universally be applied in this type of scenario.
However, having analysed many transformations between 2010 and 2014, it was clear that preemptive change does generate significantly higher long-term value than reactive change.
Moreover, it does so faster and more reliably.
THE VALUE OF PREEMPTIVE TRANSFORMATION
Each company’s circumstances are unique, and should a company embark on a transformation when it is outperforming its industry, that transformation would be described as preemptive. If the firm is underperforming, a transformation is categorised as reactive, if it’s launched at this point.
Outperformance following a preemptive transformation is true across most industries, except financial services. Can that be explained away by the tendency of high-performing firms to continue outperforming?
It’s worth noting that the earlier a transformation is initiated, the better, however, recent analysis has shown that only 15% of outperforming companies embark on transformation. Compare that to 20% of underperforming and 25% of severely underperforming companies that decide to do so.
Jack Ma’s Alibaba grew from an 18-employee startup into a Fortune Global 500 company in less than 20 years. Internet penetration in China in 1999 was less than 1%, and even though growth was foreseen, no one could’ve predicted just how big the company would become in such a relatively short space of time.
Alibaba’s decision-makers constantly reevaluated their strategies and restructured the company accordingly. By 2011, Alibaba’s online marketplace Taobao had captured more than 80% of the digital Chinese consumer market. Given that Alibaba frequently reshuffles its more than 20 business units, Taobao is just one example of many preemptive restructurings.
SECONDARY BENEFITS OF PREEMPTION
Preemptive transformations result in consecutive restructuring costs for an average of only 12 months, compared with 14 months for reactive ones. They also cost less, perhaps because of a shorter timespan. Finally, increased leadership stability is a by product of preemptive change. A change of CEO in the two years following a transformation is significantly lower in the case of preemption (16% versus 21%).
STEPS TO SUCCESSFUL PREEMPTIVE CHANGE
Once the financial performance of a company has begun to decline, it’s already too late for a preemptive change. So the question one should really be asking is how can leaders turn around what is already a successful company?
Short-term tactical moves and long-term aspirations have to be balanced. Investment in the future, and in digital technology in particular, is a must. Leaders must continue to push the boundaries and explore new options on a consistent basis.
If a company appears to be doing well, a lack of urgency from those at the top is almost a given. Management must envision new risks in order to test the resilience and adaptability of the current business model in a changing environment.
Most financial metrics (eg earnings or cash flow) are backwards-looking. It’s the forward-looking metrics that will help determine how ready a company is for it’s immediate, medium and longer-term future.
Preemptive change is likely to cause friction with those who believe that prudence, for example, is the best policy. Leaders must take control of the narrative and actively manage investor expectations in order to make preemptive transformation feasible.
In fact, reliance on reactive approaches has often caused transformation to become associated with painful, defensive, and remedial change efforts, whereas preemptive transformation is more likely to be focused on innovation and growth from the outset.
A complex business transformation requires a different mindset and different change management mechanisms. That means relying on adaptive or visionary models of change, rather than heavy-handed, top-down approaches.