How kernels of reinvention can help firms thrive

Business breeds buzzwords: all companies seek innovation, reinvention and growth, and pledge to pivot when old models become obsolete. Yet the pathway to reinvention, despite such a clear goal, is often not obvious. Should a firm totally discard the old ways that are showing signs of obsolescence, or seek to protect core strengths while evolving them for new challenges?

What are kernels of reinvention?

Research at Cambridge Judge Business School finds a pattern among successful corporate reinventions that build on existing capabilities to develop a new strategic purpose – what the research terms ‘kernels of reinvention’.

Kernels of reinvention help firms develop ways to pivot that don't discard the current business model but also don't start from scratch.

Professor Khaled Soufani

“We find that these kernels serve as cornerstones or anchors for building new businesses, and this helps firms develop ways to pivot that don’t discard the current business model but also don’t start from scratch,” says research co-author Khaled Soufani, Management Practice Professor of Financial Economics and Policy, and Director of the Circular Economy Centre at Cambridge Judge.

Adds co-author Samsurin Welch, Fellow at the Circular Economy Centre: “There’s a term for this in evolutionary biology called ‘neofunctionalisation’ in which organisms repurpose genetic material in order to adapt to environmental changes. Companies that pivot successfully often follow this same model: take a core trait or capability and refashion it in order to thrive in an ever-changing business environment.”

The research on how kernels of reinvention can grow into new strategic directions is outlined by Khaled and Samsurin in an article published online alongside the final edition of MIT Sloan Management Review, published by the Massachusetts Institute of Technology in Cambridge, Massachusetts, which recently announced that the journal would cease publication after 67 years in favour of a wider digital communications portfolio. The research draws on some well-known articles about innovation, including the 1997 article by the late Clayton Christensen “The Innovator’s Dilemma” that explains how incumbents get trapped by disruptive innovation.

Business reinvention examples: from Fujifilm to Disney

The authors’ observations about pivoting companies include some of the best-known names in areas ranging from photography to automaking to computing.

For example, Chinese automaker BYD had decades of expertise in battery electrochemistry that served as a pivotal kernel in the company’s evolution into a global leader in electric vehicles. Fujifilm used its expertise in precision coating science and chemistry to move into cosmetics, as the science that keeps film stable can keep skin moisturised and protected from UV damage. Disney saw that streaming was disrupting the traditional film business, so the company developed its own direct-to-consumer streaming business Disney+.

The authors focus particularly on Danish energy company Ørsted, which drew on its kernel of expertise in North Sea oil projects to shift aggressively from fossil fuels to renewable energy through offshore wind farms, and Microsoft, which drew on its enterprise business competence and relationships with Fortune 500 chief technology officers to become a leader in enterprise cloud computing.

Why circular economy principles can guide corporate reinvention

Khaled said that he and Samsurin became interested in this topic through their research in economics as well as the principles of the circular economy:

“Economics is fundamentally concerned with the efficient allocation of scarce resources. At the same time, one of the key principles of the circular economy is repurposing, which represents an important form of circularity. We therefore argue that reinvention can benefit from this principle, particularly in times of disruption, when the economic objective of a firm is not only to allocate resources efficiently but also to effectively repurpose existing resources to create new value and opportunities.

We are used to hearing how yesterday's industry leaders become tomorrow's dinosaurs, disrupted by faster, sharper new entrants … But we asked the question, can dinosaurs fly – and why?

Dr Samsurin Welch

Adds Samsurin:

“We are used to hearing how yesterday’s industry leaders become tomorrow’s dinosaurs, disrupted by faster, sharper new entrants. But that is not always what happens. Large companies can reinvent themselves, sometimes proactively and sometimes only after crisis forces the issue. We asked the question, can dinosaurs fly – and why? The answer is rarely to double down on the declining core business, but neither is starting from a blank slate. We were inspired by circular economy and evolutionary biology, where genetic material can acquire new functions under environmental pressure. That became our analogy for corporate reinvention. We still see new examples emerging: BlackBerry, once a poster child for disruption, has rebuilt itself around safety critical software for industries like vehicles, defence and robotics.”

4 traits of a genuine kernel of reinvention

Yet in seeking to repurpose those existing resources, firms need to recognise that not every kernel truly creates new opportunities. So the research identifies 4 characteristics that “distinguishes a genuine kernel from wishful thinking about legacy assets”:

1. The kernel lies deep within the firm as a capability, as with Fujifilm, and is not simply what the company sells or is known for.
2. Kernels are generative in that they enable new value creation, such as Walmart using its knowledge in grocery retailing and perishable goods to very early develop an e-commerce business.
3. Kernels should provide a defensible advantage that rivals cannot easily replicate.
4. The kernel should create a coherent and “visible, unbroken narrative thread from the legacy business to the new direction”, which makes the shift more credible to stakeholders including employees and investors.

“There are many different types of kernels,” says Khaled. “Kernels may be technical or scientific as with BYD and Fujifilm, or relational and commercial as with Microsoft, but it’s really important to consider carefully whether a prospective kernel really provides a way to develop a compelling new direction.”

Samsurin adds that it’s important for companies seeking to reinvent themselves to recognise clearly the shifts they face in their business landscapes. “For Fujifilm it was the collapse of traditional film photography, for Ørsted the volatility of fossil fuels and public opposition to coal, and for BYD the electrification of the auto industry.”

The Reinvention Playbook: 5 steps to pivot your business strategy

The authors emphasise the reinvention is not a one-off event, but instead requires a series of decisions as firms adapt over a period of years to their changing industries. So they develop what they term a Reinvention Playbook that outlines 5 steps to reinvention based on their key kernel:

How a credible narrative wins stakeholder support for reinvention

“The best narratives make clear what must change, and how the company is building from an existing advantage to gain a plausible right to win in the new arena,” say Khaled and Samsurin. “Done well, this gives stakeholders a credible reframing of where the company is heading, grounded on past strengths.”