For this Discussion, imagine the following scenario: You are part of a team at the organization where you are currently employed (or at an organization with

Digital Article / Strategy

What the Best Transformational Leaders Do Learn from Jeff Bezos and Reed Hastings. by Scott D. Anthony and Evan I. Schwartz

Published on HBR.org / May 8, 2017 / Reprint H03N5Y

Companies that claim to be “transforming” seem to be everywhere.

But when you look more deeply into whether those organizations

are truly redefining what they are and what they do, stories of

successful change efforts are exceptionally rare. In a study of S&P 500

and Global 500 firms, our team found that those leading the most

successful transformations, creating new offerings and business models

to push into new growth markets, share common characteristics and

strategies. Before describing those, let’s look at how we identified the

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exceptional firms that rose to the top of our ranking, a group we call the

Transformation 10.

Whereas most business lists analyze companies by traditional metrics

such as revenue or by subjective assessments such as “innovativeness,”

our ranking evaluates the ability of leaders to strategically reposition

the firm. Some companies that made the list were obvious choices;

for example, the biggest online retailer now gets most of its profit

from cloud services (Amazon). But others were surprising, given their

states before embarking on transformation. The list includes a health

care company that was once near bankruptcy (DaVita), a software firm

whose stock price stagnated for a decade (Microsoft), a travel website

that faced overwhelming competition (Priceline), a food giant that

seemed to lose its focus (Danone), and a steel company that faced new

pressure from lower-cost rivals (ThyssenKrupp).

The team began by identifying 57 companies that have made substantial

progress toward transformation. We then narrowed the list to 18 finalists

using three sets of metrics:

New growth. How successful has the company been at creating new

products, services, and business models? This was gauged by assessing

the percent of revenue outside the core that can be attributed to new

growth.

Core repositioning. How effectively has the company adapted its

legacy business to change and disruption, giving it new life?

Financial performance. How have the firm’s growth, profits, and stock

performance compared to a relevant benchmark (NASDAQ for a tech

company, for example, or DAX Index for a German firm) during the

transformation period?

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We recruited a panel of expert judges (see the list below), who evaluated

the companies through the lens of their own expertise and gauged

which transformations were most durable and had the highest impact

in their industries. (For more on our methods, see the sidebars below.)

With these criteria in mind, our final list is as follows:

Our analysis revealed characteristics shared by the winning firm’s

leaders as well as common strategies they employed.

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Transformational CEOs Tend to be “Insider Outsiders”

The list is topped by companies headed by visionary founders with no

prior experience in their industries; Jeff Bezos came from the world of

finance, and Reed Hastings from software. As it turned out, having no

predetermined way of doing things turned out to be an asset when it

came to reinventing retailing and television, and these leaders kept that

outsider’s perspective even through waves of growth.

We see an interesting pattern across the professionally managed

companies, those whose CEOs were hired by the board. These CEOs are

what we call “insider outsiders.” Make no mistake, they have substantial

relevant experience. They had 14 years of tenure on average before

getting the top job. That knowledge helped them understand how

to make change happen inside an organization. Yet these executives

also had an outsider role where they worked on an emerging growth

business or consciously explored external opportunities, giving them

critical distance from the core. After becoming CEO, that insider-

outsider perspective helped them explore new paths to growth without

being constrained by yesterday’s success formula.

Satya Nadella, for instance, joined Microsoft in 1992 and worked his

way up to running its cloud computing effort, building that business

unit into a viable new growth platform before becoming CEO, in 2014.

He got the top job because of that, and then as CEO he accelerated

cloud-business development to make it the company’s primary strategy.

The same was true of Adobe’s Shantanu Narayen. He joined the

creativity applications vendor in 1997, and got the CEO job a decade

later largely because he was able to articulate a vision for pursuing

digital marketing services as the new growth path.

At Priceline, Glenn Fogel joined in 2000 and became head of strategy.

Long before becoming CEO, in 2016, he was searching for new growth in

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the hypercompetitive travel reservations market, coming across a pair of

small European startups with a business model opposite to Priceline’s

in two key ways: Instead of taking an up-front 25% commission on a

hotel reservation, the startups charged only 15% after check-out. Instead

of focusing on major hotel brands, they pursued the long tail, engaging

with more than 1 million inns, B&Bs, and apartment buildings in 200

countries. The result was the Booking.com platform. What started with

a $200 million investment a decade ago now accounts for most of

Priceline’s new growth as well as its rise past $80 billion in market

valuation.

And at Danone, Emmanuel Faber, an insider for 17 years, won the

CEO job, in 2014, because he was one of the architects of the firm’s

2020 vision to transform from a food and beverage conglomerate

into a family health and medical nutrition company that emphasized

sustainable agriculture. That vision prompted Danone to divest product

lines such as biscuits and beer while broadening its core dairy franchise.

