Engines of Adaptation

Engines of Adaptation

Young entrepreneurial firms, not just incumbent dinosaurs, are vulnerable to being swept aside by new insurgents that present customers with a better proposition.

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Engines of Adaptation

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Markets are littered with once-successful companies that failed to adapt to changes in technology or customer behavior. Young entrepreneurial firms, not just incumbent dinosaurs, are vulnerable to being swept aside by new insurgents that present customers with a better proposition.

The challenge for growing firms is that they must learn how to adapt even as they’re making constant incremental improvements to the core business. That creates real tension, as one entrepreneur told me in Shanghai recently: “On one hand, I need to professionalize my company—it is out of control, and we need to bring it under control. On the other, I’m not even sure my business as it is currently configured will survive. E-commerce is moving into our space so quickly that it is unclear companies like mine will be around…. Can you change engines on a Formula 1 car and still win the race?”

Budding entrepreneurs might protest that they don’t have resources to achieve full potential in the core, let alone consider changes to that core. Yet a prerequisite for adaptation is the willingness to embrace the future no matter what, to aggressively look at all new business models and insurgencies in the market, and to dedicate a portion of resources to considering how the current model must change.

Once you recognize that you must embrace the future, you will quickly see that you have an Engine 1 (which got you here) vs. Engine 2 (which will power your future) problem. To manage that problem, I advocate a 70:20:10 resource allocation.

Engine 1 generates most of your revenue and all of your profit, so it must be constantly fine-tuned, requiring 70% of the organization’s time. Those responsible for Engine 1 must also consider how best to expand it into adjacent customers, channels, or regions. It’s preferable to extend the model rather than build a new one, because you can grow with less complexity, using many of the same resources. Searching for adjacencies should absorb another 20% of available time.

The final 10% should go to identifying and developing Engine 2 for the next wave of growth. Engine 1 and Engine 2 have quite different demands. Engine 1 needs to benefit from steady learning, continuous improvement and constant simplification. Engine 2, similar to a start-up, is highly disruptive, chaotic, unsure, still finding the right repeatable model to sustain itself. Too many strategy planning processes fail, in part, because they don’t draw this distinction. The 70:20:10 model gives leadership a much better chance of effectively managing these conflicting priorities.

Although Engine 2 serves as a disrupter, it must be able to lean on important elements of Engine 1. For one thing, it should embrace the company’s original mission as it looks for new opportunities. One emerging market company, for example, has defined its insurgency around the notion that whatever a rich person enjoys, a common person should be able to afford. Within that broad purview, the company has used packaging innovation to disrupt many unrelated consumer categories.

This is touchier, but the Engine 2 team can also think about Engine 1 as a proprietary asset that gives it a leg up as it looks for new ventures. It might reject Engine 1’s repeatable model but find real value in the accumulated experience. It might eschew the current sales approach but find that it can borrow the distribution infrastructure. The point is that Engine 2’s competitive advantage stems partly from its link to the proprietary assets of Engine 1. Unless you establish this connection, the Engine 2 team is nothing more than a venture capital fund without the expertise—in other words, a bad VC fund.

Dividing strategy by 70:20:10 helps allocate time and resources, ensuring that all three areas get the proper attention. The boundaries of each category will be dynamic. As you develop adjacency moves in the 20%, they could become core activities. This fluidity does present risks—for instance, meetings that should be about the core’s full potential can devolve into lamenting about fundamental threats that will require core redefinition. One method to manage this balance is a regular off-site meeting for the leadership team to discuss the strength of the core, review key macro trends and learn from growth experiments.

Most strategic planning processes waste time by focusing on current revenue sources. Instead, the process should regularly ask, “Who are we, and why do we exist?” The Engine 1 team can answer by describing the voices of the customer and the front line, and by describing near-term adjacencies to pursue. Engine 2’s team can describe the next generation of insurgents, radical innovations in the marketplace and how the business needs to change to maintain insurgency. This avoids the plight of many companies that don’t make their core business sufficiently lean and simple, or pursue real adaptation: They are stuck in the middle, living off the past.

James Allen is co-leader of the global strategy practice at Bain & Company and co-author of the upcoming book “The Founder’s Mentality.”


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