Peter Drucker, the most influential management scholar of the 20th century, stated in 1994 that “Every organization – whether a business or not – has a theory of its business.” He added that “A strong and focused theory is enormously powerful”. However, over the years many successful large corporations have failed because their theories of business no longer worked.

Drucker was probably referring to the digital transformation that came after about twenty years.

Why does your business need compliance theory?

According to Drucker, leaders tend to prioritize “how to do” over “what to do.” They often justify maintaining the status quo without a robust theory of digitization and adaptation. Typically, they adhere to familiar rules and utilize digital tools in obvious areas while avoiding new and uncharted territories. Leaders need a strong theory on how digitization will transform companies and industries. Without this, they fail to recognize its potential for transformation, leaving many businesses inadequately prepared for the digital future.

Drucker addressed professional managers, while Jim March, a renowned Stanford University professor and leading organizational scientist of the 20th century, urged researchers to better understand the balance between exploring new possibilities and leveraging established practices. Successful companies face significant pressure to adhere to proven success routines, complicating the adaptation process. Past measures have been effective, making leaders more likely to follow predictable paths even when the future diverges from the past. Consequently, they struggle to determine when, where, or how to change course. In essence, successful companies often become trapped by their past core competencies precisely when the future requires a departure from them. This is the paradox of success.

According to the digital matrix by Venkat Venkatraman, digitalization creates a different future than the past, where the use of old rules and practices may be limited. For this reason, it calls for a new theory of business.

The theory of digital adaptation that will both maximize your profits from your current business and, at the same time, help you build your future business in an unknown and uncertain world?

Weak signals: Learn to recognize impending transformations

In 1976, Professor Igor Ansoff, a pioneer in strategic thinking, wrote, “We need a fundamental change, but this signal is obscured among a multitude of others. While this signal is not as loud, clear, and unambiguous as the sound of doomsday, it is not necessarily good news.” Ansoff referred to weak signals—fragments of unclear and controversial information about the future that often get lost amid the “noise” of standard information mechanisms. He lamented that these early warning signals are frequently ignored. Ultimately, any theory of adaptation relies on an organization’s ability to discern the potential meaning of weak signals and understand their implications before others do.

Some weak signals pertain to adjusting current business operations, such as better understanding internal process trends, crafting more targeted marketing messages based on social media monitoring, or more effectively utilizing data and analytics from Twitter feeds. Increasingly, many companies have successfully grasped and responded to weak signals within their operations. I urge you to focus on these weak signals, as they are crucial for refining your current business model. Additionally, understanding how your business model can be enhanced through digital technologies in three transformative stages and three strategic moves used by key players is essential.

Ansoff’s observations remain accurate today. Many leaders lose valuable time before recognizing the importance of weak signals and developing an initial strategic response. They waste even more time as they begin to move and redirect their organizations. Failing to identify and react to these weak signals promptly undoubtedly undermines your company’s adaptive capabilities. Understanding these weak signals is crucial for strategic thinking about your digital future and comprehending the potential scale, scope, and speed of these changes.

Automation tools and algorithms alone won’t address the issue. Leaders must reassess their assumptions to understand how their business model can navigate transformative stages. Classic failures, like Xerox, which missed recognizing the potential of innovations from its own division, underscore this point. While Apple, IBM, and Microsoft capitalized on weak signals to develop PCs, Xerox focused on photocopiers, missing the computer business opportunity. Similarly, Kodak failed to foresee the shift to digital photography. Such changes often conflict with the core business of traditional companies, making adaptation challenging. Companies must continuously adapt to remain relevant amidst technological shifts.

Key Principles for Effective Adaptation

Principle 1: Be curious and significantly alien to the current situation about the future.

Edwin Land, the founder of Polaroid, often said, “Some people want to obsolete your product; make sure you do it yourself!” The secret lies in curiosity or, as widely attributed to Albert Einstein, “The important thing is not to stop questioning.” In his view, what contributed to his success was not a special talent but rather his curious eagerness. In this regard, the driving factors that stimulate curiosity are deep alienation from the current situation and enthusiasm about potential future options. Each of these drivers provides a valid reason to embark on an adaptive journey.

However, even those curious about the future often trap themselves in limited exploration and staying within their comfort zones. For example, if your business deals with agricultural equipment, you may be curious about mechanical engineering, but are you also curious about sensors and software? You should be. According to research by Clayton Christensen, a Harvard professor, many traditional businesses have failed to see threats even when disruptions in their local market occur. But why? Because on the surface, such threats differ from more established ways of doing things, and in reality, managers are not curious enough to understand how these threats accelerate and jeopardize their core.

Questioning the current situation should be at the heart of your change management program. To achieve this goal, design several formal mechanisms to understand the assumptions and success drivers (key competencies) in the past and present. However, then examine whether these factors will lead to your company’s success in the future or not. Also, make sure you have a few elite members with a “hacker mindset” in your leadership team, whom even Facebook wants to hire. These are individuals who are curious about the future and deeply alien to the current situation. Understand how and when key competencies can turn into competency traps.

Principle 2: Design new experiences to learn

Ralph Waldo Emerson, a prolific writer and poet of the 19th century, has a famous quote: “All life is an experiment. The more experiments you make, the better.” Another quote attributed to Albert Einstein states: “No amount of experimentation can ever prove me right; a single experiment can prove me wrong.” As the French scientist Claude Bernard put it, the scientific community broadly accepts that “observation in science is passive, but scientific experimentation is active and dynamic.”

Jeff Bezos at Amazon emphasized in his 2014 letter to shareholders why gaining experience is crucial: “Failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment.”

We believe in initial failure and iteration to make things right. When this process works, our failures are relatively small in scale (often starting with small experiments). Once we find something truly beneficial to customers, we double down on it to turn it into a larger success. However, the path is not always clear-cut. Inventing is complex, and over time, we will undoubtedly face failures in some investments. You can learn from experience anywhere; especially those that involve complexities and uncertainties of aligning with digital technologies. Whether new experiences in adaptation succeed or fail doesn’t matter; what matters is that gaining new experiences paves the way for deeper and broader learning.