Many companies stumble when their core business collapses. But there are also some who are becoming more resistant and turning things around. What is your recipe for success?
Logitech has not always surfed the wave of success, but can look back on an eventful company history.
The French-speaking Swiss technology company Logitech is riding a wave of success: Whether PC accessories such as keyboards and mice, lifestyle products such as Bluetooth speakers, video conferencing systems or gaming accessories – due to the pandemic-related retreat into one’s own four walls, the products are currently selling like hot cakes.
That was not always so. The company looks back on an eventful company history; three times it almost went bankrupt. With the advance of smartphones, the PC and with it Logitech’s business with computer accessories lost importance. The company had to reinvent itself. When CEO Bracken Darrell took over the helm nine years ago, he poured big bucks into new businesses like video collaboration and gaming. As part of the transformation, the topic of design also gained in importance in the group, the corporate culture changed and finally the business results improved again.
Why Kuoni failed
However, the tour operator Kuoni, whose European travel business was sold to the German Rewe Group, did not manage to turn the tide. Jan Sedlacek, founder and managing partner at the management consultancy Stryber, worked at Kuoni during the period of upheaval and later founded his own company because he wanted to do it better.
“Everything looks simple on paper,” says Sedlacek. In reality, however, there are many hurdles in companies that make change more difficult. This includes existing processes and systems, the corporate culture, an understanding of management geared towards preservation, financial incentive systems, as well as boards of directors and shareholders who shy away from the transformation. Even employees who identified strongly with their job and their working environment did not feel comfortable: “Anyone who travels to beautiful countries for work does not necessarily want to work in the office of an online travel shop.”
Based on the experiences that Sedlacek has made in the transformation of companies, he has come to the following conclusion: “The traditional business cannot be transformed on its own.” In order to create the change, the future-oriented divisions should therefore be set up completely separately from the core business. “The management has to protect the startup area and be patient,” says Sedlacek. It usually takes five to seven years for a new business area to stand on its own two feet.
Netflix makes a virtue out of necessity
The former DVD rental company Netflix, which saw its existence threatened by the advance of YouTube and other streaming services, opted for a separation of its core business and new mainstay, but then successfully transformed itself into today’s streaming market leader. But the change was not only successful because of this; experimentation, learning from mistakes and courageous determination also played an important role in the transformation. For example, it was difficult to obtain affordable licenses for popular film and television programs. Netflix was not deterred by this, but made a virtue out of necessity and began to produce its own content.
The unusual corporate culture is often cited as a major reason why Netflix emerged victorious from the crisis. The streaming provider puts a lot of energy into filling the jobs with the very best candidates. The employees are extremely well paid and enjoy a lot of freedom. For example, they decide for themselves how many weeks of vacation they take per year. In return, the company expects exceptionally good performance from them. If the employees do not meet the high expectations, they are dismissed without further ado – with a generous severance payment.
In addition, everyone at Netflix makes their own decisions without having to check with their manager beforehand. Employees are encouraged to give honest feedback to their bosses. Managers do not micromanage, but ensure strategic alignment and provide team members with the necessary information. Open and constructive communication as well as various forms of cooperation in order to achieve ambitious goals together are also firmly anchored in the corporate culture.
Fujifilm switches to cosmetics
Sometimes the upheavals in an industry are so profound that corporations practically have to give up their core business and break into new lines of business. While Kodak had to file for bankruptcy in the course of the invention of the digital camera, the Fujifilm management averted the impending downfall by fundamentally realigning the group and opening up business areas in completely different branches of the economy.
This worked because chemical compounds that had been developed for film photography could also be used in the pharmaceutical, healthcare and cosmetics industries. For example, it turned out that the chemical process used on aging films can also be used on aging skin.
“The crucial thing is that Fujifilm planned this transformation before it happened,” says Alexander Osterwalder, innovation expert and co-founder of Strategyzer. A company cannot make such a fundamental change overnight as many companies are trying to do. The board of directors must have the courage to set a strategic course at an early stage, and management is called upon to explore options for the future. You should always look beyond the borders of your own branch of industry.
Across industry boundaries
“Especially for international corporations, it is becoming increasingly difficult to remain in their traditional industry,” says the innovation expert, who ranks fourth on the Thinkers50 list of the world’s most influential management thinkers. The big technology companies, which led to upheavals in various industries, showed the way.
Management consultancy McKinsey estimates that by 2025 over 30 percent of expected global sales will be redistributed across today’s industry boundaries. Hundreds of industries that were previously separate from each other formed ecosystems. For example, the Chinese insurance group Ping An has long since drawn its conclusions from the advance of the technology groups Alibaba and Tencent. The group, which is one of the world’s largest insurers, has built a platform as its core and is now active in the financial sector, healthcare, real estate and the smart city sector. Ping An built an ecosystem in which the individual areas strengthen each other.
Diversity and risk taking
The top management of the group consists of a significant number of non-Chinese and non-financial people. The different perspectives on a topic help the Group to develop new business models more aggressively. Despite its size, the group has managed to develop a start-up mentality and an environment in which employees are required to act entrepreneurially. In addition, the group is increasingly relying on borrowed capital when establishing new pillars, because it often takes several years for an investment in a new idea to pay off.
As Jessica Tan, Executive Director and Co-CEO of Ping An, said in an interview with the McKinsey Quarterly publication explains, this corporate culture plays an important role. At Ping An, everyone can come up with new ideas, risk-taking is encouraged and failure is not stigmatized. However, the employees then have to make an effort to find a new way. You can only keep up with the pace of the market if you have vision, set yourself ambitious goals and don’t hold on too long to something that is doomed to fail, says Tan.
Many other companies shy away from such a fundamental change. Without pressure from the board of directors, the management team usually has little incentive to tackle far-reaching changes at an early stage: Especially in listed companies, the members of the executive board usually only hold the top position for a few years and they assume that they will no longer reap the rewards of their efforts. Top management often does not want to oppose the heads of departments in the core business, who fear that their department will be cannibalized. Ditto for key shareholders who rebel when dividends are cut to invest in the future.
Two cultures under one roof
According to the innovation expert Osterwalder, companies succeed in constantly reinventing themselves if they combine existing business and future business under one roof: “To do this, two different cultures should be established.” The management has to lead the two areas at the same time and bring them into line. The core business is about exploiting what already exists, i.e. long-term planning, fixed budgeting and ongoing improvements in efficiency and sales.
In future business, on the other hand, the focus is on exploring something new; new models would be systematically developed. “Out of ten ideas, six fail, three survive, and one becomes the cash cow of tomorrow,” says Osterwalder. Other manager types are needed to explore this; people are in demand who can deal well with uncertainty and recognize patterns. As soon as a future model has grown sufficiently, the other culture, geared towards long-term planning and improvements to the existing situation, comes into play.
Copying is not enough
Overall, companies that separate their future business from their core business and have a spirit of optimism and an innovative corporate culture have a better hand than others when their core business collapses. A far-sighted board of directors and a management team that makes decisions at an early stage and embodies an understanding of leadership that relies on personal responsibility are also important for change.
Ultimately, every company has to find its own way, since the starting point is always different. The corporate culture should fit the DNA and cannot be copied by others. Market trends can be interpreted in different ways, can change quickly, and some crises come out of the blue. Then those who have become resistant – perhaps as a result of previous crises – and remain adaptable will have an advantage.