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The Imperative

About Scaling Edges: A pragmatic pathway to broad internal change

As product life cycles compress and customers grow increasingly fickle in their purchasing patterns, firms that innovate solely by flooding the market with new products are at risk.

In the spring of 2009, one Fortune 1000 firm was struggling to stay afloat in the midst of a steep economic downturn and rapidly changing industry dynamics. Like other firms before it, the company’s leadership sought large organizational changes to cope with these mounting pressures. “Our top priority,” the CEO announced when discussing their most recent quarterly loss, “is getting our financial house in order by continuing to reduce expenses, pay down our debt, and improve cash flows.” These comments were by no means earth shattering; in the throes of an economic crisis, this same sentiment was being echoed by executives at other large companies as well.

The CEO was Ron Marshall, leader of the Borders Group from 2009-2010. In 2005, just six years prior to its bankruptcy and liquidation, Borders was the second-largest book retailer in the world, with 1,329 locations, including outposts in Asia and the UK. Industry commentators regarded Borders as a retail powerhouse, predicting its growth to spell the demise of independent bookstores everywhere. And yet, between 2001 and 2008, as the internet age was redefining commerce, Borders did not invest in an online storefront. In fact, the firm adopted a strategy which included turning over its online operations to Amazon (its competitor!) in 2001, while doubling down its brick-and-mortar retail strategy.

While the Big Shift affords firms great opportunities, as the spread of mobile and social platforms did for PopCap, it can also threaten the survival of existing firms that fail to grasp its urgency and magnitude. This is not meant as an indictment of a single firm or even a single industry – rather, the disconcerting reality is that declining performance is occurring throughout the entire economy. In our annual Shift Index, we analyzed firm performance through Return on Assets (ROA) for all U.S. public companies over the past 45 years. Our findings indicated that ROA for all public firms has experienced sustained deterioration with a 75% decline between 1965 and 2010.

Many executives and board members acknowledge that profitability and performance are eroding; how could they not? And yet, most ailing firms take one of two avenues to alleviate these concerns: aggressively cut costs or develop new products and services to raise revenue. While these are conventional strategies, we argue that both are offering diminishing returns for firms. As shown in the Shift Index, cost cutting and layoffs can provide firms with immediate bottom-line relief. The effectiveness of these cuts, however, usually diminishes as firms push harder and harder on their existing resources with minimal gains. Meanwhile, increasing revenues through product or service innovation is also becoming more difficult. In the U.S. economy, Competitive Intensity has more than doubled since 1965, and Brand Disloyalty is on the rise. As product life cycles compress and customers grow increasingly fickle in their purchasing patterns, firms that innovate solely by flooding the market with new products are at risk.

The implications of Borders’ history are much greater than the familiar tale of ‘Death by Internet Age.’ Borders is an early manifestation of the dangers firms may face if they do not enact the transformative restructuring required to compete in a post-Big Shift world. This is a lesson that eventually, even Borders learned; in May 2010, Borders embraced the foundational shifts in their industry and released their own e-reader, the Kobo. However, by this time, it was simply too little, too late.

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