Transformation in Challenging TimesBy Faisal Hoque | Posted 2009-02-17 Email Print
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Transformation is the management challenge of the 21st Century.
We are living in a transformative age, and no industry is immune to waves of change. The automotive and energy industries are racing to find the next stage of their evolution in a world that is—if it hasn’t already—passing the tipping point where there is less easily accessible oil in the ground than the global market demands. The media is grappling with the democratization of information resulting from the Internet that has completely eroded the business models of film studios, music producers and traditional journalism publishers. And the U.S. government’s massive more than $700 billion intervention into the financial services industry to clean up the chaos resulting from bad risk taking and regulatory oversight failures will forever transform banking, stock trading and investments.
The fear permeating boardrooms and executive suites is that of disintermediation. Businesses can operate well and see healthy revenue and profit streams even during the challenging times. Today, however, lurking in the background is a new threat--a new entrepreneur, a new delivery model or a new idea that can and will rip the legs out from underneath an otherwise stable and profitable industry. The newspaper and television industries were completely disrupted by the Internet. Software as a service is challenging software giants such as Microsoft, IBM and Oracle to their very core. And social networks such as LinkedIn, Facebook and Twitter are revolutionizing business-to-business and person-to-person communications.
Michael Dell reflected on his sudden adoption of an indirect sales model after years of building his computer empire on a purely direct sales relationship with customers. Why change? The founder and chief executive of the company that bears his name said it was “a monolithic strategy that worked well until it stopped working.” In other words, he chose to change his business model before some other disruptive force made that decision for him.
Henry Ford once said, “Failure is the opportunity to begin again, more intelligently.” Perhaps that was true in the early 20th century, but the modern economy is far less forgiving. Enterprises are beginning to understand that change is becoming a permanent way of life, that the status quo will never again be good enough and that the biggest risk is not taking a risk at all. Companies must continually innovate to anticipate and adapt to new market demands and adjust their business models to capitalize on new and more efficient delivery systems.
This enterprise transformation means positioning an organization to manage its current business with increasing efficiency, discarding activities that no longer make sense, and constantly investing in new products, services, processes and business models. It is not tweaking at the edges. It is creating a new organization, one that thinks and acts differently. It is a continuous process.
At the end transformation or change is a management challenge. Agile firms are able to improve existing practices and innovate new ones on a regular basis.
The notion that companies must continually renew themselves has appeared in management literature, with increasing frequency, since economist Joseph Schumpeter introduced the term “creative destruction” in his 1942 book Capitalism, Socialism and Democracy.
Schumpeter noted that every industry advances on technological progress—farming, manufacturing, power and transportation—and organizational innovation. The old ways are destroyed incessantly and new ways given life. Economists, he wrote—and this should apply to business executives, as well—have traditionally focused on price and quality when thinking about competition, but such variables give an incomplete picture. On this, he wrote:
- “In capitalist reality, as distinguished from its textbook picture, it is not that kind of competition which counts, but the competition from the new commodity, the new technology, the new source of supply, the new type of organization … competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.”
Now, 65 years after Schumpeter wrote those words, we find ourselves in this exact situation. Competition over price is competition in commodities. Such competition is adequate but not acceptable. The new thing, which we cannot see, will come along and make our commodity passé—and then we must compete with this intruder. It is the automobile to the buggy-whip makers, and file sharing and YouTube to the music labels. It’s Saleforce.com to Oracle and IBM. It is entire economies: China and India to the United States and the European Union.
Management guru Peter Drucker noted that Schumpeter was much less known than John Maynard Keynes, his contemporary, and yet predicted that his ideals would influence business and management thinking into the 21st century. He wrote:
- “The innovator is the true subject of economics. Entrepreneurs that move resources from old and obsolescent to new and more productive employments are the very essence of economics and certainly of a modern economy. Innovation makes obsolete yesterday's capital earnings and capital investment."