Culture Transformation - The Dilemma of the Incumbent

There is an abundance of case studies in business schools that try to unravel the theories behind the reason companies who were once dominant in their industries eventually lost out to new entrants who eventually disrupted them. Of most of the cases I have been privy to study, authors attribute the demise of such incumbents to their unwillingness to evolve their business models, their inability to make decisions quickly due to unnecessarily complex layered structures and their inflexibility caused by convoluted bureaucratic internal processes. These may just be three of many reasons that result in the inability of incumbent companies who once had a dominant market share to compete in the medium to long term.

Initially, the challenge themed “incumbents’ unwillingness to evolve their business models” was difficult for me to comprehend because it gives the impression incumbents deliberately decide not to change even when they are faced with the threat of disruption. If the affected incumbents were once dominant in their industry, then it is likely that they had a competent management team, but what leadership will be irresponsible enough to refuse to effect the required change even when disruption is imminent? It turns out that if you ask more questions you will find that this representation is misleading. During my recent studies when I dug deeper, I found that the problem in reality, was not that these companies chose not to do anything when faced with the threat of disruption. An unwillingness to change or evolve is not the issue because most actually do try but obviously do not succeed. The real problem often does not seem obvious because it does not, in itself, seem like a problem but when you put it in the context of an increasingly complex market driven by rapid changes in digital technology, you will begin to see why the old way of doing things may no longer work in today’s world. The bane of most legacy incumbent companies that they are unable to overcome, and ultimately leads to their demise, is the fear of failure. Unlike their new generation startup challengers, the fear of failure is a general culture problem incumbents face. For any incumbent company to remain competitive in the long term, they must master the art of concurrently managing their core business (that drives short term profitability), evolve their current business models (to remain competitive in the medium term), and build the new business that will generate future revenue. Maintaining the core business that keeps the lights on is usually not the problem, it is evolving the current model and building the future business that is often the main challenge because it requires a new way of thinking.

Every business model eventually becomes less relevant over time if it does not evolve. This is because your competitor will most likely launch products and services that offer to solve your existing customers’ problems in a more efficient (and perhaps cheaper) way that may disrupt your current core offering if you do not adapt. Incidentally, most companies actually do try to evolve but eventually are unable to but the question is why? The dilemma is often because the incumbent tries to apply the same cultural principles that brought them success with the legacy business while trying to build for the medium to long term and it often does not work. If you dig deeper, you will find the root cause to be that most successful leaders are quite good at learning new things, but what they are terrible at, is unlearning the old. In the following paragraph, I will try to use a typical example to explain my point that I am almost certain most of you reading this article will be able to relate with.

“What is your strategy?” is a question I am sure most of you have been asked by your principals each time you propose a new idea or an enhancement to an existing product/service that requires the deployment of resources to execute. You must show management the strategy that assures them that the said venture will succeed before you get the approval to proceed to ensure resources are not ‘wasted’. To have any chance of the strategy you present to convince management, the document presented must often contain information on the market size/opportunity, the competitive landscape, the proposed offering/value proposition, projections on financial performance and the required resources/approach required to execute the plan. The main reason why management will ask you to show a strategy that contains most if not all the information I listed, is because they must be convinced the new idea will not fail and the deployment of resources will guaranty an ROI.

Most companies traditionally have a culture that views failure as a bad thing. In fact, most appraisal systems and internal processes that are adopted by most incumbents today, reward success and punish failure and this is the core issue. In the old days when it was easier to a certain degree of accuracy, predict what will work and what wouldn’t, that culture may not have been a problem. In today’s world characterized by VUCA (Volatility, Uncertainty, Complexity and Ambiguity) it is an unrealistic expectation to expect people to be able to accurately predict whether an idea will succeed or fail so a culture of learning and experimentation must replace the old way of doing things. A culture of learning and experimentation requires the acceptance that in order to succeed, there will be times when we will fail but the application of the learnings from the times we fail will eventually lead to success. By implication, in a world where the chances of success are determined by our ability to experiment and learn, failure therefore becomes an integral and often unavoidable ingredient for success. Companies with a culture that does not accept that failure is inevitable in order to succeed, will never enable a process of experimentation to thrive and hence reduce the incumbent’s ability to succeed in its medium to long term endeavours. Just to be clear, failure in itself is not useful to achieve success, it is the ability to learn from failure and do things differently based on that learning that helps achieve success.

In summary, there are three key things I would like you to take away from this article that incumbents must be able to imbibe as they look to transform their culture in order to remain competitive:

1.?????Elaborate strategies that try to accurately predict the success of an idea is no longer a realistic expectation

2.?????Once you have the data that indicate the viability of a new idea, rather than expend energy on defining an elaborate strategy that predicts whether it will fail or succeed, focus on experimenting with the idea, test and find what works and what doesn’t then adapt accordingly

3.?????Management must change their expectations and their measure of what success means. They must recognize that in today's world characterized by VUCA, failure is inevitable if you must succeed. They must promote a culture that enables and encourages a workforce that is not afraid to fail, and evolve to a culture that knows how to learn from failure and do things differently. The goal is to fail fast and fail cheaply but more importantly learn during the process