1. SCALE AND CUSTOMER INTIMACY
DEFINITION: New technologies and analytic techniques are making it possible to minimize or eliminate the traditional trade-off between scale and intimacy.
COMPANIES ACHIEVING THIS: Tech-based disruptors such as Google, Facebook, Tesla, Alibaba and Amazon - as well more established companies like Vanguard, Starbucks, Haier and LEGO. Nordstrom ($14 BN) grew revenue by 50% in the past five years with investments in software that allows store associates to communicate with customers via texts and the purchase of Trunk Club, a personal shopping service. Starbucks delivers intimacy through the baristas at the front line while investing in a superior mobile experience, personalization and value based on loyalty program insights.
WHAT THIS WILL LOOK LIKE IN 2027: Firms will combine big data, which will be pervasive, with human intelligence from frontline interactions with customers, and the information will be instantly visible throughout the company. Transactional activity will be almost entirely automated; algorithms and machine learning will simultaneously reduce the need for routine interaction while opening up new avenues for customer engagement. Cloud-based service firms will become the default providers of back- and middle-office functions, dramatically shrinking the size of the average firm. Some firms will each offering carefully tailored to target customers—who may not even know they are dealing with the same large company. Products, services and experiences will blur.
2. PROFESSIONAL MANAGERS VS MISSION CRITICAL ROLES
DEFINITION: The best companies have articulated not just a higher purpose but also a bold, insurgent mission around how they will serve customers. the priority will be to create communities of expertise within the firm or within its ecosystem to reorient investment around the key roles that deliver the customer mission and to place the best talent in these roles.
COMPANIES ACHIEVING THIS:
IKEA - the mission is to create well-designed products at breathtakingly low prices, which demands low initial product costs and relentless ongoing cost reduction. The mission-critical rolesinclude purchasing and product design.
Yonghui (the supermarket chain) - the mission is to provide safe food for Chinese families. That elevates supply chain teams working with Chinese farmers to a mission-critical role.
Spotify - The company organizes its engineers into self-managing teams of no more than eight members, known as squads, each with end-to-end responsibility for a cluster of features. Squad members decide what to build, how to build it and who they need to work with to ensure interoperability. Haier (the $30 billion Chinese white goods manufacturer with more than 70,000 employees) - the core organizational units are selforganizing teams built around the mission-critical roles of marketing, design and manufacturing. Teams are fluid, focused on specific projects and staffed through an internal market for talent. Recently, Haier has opened up its teams to external partners through what it calls a “networking strategy.”
WHAT THIS WILL LOOK LIKE IN 2027: With most activity automated or
outsourced, almost all remaining roles will be mission-critical. Most work will be project-based, with Agile teams the dominant organizational unit; such teams will blend internal and external resources to provide the right skills as needed. Teams will be self-managed, leading to a vast reduction in the number of traditional managers. Employees will have no permanent bosses, but will instead have formal mentors who help guide their careers from project to project. Coaching and feedback will be real-time and continuous, with performance reviews transparent the way social media ratings are today.
3. ASSETS VS ECOSYSTEMS
DEFINITION: Starting with noncore activities,but eventually stretching through almost any aspect of a firm’s value chain, many companies, large and small, took the opportunity to shed assets and rent the capabilities of other firms. The successful outsourcers offer their customers scale, experience, methodologies and variable economics that they could not achieve on their own or that they simply prefer to hand off to others in the interest of staying
ruthlessly focused on what they uniquely can do. The art for any firm—type 1, 2 or 3—will be to figure out what to do itself and then to form win-win partnerships with firms in the other two categories to maximize value for customers.
COMPANIES ACHIEVING THIS: BMW is teaming up with Intel and Mobileye to work on autonomous vehicles, and BMW and Toyota are reportedly collaborating on a new generation sports car. Technology-based platform companies such as Google, Apple and Facebook have earned huge revenues from very small employee bases—$2.1 million per employee at Apple and $1.4 million at Facebook vs. $0.7 million per employee at Procter & Gamble and $0.3 million at Wells Fargo. Calculations of market capitalization per employee show similarly skewed results.
WHAT THIS WILL LOOK LIKE IN 2027: Platforms will continue to proliferate and pursue a winner-take-all dynamic, constrained in part by social and regulatory pressure around the world. Both platforms and outsourcing will require huge scale, but small product and service companies will be able to use that scale to thrive as well. “Everything as a service” will be available on demand, from a mix of horizontal (cross-industry) and vertical (industry-specific) outsourcers, with the latter often set up as joint ventures by industry participants. There will be ongoing battles at the seams between the three types of companies. Big economy platforms will become a material force for building community and increasing bargaining power among skilled workers, much as unions have done historically for lower-skilled workers.
4. CAPITAL GETS A RESET
DEFINITION: Private equity firms have had to lengthen their investment horizons to create value with their portfolio companies, from 4.5 years in 2006 to 6 years in 2016; Blackstone, Carlyle Group and others have recently launched funds with longer target holding periods. Scale start-ups—the leading engine of job creation—are staying private longer, on average 11 years in 2014, and, in some cases, are even going straight from venture to private equity ownership to provide liquidity to early investors and employees.
COMPANIES ACHIEVING THIS: Pfizer and other pharmaceutical companies have lined up one-off funding for the development of specific products, matching their capital needs with the risk preferences and expertise of individual investors. In 2014, Unilever issued a “green bond,” offering clarity and transparency around the use of proceeds, including a set of clearly defined criteria on greenhouse gas emissions, water use and waste disposal for the projects funded. Peer-to-peer lending and crowdfunding platforms such as Kickstarter and GoFundMe are another aspect of this evolution.
WHAT THIS WILL LOOK LIKE IN 2027: The line between public and private ownership will blur. Large public companies will pursue long-term anchor investors and adopt the governance practices of leading private investors, while larger private companies will trade in secondary markets that require enhanced investor protections. The line between debt and equity will also blur, as off-balance-sheet project-based equity becomes a significant funding source. Investors will invest in projects rather than companies, creating a new ecosystem of financial intermediaries to help them identify and gain access to the best projects. Activist investor techniques, both short and long term, will increasingly be adopted by traditional money managers in pursuit of alpha.
5. ENGINE 1, ENGINE 2
DEFINITION: Leaders of the firm of the future will be toggling between running their core—today’s engine—as efficiently as possible, looking for sustaining innovations there. They will also need to create a new business—tomorrow’s engine—that reflects new customer needs, new competitors, new economics or all three. The two engines demand different approaches. Discipline, repeatability, small continuous improvements, careful risk assessment and conventional financial analysis are the hallmarks of Engine 1. Agility, creativity and leaps into the financial unknown with the expectation that only a few investments will ultimately pay off are the chief traits of Engine 2.
COMPANIES ACHIEVING THIS:
Marvel: Continues to develop its publishing core while expanding the character licensing business that has become its new core. Netflix: From the mid-2000s, the core DVD business was milked to fund the rapid growth of the streaming business.
IBM: Shrunk its traditional hardware business while expanding its newer software and services offerings In each case, moves into Engine 2 meant new competition, new cost structures and new economic models to run in parallel, and the new business took at least five years to flourish.
Steve Jobs/Apple: Was two generations ahead, and understood the value of the ecosystem that could be created by keeping hardware and software vertically integrated.
WHAT THIS WILL LOOK LIKE IN 2027: Companies will set up and manage Engine 2 under the corporate umbrella but will likely structure, staff and fund it separately. Resource allocation will be a point of integration across Engine 1 and Engine 2, and will be continuous and zero-based. Top talent will rotate through both engines, learning a balanced set of skills and fulfilling mission-critical roles on both sides of the business.