A Blog by Jonathan Low

 

Jun 30, 2017

Why It Matters That Most Current CEOs Can't Lead a Digital Transformation

CEO turnover is increasing. The reason given is usually 'results,' which traditionally means financial outcomes.

The real issue is that every business is now a tech business - whether it wants to be or not - and that means a need not just for new skills and experiences, but a new outlook on opportunity and strategy.

Barry Libert reports in Forbes:

“Who ever thought Ford would be competing with Google? But they are, and Mark Fields wasn’t moving fast enough.” The leadership turnover that we are already seeing in the market will only accelerate. Many leaders are deemed too young, or too tech-focused to lead incumbent organizations, but tomorrow will see that these are exactly the leaders need(ed) in the digital age.
Years ago, Jim Collins wrote the best-selling book, Good to Great, praised by business leaders and academics alike. Collins noted seven characteristics common to firms that go from “good to great,” one of which was their ability to get the right people “on the bus.” This obviously includes the bus driver as well—the executives who guide their organizations. Unfortunately, more and more companies are concluding that they don’t have the right leadership. Significant CEO departures like Jeffrey Immelt leaving General Electric and Mark Fields stepping down at Ford highlight the struggle many companies face to find the right leadership in the digital age. As Michael Useem, professor at the Wharton School, said to the NY Times, “Who ever thought Ford would be competing with Google? But they are, and Mark Fields wasn’t moving fast enough.”
Speed is a serious concern for incumbent organizations. While their leaders are “driving the bus,” Jeff Bezos is flying past in a Prime-branded rocket ship. What has changed in the past sixteen years? The evolution of new, more profitable business models using new technologies like social, mobile, cloud, analytics, and platforms. The underlying technologies and rapid speed of evolution required to succeed with newer business models are real challenges for the average executive. Incumbent companies and traditional boards need new thinking and skills to succeed. Many leaders don’t realize that there are four business models, and most focus on the least profitable and efficient one. Each serves its customers with different products and services:
  • Asset Builders produce and sell physical things
  • Service Providers offer professional services
  • Technology Creators develop new technologies like biotech and high tech
  • Network Orchestrators manage social, business, and transactional networks
Due to the difference in their respective growth rates, marginal costs of growth, profit margins, scalability and capital efficiency, each of these business models trade at wildly different price to revenue ratios.
  • Asset Builders are usually priced at .5 – 2x revenues
  • Service Providers are usually priced at 1 – 3x revenues
  • Technology Creators are usually priced at 3 – 7x revenues
  • Network Orchestrators are usually priced at 4 – 11x revenues
Each business model has its own clock speed—essentially its speed of response to new market forces including technologies, trends, and preferences. Asset Builders are oldest and slowest moving organizations. Production and retail are asset-intensive processes relying on plants, inventory and real estate, and are more difficult to change and adapt. Service Providers move a bit faster, because they offer the services of people who can change and adapt more easily than physical things.
The clock speed really increases, however, when technology becomes integrated into the business model. Companies that operate as Technology Creators have to stay on the cutting edge of new technological development, and are accustomed to a fast pace of change. For example, consider Moore’s law, which predicts that semiconductor chips will double in speed every 18 months. Companies using the last business model, Network Orchestrators, employ technology and extensible, flexible platforms to move the fastest of all. The organizations that utilize this model can react incredibly fast to market changes. For example, Uber’s network of drivers or Airbnb’s network of hosts can meet a new customer need before the company is really even aware of changing dynamics.
Now business model is not black and white and many companies operate a variety of business models, but this framework provides a clear and understandable road map to help leaders understand their organization’s positioning and needs. But there is the rub: different business models require different types of leaders.
If you are running a manufacturing company, retailer or distributer—all Asset Providers—a great bus driver, metaphorically speaking, might be a good choice. Slow, plodding, meticulous and focused on no errors and therefore little or no innovations. For a professional services company, a different type of leader with a faster clock speed, perhaps a train conductor, is required. For a technology company, you might need a jet pilot who is willing to fly very fast and break the sound barrier. Finally, if you want to compete in the dramatically changing and highly profitable world of platforms, like Amazon, Apple, Facebook, and Alphabet, you need an astronaut who is willing to go where no one has gone before.
When putting the whole picture together, there are a few lessons to consider:
  1. Do not ask bus drivers, even great ones, to lead business model transformations. After years of managing sites and inventory, their clock speeds are simply too slow. Further, they often don’t appreciate the technologies and competencies essential to success in other business models. Unfortunately, this is the situation that most incumbent firms face when trying to navigate digital transformation—they have a bus driver trying to steer a rocket ship.
  1. Do and measure new things when trying to adapt business model. Each business model has its own competencies, road maps, requirements, go-to-market strategies and KPIs. Thinking that these business models can all fit together nicely is a false assumption. Thinking that they can work collaboratively like they do at Amazon, but operate on their own bottom line, is reasonable and appropriate.
  1. Understand the difference in growth versus profits. In the first two business models, profits rule. But in the latter two, the ability to scale rapidly and a low cost means that growth rules. Leaders using the first two business models often sacrifice future growth for current profits. Leaders using the last two favor growth over profits.
  1. Recruit board members that understand what it takes to be a digital organization. It is clear that if you don’t have digital board members, you will not allocate sufficient capital to technology and platform opportunities. People who want to go to Mars are not interested in a slow ride to the local elementary school.
  1. Support your business models with right type of investors. If you want to be in the business of people and things, then pick investors that want that type of business. If you want to build technology and paltforms, make sure you recruit growth investors who are prepared for the adventurous ride. If you are in transition, find believers in your growth story who will provide you with leeway to create your digital future.
The leadership turnover that we are already seeing in the market will only accelerate. Bus drivers are stepping down, or being forced out, as investors and markets realize they just don’t have the competencies to steer the company through new business models. Unfortunately, many of these “bus drivers” are being replaced with slightly younger “bus drivers” with the same competencies and focus areas. If you want to build a platform with a network that is running at exponential speeds, you need leaders that enjoy warp speed. Today many of these leaders are deemed too young, or too tech-focused to lead incumbent organizations, but tomorrow we will see that these are exactly the leaders we need in the digital age.

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