Editor's Note: Take a look at our featured best practice, Digital Transformation Strategy (145-slide PowerPoint presentation). Digital Transformation is being embraced by organizations across most industries, as the role of technology shifts from being a business enabler to a business driver. This has only been accelerated by the COVID-19 global pandemic. Thus, to remain competitive and outcompete in today's fast paced, [read more]
5 Critical Success Factors for Successful Business Transformation
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Business Transformations have become a necessity in the fast-changing technological and competitive business environment. Transformation is characterized by significant and risk-laden Restructuring of a company, with the objective of accomplishing Operational Excellence and changing its future course.
Business Transformation is a priority for many top executives but it is usually a reaction to challenging circumstances rather than being a preemptive measure.
Business Transformation is prompted by a combination of 2 situations:
- Need to address inherent problems causing organizational drag—these problems may be internal and/or external.
- Aspiration by the top management and other senior stakeholders to seize the occasion of addressing these problems, in ways that deeply alter the Business Model of the organization including Value Creation.
Business Transformation entails not just making incremental changes but fundamentally changing all or some of the following:
- Organizational Structure
- Core Product or Service Portfolio
- People—the way employees work
Undertaking such arduous effort requires approaching the task in a structured way. Research shows that quite a few of such undertakings are based on anecdotal beliefs instead of being based on empirical data.
Countering this trend, the Boston Consulting Group conducted an empirical study of financial and non-financial data-set comprising 300 U.S. public companies. The data spanned a period of 12 years from 2004 to 2016. Selection was based on the following criteria:
- Companies that had a $10 billion or more market capitalization between 2004 and 2016.
- Of these, companies with an annualized deterioration in Total Share-holder Return (TSR) of 10% or more relative to their industry average (2 years running or more) were identified.
Based on extensive analysis—that included use of methodologies like trained proprietary algorithms, prediction models, and Multivariate Regression Analysis—a pattern pertaining to Business Transformation emerged. The pattern depicted the following themes:
- Frequency of Failure
- Impact of Digital Disruption
- Impact of Downturn
- Competitive Volatility
The study also suggested the following 5 evidence-based Critical Success Factors (CSFs) for achieving Transformation Success.
- Cost Management (drives short-term success)
- Revenue Growth (drives long-term success)
- Long-term Strategy and R&D Investment
- New, External Leadership
- Holistic Transformation Programs
Let us examine in a bit more detail some of the CSFs.
In order to launch the Transformation effort on the correct footing, Cost Management is key, in the short term especially. Predictably, empirical analysis suggests that the leading driver for organizations recovering from severe TSR deterioration is a determined Cost-cutting effort during the 1st year of Turnaround. By year 3, Cost Reduction is accountable for the major share of TSR growth as companies divert their portfolios and make available funding for growth investments.
Merely short-term operational improvements do not augur well for a sustainable Transformation. There has to be a long-term Growth Strategy put in place. For this to happen, leaders have to challenge the foundations of the company’s Business Model.
Research divulges that Revenue Growth progressively becomes the driver for TSR recovery after year 1 in all the successful Transformation efforts. Revenue Growth overshadows, by far, all the initial drivers for TSR recovery by year 5 of all successful Turnaround efforts.
Long-term Strategy and R&D Investment
Turbulent competitive environments, particularly, require long-term Strategic Planning and investment in Research and Development for fruitful Business Transformations. Empirical research and analysis demonstrates:
- A 4.8% difference between Transforming companies showing above-average long-term strategic direction compared to companies with a below-average orientation.
- More pronounced findings in transforming companies operating in turbulent competitive environments—long-term orientation linked with a TSR increase of 7%.
- Companies with above-average R&D investments had upwards of 5.1% TSR impact in contrast to those with below-average spending.
These CSFs strengthen the odds of success in Business Transformation individually. When used together, most of them produce an impact that is larger than the totality of their individual parts.
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"If you don't transform your company, you're stuck." - Ursula Burns, Chairperson and CEO of VEON; former Chairperson and CEO of Xerox
Business Transformation is the process of fundamentally changing the systems, processes, people, and technology across an entire organization, business unit, or corporate function with the intention of achieving significant improvements in Revenue Growth, Cost Reduction, and/or Customer Satisfaction.
Transformation is pervasive across industries, particularly during times of disruption, as we are witnessing now as a result of COVID-19. However, despite how common these large scale efforts are, research shows that about 75% of these initiatives fail.
Leverage our frameworks to increase your chances of a successful Transformation by following best practices and avoiding failure-causing "Transformation Traps."
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About Mark BridgesMark Bridges is a Senior Director of Strategy at Flevy. Flevy is your go-to resource for best practices in business management, covering management topics from Strategic Planning to Operational Excellence to Digital Transformation (view full list here). Learn how the Fortune 100 and global consulting firms do it. Improve the growth and efficiency of your organization by leveraging Flevy's library of best practice methodologies and templates. Prior to Flevy, Mark worked as an Associate at McKinsey & Co. and holds an MBA from the Booth School of Business at the University of Chicago. You can connect with Mark on LinkedIn here.
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