Sane Blogger: 2023

A chess piece on a chessboard

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Business transformations are often described as the orchestrated redesign of the genetic architecture of a corporation (Morgan and Page, 2008). Such a transformation usually involves radical change with a massive effort, is operated top-down, has clear objectives and has defined benefits to be achieved (Handbook, 2012). Therefore, Business Transformation Management is the holistic management of extensive, complex changes on which organization’s future success strongly depends (FHNW, 2012). And, this contrasts with continuous improvement, which takes place as a directed incremental change silently following the path of a long-term strategy of an organization.

Transformational initiatives are typically driven by value deficiencies experienced by an organization that cause them to reconsider and ultimately change the way they conduct their day-to-day operations in order to survive and grow organically (Rouse 2005). Factors such as changing environmental factors (Romanelli and Tushman 1994), changing market conditions, competitive threats, government regulations (Walker 2007), customer demand and satisfaction (Ashurst and Hodges 2010), political, regulatory, and technological advancements (Greenwood and Hinings 1996) – these are classified as variables external to the business which are beyond their control. On the other hand, there are also internal drivers that leads to a transformation, such as experiencing performance crisis, change in leadership (Romanelli and Tushman 1994), or the company seeking growth & expand its market share (Rouse 2005) - (Safrudin & Recker 2012)

Business leaders, consultants and managers conduct business transformation for firms. To them, understanding the mechanism of executing a successful transformation remains the most important consideration. A brief literature review suggests that following are three popular methods to view execution of business transformation: -

In the book ‘A Handbook of Business Transformation Methodology’ written and published with the support of SAP edited by Axel Uhl, Lars Alexander Gollenia, the big picture of Business Transformation Management has been defined as a Meta Management. Under meta management view, a firm can be viewed under following two broad components (with respective sub-components as mentioned): -

Direction

Strategy Management
Value Management
Risk Management

Enablement

Business Process Management
Transformational IT Management
Organizational Change Management
Competence and Training Management
Program and Project Management

In the paper titled ‘An Executive’s Guide to Business Transformation’, it is mentioned that any successful business transformation will have to address all eight components of the business transformation model. These are: value streams, strategy, organization, people, processes, systems and resources, leadership and performance measurement. For a transformation attempt to succeed, all eight components must be addressed. Most failed transformation attempts have failed to address one or more of these components. (Umit S. Bititci, 2007). The brief on these components are as under: -

Value streams – Orchestration to deliver value to customers
Strategy - Utilization of resources for competitive positioning
Organization - Organizational structure (hierarchical design)
People - Collective strength, passion and aspirations of workforce
Processes - Operational processes for delivery of products or services
Systems and resources – Ecosystem of operations, infrastructure and resources
Leadership - Approach of management in leading the organization
Performance measurement - Systematic approach to collecting, analyzing and evaluating products and services offered by an organization

The McKinsey 7S framework is a management model to assess and monitor changes in the internal situation of an organization. The framework consists of seven core elements of an organization structure, strategy, systems, skills, style, staff and shared values. An organization performs well under process of change, if these elements are aligned and mutually reinforced (Peters and Waterman, 1984). The core elements (components) are classified in the following way: -

The hard elements are:

Strategy – Utilization of resources for competitive positioning
Structure – Organizational structure (hierarchical design)
System – Operational processes for delivery of products or services

The soft elements are:

Shared Values – Organizational culture (norms, standards, values)
Skills – Talents and capabilities within organizational staff
Style – Approach of management in leading the organization
Staff – Collective strength, passion and aspirations of workforce

The above popular methods offer comprehensive guidance to organize, execute and monitor business transformation. In line with the mentioned methods the literature is rich in insisting on a variety of other similar methods on effective execution of business transformations (Examples in Reference). Much of the available literature addresses generic business transformations. However, some (of these literature) focus only on business model, some focus on a specific sector like (say) power sector or (say) telecom sector, some focus on technology like (say) digital transformation and, some are concerned with transformation to synchronize business with evolving norms of ESG (Environmental, Social, and Governance).

It is observed that existing literature is still inconclusive about the key factors contributing to successful business transformation for a firm. In this blogpost, I have attempted to explore this aspect of business transformation.

An organized effort, which is expected to have profound impact on business-prospects of a firm, usually has following two components: -

Planning
Execution

These two components are usually sequential (the planning precedes execution). In fact, these two components are so fundamental to any organized endeavor that they remain critical consideration for operational design of any firm. Drawing an analogy, it is reasonable to assume that any business transformation can have the following two fundamental components: -

Strategy (Business Transformation Strategy) – The strategy is a plan to bring changes to the value proposition of a firm for intended competitive positioning in the market. This component is the planning part of business transformation.
Implementation (Business Transformation Implementation) – Streamlining the organizational structure and organizational resources to convert (strategy implementation) plan to execution (eventually) to yield intended result. This component is the execution part of business transformation.

