How to Anticipate a Burning Platform

It's been nearly two years since Nokia CEO Stephen Elop shot off his burning platform memo as a way of shaking up the phone company's leadership. This fiery term refers to the story of a worker living on a North Sea oil rig who awoke one morning to a loud explosion and an all-consuming conflagration. The man stumbled to the platform's edge, where he confronted a 30-meter drop to freezing waters. Not a good choice to face.

The man on the burning platform decided to jump. The situation "was unexpected," Elop wrote. "In ordinary circumstances, the man would never consider plunging into icy waters. But these were not ordinary times — his platform was on fire. The man survived the fall and the waters. After he was rescued, he noted that a 'burning platform' caused a radical change in his behaviour."

As we can see with an additional year of hindsight, the lesson of the burning platform is that it is far better to anticipate the crisis and change your behavior well before the explosion. Nokia is still struggling to find a future beyond going head to head with the Android and iPhone platforms in the fiercely competitive smart phone market. Its bet on location-based services is intriguing, but hasn't born fruit yet.

Those kinds of payoffs require time. To see why, please check out "Two Routes to Resilience," an article from Innosight-affiliated authors in the December issue of Harvard Business Review. The authors delve into case studies of three severely disrupted enterprises that were each able to rebuild their core while also branching into a new growth market — before an impending crisis consumed the company.

In 2007, for instance, when Amazon introduced the original Kindle, it was far from clear whether e-readers would ever catch on in a big way. The book retail platform was not yet burning. But the flames were about to rise.

Yet Barnes & Noble took the Kindle as a serious warning sign while rival Border's didn't appear to make any significant strategic changes. The HBR article describes how B&N moved on multiple fronts at once: It aggressively reduced costs in its core retail business while refocusing its stores around consumer needs. At the same time, the New York company launched a Silicon Valley start-up with a separate mission, management team, and business model while leveraging vital assets of the parent. The result: the Nook debuted in 2009 and leapfrogged the Kindle in key features, capturing nearly a third of the e-reader market and probably saving the company's life.

Consider how narrow B&N's window was. By 2010, it would have been too late to act, as we saw with the Border's bankruptcy. Once a crisis becomes obvious, burning platforms are certainly motivating, but the challenge of achieving a transformation becomes that much steeper. There's precious little time to explore alternatives. Investor scrutiny dramatically narrows. Missteps that could be tolerated in ordinary times can prove fatal.

Even if disrupted corporations do act in time, painful cuts are likely to leave painful scars. In another example Innosight has researched, Xerox was forced to lay off nearly 40,000 of its 91,000 workers from 2000 to 2005 to return to profitability and make way for its transformation from a technology company into a services company. It's only this year, for the first time, that services revenue surpassed technology revenue.

Transforming too early carries its own risks, as Netflix experienced when it prematurely split the company in two and had customers nearly revolt. So, how can you identify the magical moment when there's sufficient time and degrees of freedom to act? "Two Routes to Resilience" article co-author and Yale School of Management professor Richard Foster suggests four ways to determine whether you should embark on a corporate transformation effort:

Scan the periphery. Research that Innosight conducted with Foster earlier this year suggests that 75% of the companies on today's S&P 500 index will not be on the list 15 years from now because they will stumble, be overtaken, or be acquired. Some of the companies that will be on that 2027 list do not yet exist, while others are already honing their disruptive models at the edges of today's markets. Companies should have their fingers on the pulse of the start-up community to spot potentially transformational development early.

Look at profit margin trends. EBITDA (earnings before interest, taxes, depreciation, and amortization) is the equivalent of corporate blood pressure. When those profit margins start to trend down, it often signals an emerging weakness in the core business. For example, in the mobile phone industry, Motorola's margins started to sag around 1994, Nokia's in 2001, and Research in Motion's in 2009. Yet none of these companies was in outward crisis when these declines first appeared. Barnes & Noble had weak blood pressure in 2009, but recently its EBITDA has shown signs of recovery, increasing more than 15% to $65 million in its most recent quarter.

Listen to passionate leaders. Two decades ago, a small group of executives within Johnson & Johnson realized that a small rise in minimally invasive surgical procedures could pose a risk to the company's suture business, Ethicon. They didn't have hard data to support their view, but the strength of this group's conviction led management to back their investment in a disruptive business called Ethicon Endo-Surgery, which ended up powering substantial growth for years.

Carefully monitor customer satisfaction. While the old saying, "You never get fired for buying IBM" may still have been true in the early 1990s, clear signs of discontent with Big Blue suggested a need for a corporate overhaul. Customers weren't just grumbling; they were switching to more nimble manufacturers, or shifting their IT investment dollars from hardware to supporting services. The depth of dissatisfaction became clear to CEO Lou Gerstner, who spent three weeks visiting key customers after taking IBM's reins in 1993. Not only did the loss of customer trust and disturbing ratings on quality help to further Gerstner's view that IBM needed a radical reinvention, what he heard from customers gave him increased confidence that IBM had the attractive opportunity to move aggressively into business services, the strategy that Xerox also pursued several years later.

Signs suggesting the looming need for transformation aren't always obvious, and they are never unmistakable until it's too late. But picking up on the weak signals and getting the timing right can be the difference between stepping boldly into the future or jumping, panic stricken, from your burning platform into an unforgiving sea.

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