A close read of select case studies illustrates how chapter two can drive success or failure. The Australian airline Qantas’s creation of JetStar demonstrates a successful transformation through foundational innovation. Kodak illustrates the perils of a missed opportunity for a strategic turnaround. And IBM exemplifies how transformation must be managed over an inconveniently long time horizon.
A New Route for Qantas. In 2000, two low-cost carriers disrupted the Australian domestic-aviation market—a historic duopoly controlled by Ansett and Qantas. Twelve months later, Ansett collapsed and Qantas, a traditional airline with a high cost structure, was losing share. From 2003 to 2010, however, Qantas’s TSR outperformed both the market and the sector. How?
Qantas first commenced a transformation program to streamline operations, cutting $1 billion in costs over two years. Qantas then layered on chapter two—a fundamentally different business model—with its launch of Jetstar, a wholly owned, no-frills, low-cost carrier. Today, Jetstar is a core driver of Qantas Group’s profit.
Chapter two worked because Qantas stayed focused on a key success factor for low-cost carriers: high-asset utilization—that is, maximizing the hours a plane operates, which enables the airline to charge lower fares. Qantas kept Jetstar’s network and value proposition intentionally separate from its full-service offering, and it branded Jetstar distinctly for the leisure traveler. With its own fleet and profit-and-loss statement—and interactions with Qantas only at the board level—Jetstar flourished unencumbered by the legacy organization and cost structure. Further, a leadership team drawing heavily on external talent brought fresh thinking, flexibility, and a cultural shift to enable the new model.
International competitors undertook similar cost-reduction and low-cost-carrier launch efforts. But by the middle of the first decade of the twenty-first century, many such ventures were grounded. Falling into several of the common transformation traps, these new ventures were often too encumbered by core business cost structures or thinking to be effective and viable.
Kodak: A Missed Photo Op. Few brands were as synonymous with their industry as Kodak. So it was a sad end of an era when the company filed for bankruptcy in 2012. Kodak made a genuine effort to transform; it just didn’t do so thoroughly or nimbly enough. In early September 2013, the company emerged from bankruptcy but as a much smaller operation with an unclear path forward.
Kodak’s chapter one was characterized by multiple, insufficient rounds of cuts and layoffs, steps that degraded morale and failed to attract talent to fuel innovation. At the same time, even though Kodak had clearly identified a compelling opportunity—a shift to affordable digital cameras—it did not allocate sufficient resources to develop and expand this new strategy. Falling into the persistency trap, Kodak stifled new projects that did not meet the benchmark economics of its existing legacy film business. The culture of the legacy business prevailed with digital efforts integrated within the company, leaving Kodak ill-equipped to shift to a new business model.
IBM: Updating the Operating System. IBM’s transformation is compelling for the persistency and success of its chapter two efforts. Since Big Blue embarked on a full transformation two decades ago, the company has undergone a chapter one operational turnaround; adopted a new strategy, business model, and vision; and—most critically—supported adaptive innovation despite changes in leadership and the environment. Three CEOs and two market crashes later, IBM’s revenue has nearly doubled.
IBM engineered continuous transformation into its organizational DNA. Management displayed a clear vision for the future, pragmatically shifting its business toward high-margin services and software while shedding the lower-margin, lower-growth hardware business. The company ensured many shots on goal by empowering teams to innovate and build new businesses through a structured process, including incubating emerging business opportunities under separate management. And leadership has taken a long view and communicated it actively, going so far as to share four-year financial roadmaps with investors and analysts.
The most important lesson CEOs should learn from IBM’s transformation is that the job of sustaining growth and innovation is never done: IBM doubled down again on software and services at the end of the last decade and plans to spend $20 billion on acquisitions between 2012 and 2015 to drive growth.