Radical vs Incremental Business Transformation: When and which matters most for CEOs?

Successfully navigating uncertainty is a challenging task for many CEOs. One critical question that arises often is: when should a radical transformation be driven, or when is it more appropriate to opt for an incremental approach? Here we explore key points for them, and their c-suite, as they adapt their organisations to benefit from opportunities the future offers.

Understanding the Fundamentals

First and foremost, let’s clarify these two distinct types of transformation. Radical transformation signifies a sweeping overhaul of the business’s strategies, systems, processes, or structures. This drastic change is usually triggered by a significant shift in the market or a threat to the organization’s survival. On the flip side, an incremental transformation suggests a series of gradual changes, enhancing existing processes or systems over time to optimize efficiency and profitability.

Recognizing the Need for Radical Transformation

Typically, external factors trigger radical transformations. Market disruptions driven by innovative technologies, regulatory changes, or dramatic shifts in customer behaviour may necessitate a complete rethinking of the organisational model.

One recent example of a business that has undergone radical change is Disney. With the rise of streaming platforms changing the landscape of entertainment, Disney had to think about how it could compete in this new space. The traditional model of releasing films in theatres and then selling them through various physical and digital means was being disrupted.

In response, Disney launched its own streaming service, Disney+, in November 2019. This was a radical transformation for the company, which had previously relied heavily on its theme parks, merchandise, and box office sales for revenue. They invested significant resources into their new platform, including creating original content to attract subscribers.

The launch of Disney+ has proven successful. As of 2023, they have amassed over 100 million subscribers worldwide. This radical transformation has not only allowed Disney to keep pace with competitors like Netflix but also opened up a new, direct-to-consumer revenue stream that has proven crucial, especially during the COVID-19 pandemic when their theme parks were closed.

Disney’s shift to the streaming business demonstrates how even established companies need to be ready to make radical changes in response to industry disruptions.

However, internal factors can also necessitate a radical transformation. Persistent underperformance despite efforts towards improvement, or a significant shift in a company’s vision or mission, might call for a complete overhaul.

Technology’s Impact on Transformation

Carolin Fourie, Signium Partner for Industrial and Technology in Germany, says the change of mobility over in the automotive industry in Germany required a radical transformation of the entire sector.

“An incremental change in this sector was not an option for CEOs. Instead, their challenge was – and still is – to have on board the right leaders for the change and to take the organization through the new journey.”

Quite a few CEOs, she notes, have come to realize that their organizations had become too much of a “cumbersome tanker” to adapt in the necessary timeframe.

“Several of my clients decided to set up a start-up, to run like a “speed boat” alongside the traditional organization in order to rapidly respond to the need for digitalization, market changes and for lean, fast structures. Others decided to divide different segments into stand-alone business units to increase agility.”

Culture and human risk tolerance are important parameters in this context, Carolin asserts. “CEOs need to ensure that the organization remains true to its purpose while adapting to changing market dynamics.

“Importantly, the CEO must not lose people on the journey. She/he must lead the way as a visionary and authentic driver of the transformation. Without the buy-in of their people, any transformation is doomed to fail.”

Choosing Incremental Transformation

An incremental transformation approach is generally more appropriate when a company is performing well but aspires to improve further or adapt to gradual changes in the market. Here, implementing small, ongoing changes can lead to substantial improvements over time.

A recent example of a business that has undergone incremental change is Microsoft. Under the leadership of CEO Satya Nadella, Microsoft has been gradually shifting its business model away from one-time software sales towards subscription-based services.

This shift began with the introduction of Office 365 in 2011, a subscription-based version of their popular Office software suite. This was followed by the launch of the Azure cloud computing service, which has become a significant part of Microsoft’s business.

These changes didn’t happen overnight. It has taken years for Microsoft to build up these services and convince customers to embrace them. However, this incremental approach has paid off, with both Office 365 and Azure becoming major revenue drivers for the company.

This transformation wasn’t just about changing revenue models, but also about shifting the company culture to focus more on customer needs and feedback. This cultural shift, too, has been gradual and ongoing.

Microsoft’s incremental transformation is an excellent example of how businesses can adapt their strategies and cultures over time to stay competitive in a changing market.

Key Considerations for CEOs

When deciding between a radical and incremental approach, there are several key points that CEOs and their c-suite should consider:

• Urgency: The speed at which change needs to occur plays a significant role in this decision. If the company’s survival is under immediate threat, a more radical approach may be necessary.
• Resources: Does the company have the necessary resources (financial, human, technological) to support a radical transformation? If resource limitations exist, an incremental approach may be more feasible.
• Risk Tolerance: Radical transformations inherently carry more risk than incremental ones. Therefore, understanding an organization’s risk appetite is crucial before making such a decision.
• Culture: Is the organization’s culture ready for a sweeping change? If not, initiating smaller changes to prepare the team for larger ones down the line might be necessary.
• Future Readiness: It’s essential to consider future trends and disruptions on the horizon. Proactively preparing for these can help make a case for a more radical approach.

Balancing between Radical and Incremental Transformations

There isn’t a one-size-fits-all solution when it comes to business transformations. The decision between a radical and an incremental approach depends on several factors, including the company’s current performance, the industry’s state, and the external market environment.

Successful CEOs understand that both radical and incremental transformations have their place in business strategy. Radical transformations can lead to industry leadership and disruptive innovation. In contrast, incremental transformations can foster continuous improvement, keeping the company competitive and relevant in a changing market.

“Genuine leadership qualities, authenticity, empathy, but also perseverance are the key criteria for a CEO to successfully drive a transformation, regardless of whether it is a radical or a incremental one,” Carolin adds.

CEOs need to evaluate their company’s unique circumstances and decide the appropriate course of action, she says. The key lies in understanding the current situation, scanning the horizon for upcoming changes, and being prepared to pivot when necessary.

“It’s crucial to remember that the only constant in business is change. The CEOs role is to guide their organizations through this ever-changing landscape, irrespective of whether the change happens in giant leaps or measured strides.”

Strategic transformation—be it radical or incremental—is an integral part of leading any business. Both approaches have their merits dependent on circumstances. The decision between the two is a strategic one that CEOs must make in conjunction with their shareholders and Board, and the industry dynamics at play. By navigating this interplay, anticipating future trends, and being ready to adapt when necessary, CEOs can ensure their organizations are resilient, prepared, and built for growth for whatever they head into.