For new growth, in 2007 Faber helped form a new business unit called

Nutricia, anchored off a $17 billion acquisition, to pursue baby foods,

protein bars, and health shakes. Today this unit accounts for 29% of

revenue.

The Transformation 10 Judges

Chris Chadwick, former CEO of Boeing Defense

Clay Christensen, Professor at Harvard Business School and Innosight

co-founder

Scott Cook, founder and chairman of Intuit

Matthew Eyring, Chief Strategy & Innovation Officer of Vivint Inc.

A.G. Lafley, former CEO of Procter & Gamble

Rita McGrath, Professor at Columbia Business School

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TEO Ming Kian, Director at Temasek and Chairman at Vertex Holdings

Theodor Weimer, Country Chairman at UniCredit

They Strategically Pursue Two Separate Journeys

Many firms that have tried to transform have failed. A common reason

why is that leaders approach the change as one monolithic process,

during which the old company becomes a new one. That doesn’t work

for a host of practical reasons. An organization that grew up producing

newspapers, for instance, not only lacks key skills to build a digital

content company but also might actively resist embracing the new in

order to protect the business it knows and loves.

Success requires repositioning the core business while actively

investing in the new growth business.

Apple serves as the classic model of such “dual transformation.” With

the iMac and iBook, Steve Jobs reinvigorated the core Macintosh

franchise by injecting a new sense of design and rethinking what

computers would be used for in the age of the internet. On a separate

track, he launched the device and content ecosystem, starting with iPod

and iTunes, that would become the company’s new growth engine.

It’s a strategy that has also worked for others on the list. While Amazon

has expanded its core retailing platform into new categories, such as

food and streaming content, in parallel it has built the world’s largest

cloud computing enterprise. Amazon Web Services CEO Andy Jassy

has been with the effort since it began as an internal challenge to

scale IT infrastructure. Established as a separate division in 2006, AWS

ultimately addressed a long-standing analyst complaint about Amazon

— that its core was only barely profitable. Today AWS accounts for

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just 10% of Amazon’s $150 billion in revenue, but generates close to $1

billion in quarterly operating profit.

German steel maker ThyssenKrupp, facing pricing pressure from Asian

competitors, likewise embraced a dual transformation strategy. In 2011

the board selected as the new CEO one of its own members, Heinrich

Hiesinger, a Siemens executive with experience supplying technology

to many industries. From day one, Hiesinger began executing a plan

for repositioning the declining core of steel manufacturing by divesting

less profitable product lines, focusing on higher-margin custom

manufacturing, and even opening 3D printing centers to fashion

components such as parts for wind turbines. For new growth areas that

now make up 47% of sales, it moved into industrial solutions and digital

services, creating systems such as internet-connected elevators.

They Use Culture Change to Drive Engagement

Microsoft is a case in point. In the four years since Satya Nadella

came on as CEO, he has been credited with transforming Microsoft’s

cautious, insular culture. In the old world, large teams would work for

years on the next major version of a franchise program like Windows

and Word, leading to a risk-averse environment. In the new world of

“infrastructure on demand,” dozens of new features and improvements

would need to be introduced per month — and no one would fully know

ahead of time what they might be. This required a culture of risk taking

and exploration.

In this way, Nadella was unlike his predecessors, in that he built his

reputation as a hands-on engineer, not as a visionary like Bill Gates

or a Type-A salesman like Steve Ballmer. Instead, Nadella was known

for listening, learning, and analyzing. His idea of how to engage and

motivate employees wasn’t by making a speech but rather by leading

a company-wide hackathon, and empowering employees to work on

projects they were passionate about. This new level of employee

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engagement has helped drive Microsoft’s expansion into cloud services

and artificial intelligence, areas that now account for 32% of revenue.

The story of Kent Thiry, CEO of the kidney care firm DaVita,

also illustrates the role of employee engagement in successful

transformations. In 1999 Thiry came with a strong track record in the

kidney dialysis industry to salvage a near-bankrupt company called

Total Renal Care, whose market cap was sinking below $200 million.

In addition to finding ways to stem losses, he led a six-month effort

to create a new identity and set of values, to reengage the company’s

dispirited workforce and generate enthusiasm for his growth plans.

He chose the name DaVita, Italian for “giving life,” and settled on

a list of core values that included service excellence, teamwork,

accountability, and fun. As any manager knows, a generic-sounding

list of values won’t move the culture needle unless leadership brings

it to life. To that end, Thiry and senior managers performed skits

in costumes — for instance dressing as the Three Musketeers and

leading call-and-response chants of “All for one, one for all.” To honor

employee heroism, he became the emcee of awards banquets that had

all the music, stagecraft, and emotional speeches of the Oscars, and

he celebrated “village victories” around milestones like achieving a five-

star quality rating for dialysis delivery from the Centers for Medicare

and Medicaid Services.

