As we come to the final step in the Journey North, which is all about adaptation, there is good news and bad news for insurgent companies. The good news is that incumbents are notably bad at strategic adaptation and will always find it difficult to respond to the threat posed by insurgents in their industries. The bad news is that insurgents quickly become big, established companies themselves and also find it difficult to adapt. This leaves them no less vulnerable to new insurgents.
To grow sustainably, insurgent companies must learn how to adapt. Eventually, inevitably, they will have to institute fundamental change in their strategies and Repeatable Models®. If steps 1–5 have been about locking in that model, learning from it and making constant incremental improvements to the business, then Step 6 is about throwing that model out and working on a new one. The tension is obvious. As one member of the DM100 told us in Shanghai last spring: “I feel I have two contradictory missions. On one hand, I need to professionalize my company—it is out of control and we need to bring it under control. On the other, I’m not even sure my business as it is currently configured will survive. E-commerce is moving into our space so quickly that it is unclear companies like mine will be around. So I need to somehow invest in improving our current business while also developing a new engine of growth. Can you change engines on a Formula 1 car and still win the race?”
Let’s be clear: Step 6 assumes steps 1–5 are being done brilliantly and therefore you have some discretionary energy to focus on “what’s next?” And I can already hear you shouting: “We don’t have resources to achieve full potential in the core, let alone consider changes to that core!” Unfortunately, Step 6 assumes you can free up resources, which is why Step 5, “Simplify to redeploy,” is so critical. Assuming you can, indeed, simplify the core business to focus resources on strategic adaptation, here are half-a-dozen things we’ve learned about doing it effectively:
- Embrace the future. The transcendent moment for any start-up is that moment when 100% of the employees know without a shadow of a doubt that they have harnessed the future. They are insurgents at war against their industry on behalf of an underserved customer and, for one golden instant, it is absolutely clear they are winning on all fronts. The problem for insurgents is that this moment is fleeting. It is only a matter of time before new insurgents appear with fresh propositions. Suddenly, rather than “being the future,” companies start to “fight the future.” So the first step of adaptation is to fight back against this shift—to make it a cultural imperative to embrace the future no matter what. You have to be willing to aggressively look at all new business models, all new insurgencies in the market, and be prepared to dedicate a portion of your resources (10%, as we will see) to considering how your model must change to respond. Your people need to know that some part of their organization is working hard to meet the future head on.
- Organize to manage the “Engine 1 vs. Engine 2” problem. Once you recognize that you must embrace the future, you will quickly see you have what we’ve coined an Engine 1 vs. Engine 2 problem. Engine 1 is the engine that got you here; Engine 2 is the one you will need to power your company’s future. Deciding how to allocate time and resources between them is tricky, but we advocate a 70:20:10 model. Engine 1 is your core business. It generates most of your revenue, all of your profit and three-quarters of your strategic problems. Like a Formula One race car, it must be constantly adjusted and fine-tuned, requiring 70% of your time. Those responsible for Engine 1 must also consider how best to expand it into close “adjacencies”—new customers, new channels, new geographies and so on—that take advantage of the existing repeatable model as much as possible. Extending your model is always preferable to building a new one, because it means you can grow with less complexity, using many of the same resources. Searching for adjacencies should absorb another 20% of your energy.The final 10% should be devoted to identifying and developing Engine 2, which is the engine that will determine the next wave of growth. It is the part of the organization that says: Keep fine-tuning Engine 1’s spark plugs, but we just might need an entirely new engine to win this race—and we’ll worry about that. Our experience suggests that it is best to divide Engine 1 and Engine 2 into two entirely separate business problems because the demands of each are so different. Engine 1 needs to benefit from steady learning, continuous improvement and constant simplification. It is the part of your business driving down the experience curve, becoming more productive with each day of learning. Engine 2 is highly disruptive, chaotic, unsure, still finding the right repeatable model to sustain itself. We’ve found that most strategy planning processes are broken, in part because they don’t draw this distinction. The 70:20:10 model gives leadership a much better chance of managing these conflicting priorities effectively.
- Let Engine 2 return to the chaos of your founding days. You’ll recognize the right organization for Engine 2. It looks a lot like Engine 1 did when your company was in its infancy. Engine 2 is a start-up, with hundreds of ideas, lots of experimentation, lots of failure and fast adaptation. It is open to different partners and willing to try “wild things” to support the customer. The best leaders for Engine 2, interestingly, are often the original founders. Their skills and interests are frequently more attuned to start-ups, and asking them to lead Engine 2 will reawaken their entrepreneurial drive without distracting the core Engine 1 business. Engine 2 is also a wonderful place to rotate your kings. Let them bring their customer insights to a new business challenge—designing the right company for the future.One of the primary reasons we believe retaining the Founder’s Mentality℠ is so critical over time is that it is essential to building Engine 2. How can a stalled incumbent that has lost the energy in its core ever recover the muscles necessary to develop an Engine 2 business? It can’t, unless it embarks on a journey of renewal to rediscover elements of its Founder’s Mentality. Profound strategic adaptation demands the skills of a start-up. To grow sustainably, you lose these skills at your peril.One final thought on this: Once you have created the right start-up organization for Engine 2, you will need to focus it on the right set of activities. That means a) opening up the funnel very wide at the outset and b) managing the funnel aggressively. On the first point, we often use a “five lenses’’ approach with the Engine 2 team to force it to really survey the widest possible set of disruptions that might shift behavior among existing and future customers (each lens is a new angle for disruption). On the second point, the funnel is not managed in theory—the team must experiment regularly with existing and new customers to develop new propositions that can be proven commercially. We are big fans of serial entrepreneur Steve Blank’s customer development model, and believe the Engine 2 team must adopt something like this to begin to bring true innovation into the company.
