Two Phases of Business Transformation

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Framework Primer
Two Phases of Business
Transformation
Presentation created by
PHASE 1 PHASE 2
Trigger Operational Turnaround New Strategy Adaptive Innovation
TSR
Time

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Contents
Overview
Transformation Trajectories, Phases, and Stages
Factors for Long-term Success
Transformation Traps
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A Business Transformation undergoes 2 phases—characterized by Cost
Reduction and Growth & Innovation
Presentation Overview
Transformation projects are common in organizations these days. However, based on a
study conducted by the Boston Consulting Group, about 75% of such efforts fail.
Based on this same study, BCG identified 2 phases that exist in all business
transformation projects, which traverse through 4 stages:
• Trigger
• Operational Turnaround
Triggered by a performance or industry shift, the first phase is focuses on Cost
Reduction. The second phase focuses on Growth and Innovation.
Other topics covered include the factors to long-term success (Turning the Page,
Creating a New Vision, Foundational Innovation, Commitment, Imposed Distance,
Adaptive Approach, Shots on Goal, Patients) and transformation traps (Early-Wins,
Efficiency, Legacy, Proportionality, False Certainty, Persistency, Proximity).
Transformation projects become more pervasive, as markets become more turbulent and
likewise market leadership becomes less durable.
1
2
New Strategy, Vision, or Business Model
Adaptive Innovation
3
4

75% of business transformations ultimately fail
Transformation Projects Study
Ursula Burns, CEO of Xerox, said in 2012, “If you don’t transform your company, you’re
stuck.”
Source: BCG Analysis, 2013
• This data is based on the analysis
of 48 companies that were
publicly undergoing corporate
transformation efforts.
• Total Shareholder Return (TSR) is
adjusted by S&P 500 growth,
where 1 is the same growth rate
as the index. Long-term growth
refers to a period of 5 years of a
period that is going—i.e.,
transformation initiatives that
begun since July 2008.
1 2 6 7
1
0
2
3
4
Long-term relative TSR growth
Year one relative TSR growth

Contents
Overview

Based on the study of organizations that have undergone transformation
initiatives, we find there are 2 common transformation trajectories
Transformation Trajectories
The full business transformation process goes through 4 stages: Trigger; Operational
Turnaround; New Strategy, Vision, or Business Model; and Adaptive Innovation.
There are 2 common transformation trajectories:
1. Short-term recovery with a long-term slow decline
2. Short-term recovery with long-term restoration of growth and performance
New Strategy,
Vision, or
Business Model
PHASE 1 PHASE 2
Trigger Operational
Turnaround
Adaptive Innovation
TSR
Time
1
2
1
2

Triggered by a decline in performance, the first phase is focused on cost
reduction efforts
Phase 1 – Operational Turnaround
In theory, organizations can continuously transform themselves—however, in practice, this
rarely occurs.
New
Strategy,
Vision, or
Business
Model
PHASE 1 PHASE 2
Trigger Operational Turnaround Adaptive Innovation
TSR
Time
• Phase 1 is fully comprised of the Operational
Turnaround stage.
• Streaming business processes achieves several
goals:
̶ Reduces operational inefficiencies
̶ Buys time by addressing short-term financial
distresses
̶ Frees up resources to fund the journey towards
future growth
• Typical Phase 1 activities will lasts up to 18 months.
By the end, Total Shareholder Returns (TSR) is
returned to industry parity levels.
• It is important to boldly cut costs at the outset,
instead of holding back. If we don’t do this, we risk
repeated rounds of cost cutting, thereby
undermining employee morale, momentum, and
leadership credibility.

New
Strategy,
Vision, or
Business
Model
PHASE 1 PHASE 2
Trigger Operational Turnaround Adaptive Innovation
TSR
Time
In the second phase, we switch our focus from cost reduction to top-line
revenue growth
Phase 2 – New Strategy/Vision/Business Model and Adaptive Innovation
Innovation is the key to long-term, sustained growth.
• Phase 1 was focused on cost
cutting efforts—on the other
hand, phase 2 is focused on
growth and adaptive innovation.
• Typically, an organization would
deploy a new strategy, vision, or
business model that was refined
over a multi-year period.

Contents
Overview

To ensure the success of phase 2, here are 8 factors to long-term success
that we should follow as guiding principles
Factors for Long-term Success (1 of 2)
There are 8 factors that drive long-term success in transformation projects.
Turning the
page1
Companies make a conscious decision to go beyond the efficiency moves of phase one
and refocus on growth and innovation
Creating a
new vision2
Companies articulate a clear shift in strategic direction, coupled with room for
experimentation
Foundational
Innovation3
Companies innovate across multiple dimensions of the business model, not just in
products and processes.
Commitment4
There is persistence from leaders in the face of inevitable setbacks and internal
opposition to unproven shifts in strategy.

To ensure the success of phase 2, here are 8 factors to long-term success
that we should follow as guiding principles
Factors for Long-term Success (2 of 2)
Although these factors are commonalities in transformation efforts, each transformation
has its own unique set of challenges.
Imposed
Distance
There is a willingness to shift from the historical core business model and its underlying
assumptions, often by creating a deliberate degree of separation between the new
business model and legacy operations.
Adaptive
Approach
Transformation unfolds through trial and error, with ongoing refinement of a flexible plan
Shots on
Goal
Companies do not pin growth hopes on a single move but rather on deploying a portfolio
of moves to drive growth
Commitment There is adherence to vision over a multiyear period
5
6
7
8

Contents
Overview

As mentioned, the majority of transformations fail—here are several traps
organizations fall into that lead to their transformation failures
Transformation Traps (1 of 2)
Early-Wins
Trap
Companies declare premature victory after phase one and fail to declare or develop a
second phase.
Efficiency
Trap
Companies continue with multiple rounds of cost cutting and efficiency improvement
measures
Legacy Trap
Companies fail to shed core assumptions and practices even when they are self-limiting
or no longer relevant..
Proportio-
nality Trap
Companies make promising moves—such as a series of new business pilots—that are
not proportionate to the scale of the challenge.
1
2
3
4

As mentioned, the majority of transformations fail—here are several traps
organizations fall into that lead to their transformation failures
Transformation Traps (2 of 2)
Although on the surface, these transformation traps may seem self-evident, they are often
difficult to avoid.
False
Certainty
Trap
Companies believe that the course of action can be rigorously planned in advance, and
they overemphasize disciplined implementation of a fixed plan instead of continually
iterating in response to new knowledge
Persistency
Trap
Companies underestimate the time needed to see results (often up to a decade), and,
consequently, they let up too soon.
Proximity
Trap
Companies undermine the new business by keeping it too close to the core business,
even when that closeness triggers competition for resources or conflicting assumptions.
5
6
7

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Flevy (www.flevy.com) is the marketplace
for premium documents. These
documents can range from Business
Frameworks to Financial Models to
PowerPoint Templates.
Flevy was founded under the principle that
companies waste a lot of time and money
recreating the same foundational business
documents. Our vision is for Flevy to
become a comprehensive knowledge base
of business documents. All organizations,
from startups to large enterprises, can use
Flevy— whether it's to jumpstart projects, to
find reference or comparison materials, or
just to learn.
Contact Us
Please contact us with any questions you may have
about our company.
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