The success in turning around DaVita’s core business caught the

attention of Warren Buffett, whose Berkshire Hathaway became DaVita’s

largest shareholder. But it was DaVita’s move into new growth areas that

earned it a spot on our list. Starting with an acquisition of 50 physician

offices, DaVita worked to build an “integrated delivery network” that

contracts for the full spectrum of care, using the value-based care model

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of being paid to keep patients healthy rather than accepting fee-for-

service — resulting in new growth that now represents 30% of revenue.

Methods

We began the process of identifying candidates for the Transformation 10

by screening companies in the S&P 500 and Global 500 according to the

following questions.

1. Has this company exemplified strategic transformation?

2. Has this transformation had impact on customers and its industry in the

past decade?

3. Does the company show potential to sustain its transformation over the

next decade?

During this first phase of the methodology, a small team of Innosight

consultants pored over the S&P 500 and Global 500 to arrive at a list of 57

companies that had made a clear commitment to strategic transformation

within the past 10 years. Our team rated each company using a set

of criteria measuring their financials (notably revenue growth and stock

performance), the degree to which they had built meaningful new growth

businesses, and the degree to which they had repositioned their core

business.

During phase two, we used these comparative metrics to narrow the list to

18 finalist candidates. For each of company, we created a one-page judging

profile. We then sent that presentation of profiles along with instructions

out to our panel of judges, who scored each company on a scale of 1 to 5,

with 5 being the best example of a successful strategic transformation.

They Communicate Powerful Narratives About the Future

To change the culture and move into new growth areas, the CEO needs

to become “the storyteller in chief,” says Aetna’s Mark Bertolini. That

means telling different aspects of the same transformation narrative to

all the constituencies and stakeholders in the company.

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“The CEO’s responsibility is to create a stark reality of what the future

holds,” says Bertolini, “and then to build the plans for the organization

to meet those realities.”

In Aetna’s case, this meant building a narrative of how the move away

from fee-for-service reimbursement to the new business model of value-

based care would change the nature of health insurance, and one day

possibly render it obsolete. Instead of simply reinforcing the story about

strengthening Aetna’s current businesss, Bertolini developed a narrative

about building new skills to help consumers make better health choices

— and about building a new organization that can make money doing

so.

Telling that kind of story about the future is not a one-time event. “It’s

easy to underestimate the amount of communication that is needed,”

he adds. “You have to be tireless about it, consistent and persistent,

and keep battering the core messages home week after week. Your

leaders have to as well, and they have to tailor the message so it has

the appropriate level of fidelity relevant to each part of the organization.

A person working in a call center might need a different set of messages

than a line manager does to understand how he docks into the big

picture.”

They Develop a Road Map Before Disruption Takes Hold

Because dual transformations typically take years, we used a 10-year

time frame in our analysis. Indeed, transformations often can’t be

completed during the average tenure of a CEO. These long time horizons

mean that there’s no time to waste in getting started. Many of the

most notable disrupted companies — from Blockbuster, to Borders, to

Blackberry, to Kodak — ran into their deepest troubles a decade or more

after some of the first warning signs appeared. None of their leaders

developed effective transformation plans in time to halt the decline.

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At the other end of the spectrum is Reed Hastings of Netflix. Even as the

original DVD-by-mail business grew quickly to dominate the industry,

Hastings believed that a new wave of disruption could be rolling in. “My

greatest fear at Netflix,” he says, “has been that we wouldn’t make the

leap from success in DVDs to success in streaming.”

That’s why he laid the groundwork for a transformation as far back

as 2007, when he started negotiating deals with Hollywood to test

online streaming of movies and TV shows. Famously, Hastings moved

too quickly to spin off the core and focus only on streaming, when

Netflix announced plans in 2011 to create a stand-alone mail-based

DVD company called Qwikster. This prompted a backlash from angry

customers — and triggered a humbling apology from Hastings.

But the mistake he made was preferable to waiting too long. He

reformulated his plan, this time to extend the life of the core DVD

business while aggressively rolling out the new streaming service in

parallel. It proved to be such a winning strategy that it funded a big

move into original content. Now, with membership of 100 million

homes in 190 countries, Netflix is the leader of a reconfigured movie

and television landscape that it helped shape.

As all these cases show, transformation is not just about changing an

enterprise’s cost structure or turning analog processes into digital ones.

Rather, it’s about pursuing a multiphase strategy to reposition today’s

business while finding new ways to grow. That’s why we believe the

companies that made the Transformation 10 list deserve to be seen as

models to help other leaders create the future.

Editor’s note: Every ranking or index is just one way to analyze and compare companies or places, based on a specific methodology and data set. At HBR, we believe that a well- designed index can provide useful insights, even though by definition it is a snapshot of a bigger picture. We always urge you to read the methodology carefully.

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This article was originally published online on May 8, 2017.

Scott D. Anthony a clinical professor at Dartmouth College’s Tuck School of Business and the author of Epic Disruptions.

@ScottDAnthony

Evan I. Schwartz, a writer focused on innovation and leadership, is Innosight’s former Director of Storytelling.

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