Avoiding Obsolescence Through Business Transformation and Performance Improvement
The discussion around business transformation and performance enhancement is at an all-time high. Corporate executives and pundits alike consider the area to be of significant importance in an age of digital disruption, new business models and expanding connectivity.
For newcomers to the discussion, what does business transformation mean? How does it improve performance and help businesses thrive in an uncertain business environment?
Richard Mgrdechian is currently the President of Prometheus Partners, a NYC-based consulting firm specializing in corporate restructuring, strategic consulting, and business transformation. Throughout his decades of experience, Richard Mgrdechian has undergone and managed the innovation and transformation process several times. He took the time to briefly discuss business transformation and performance improvement with us.
To approach this discussion, Richard Mgrdechian says it must first be clear what transformation is. The Oxford Dictionary defines transformation as “a marked change in form, nature, or appearance.” Framing business transformation within this context offers a clear picture of what it means and how businesses need to undertake transformation.
Going deeper, what does business transformation mean from an organizational level? Though the specific definitions vary, in general there are three types of transformation, each playing different roles: operational, core transformation and strategic transformation.
Operational Transformation and Performance Enhancement
Operational transformation, also known as business or performance enhancement is the most basic form of business transformation. In this form of transformation, a business focuses on optimizing its core process such as costs, supply chain, IT, working capital management and other areas. The result is a better, faster, or cheaper way of running existing processes.
Mgrdechian explains that performance improvement from this type of transformation is visible but typically limited to relatively small improvements in terms of EBITDA or other key metrics. In other words, this type of transformation generally serves to maintain the status quo, only make it more optimized.
From a competitive perspective, such transformation is essential in the short term, but will do little to stave off onslaughts from more aggressive competitors or agile startups.
Core transformation is more radical than operational transformation but less disruptive and risky than strategic transformation. In this type of transformation, a company retains its core offerings but offers them in a radically different ways, often through unbundling or some form of digital distribution.
Examples of operational model transformation include Netflix moving from delivery of physical DVDs to streaming but remaining in the entertainment industry, Walmart aggressively moving into the e-commerce business but remaining in the traditional brick and mortar retail business, and Western Union switching from location-based money transfers to digital transfers.
In terms of performance improvement, this type of transformation offers vastly improved outcomes because the company can operate at significantly improved efficiency with additional high growth distribution channels and business models.
Strategic transformation is the most radical form of all three. In this type of transformation, which perhaps is the one that remains truest to the definition of transformation, a company changes the very essence of its identity.
Richard Mgrdechian explains that the reason why this type of transformation is so radical is that it takes a different trajectory from that of the originating company. In terms of improvement, this type of transformation holds the most promise and peril, because it can either lead to spectacular failure or result in a new hyper-successful company. Mgrdechian points out a great example of a company successfully implementing this form of strategic transformation would be Littlefuse, Inc., the 93 year-old electronics manufacturer based in Chicago, IL. Over the past ten years, that company completely restructured its business strategy, as well as its manufacturing operations, and went from selling mostly small glass fuses installed under automotive dashboards, to becoming a major player in the power protection for the vastly larger (and much faster growing) consumer electronics and IT industry.
A Case for Continued Transformation
There is no doubt that the double whammy of software, combined with the preponderance of new and innovative business models, are eating the world, and large corporations are feeling the bite. As such, the only real way to survive in the long term is through a continuing transformation agenda. The first phase involves operational and operational model transformation, which strengthens the current business, whereas the second phase involves strategic transformation and requires companies to make “moonshot” bets on building new core businesses that can help them best adopt for the future.