Pivot to the Future

introduction

REINVENTING REINVENTION

THE CEO OF a large professional services firm might have been slightly amused by the irony of the situation, if the problem wasn’t as serious as he had come to realize. He and his colleagues had spent decades advising companies around the world on how to move forward as disruption upended one industry after another. Now, as digital technologies, including broadband internet, cloud services, and mobile devices proliferated, his own core consulting business was getting squeezed on both ends.

From the bottom, high-quality providers in India were offering global customers low-cost outsourcing for application development and other technology services long important to his company’s business; and they were starting to move into higher value-add services that directly competed with his company. From the top, hardware giants and software platform providers were leveraging proprietary software products to convert themselves into massive services companies, threatening to interfere with strategic relationships his company had nurtured with senior executives across the Global Fortune 500.

Out on the horizon, gathering storm clouds of emerging technologies, including web- and mobile-based digital technologies and collaborative social media, were closing in quickly and ominously, with the potential to disrupt, well, everything. Economies of scale for technology-based platforms, for example, could soon make it possible for software products to displace large numbers of expert professionals.

Even as the company’s existing markets faced stalled or declining growth, new value in emerging technology businesses was being picked off by others. The opportunity was there, and right in the company’s wheelhouse. But management couldn’t reach it. It was as if the value were somehow trapped.

What was needed was not just a new strategy, but a new approach to strategy: One that enabled the company to make the most of new technologies, turning them from disruptive threats to profitable opportunities. One that would let the company do so faster all the time.

To thrive, the company would have to out-innovate the fastest-moving companies and disrupt its own core business before someone else did it to them.

That potentially disrupted company a few years back, 2014 to be precise, was Accenture, the home of your three authors: Omar Abbosh, Paul Nunes, and Larry Downes. This book originated with Accenture’s experiences not only in reinventing itself, but also in reinventing the very idea of reinvention as essential and possible amid constant technological disruption.

To accelerate growth today and establish leadership in tomorrow’s opportunities, Accenture would need to remake its business. We would need to systematically reinvest in our core assets—including our people, our intellectual property, our culture, and our information systems—all of which were already facing strong headwinds.

Having done so, our key insight was that in the face of predictable unpredictability, a single large-scale “transformation” just doesn’t cut it. Reviewing the history of business success and failure over the past half century, we concluded instead that the only solution to continuous and potentially devastating change is constant reinvention, rearchitecting the business in a way that allowed us to pivot from one opportunity to the next, quickly and efficiently.

Specifically, Accenture would need to balance its strategic initiatives around three distinct stages in the business lifecycle: mature products and services approaching obsolescence (the old); today’s most profitable offerings (the now); and leading-edge ventures targeted at the immediate future (the new).

We would need to grow profits in all stages, releasing value already there but which had become trapped. We would need to continually pivot the business around a fulcrum of core assets, shifting from one stage to the next, reacting quickly as market conditions changed and technology disruptors emerged—an approach to business value creation we came to call the “wise pivot.”

As part of Accenture’s own wise pivot, our internal think tank, Accenture Research, conducted more than two years of research on how technology was impacting businesses of all sizes, old and new, across industries and geographies.

We wanted to understand three things: which industries were vulnerable to disruption; how successful companies find their value opportunities; and how leading organizations pivot in response to disruptive change. We also wanted to see how leaders manage to expand growth in legacy businesses while also moving rapidly into new businesses that quickly achieved the scale needed to capture profits.

So far, we’ve performed economic research and case analysis of over three thousand of the largest companies by revenue across twenty major industry segments, determining both the drivers of disruption and the new strategies leading companies have developed to make the most of them.

In addition, we surveyed or spoke with thousands of executives to gather their perspectives. All that research was validated by hands-on experience working with clients across industries to help them make the kind of strategic pivots we executed for our own business.

Throughout the book, we will be referring to the findings of our research, including insights from detailed case studies and from our engagement with leading businesses. To learn more about how the work was conducted, and to read our latest thinking, please visit our website: https://www.accenture.com/us-en/innovation-architecture-accenture-research.

Our study of the inspiring and sometimes sobering stories of renowned leaders in industries as different as retail, manufacturing, financial services, and consumer products revealed, as in our own experience, that exploiting disruption requires more than just vision.

It calls for, among other things, bold technology leadership driven by senior executives, the creation and acquisition of promising disruptive businesses, and a coordinated process that retrains employees and rebalances assets from one stage of the business lifecycle to the next.

These critical elements are more than just aspirations. They are imperatives that must be translated into new digital-age strategies and executed precisely, using the kind of guerilla tactics favored by disruptive start-ups.

Developing new strategies that unlock trapped value, executing simultaneously in the old, the now, and the new, and repeatedly refocusing the business around a core of old and new assets—these are the elements of the wise pivot.

