Why businesses need to embrace discontinuity
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Standing still is not an option for any business. The world is always changing, and companies can either keep up or go under. In most circumstances, keeping pace need only involve incremental change — the company protects its business model while aiming to boost sales of existing products and services. Anything more drastic is too risky.
But the Covid-19 era is not most circumstances. Such leisurely change is no longer an option for many companies. The crisis has torpedoed whole sectors, their customer bases taken away overnight.
So for many business and industries, recovery from the coronavirus crisis will instead require “discontinuous transformation” — a change not just in the rate but also the direction of travel, and not through mere incremental moves. Such radical reassessment of capabilities, operations and even the business model itself could become a routine necessity.
The Danish energy company Orsted is a good illustration of a company that moved sharply in a new direction — reflected in its decision to change its name in 2017 from Danish Oil and Natural Gas. Beginning in 2012, it moved aggressively away from fossil fuels into offshore wind farms.
It did not merely diversify into existing wind power systems and price structures, but pursued an ambitious programme to make wind power more competitive. The company chose to embark on a new way of doing things, rather than settling for doing things the old way in a new business.
By contrast, General Electric sought at the beginning of the last decade to transform its industrial equipment business through digital technology, and created a new GE Digital unit. But pressure to deliver on short-term goals (a linear rather than discontinuous approach) distracted it from longer-term innovation goals. GE Digital’s wobbles were seen as a factor in the chief executive’s early departure in 2017.
Finance plays a key role in this type of rethinking and reorientation. Traditional forecasting methods and return on investment (ROI) benchmarks may need re-evaluation. The types of linear progress that finance managers have historically sought will become obsolete at many companies because of the economic disruption caused by coronavirus.
Research that I and my colleagues have conducted at a big telecoms company facing technological disruption has yielded four important insights into discontinuous transformation. They will be relevant to businesses of all sizes as they navigate cash-strapped months and years ahead.
First, transformation can occur without large capital expenditures — indeed, new capital will not help if the approach is wrong to begin with. The trajectory of change is difficult to discern at the start, and becomes clear only as the journey unfolds.
By committing large sums upfront, before the steps required are apparent, management creates a risk of significant waste; if backtracking is needed, there will be heavy capital loss as well as delay to factor in. Paradoxically, slower spending speeds up change: to borrow the US Navy Seals’ saying: “slow is smooth, and smooth is fast.”
Second, managers need to rethink forecasting by setting new ROI rates and timings that reflect the flexibility implicit in discontinuous transformation. Conventional ROI yardsticks fail to recognise the nature of progress at such moments, and it can be a mistake to discontinue projects because they don’t seem to be making “enough” headway early on.
Third, executives should not underestimate what they can do with savings in times of discontinuous transformation. Big cost reductions can flow from dismantling an existing business in favour of a new model. Liquidity will surely be a big issue for financial managers as they navigate a recovery from the economic impact of coronavirus, so such savings could be a lifeline for many companies.
Finally, and on the other side of the ledger, liquidity can also be protected by not prematurely dismantling existing revenue streams that can help fund the transformation. The key is to tap these sources while not allowing them to impede progress by providing a false sense of security.
Beyond changes to financial benchmarks, discontinuous change also requires a mindset adjustment. It is “emergent”, more like a gap-year backpacking adventure than a strictly timetabled coach excursion. For financial managers, this can require accepting that the goal and path are not completely clear from the start — an unsettling prospect for professionals trained to cherish clarity.
This is not the only cultural shift that leaders need to assimilate. Traditional hierarchies and routines loosen during discontinuous transformation, with employees becoming empowered to think and act in new ways, and new types of collaboration across functions and teams emerging. The adaptations involved in working from home, as many have had to in recent months, will help catalyse such developments.
While hierarchy serves a valid corporate purpose, that of ensuring accountability, it can also stifle creativity if it is too rigid. As companies emerge into the new economic landscape that coronavirus has given rise to, the capacity for creativity will be more valuable than ever. In an era of discontinuity, “business as usual” is a high-risk proposition.
Kishore Sengupta is reader in operations management at Cambridge Judge Business School