Figure – 1: Components of Business Transformation

Let us further understand the Strategy and Implementation. According to Michael Porter (Porter, M.E. Competitive strategy. New York: Free Press, 1980), a firm needs to formulate a business strategy that incorporates either cost leadership, differentiation or focus to achieve a competitive advantage. More recently, the meaning of business strategy has expanded, ranging from the document that contains the firm’s business plan to the strategy of the whole firm, to the strategy of departments and divisions inside the firm (Dagnino, 2018). The formulated strategy is implemented by firms through a systemic arrangement immaculate with the objective(s) of the chosen strategy.

Usually, strategy and implementation are consistently at work in a firm. Before the transformation comes into picture, a firm keeps on implementing a long-term strategic plan in an incremental and continuous way. Let us name this phase as Static Phase. Now, suppose to reposition the firm (for (say) to go for an ambitious expansion of business), its leadership formulates a transformative strategy. This transformative strategy is then implemented by the organization. Let us name this phase as a Dynamic Phase. In this blogpost, I will discuss the Dynamic Phase and therefore, strategy and implementation will relate to business transformation only in dynamic phase (unless stated otherwise).

Thus, initially, the (transformational) strategy precedes (transformational) implementation during dynamic phase. And then, transformational implementation closes-up to strategy to complete transformation. Once implementation of this strategy is successful, the Static Phase is (again) reached. And, during this static phase, once again a long-term strategic plan is implemented by the firm in incremental and continuous way. Of course, during this phase also, the strategy may precede implementation but the difference between lead and lag remains relatively less. Therefore, the risk associated for the firm during static phase is lesser in comparison to the dynamic phase.

With this background, let me get back to the (above mentioned) three methods used for Business Transformation Management. I will try to reduce the components used in the (above mentioned) three methods to the two fundamental components that is Strategy and Implementation. This exercise should establish that these two components (Strategy and Implementation) are essentially the fundamental components of business transformation, which are hidden within the mentioned methods. However, in these models, to assist strategy-practitioners, the fundamental components have been eventually broken into sub-components (for much granular representation).

Figure – 2: Table reducing Popular Methods for Business Transformation Management to Fundamental Components of Business Transformation (Strategy and Implementation)

The above table shows that the Meta-Management components under BTM (Business Transformation Management) method has already classified all the components under two heads these are Direction (which can be understood to be referring to the Strategy) and Enablement (which can be understood to be referring to the Implementation). The components in Executive’s Guide and in McKinsey 7S Framework also can be reduced to be classified under the two fundamental components as shown in the table above.

Having established that the business transformation can be understood to have two fundamental components (Strategy and Implementation), let me prepare to have a closer look on these two components.

The strategy is planning part of business transformation. The strategy is futuristic articulation of anticipated changes represented through logic of business analytics. Business Transformation Strategy is cautiously drafted as a collective effort by a team of experts and practitioners. Strategy has many interdependent moving parts to be controlled by a strategist. Therefore, numerous risk mitigated assumptions are made during the process of strategy formulation.

Time and again it has been observed that no strategy is perfect in getting all the assumptions right. Therefore, strategy often fails to read the market with perfection and also sometimes fail to understand the ground realities of operational challenges in delivery of products and services within the firm.

The above facts, eventually make the strategy to get out of sync with implementation. However, through monitoring, control and through corrective actions, the strategy is fine-tuned during the implementation phase. Since it may never be possible to have a perfect strategy, the ability of a firm to swiftly adjust the strategy with ever changing situation on ground keeping the essence of transformation in focus could turn out to be a key organizational characteristic for the success of a business transformation.

With the above arguments, it can be inferred that a firm with relatively higher strategic agility may be more successful in executing business transformation strategy. Strategic agility is defined as “the ability to remain flexible in facing new developments, to continuously adjust the company's strategic direction, and to develop innovative ways to create value” (Weber and Tarba, 2014). It is a multidimensional concept, which includes both the ability to detect, anticipate, and sense market opportunities, evolving conditions, and other environmental changes and the ability to seize the opportunity with speed and implement new solutions (Gayathri Sampath and Bala, 2017). Particularly in a turbulent international scenario, where globalization affects consumer behavior and markets are impacted by continuous change, one of the most important success factors for international firms is strategic agility (Morton et al., 2018).