Any business can execute its own wise pivot and turn existential threats into golden opportunities by freeing trapped value. But make no mistake: This is not an undertaking for the faint of heart. In markets driven by continuous technology-based change—increasingly, all of them—one pivot is followed by the next and the next, demanding a strategic approach that doesn’t fight the tide as much as it surfs waves of disruption.

The wise pivot crosses businesses and time frames, releasing value already there but currently trapped. Through interconnected, rolling strategies that operate within and between the lifecycle stages—the old, the now, and the new—leaders continually reallocate assets and investments to balance all three. This assures continued revenue from core assets that may be nearing the end of their life and generates profits needed to invest in the future as the business and its people move quickly through the now, and arrive sustainably at the new.

Instead of exploiting core assets—products, customers, and technologies—the wise pivot rotates around those assets, spinning into control rather than out of it:

In our experience, few enterprises are prepared to embrace the new, even when it’s clear the core business is running out of steam. Oil companies know their long-term future will not be based entirely on fossil fuels, but what then? As automobiles become self-driving, likewise, auto insurance companies need to find new things to insure. Each enterprise must find its own route to the new, preserving those aspects of the company’s core, such as its culture, that made it successful in the first place.

Even when the path looks clear, pivoting to the new is fraught with obstacles. We regularly hear from leaders of the companies we work with that they lack the resources to invest in the new, let alone scale ventures rapidly, having committed all their assets to maintaining today’s core.

Even if sufficient capital can be freed up, inertia may still hold back real change. Today’s processes and IT systems, after all, have been optimized, sometimes over decades, to support the core. They are literally hard-coded to implement a strategy perhaps long forgotten. These corporate “antibodies” may unintentionally destroy initiatives with the potential to lead managers to the future. The old wakes up every morning determined to kill the new.

The solution requires a reallocation of resources driven from the top: the CEO, CFO, and other members of the executive team. Consider the courageous decisions of Microsoft CEO Satya Nadella. After previous efforts to compete in social media and smartphones generated disappointing results, Nadella decided to pivot elsewhere.

The company moved from standalone Windows to cloud computing, seeing that as their best route to a new core. To take on fast-growing Amazon Web Services (AWS), Nadella led the company in a number of acquisitions to support its “cloud-first, AI-first” mission. Since the launch of Microsoft Azure in 2010, its commercial cloud business has delivered more than $23 billion in revenue, with a gross margin of 57 percent in fiscal year 2018.

Microsoft recently invested $7.5 billion to acquire open-source software development platform GitHub, further extending its status as one of the world’s leading cloud-computing vendors. Microsoft is gearing toward its “next new,” building an AI powerhouse with its eight-thousand-employee-strong AI and research division.

As that example makes clear, a wise pivot likewise requires radical approaches to growing new businesses quickly. To truly profit from disruption, an enterprise must be prepared to manage increasingly short windows of profitability, scaling up rapidly as customers embrace the new all at once, then scaling down nearly as fast when demand declines.

To achieve scale quickly, managers need early access to emerging technologies and the relationships to exploit them when the timing is right. To gain needed market and technology insights, the wise pivot relies heavily on experimentation and and early investment. That can take many forms, including internal start-ups nurtured in facilities known as “incubators” or investments in outside incubators sponsored by multiple businesses, known as “accelerators.”

Businesses facing disruption have also launched and formalized corporate venture capital funds that give them partial ownership of start-ups developing relevant technologies. But in some cases, the best way to ensure rapid scale in new markets is simply to acquire start-ups that have already developed new products and customer relationships.

Consider the elegant pivot of Dutch consumer products giant Royal Philips. The company recognized in the early 2000s that over the course of a decade or less, LED (light-emitting diode) technology would become better, cheaper, and more sustainable than traditional incandescent lighting—a category Philips helped invent and that had given it a competitive advantage for over a century.

Leveraging the company’s old assets in manufacturing, distribution, and marketing, the company made strategic short-term investments in the compact fluorescent lightbulb (CFL)—an interim improved lighting technology—even as it quickly ramped up its research, development, and investments in LEDs. As it sold off the assets of the incandescent business to competitors, Philips was ready to enter the LED market as a service provider, offering one of the first programmable lighting systems based on its proprietary Hue technology.

All the while, the company was investing in and expanding its health technologies business, which ultimately became its new core. Then, after a hundred years in lighting, Philips largely exited the business. It saw its future elsewhere and, thanks to careful planning in its old and now, it had the innovation, finances, and talent to rotate successfully to the new.

Or look at Amazon, which leveraged its success in selling books to successfully enter the e-book market with its Kindle product, despite having almost no previous experience in consumer electronics. Amazon began by increasing investments in key technologies, including storage, display, battery, and networking, that had failed to deliver winning products for earlier, competing readers.

