In this month’s Agility Update, our first three articles discuss the effects of technological change on some management practices.
The first argues that Best Practice Models which have been in wide use may be useful in delivering incremental improvements, but less so for transformational change. Similarly, traditional financial reporting frameworks in digital businesses don’t always adequately reflect important investments in intangibles.
A further article suggests that half-hearted efforts to embrace new technology (Hybrid Cars) can leave the door open to those that take the risk (Tesla).
We finish with an encouraging survey on the opportunities seen by Australian business in ASEAN.
Accelerating technological change is exerting new pressures on established companies with existing assets and high investor expectations in terms of return on investment. Often framed as value stocks, such incumbents – if not managed properly – risk seeing their profits ending up in shareholders’ pockets rather than being used to upgrade machinery and factories or develop new capabilities.
To survive and flourish, the challenge is twofold – delivering results today, and building a growth prospect for the future. Howard Yu, a professor of strategic management and innovation at IMD Switzerland, says this means experimentation, forming new business units to test disruption commercialisation, and developing a portfolio of businesses running different models with decision-making pushed down to people on the ground. The role of senior executives then needs to become that of the final integrator across these businesses – sifting and sharing the critical knowledge and deciding on resource allocation.
Read Strategy+Business articles Howard Yu disrupts disruptive innovation and also Best practices are dead which argues that best practice models are great for incremental improvements but not for transformations.
As the world digitises, financial reports are getting more and more out of sync, according to a recent Harvard Business Review (HBR) article. In the accepted financial framework, the balance sheet presents a reasonable picture of productive assets and the income statement provides a reasonable approximation of expenses required to create shareholder value for industrial companies dealing with physical assets and goods. Their research has found that intangible investments have surpassed property, plant, and equipment as the main avenue of capital creation for U.S. companies – which further suggests that the balance sheet has become an artefact of regulatory compliance, with little or no utility to investors.
A digital company invests in intangibles – research and development, brands, peer and supplier networks, customer and social relationships, computerised data and software, and human capital – to build its future. It argues that an inability to capitalise such expenditures puts them in a position where the more it invests in the future the higher its reported losses.
The HBR article highlights more inconsistencies and misfits for the digital company. While it acknowledges that companies like professional services firms are also built on intangible assets like human capital, the accounting challenges for modern, digital companies are more severe as they have increasing returns to scale on their idea-based platforms. For example, Google can service billions more clients with the same office just by adding to its server capacity.
As it is unlikely that accounting standards will change in the near future, HBR’s advice to digital companies is to communicate the success of their business model via the Management Discussion and Analysis Section of their annual report. Read the HBR article here (free, registration required).
Mature companies can lack the vision and the commitment to become leaders in new technology, according to a recent MIT Sloan Review article.
So, even when consumers are ready to embrace new technology, incumbents tend to develop watered-down products with limited capabilities, leaving them exposed to upstart competitors. The article cites the example of hybrid cars offered by internal combustion engine makers, such as General Motors Co., and Honda Motor Co. Ltd that combined old and new technologies. Their hybrid strategy left the door open to new competitors like Tesla that pursued solely the Electric Vehicle (EV) technology – leaving the incumbents to play catch-up.
Read The hybrid trap: why most efforts to bridge old and new technology miss the mark (free, registration required) for a detailed analysis of why hybrid product strategies can fail.
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