The business transformation implementation depends on a firm’s capability to transit from AS-IS scenario to the TO-BE scenario following the strategy and capability to sustain the operations post transformation. It is expected that during transformation the implementation should be able to flexibly follow changes to strategy introduced to accommodate unexpected circumstances. The implementation should also be able to give feedback on real situations (especially the adverse ones) as faced on ground back to the strategy to invite required adjustments to strategy to meet the intended objective of the transformation. The fundamental aspect of an organization to drive the above requirements of implementation could be the firm’s ability to assimilate external knowledge into operational processes swiftly with conscious efforts. This is also evident looking into the organizational operational capacity from Dynamic Capability Theory (DCT) view. Dynamic capabilities theory (DCT), which was developed by Teece, Pisano and Shuen (1997) was defined as “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments” (Arokodare, Asikhia; 2020). The dynamic capabilities of organizations stablish the connections to manage the absorption of knowledge (Vargas Hernández; 2017).

The above discussions indicate that fundamental organizational characteristic to drive operations of a firm during transformational challenges is Absorption Capacity of the firm. A firm’s Absorptive Capacity (ACAP) is the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends is critical to its innovative capabilities (Cohen, Wesley,Levinthal; 1990). In their seminal work, Cohen and Levinthal (1990) define ACAP as a firm’s ability to: (1) recognize the value of, (2) assimilate, and (3) apply new external information to commercial ends. Zahra and George (2002) modify and extend the ideas put forward by Cohen and Levinthal (1990) by specifying four distinct dimensions of ACAP: (1) “acquisition,” (2) “assimilation,” (3) “transformation,” and (4) “exploitation”. ACAP is essentially an organizational level construct (Addorisio, et.al. 2014). Thus, it is reasonable to assume that absorptive capacity is an ability firms should develop if they wish to adapt to changes in an increasingly competitive and changing environment and to achieve and sustain competitive advantage (Jiménez-Barrionuevo, 2011). Considering the above points on ACAP, it may be assumed that a firm with relatively higher absorptive capacity may be more successful in executing business transformation implementation.

Summing up in brief, business transformation has two fundamental components strategy and implementation. Strategy depends on “Strategic Agility” of a firm. Implementation depends on “Absorptive Capacity” of a firm. Thus, the success of business transformation endeavor of firm depends on following two factors (as shown in the figure below): -

Strategic Agility of the firm
Absorption Capacity of the firm

Figure – 3: Factors for Successful Business Transformation of a Firm

Taking the discussions forward, it may be possible to do a Cartesian Analysis with “Strategic Agility” as X-axis and “Absorptive Capacity” as Y-axis. The firms may be plotted with standard quantified values of Strategic Agility on X-axis and to that of “Absorptive Capacity” on Y-axis. The XY quadrant may be divided into four areas. This is shown in the following figure.

Figure – 4: Classification of Firms based on Prospects of Business Transformation

Any firm may fall into any of the areas as shown in the figure. Every area is discussed with reference to prospects of success of business transformation in the following points: -

Lower Left – The Averse Firms – Firms falling under low Strategic Agility and low Absorptive Capacity area find Business Transformation most difficult with respect to the contemporary firms falling under other areas. Such firms remain averse to Business Transformation and may have temptation to resist transformation.
Top Left – The Cautious Firms – Firms falling under low Strategic Agility and high Absorptive Capacity area find readjusting strategy during the course of Business Transformation difficult. Such firms remain cautious to Business Transformation and have temptation to go slow with transformation.
Lower Right – The Ambitious Firms – Firms falling under high Strategic Agility and low Absorptive Capacity area find it difficult to carry on implementation in the same spirit with consistently readjusting strategy during the course of Business Transformation. Riding on high Strategic Agility, such firms remain ambitious to take on ambitious business transformation and have temptation go for an aggressive strategy without an adequate organizational support in implementing the strategy.
Top Right – The Agile Firms – Firms falling under high Strategic Agility and high Absorptive Capacity area find business transformation easiest with respect to the contemporary firms falling under other areas. Such firms remain agile to business transformation and may have temptation to swiftly transform with changing strategic requirements of the firm.

Keeping a firm at a high Strategic Agility score and at a high Absorptive Capacity score may surely come at the cost of increased operational cost for the firm. At times, it may be difficult to accommodate. More so, for firms having price sensitive products and/or services and operating under extremely competitive market. It is understandable that under such circumstances strategists face pressure to consistently optimize costs. Still, for the long-term prospects of capitalizing on next transformation to gain positional advantage in the post-transformation market landscape, (in my opinion) a strategist should always insist management to accommodate the increased operational cost.

The four types of firms obtained on cartesian analysis (as above) with the factors of business transformation may have some characteristics preferences for conducting business. These are elaborated in the following tables and are solely based on my personal experiences acquired during last two and a half decades in various sectors.