Customer behavior is morphing, as the digital revolution that started with the internet has gone mobile/social and diminished the importance of physical products and retail outlets. That said, most incumbent CEOs still oversee legacy businesses that generate the bulk of their profits from the physical world.
- In banking, for example, most new accounts still come through the branch network. And, while most customers are clearly shifting to digital channels, they still say access to a branch is vital. If I’m the CEO, I can’t shut down the branch just because I know customers can go online to conduct their banking business. Shutting down branches will affect customer acquisition, and long-term stickiness.
- In automotive, selling cars is still the dominant source of revenues and will be for some time. But customers also show an increasing affinity for other mobility modes—car sharing, ride sharing, car rental, and so on. If I’m the CEO, I don’t necessarily want to shut down the dealership—yet—just because I know that customers are beginning to favor other modes of mobility.
These, and similar scenarios in other industries, present a dilemma: We know that there will be an inflection point when a new model disrupts the old, but when is the right time to react? Missing the boat is obviously a big risk, but over-reacting too early can also be costly and prematurely accelerate the decline of your current cash cow. How can you predict the inflection points at which the way you manage your portfolio of old and new businesses needs to change?
Your transformation strategy can be managed like a hedge within your portfolio of business models.
In practice, this is not an all or nothing choice. You may not be ready to shut down your bank branches or car dealerships, because you will cede revenues to your competitors—and those revenues are needed to invest in the future. But you can experiment with new models today, and look at investment decisions for legacy and new businesses as those experiments start to prove their worth.
Luckily, disruptive inflection points don’t happen overnight (even if they happen faster than they used to). Your transformation strategy can be managed like a hedge within your portfolio of business models. Small-scale experimentation as new trends start to emerge can be shifted into major areas of investment as the new model starts to prove itself. On the flip-side, a legacy business model that currently receives the lion’s share of management attention and investment can be “managed down” once there are good options for replacing it. After all, it has always been better to disrupt yourself than to be disrupted by someone else.
Think about how your activity and investment dollars are split between businesses in four different phases across the life cycle, and map out how you think that will evolve over time, with a particular focus on the milestones that should shift a business from one model to another:
- Established businesses that have room for further growth within their current business model and are not expected to be significantly disrupted in the medium-term;
- Established businesses whose business model is threatened, making the case for more-than-sustaining (marginal?) investment hard to make;
- Experiments that prove the opportunity to develop a new business or that flesh out the practical realities of operating a new business, but are not ready for scaling either because the business model is immature or because customers are not yet ready for them;
- New businesses that have demonstrated scalability and the ability to absorb investment to support rapid growth and may be disrupting your established businesses, and eventually might move back into model (1).
How many different businesses are you running? Which phases are they in? Do you have the right balance of businesses in different phases, especially in phases 3 and 4? And when is the right time to reallocate your time, attention and money between them—to disrupt yourself?