This is a summary of the article Two Routes to Resilience published in the December 2012 edition of Harvard Business Review.

Companies need to innovate to

• respond to market shifts,
• compete with disruptive star-ups, or
• close the gap to meet future revenue goals.

These transformations are better served through two separate efforts: Transformation A adapts the core business to the new realities. Transformation B creates a new disruptive business. Making both transformations work requires a Capabilities Exchange that ensures resources are leveraged and competing priorities are managed.

Transformation A

Goal: Find the competitive advantage the current model can sustain in the disrupted environment. Remember, disruptive innovation does not destroy all value. To find this advantage, answer these four questions:

• What can we still do better than our traditional competitors and upstarts?
• What must we give up?
• Why do our customers come to us?
• What is the real need that connects our customers to our brand?

Tactics:

• Focus on higher profit niches
• Cut costs (reduce workforce, close stores, etc)
• Redefine your product line to offer better, less expensive options

Transformation B

Goal: Exploit new profits without being encumbered by the revenue requirements and practices of the core business. To achieve this, answer this question: What unmet needs to customers have in today’s environment?

Tactics:

• Conceive a business model that fulfills the unmet needs profitably.
• Implement and evolve the business model, testing essential assumptions first and quickly adjusting as you learn.
• Develop the new model’s own profit formula, staff, processes and culture.
• Embrace the possibilities of new markets as enthusiastically as startups do.

The catch: it can take time (years) for the new revenue streams to reach their potential.

The Capabilities Exchange

The Capabilities Exchange coordinates the two transformation efforts so that each gets what it needs and is protected from interference by the other. Setting up the exchange is a five-step process:

1. Establish leadership. Use a centralized approach with three core leaders: the CEO, the leader of the core transformation and the leader of the disruptive business.
2. Identify the resources the two organizations can or need to share. Start by identifying the capabilities that organization B can borrow from the core to gain a competitive advantage over startups (i.e. branding, marketing and customer data).
3. Create exchange teams. Have the leaders of each transformation allocate resources. Allow groups to form and dissolve without impacting regular operations. Keep teams small and with short reporting lines.
4. Protect boundaries. Each organization must operate as if the future of the company depended on it alone. You will be investing in the new venture while cutting the legacy organization, so you may find that you will need to stop legacy employees from trying to meddle with the disruptive new business. It’s also important to avoid bleeding the core to prop up the new venture.
5. Scale up and promote the new business. Ideally, the repositioned A organization will remain (or become) profitably self-sufficient. But the disruptive business is the source of future growth. As such, the B organization should receive an increasing share of resources and attention. Top management must put the new business centre stage when talking to the outside world about the company’s vision and prospects. Otherwise markets and customers will not see the evolution.