Once these technologies matured enough to be combined in an effective and affordable product, Amazon leveraged its knowledge of the book industry, along with its expertise in retailing and its powerful customer base, to enter the market quickly with a product that finally met consumer needs.

The company was at the same time planning its next “new,” finding other uses for the skills, relationships, and technologies it had developed to support its high-volume retailing platform.

Leveraging these core assets, Amazon turned its IT infrastructure into a service for others; first for smaller retailers it hosted on its platform and then, as it scaled up, as the cloud-based hosting business Amazon Web Services. Offering business users convenience and substantial cost savings, AWS exploded into a nearly $20 billion business in the course of a decade.

Finally, consider the wise pivot of Netflix, which began as a DVD-by-mail service for renting movies. Even while the company launched its service—ultimately deadly to traditional rental businesses like Blockbuster and West Coast Video—CEO Reed Hastings was preparing the organization to move to the “new”: streaming a subscription-based digital video service over increasingly ubiquitous high-capacity broadband networks.

Capturing and analyzing customer data in the streaming business was in turn an essential pivot to get the company to its next new: the creation of original programming. The inference engine the company built gave it deep insights into customers’ viewing habits and preferences, helping jump-start its dramatic and successful entry into its new business as a major video studio, outpacing incumbents that had been producing video content for decades if not longer. In 2018, the company topped traditional and new media company competitors with the most Emmy nominations of any studio.

For Netflix, balancing investments in all three lifecycle stages required delicate and constant shifts in strategy, not all of them executed perfectly. For example, while relentlessly improving the operating efficiency of the still-viable DVD delivery business to sustain revenue as most customers shifted to the streaming service, Hastings tried to separate the two businesses—prematurely, as it turned out. Customers revolted against new pricing plans, and Netflix quickly undid the change.

Likewise, as the streaming market rapidly became crowded with competing products from incumbents and new entrants, Netflix continued to invest in digital compression and other optimizing technologies; it knew its technical platform would be the cornerstone for distribution of its soon-to-arrive original content.

Finally, in today’s new, Netflix relies on a deep, data-driven relationship with its more than one hundred million global subscribers. Rejecting the old blockbuster, intuition-based model of Hollywood, Netflix has applied a scientific approach to developing and promoting original content, scaling it up quickly to keep a growing list of competitors throughout the supply chain continually off guard.

These cases make it clear that the wise pivot doesn’t simply balance unrelated investments across the three lifecycle stages of a company’s businesses. It discovers valuable synergies between them—some planned, some totally serendipitous.

While building our future AI practice, for example, Accenture discovered innovative ways to automate the tedious and error-prone process of software testing, a key component of our business at the time. These new tools exponentially improved both the efficiency and reliability of the process, improving the performance of our business in the now.

Competitors may have viewed this development as cannibalizing the valuable expertise Accenture had spent decades developing. We saw instead the opportunity to release trapped value growing in an inefficient, expensive, and labor-intensive process that AI was now capable of automating. Rather than wait for others to target that value, we did it ourselves.

Sooner rather than later, we knew, AI would transform testing, if not by Accenture, then perhaps by someone else without a legacy practice to protect. As we worked to pivot our testing experts into other fields, the wise pivot breathed new life—and new profits—into a fading business.

As this last example suggests, mastering a wise pivot requires a constant and courageous rotation through the old, the now, and the new. The new eventually (perhaps quickly) becomes the old, and the cycle continues. Over- or underinvesting in any one stage is a constant risk, one that can prove catastrophic. Leaders must revisit the ratios of investment in each, keeping them in balance in the face of sometimes unpredictable disruption from outside. In effect, they create a triangle of balance, pivoting from one to another.

In the pages to come we will explore in detail the winning strategies of companies old and new that are thriving under constant competitive threat and ceaseless technological change. And we will look closely at the tools and tactics they have devised to sustain growth in an age of continuous disruption.

The key finding of our research is that there is a growing gap between what is technologically possible and what companies actually do with that potential. The mismatch is generating rich stores of trapped value, fueled by continuing improvements in the speed, size, power, price, and efficiency of digital technologies.

Despite this opportunity, in many industries we have studied, the top incumbents are no longer growing profits, even as technology-based innovation is creating vast amounts of new value. Someone else, often a new entrant, is finding and capturing that value.

The wise pivot is driven by a deep understanding of the obstacles that increasingly prevent older businesses from keeping up. It offers strategies for reversing that trend, turning core capabilities and resources from aging assets into engines of faster growth.

The opportunities for discovering and releasing trapped value are great, but the time available to find and release it is growing shorter with each new generation of disruptors. Our research revealed four distinct areas where trapped value accumulates, each attracting different kinds of competitors and new entrants.

How to find and capture that value is the topic we explore first.