5 Ways To Change Your Business

Consider some of the past generation’s companies that seemed so established, you couldn’t imagine a world without them: Pan Am, Digital Equipment, Wang Laboratories, Netscape. Once dominant in their niches, each of these giants eventually died, got sold off in pieces and has been largely forgotten. In the brief space of a decade, the largest and most indomitable-seeming companies can see their fortunes fade. Of the Fortune 100 companies listed in 2001, 15 have been acquired (most as they foundered), 14 have drifted off the list, another 8 have gone bankrupt and at least 2 others came within a whisper of Chapter 11. If almost half of the 100 largest American companies from 10 years ago have struggled when faced with challenges, certainly those with fewer resources must experience greater threats.

Presuming that you can avoid the missteps of reckless or illegal behavior, which hobbled 10 of the last decade’s largest companies, you’ll still face the much greater challenge of adapting to the ever changing business environment. The first major hurdle is figuring out when you need to adapt. “Companies shouldn’t simply wait for and react to threats. They can proactively develop a business model design capacity to anticipate opportunities and to make offensive moves into new markets,” says Mark W. Johnson, chairman of Innosight, a strategic innovation consulting and investing company based in Watertown, Mass.

One sign that a company should pick up the pace on finding new opportunities: declining margins in existing categories. Even if sales are strong, slipping margins, especially with new product launches within those categories, are a telling sign of the need for evolution, says Stephen Wunker, CEO of New Markets Consulting in Ipswich, Mass. “If the price-premiums of new innovations are declining,” he adds, “it means your headroom for innovation in a traditional category is running out and people are looking for differentiation along new sorts of dimensions.”

For example, take computer processor speed. Companies used to focus intensely on it as a metric, and it helped Intel become dominant—the company won over its last major PC industry holdout, Apple, in 2005. Now speed is effectively irrelevant, and Intel finds itself trying to catch up to the energy-efficient chips powering mobile devices from the likes of Britain’s Arm Holdings and Texas firm Intrinsity, purchased in 2010 by Apple to power the iPad.

As the rapid-fire shift of consumer behavior brought about by new technologies and new economic realities promises to continue in the coming years, we asked five corporate innovation gurus for their best tips on how to evolve.

1. Focus on Customers, Not Competitors.

The deadliest error companies make is also the most common: defining the essence of their strategy as competition. “I find that statement very dangerous, because it puts the competitor at the center. They become the benchmark: For me to win, I have to beat somebody,” says Arnaldo Hax, a management professor at MIT’s Sloan School of Management and coauthor of The Delta Project: Discovering New Sources of Profitability in a Networked Economy. “If you are obsessed with your competitors, then, either explicitly or implicitly, you begin to imitate them,” he adds. This focus on competition drives industries toward convergence, which in turn results in the commoditization of products and services. “Commoditization is the very worst thing that can happen to a business,” Hax notes. The hallmarks of a commoditized industry include a managerial focus on market share and sales volume over profitability.

Rather than focusing on competitors, instead channel that energy into understanding your customer. Ideally, says Hax, you should focus on each customer at as granular a level as possible. Rather than key on sales forecasts, which extrapolate past performance into the future, look for the untapped opportunities with your customers to drive profitable innovation. Wal-Mart and Dell are examples of companies that have excelled over the long term by focusing on customers in what can easily be commoditized businesses.

2. Innovate your Business Model, Not Just your Products.

“Smart companies approach [their] business model in the same way they approach product innovation. They pursue a portfolio of small-scale experiments, which increase their strategic options in response to opportunities or future market shifts,” explains Innosight’s Johnson, who recently authored Seizing the White Space: Business Model Innovation for Growth and Renewal.

Broadly speaking, the process has three steps. The first is thinking, just as startups do, about how to satisfy an unmet need for a real customer through a powerful new customer value proposition. Step two is to construct a blueprint of a business model that can fulfill that job profitably for a price the customer is willing to pay, says Johnson. Step three: Implement the blueprint—not all in one go, but as a series of low-risk experiments in which you test hypotheses about the model and apply lessons learned as the project slowly achieves scale.

“The key word here is slowly,” stresses Johnson. “The point for leaders is that in this process, the essential resource the company needs to contribute is not money but time. New growth opportunities should show profits early on—but, as any startup knows, will not earn significant revenues for years; most typically, not for five to seven years.”

3. Find an Innovation Partner.

While many leaders want their organizations to think creatively—and undoubtedly the potential exists within most companies—innovating a new business model “is an extraordinarily difficult thing to execute, because you are running the existing business while trying to change some highly ingrained behaviors many of which have never even been written down,” explains New Markets’ Wunker, whose recent book is Capturing New Markets. In such cases, the best solution is to partner with a company that possesses the skills, market segment insight or creativity your firm may have trouble tapping into. Such joint ventures are themselves tricky to navigate, but they can provide a high degree of flexibility to determine the true needs of the marketplace and provide a valuable learning experience for your organization. Yet to maximize the benefits of partnerships, companies must ease up on fulfilling financial performance metrics—a shift that larger companies often resist. “They can look at their return on assets or projected investment rate of return and say the business looked great,” Wunker explains. “But at the end of the day, it is an entrepreneur who has won the new ground.”

4. Always Be Redesigning.

“In a time when technology changes bring waves of radical change to business frequently, executives no longer have the luxury of redesigning their business model once,” says Alexander Osterwalder, a Switzerland-based consultant and the author of Business Model Innovation, a workbook for disruptive innovation. “If you don’t start while life is good or great, you risk getting disrupted.” A prime example: the music industry and its experience with the Internet. Similarly, telecoms saw their highly profitable oligarchy of international phone calls be quickly gutted by the emergence of Skype, followed by Google Voice and others.

The key is to create a portfolio of potential business models to roll out if—and when—they are needed, Osterwalder says. “It’s not deciding what are the solutions between A, B and C, but creating the alternatives D, E and F,” he explains. By creating a portfolio of potential business models based on your foresight of technological advances, consumer trends and trends in other industries, the organization will have greater flexibility. In some cases, this will even provide the inspiration for your own disruptive change.

5. Find your Story—and Tell it.

Take a step back and consider the advice you’ve read here so far. Essentially, it’s about telling the story of your business and what you want your potential customers to know. “Stories and storytelling are how we relate and communicate best,” says Gregg Morris, an organizational story consultant in Chapel Hill, N.C. “Take an idea, wrap it in an emotion and you have a story. Put it out there and try and get your customers, clients, shareholders to interact with that.” Morris is part of a field called applied storytelling, which posits that the best brands dominate a narrative space, making a connection with consumers beyond selling a product. Consider Nike, which crafts narratives around world-class athletes for gear largely used by casual gym members; or Thule, whose customers are as likely to carry kids’ gear around in those rooftop boxes as they are snowboards.

Executives of companies large and small should consider the narrative possibilities offered by emerging technology, from QR codes that can direct mobile-phone users to company websites to the potential of Near Field Communication devices, through which our mobile devices may one day be able to power advertising posters to switch images. “It’s no surprise [that] many of the best CEOs have also been terrific storytellers,” says Morris.

Reinventing your business for the coming years may seem like a daunting task—and it can be—but it’s not impossible. Just look at Apple: 15 years ago, the company was an also-ran with an estimated 2 percent of computer market share and real questions to face about its viability. Now it is the largest company in the U.S. (by market capitalization) and has single-handedly popularized the MP3 music player, the smartphone and the tablet computer.

The key, says Innosight’s Johnson, is to embrace “serial innovation” and recognize that it’s an ongoing process, not a singular event. Once you’ve done that, innovation will be in your blood.