Some years ago, famed investor Warren Buffett told an interviewer that his approach to investing “is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it’s the lack of change that appeals to me. I don’t think it’s going to be hurt by the internet. That’s the kind of business I like.”
Well, who wouldn’t like Wrigley — a company that’s been around since 1891, offering pretty much the same customer value proposition the whole time, and that was doing well enough after its first 100-plus years that Mars Corp. acquired it for $23 billion?
I’m not an investment adviser, and I would never second-guess Buffett if I was, but as someone who has spent a lot of time in the C-suites of publicly traded companies, I can attest that Wrigley is an exception that proves a much-different rule.
In today’s business environment, disruption and discontinuity may be the only constants. Product cycles are getting shorter and business models more ephemeral. In 1965, the average length of time a company remained in the S&P 500
was 33 years. By 1990, it was 20 years; in 2012 it was just 18. Based on the 2017 churn rate, it is forecast that fully half of the S&P 500 will be replaced over the next decade. According to our research at Innosight, half of the 39 companies that emerged onto the Fortune 500 over the last decade were business-model innovators.
‘Every new business we’ve ever engaged in has initially been seen as a distraction by people externally, and sometimes even internally.’
Wall Street may prefer safe, stick-to-your-knitting strategies, but most companies find that to remain viable, they need to move past their core and adjacencies and venture into what’s known as “white spaces.” Remaining too close to home is actually a greater risk.
is a textbook example.
“Every new business we’ve ever engaged in has initially been seen as a distraction by people externally, and sometimes even internally,” Amazon CEO Jeff Bezos has said. “They’ll say, ‘Why are you expanding outside of media products? Why are you going international? Why are you entering the marketplace business with third-party sellers?’ These are fair questions. But they all have at their heart one of the reasons that it’s so difficult for incumbent companies to pursue new initiatives. It’s because even if they are wild successes, they usually have no meaningful impact on the company’s economics for years.”
Big, publicly traded corporations are collections of business models that are in different phases of their lives. Some are robust and growing; others are commoditizing, being disrupted, or otherwise failing to meet their customers’ needs.
When a business model runs its course and is retired or sold off, the life of the corporation is carried on by its other business units and through the creation of new business units with new business models. Only by continuously creating, operating, trading, and closing business units (and their associated business models) can corporations stay vibrant, continue to grow, and remain relevant to customers.
Corporations that do this well are led by people who know how to balance the company’s core enterprises with new business models. They authorize the formation of teams that are capable creating these models, and then they allocate needed resources.
Corporate leaders answer to a broad assortment of stakeholders, including board members, analysts, and investors. Many of these constituents are impatient for rapid growth and wary of new business initiatives that stray too far from the core.
To open up their organizations to transformational possibilities, leaders must stop looking at potential new enterprises through traditional lenses, established profit formulas, and current combinations of resources and processes.
Instead, they must be prepared to change the game within their industry, transform existing markets, or create altogether new ones. They must be cautious, of course, but they cannot afford to be timid. And they must be patient; new growth takes time to mature, and it needs to be nurtured along the way.
Successful managers nowadays continually build and rebuild their organizations. To thirive in today’s marketplace, to be built to last, every business must be built to transform. Investors should recognize and reward companies and corporate leaders fitting that description.
Mark W. Johnson is co-founder and senior partner of Innosight, an innovation and strategy consulting firm. He is the author of Reinvent Your Business Model: How to Seize the White Space for Transformative Growth (Harvard Business Review Press, 2018).