Business Creation vs. Business Transformation

Please take a brief moment and think about the following question:

What has been the greatest entrepreneurial achievement of the past 20 years?

The most common answers to this question will be: Google (Larry Page and Sergeji Brin), Facebook (Mark Zuckerberg), Tesla (Elon Musk) or Amazon (Jeff Bezos). Yet all of these companies have only outgrown start-up status in the last few years: Amazon was founded in 1994; Google in 1998, Tesla in 2003 and Facebook in 2004.

Undeniably, all of these company foundations are outstanding entrepreneurial achievements. Interestingly, no companies that have been established on the market for a longer period of time appear in lists like this one.

When such a name does come up, it is often Satya Nadella. The CEO of Microsoft has led the company, founded in 1975, for five years. In that time, he has steered the company through one of the biggest corporate transformations in recent economic history.

Business Creation vs. Business Transformation - Apples vs. Pears?

Can these different management performances be measured against each other? Or are we comparing apples and oranges? A comparison of the tasks that managers have to face in each case reveals clear differences.

So what specifically characterizes the activity of a founder? And what characterizes the activity of a manager who transforms an established company?

Start-Ups

A start-up is literally planned "on a greenfield site". From the selection of employees to work processes and equipment - all organizational areas start from scratch. In the process, the entrepreneur can change the pace of growth at will - depending on his willingness to take risks. He can scale slowly or quickly as needed. If his business model does not work, the invested "sunk costs" remain manageable.

So a startup founder can use the technological and organizational opportunities of the present to build his business model.

Established companies

By contrast, it is much more difficult - especially under the conditions of digitization - to manage and transform an existing company.

Established companies often cannot fall back on the possibilities of a start-up. Instead, management must work with the resources already available: Employees, technology and workflows are ingrained over years. And any change is difficult.

Challenges in the transformation of established companies
Transformation in the operational sense means the "fundamental shift in a company's relationship with individuals and with its economic and social environment."

If management triggers such a process, a number of changes result for the company: The company's own value creation processes, organizational structures, technologies and infrastructures, utilization models and business models must be questioned and redesigned.

Digitization increases the urgency of business transformation

Digitization is intensifying the urgency of transformation for many companies. For too long, German companies in particular have hesitated to implement digital transformation processes. Now that digital technologies are replacing each other in ever faster cycles and disruptive business models from American providers are turning entire industries upside down, many corporate leaders are recognizing the need for change.

In the future, almost all business processes and business models will become digital. And if the product is not digitized, then the stages of value creation around the product will be digitized. This shifts the actual value creation away from physical production to digital platforms.

What to do in the "Innovator's Dilemma"?

Innovative companies in innovative industries in particular often fail to successfully adapt new technologies due to their market ties. Established companies are therefore regularly forced out of the markets by disruptors.

With the right strategy, companies can defend themselves against this development - provided they have developed and implemented a strategy for digital transformation. Microsoft has shown what such a transformation can look like.

Microsofts Cloud-Transformation

When Satya Nardella took over as CEO on February 4, 2014, the company was in the deepest crisis in its young history. Looking at the initial situation with the help of a portfolio analysis (BCG matrix, Boston Consulting Group), Microsoft was operating a "herd" of aging cash cows at that time: Operating systems on local computers and laptops, systems integration, consoles.

Satya Nadella broke the Innovator's Dilemma threat (for now) by enacting an absolute focus by Microsoft on cloud-based business models. This was despite the fact that the cloud still accounted for a very small portion of revenue at the time. It was clear to the CEO at this point that this would change within a very short time.

A necessary prerequisite for the realignment was to integrate the transformation into all parts of the company - and thus to take a high risk. The implementation of the cloud-first strategy was therefore met with a great deal of skepticism, not only internally among employees, but also among the company's shareholders. The pain that such a transformation process can cause in a company can be read about in Nadella's 2017 book "Hit Refresh".

What a successful transformation requires

Geoffrey Moore explains how established companies like Microsoft can (and have) succeeded in shaping the digital transformation with his "Zone to win" strategy. This divides corporate activities into four zones and weights them in terms of current and future criticality and transformational power.

The figure below shows the four zones of Geoffrey Moore.

Sustaining Innovation: What Keeps the Company Running

The Sustaining Innovation category describes a company's sustaining technologies. This refers to all products and services that are already successfully established on the market.

In order to create these products and services, various core activities are necessary: This usually includes the areas of production, logistics, sales and management. In the first quadrant - the performance zone - the actual value creation of the company takes place. This is where the sales are generated.

Next to it is the Productivity Zone (Quadrant II). Here you will find the necessary secondary business areas, such as administration or human resource management.

Both quadrants (I & II) usually focus their activities on the time horizon of a fiscal year and form the core of the active part of the company. Without these two areas, no organization generates revenue.

Disruptive innovation: What changes the business

The opposite areas, on the other hand, deal with disruptive rather than sustaining technologies. That is, they are already operating today with the products that will only change the end customer markets in the coming years.

Geoffrey Moore also distinguishes here between a productive and a supporting quadrant: The Transformation Zone (Quadrant IV) is already actively operating the business models of tomorrow. The Incubation Zone (Quadrant III) is responsible for providing precisely those disruptive products and services.

The time horizon of the third quadrant is long-term at three to five years. For this reason, research, development and strategy departments are primarily located in this business unit.

However, according to Geoffrey Moore, the fourth quadrant is much more important for successful business transformation: the Transformation Zone. Although these departments also work in a future-oriented manner (2-3 years), those employees develop and operate the organizational units and business models of tomorrow. For example, a financial company might start using digital financial advisors in sales (Quadrant IV). And this despite the fact that the majority of sales in the current fiscal year are generated with human advisors (Quadrant I).

The problem, however, is that very few companies can afford a fourth quadrant at all. And if they do, it is often hopelessly underfunded.

Management as a success factor for successful transformation

Microsoft, under the leadership of Satya Nadella, took a bold step here: Instead of continuing to feed its own cash cows - and focusing on Quadrants I & II - Nadella put all his eggs in one basket. He invested massively in the Transformation Zone. On the one hand, this was at the expense of the first two quadrants. On the other hand, the approach led to a massive backlash from the involved (and now disadvantaged) departments.

Management's task in such situations is to anticipate the internal reactions against shifting resources to the promising fourth quadrant. And to plan appropriate countermeasures.

Nadella has been pursuing this strategy since he took office at Microsoft: He involved middle management, controlling, production and sales in the transformation process. His idea: If management succeeds in communicating the meaningfulness of the transformation and making the potential of the change process clear to the employees affected, then the company's employees will also be convinced. Internal opponents become supporters and implementers of the transformation process.

For Microsoft, this strategy has paid off: The company is no longer seen by employees and analysts as a software company with an aging business model. Instead, Microsoft is now an innovative company that occupies a key position in the field of cloud technology - and thus the future. The company is in better shape than it has been for a long time. And this is also reflected in the share price, which has more than doubled since Satya Nadella took office (as of February 21, 2019).

Business Creation vs. Business Transformation - Apples vs. Pears!

Start-ups and companies established on the market face completely different tasks when it comes to mastering the challenges of digitization. While start-ups can plan their organization on a "greenfield" basis, established companies have to transfer existing workflows and processes to the present. In many cases, this is only possible with a great deal of entrepreneurial effort.

Microsoft offers a good example of a company that has put all its eggs in one basket on the path to transformation: the cloud. And with this decision, has successfully paved the way for a transformation of its organization.

(And when asked about the greatest entrepreneurial achievements of our time, you should probably keep Satya Nadella's name in mind in the future ...).