Last week I raised the subject of owners of distressed businesses looking for investors or acquirers and the value that a transformation plan can add to such a business. But is there a point to transformation if you are still profitable and need neither an injection of cash nor an exit?
Changing investment criteria
If you’re still not trading as a digital organisation you must realise that your chances of survival are getting pretty thin. Two years from now a third of businesses we know today will be lost because they failed to transform. This may, in part, be explained by growing evidence that business leaders don’t really understand what transformation means.
To compound this, until comparatively recently investors have been accused of showing interest only in the short term. As a result, businesses have tended to maintain their value as long as they were still profitable. However, there are growing signs that this is changing.
Recognising the value of customers
It’s been some years since investors realised the real value of a business lay in its customer base. However, it’s not always the number of customers that count. It costs something like ten times as much to acquire a new customer as it does to sell again to an existing one. Consequently, there is limited potential for businesses that chase new customers without securing existing relationships. Customer retention has therefore taken precedent over acquisition in most businesses for some time.
Strong relationships are self-perpetuating. If your customers know and trust you they’ll not only buy your product, but tell their friends. They’ll also be more willing to purchase new products that you add to your portfolio. This makes range expansion, as well as customer acquisition, far easier, cheaper and quicker. So customer retention is the more efficient strategy and, as we all know by now, efficiency is the difference between success and failure.
The need to be genuinely digital
However, you won’t retain customers in the new economy unless you are a genuinely digital business. It’s also often cheaper, easier and quicker for a disrupter to win your customers over than it would be for them to buy you out. They won’t want to be burdened with the accoutrement of your old-model business anyway.
Investors in the digital age are increasingly aware of the importance of being a genuinely digital business. There’s less pressure on a business that is already trading as a digital business than there is on those yet to make the move. Nevertheless, if you are still to embark on your digital journey, we know, even getting to the starting line will take you something like three-to-five years. The businesses I spoke of last week, hadn’t started transforming yet, but, with at least a viable plan they might retain some value.
A cautionary business transformation tale
I came across a business recently that had started its transformation, but, because its leadership didn’t really understand what digital transformation is all about, they had stopped short of transforming into a truly digital business. Having gone through a successful re-branding the business had seen it’s profile raised and it’s share price increase. Investors, attracted by the early signs of something happening that looked like transformation, decided this was a business with a future.
Once they had increased their market value four-fold, the business leaders decided this was “job done”. They shelved plans for the real business of transformation. The organisation at this stage was talking the talk, but failing to turn that into action. They had created a digital façade, behind which life remained as it always had been – too many people, with an out-of-date mind-set, following tortuous processes. Because they didn’t have the advantage of a digital organisation they were also delivering no more than the closest they could get to what customers wanted. What’s more they were labouring under the delusion that they had “transformed”. A sitting duck in fact, for the next disrupter that turns up in their sector.
You’re only as good as your NEXT big idea
So far their old model is still delivering a profit and the business’ leaders are happy not to have investment in transformation eat into that. However, investors, having taken the re-brand and up-dated communications as indications of transformation and a rosy future have started to ask “So, what’s next?”
Within a few months of the abandonment of the transformation project the absence of activity has caused investor confidence to wane. Share value has taken a dive, despite the fact that the trading figures look good. This is because astute investors know, in the digital economy, any business is only as good as its NEXT big idea. Once the flow has stopped, although the end of the road may not yet be in sight, you know it’s just around the corner.
Business transformation – plan “B”
So, what’s the answer? Does a business in this position have a future? The answer is “yes”. Of course, there’s always a future of some kind, although, in this case, it may bear little resemblance to what was originally envisaged. After all, a lot of water will have run under the transformation bridge since the previous plan was cast. It’s the nature of the digital economy that every day the landscape changes and plans have to adapt to accommodate that.
Two things are for certain – 1) you can’t just re-start the original plan and 2) a lot of precious time will have been lost. However, you also have to question whether leaders who made the decision to pull the original plan have what it takes to lead the business forward again. We’re seeing something of this predicament with the Debenhams story in the UK right now. The question may equally apply to Jaguar Land-Rover and others who thought there was a way to avoid the admittedly expensive, painful and time-consuming digital transformation process. There isn’t of course.
70% of transformations currently fail. In addition, as many as 80% of businesses who say they recognise the need for change still don’t have a plan. It’s clear our approach to transformation has to change. However, there are a whole bunch of additional challenges a business whose programme of change has stalled must address. For one thing, you only have to cry wolf once to damage your credibility with stakeholders these days. It’s unlikely such a business will succeed without a lot of help from external experts.
Leveraging the focus of your brand
If your transformation has stalled you need to get back on to it a bit sharpish. If you still haven’t started at least you are free to take an up-to-date approach. However, organisations like The John Lewis Partnership and M&S are counting on it taking them up to five years to become competitive in the digital marketplace. In that time disrupters can turn your world upside down. The starting point has to be to define your brand and build your brand community. It may seem irrelevant, but transformations fail through lack of focus. Brands give you the focus you’ll need to move quickly and efficiently and avoid stalling.
You’ll have extra ground to make up if you still think of “brands” as logos. Even when you understand what you are dealing with, creating the brand community that will deliver your transformation can itself take a couple of years. And that’s assuming you know what you are doing.
There’s no room for mistakes when you are trying to catch up. Any business that’s not already on the transformation trail is facing quite a challenge. However, once you begin to align your brand you might maintain the interest of investors long enough to, at least, get your transformation into gear!
Phil Darby
March 19, 2019