The concept of ‘Business Transformation’ needs a new definition. In business discourse the word ‘transformation’ is (over) used to describe change – moving from one state to another – be it the result of disruptive factors (e.g. new digital business models) or as part of the implementation of a new strategy (e.g. new services or product releases). This use of the word ‘transformation’ in itself is a suitable working definition, whereas the term ‘Business Transformation’ creates unnecessary confusion for business leaders. What is missing is an understanding of the overarching context and clarity on the types of ‘business transformation’ that organisations are undertaking to help eliminate the confusion.
This article outlines the core elements of ‘business architecture’, provides a definition for what a ‘business transformation’ is, and discusses the types of ‘business transformations’ that organisations take.
What is business transformation?
Digital and other technological disruption, regulatory change, evolving customer expectations, shifts in workforce patterns, increasing operating cost pressures and new and evolving business models are a perfect storm of change. Creating a compelling and coordinated response to these shifts is the top agenda item for CEOs and Boards. This response is increasingly necessary to transform a business – successfully evolving the way business is conducted to create sustainable value in response to shifts in the market or operating conditions.
What is transforming? – Business architecture defined
To understand business transformation, you need to be aware of what is transforming. Agreeing on common language for how a business is architected can help to short-cut what are often confusing discussions on business transformation. We see business architecture being made up of four important elements – business strategy, business model, operating model, and capabilities. These are defined below:
Business Strategy is the set of integrated choices that position a company to create sustainable and superior value for its stakeholders. The choices that need to be made are – what is the company’s winning aspiration, where will it play, how will it win, and how will it configure itself.
Business Model is the product of a company’s strategic choices on how it will create, deliver and capture value in the competitive marketplace. That includes detailing the markets and networks the business participates in, the value proposition offered and profit model pursued.
Operating Model is how a company configures its internal design to realise the value targeted in the Business Model. The Operating Model defines where the company will operate, what kinds of products and services it will sell, which customers and segments will it serve, what channels will be used, what are the key business processes and which will be outsourced, or handled in-house, which alliances will be most critical, and how will decisions be made and performance measured.
Capabilities are the people, skillsets, business processes, enabling technologies, and data that are combined to define how a company delivers it’s Operating Model and competes viably.
The types of transformation – reactive or proactive as well as evolving or programmatic
In looking at different examples of business transformation there are two main types – proactive or reactive. Proactive business transformation is typically a performance-driven transformation, where a company takes action on their own terms. Businesses and leaders of proactive transformation agendas can afford to be more deliberate and thoughtful, carefully analysing the situation and evaluating trade-offs, piloting a variety of options, and taking time to build consensus across the business that will result from the change. Generally speaking, time is on the leaders’ side and they can make informed strategic choices.
In contrast to this is a reactive transformation which is most often the result of an event or crisis that creates the need for a time sensitive response. Businesses in this situation need to move quickly and make fast decisions, even if those decisions aren’t perfect. Small mistakes can be fixed later. Control tends to be top-down and directive and communication – when it happens – is generally delivered on a need-to-know basis and limited to people who are directly affected. This class of transformation could be driven by a merger, responses to new market entrants, unexpected regulatory change, or shifts in market factors like the price of iron ore dropping to $35/tonne for example. Remarkably, but perhaps not surprising is that research done by Deloitte in the US has found that approximately 75% of business transformations would be classified as ‘reactive’.
Whether the transformation is proactive or reactive all elements of the business architecture need attention. The table below describes the three main types of business transformation with examples and plausible triggers for each listed. We have found that a business transformation that begins with a focus on Business Model change tends to be more ‘evolving’ in their approach (and thus usually more of the proactive type) versus a ‘programmatic’ approach that is most often the style used to deliver a Capability specific transformation.
In a future article we will introduce a framework for how a Transformation Leader (i.e. the CEO or delegate) should approach a business transformation. Our business transformation framework can be used as a starting point for how a company should structure its approach to business transformation or for a company that may be stalled in its current transformation. As with all frameworks it requires tailoring to match the severity of impact the company is facing, the time it has to respond, and most importantly the unique characteristics of the company’s position in the market, leadership style and company culture.