When to reinvent your company

There was a great article in the Harvard Business Review, “Knowing When to Reinvent” by Mark Bertolini, David Duncan and Andrew Waldeck, that does a great job of showing the indicators of when you need to reinvent your business. Although Bertolini is CEO of Aetna, the insurance company, the lessons are very relevant for game and technology companies.

In my twenty plus years in the game industry, I have seen many great companies fail because they waited too long to reinvent their business. You can look at companies that missed the shift from PC to console (the Infogrames and CDVs), the transition from console to free to play (the THQs and SEGAs), or the transition from Facebook to mobile (the Zyngas and PopCaps). Conversely, I have seen many fail when they lose focus and chase the cool shiny object too early (the NeoGeos and Playdoms).

Bertolini, et al., first make the point that “no business survives over the long term without reinventing itself.” While nobody argues this point, knowing when to start a deliberate strategic transformation is extremely challenging. There are several obstacles to such a change:

• Employees feel threatened;
• Customers can be confused or alienated;
• Investors see uncertainty and often punish what they consider higher risk.

Ironically, the better a company is doing, the harder it is to pursue strategic reinvention. Investors (i.e. the stock market) are happy with current performance. Although they may prefer a wait and see attitude, that can often lead to reinventing yourself too late (which happened to Borders and Blockbusters).

To understand when you should start the process of reinventing your company, the article’s authors define five fault lines that show the underlying business is less stable than it appears. The fault lines focus on business fundamentals:

1. Is your business serving the right customers and using the appropriate performance metrics?
2. Is your business positioned properly in its ecosystem and using the best business model?
3. Does your business’ employees and partners have the needed expertise?

These three areas lead to five fault lines that show if your business needs reinventing.

Customer needs

In the game industry ten years ago, your primary customers were retailers. Getting distribution in Walmart was often the difference between success and failure. With the emergence of online gaming, however, the end user became the customer. Successful companies went from a strategy of creating pretty boxes to one of building new business models (try before you buy, free to play, subscription) that met the needs of this changing customer model.

The authors suggest an always good strategy to learn if there is a customer fault line, talk to customers. To discover if there is a potential problem, speak with your most profitable customers, your least profitable customers and customers you are not currently serving. Rather than asking for generic feedback, learn their functional, social and emotional needs, along with their frustrations. The authors recommend asking several questions:

• What are the top unmet needs of each group of customers?
• Do customers you do not currently serve have emerging unmet needs? If so, does that signal a potential market opportunity for a competitor?
• Are your customers loyal to your product or are they captive for lack of other options? Would they defect if they could?
• If you are a B2B business, do your customers needs conflict with those of end users?
• Could emerging technology simplify how end users’ needs are met?

Performance metrics

The second fault line is around performance metrics. When an industry reaches an inflection point, old metrics can be deceptive. Once reliable ways of measuring success can lead to a sharp decline or even disaster although short-term results may be healthy.

A good example is in the social game space, where some game companies on Facebook missed the move to mobile. These companies relied on ARPDAU (average revenue per daily active user)and revenue metrics largely to judge the health of their business. While customers were defecting to mobile, their metrics actually looked better because those who stayed were the loyal users who spent more in the games. It thus created a false sense of security that they did not need to be on mobile because the “good users” were still on Facebook.

In the article, the authors suggest reassessing your business intelligence to ensure it is consistent with what your customers place the most value on. They also recommend you challenge the logic underlying each metric. The authors again offer several questions to guide your analysis:

• Do you understand what your customers really value? How well does product performance match the customer’s definition of value?
• Will future customers define quality differently from current customers?
• How closely do your customer satisfaction and financial metrics correlate? Are your customer satisfaction scores as strong as your financial indicators?
• Do your products or games have more features or complexity than most of your customers value?
• Is there a new metric that aligns with the needs of future customers?

Industry Position

If other companies are moving into your space at a lower cost, what some might call disruption, it could signal the third fault line. Companies that start by serving niches often expand to gain increasing share of the mainstream market.

To determine if your position is at risk, review the industry’s periphery: analyze start-ups, adjacent competitors and historical partners and suppliers that have the potential to fill existing and emerging customer needs. Again, the authors offer several questions to guide your analysis:

• Are regulatory, technological or other external developments lowering barriers to entry or changing how customers consume your product?
• Are external forces diminishing the value of your role in the industry?
• Is a disruptive technology emerging that could significantly change the cost-value equation in a major part of your industry?
• Is your industry expanding to include new kinds of competitors? Is there consolidation among major players?

Business model

Even if your current business model is widely used and profitable, it may not serve you in the future. Netflix is a great example of a company that reinvented a successful business model. It went from charging users to rent DVDs that were delivered by mail to charging a subscription for streaming video. At the time, many (including myself) criticized Netflix. It shows how making a case for preemptive change is always challenging, but it is even more difficult when the journey will be long-term.

To understand if you are at risk of a business model fault line, you need to look at the model and see how well it is built to compete against emerging rivals. The authors propose some questions to guide your analysis:

• Is at least one emerging competitor in your industry using a different business model (even if they are not yet profitable)?
• Is the way you make money aligned with how value is created for customers? Are customers complaining about price increases or added fees?
• How resilient are the primary elements of your existing business model? Are any at risk of being undercut by external forces or new competitors?
• Will the strategic assumptions that underlie your current model hold as your industry evolves?

Talent and capabilities

The fifth fault line is often only apparent after you have detected the first four: What skills, competencies and organizational structures will be required for future success? As the authors write, “the sense that your human resources are not well configured for the future can be the decisive indication that your company is off track.

The authors propose a fifth set of questions that can help uncover a fault line:

• Do you need to bring on board to fulfill customer needs?
• Do you have enough emerging leaders who are excited about a transformation?
• Is your company, or industry, having problems attracting top talent?
• Do the leaders of your business view talent as their responsibility or is it relegated to HR?

The reverse reinvention opportunity

While the guidelines in the HBR article show how you can identify issues that should prompt reinvention, they also provide a playbook for a new competitor to take share away from the existing companies. By asking the same questions, you can identify weaknesses of the current companies and build a strategy to outflank these companies, since most are probably not asking these questions. Thus, it is not only a strategy for reinvention but one for attacking an established industry.

The fault line path forward

The fault line framework laid out in this post (and the article I got it from) can give companies the clarity to overcome the speed bumps and roadblocks along the way. It can help leaders frame the challenge, build confidence among senior leaders, and align stakeholders with the case for change—and do so years before the situation becomes so dire that there is not enough time or capital to execute a new plan.

Key takeaways

1. Many great companies fail because they waited too long to reinvent their business. No business survives over the long term without reinventing itself.
2. You can identify the need to reinvent your business by focusing on five fault lines: customer needs, performance metrics, industry position, business model and talent.
3. You can also enter and compete in a seemingly mature market by looking for weaknesses of existing companies along these fault lines.