Strategic Transformations
Anjal Agrawal
Investment Banking at TRMG || Ex-M&A & Strategy at Virtusa || Ex-IB at Nomura (PPO) || IIM Shillong || CA || Yes Bank FutureReady Scholar || Ex-JPM || Ex-Baker Tilly DHC || #ProudSINKWAD
The sustainable growth model has always posed as an enigma for a lot of companies. The biggest companies today, who have survived the test of time, are still in constant hunt for sustainable growth. Leaders innovate and identify opportunity areas that are large enough to transform a large organization with a legacy business and inspire a compelling story of change.
But how did the visionaries lead this strategic transformation?
Hi-Tech Companies: The Masters of Innovation
Adobe was founded to enable more accessible publishing and printing software. Throughout its first decade, Adobe aggressively targeted designers and creative professionals, creating new categories of software across graphics, photo, video, and publishing. Along with Apple, Adobe helped bring about the desktop publishing revolution, launching products such as Illustrator, Photoshop, and Acrobat. Adobe then made several transformative acquisitions, enabling it to expand into web-based products (Macromedia), enterprise analytics (Omniture), e-commerce software (Magento), and marketing automation software (Marketo). This was Adobe’s transformation from packaged creative & document software to cloud subscriptions for digital experiences, marketing, commerce platforms and analytics.
Amazon began as an online bookstore and has since evolved into a global tech giant, transforming how we shop, read, and consume media. By the mid-2000s, Amazon launched its Amazon Web Services (AWS). This innovation fitted well with Bezos' initial ambition to make Amazon a tech company rather than an online retailer exclusively. By 2006, Amazon expanded its AWS portfolio with its Elastic Computer Cloud (EC2), followed by Simple Storage Service (S3). The company's expansion into digital services like EC2 and S3 would boost the company's revenues significantly. Today, they remain the bulk of the income for Amazon Web Services. Its meteoric rise to become the world's largest online retailer and a major player in industries ranging from cloud computing to entertainment has been nothing short of astounding. The main appeal of Amazon has always only been pure convenience.
Microsoft needed a lifeline when PC sales were falling in 2014. Microsoft’s software products were in decline. Windows couldn’t compete with Google’s free operating system. Microsoft’s investment in the Nokia phone was disastrous. And then Satya Nadella took over. He gave Windows away for free and dropped the Nokia phone. He defined the two main areas of opportunity—mobility and the cloud. While Microsoft’s competitors defined their products as mobile, Microsoft was about the mobility of human experiences, experiences made possible by Microsoft Azure. Under Nadella’s leadership, the Microsoft teams began exploring Agile software development practices. And what came next was the seven-fold increment in Microsoft’s market capitalization of ~$1.5tn making Microsoft one of the world’s leading digital giants, leaving most other companies in the dust.
Netflix was founded in 1997 by Reed Hastings and Marc Randolph. The company started as a DVD-by-mail service but transitioned to a streaming video in 2007. In 2013, CEO Reed Hastings released an 11-page memo to employees and investors detailing a mission to move from just distributing content digitally to becoming a producer of original content that could win Emmys and Oscars. The memo said, “We don’t and can’t compete on breadth with Comcast, Sky, Amazon, Apple, Microsoft, Sony, or Google. For us to be hugely successful we have to be a focused passion brand. Starbucks, not 7-Eleven. Southwest, not United. HBO, not Dish.” Since unveiling that new purpose, Netflix’s revenue has roughly tripled, its profits have multiplied 32x, and its stock CAGR has increased 57% annually, versus 11% for the S&P 500. Today, Netflix is the world’s leading streaming service, with 222m+ subscribers in 190+ countries.
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Integrated-Energy Giants: TotalEnergies, Shell and British Petroleum
The three largest integrated energy companies, TotalEnergies, Shell and BP, are making strategic investments in the area of energy diversification. However, they will also continue to play on their existing strengths by continuing significant investments in oil and gas till 2030.
Shell, BP and TotalEnergies’ share of low-carbon spend is growing as they try to adjust their product mixes and divest in noncore assets to diversify their portfolios, and they aim to transform themselves into diversified energy companies that own, manage and market energy. They are laying the groundwork for this by gradually repositioning their asset and energy portfolios using a mix of organic investments in existing operations, investments in new projects and acquisitions.
All three companies face a ‘range of risks’ on their decarbonisation journey though, not least because many green energy markets are yet to be cultivated. They are due to face more direct competition from utilities for projects. Moreover, if diversification comes with weaker profitability and cash-flow generating capabilities, the credit implications could also be negative. But growing low-carbon operations is also vital to the future of Shell, BP and TotalEnergies, potentially providing greater stability against volatile oil markets.
Apart from these giants, another example of a state-owned oil and gas exploration and production company is Orsted which transformed its business model to stage an IPO as the largest offshore wind farm company in the world in 2016. Finland’s Neste entered the renewable biofuels market using it’s existing capabilities in industrial processes that it perfected for its legacy business of refining oil & gas.
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Camera Manufacturing Giants: Kodak Died while Fujifilm Thrived
How have Smartphones disrupted the Camera industry?
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Fujifilm Holdings was in the same boat as Eastman Kodak, enjoying a near-monopoly market position in photographic film. But Fujifilm’s more expansive view of its business has been enormously successful, whereas Kodak failed, filing for bankruptcy in 2012.
Why did Kodak die? Kodak sold plenty of digital cameras. In 2005, Kodak captured 21.3% of the US market share and emerged first in the digital camera segment against its Japanese rivals. Unfortunately, the sales were not as good worldwide. Kodak reached an early lead in the market and had a 27% market share by 1999. But that slipped to 15% by 2003 and 7% by 2010, as Kodak ceded ground to Canon, Nikon and others. According to a Harvard case study, it lost $60 for every digital camera it sold by 2001.
Why could Fujifilm thrive? Diversification.
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Evidence of this successful evolution can be seen in the comparison between Kodak’s and Fujifilm’s performance between 2000 and 2010. While Kodak’s sales plunged by 48% between 2000 and 2010, Fujifilm posted an impressive growth of 57% in sales.
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Some other examples of similar transformations in business models are listed below (we will look at a few examples in our upcoming case studies) –
This article is an introduction to my upcoming series “Strategic Transformations using M&A” comprising of 3 case studies, focusing on how companies pursued inorganic growth strategies and used acquisitions to transform their business model.
The next article is the second part of Dell and its acquisition of EMC, which ensured Dell’s revival and strategic transformation. Until then, thank you for your time. Please post your feedback and comments.
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Please find below all the information sources that have been instrumental to the above article, along with some additional reading materials. Gratitude to all the creators –
6.????? https://645ventures.com/voices/articles/the-evolution-of-adobe-and-future-of-creative-software
7.????? https://interestingengineering.com/culture/a-very-brief-history-of-amazon-the-everything-store
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