In 1997, Nestle was the world’s largest food company. Its core segments included beverages, milk and chocolate products. These segments accounted for 70 percent of its revenues. However, as customer preference shifted toward healthier food, Nestle started to re-examine its focus. As a result, it transformed itself into a nutrition, health, and wellness group. Today, Nestle’s traditional core segments account for only 47 percent of total revenues. Meanwhile, the new focus segments continue to grow.
By 2008, Adobe had become the world’s second-largest desktop-applications company. During the company’s first 25 years, the creator of Photoshop measured success by the number of copies of software packages it licensed and sold. However, as its customers wanted solutions and support on top of the product, Adobe concluded that providing services beyond desktop software is inevitable. Thus, it divided its products into two sets of cloud services available to users on a subscription basis. The number of subscriptions and renewals, rather than package sales, became its key performance metrics.
By the late 1990s, the market for copier and printers had been drastically commoditized by industry participants. Primarily as a cost-cutting measure, corporate customers had also begun to outsource the purchasing and servicing of machines. This greatly eroded the industry position and profit margins of Xerox. In 2001, Xerox decided to concentrate on offering business processes outsourcing services. This greatly lessened its dependence on manufacturing. Aside from managing machines, Xerox then took over entire corporate functions. These include technical support, accounting, and customer relationship management. In a span of 15 years, although Xerox’s core business had declined, Xerox Business Services accounted for nearly 60 percent of total company revenues.
When Netflix started in 1997, the business model was to bypass physical DVD rental stores through mail-order subscription service. Despite its early success, it detected an incoming shift on the horizon. At that time, streaming content as a business was unattractive. In 2011, Netflix announced that it was phasing out its mail order business to focus on streaming. Hundreds of thousands of customers cancelled their subscriptions. However, as Netflix focused on its transformation into a streaming company, revenue doubled in just three years.
To focus on customer nutrition and wellness, Nestle increased its R&D spending, opened the Nestle Nutrition Institute, and began working with a wide network of universities and hiring hundreds of post-doc scientists. To deliver and sustain expected value, Adobe needed to upgrade capabilities in digital media and marketing. To service various businesses, Xerox had to source for thousands of specialists across varied industries.
In December 2015, Harvard Business Review identified five interrelated fault lines that suggested that a business could be standing on shaky ground. First, is the business serving the right set of customers? Second, is performance measured with the right metrics? Third, is the business positioned properly in the industry? Fourth, does the business have the right business model? And fifth, do the employees and partners have the necessary capabilities?
The article “Knowing When to Reinvent” warns that these fault lines tend to be overlooked when business performance is strong and shareholders are happy. And when the big one comes, it might already be too late.
Real Carpio So lectures on strategic and human resource management at the Management and Organization Department of the Ramon V. del Rosario College of Business of De La Salle University. He is also an entrepreneur and a management consultant. He welcomes comments at email@example.com. The views expressed above are the author’s and do not necessarily reflect the official position of DLSU, its faculty, and its administrators.