- Let the Engine 2 team focus on innovation and disruption, leaving the “mothership” to channel the results. The Engine 2 team has a complex mission, made more so by its complicated relationship with Engine 1. On the one hand, you want it to be a true disruptor, obsessed with the future and how the company can respond with radical new approaches. On the other, Engine 2 must be able to lean on important elements of Engine 1, or else it will fail.For one thing, it is important that the Engine 2 team embrace the company’s original insurgent mission as it looks for new opportunities. The mission should be broad enough and profound enough to allow for additional innovation beneath its umbrella. India’s CavinKare, for example, has defined its insurgency around the statement “Whatever a rich man enjoys, a common man should be able to afford.” But within that broad purview, it has used packaging innovation to disrupt consumer categories from shampoo to beverages. In our experience, while the Engine 2 team might need to reword the insurgency to adapt it to future challenges, it shouldn’t have to abandon it altogether.This is touchier, but the Engine 2 team must also think about Engine 1 as a tremendous, proprietary asset base that gives it a huge leg up as it looks for new ventures. It might reject Engine 1’s repeatable model entirely, but find real value in the accumulated experience of the kings. It might eschew the current sales model, but find the distribution infrastructure something that can be used to advantage. The point is that Engine 2’s competitive advantage, in part, stems from its link to the proprietary assets of Engine 1. Unless you establish this connection, the Engine 2 team is nothing more than a venture capital fund without the expertise—in other words, a bad VC fund.Another source of tension is that the Engine 2 team may never know what happened to many of their innovative ideas. At one extreme, the team might uncover innovations that completely redefine the company, leading to a rapid transition from Engine 1 to Engine 2. At the other extreme, it might make the most sense to pull all of Engine 2’s innovations directly into the current Engine 1 model to generate new product offerings that help the core business grow faster. Most of the time, it is a little bit of both. What’s important is that the Engine 2 team’s charter is to innovate and disrupt. It should focus there and ignore the rest. The mothership (or parent company) must ultimately decide how to manage the relationship between the two engines and shepherd the output.
- Create a strategy planning process to manage the 70:20:10 portfolio. The 70:20:10 process is all about pushing your core to full potential out of the 70%; using the 20% to develop adjacencies and forcing new, radical thinking with the 10%. Dividing strategy by category in this way provides a formal distinction that helps allocate time and resources, ensuring that all three areas get the proper amount of attention. But rarely are the distinctions so straightforward in practice.In our experience, the process needs to be dynamic, including a structured and regular effort to challenge the boundaries of each category. As your adjacency moves in the 20% fully develop, they become core activities that need to be addressed within the 70%. At the same time, as new threats and opportunities appear on the horizon to the core, the 10% activities get refreshed. This fluidity is necessary, but presents risks. If you aren’t careful, meetings that should be about the core’s full potential can devolve into brainstorming on new adjacencies to enter or lamenting about fundamental threats that will require core redefinition. The strategic planning process needs to give a regular platform for the leadership team to debate and resolve the 70:20:10 focus. Once decided, efforts need to be oriented on execution. One strategic planning approach to manage this balance is to use a regular off-site meeting that brings the leadership team together to discuss the strength of the core, review key macro trends and learn from growth initiatives and experiments. The goal of this off-site would be to agree on how to refine the 70:20:10 focus so the rest of year can be focused on execution.How you fully manage the balance across the 70:20:10 process is, of course, beyond the scope of this blog post. It was the subject of our first three books on strategy, which explore the core, adjacencies and redefinition. The necessary first step, however, is to set aside the time to formally debate these issues and to resolve them quickly and efficiently.
- Force your strategic planning process to start and end with the question, Why? It is no wonder we believe 97% of strategic planning processes are a waste of time. They are too focused on today’s revenues and allow most of the company’s resources to be trapped within current revenue sources. In our work, the right strategy process is circular. It always returns to the original insurgency so you remain at war against your industry on behalf of underserved customers. It always returns to the question: Why?This is both the first and the last step of the Journey North. The right strategic planning process forces the entire company to regularly ask, Who are we and why do we exist? The team from Engine 1 can then answer by describing the voices of the customer and the front line, reviewing the lessons of the kings and talking about near-term adjacencies that can be pursued to take advantage of the existing repeatable model. The team in charge of Engine 2 then comes in to talk about the next generation of insurgents, radical innovations in the marketplace and how the business needs change to maintain the insurgency. Finally, the teams sit down to debate and establish the right priorities for how to develop the core, how to exploit adjacencies and how to adapt the model at the edges of the business. Through this process, the teams avoid the plight of many incumbents that don’t make their core business sufficiently lean and simple, or pursue real adaptation. They are stuck in the middle, living off the past. Our model tries to prevent this by forcing two separate teams to address the issues facing Engine 1 and Engine 2.
Sustainable, profitable growth requires that companies maintain their Founder’s Mentality as they scale. This is critical for achieving the full potential of the core business—steps 1–5. But the Founder’s Mentality is also a vital element of managing for the future. Managing your Engine 2 business as if it were a start-up is the only way to bring real strategic adaptation to your business. You want the majority of your people improving the existing model and keeping the Formula One car running strong. But you want some of your best minds challenging the core model down to its fundamentals to prepare for the day when the old engine loses power.
Learn more about The Journey North and its steps: