Corporate transformations still have a miserable success rate, even though scholars and consultants have significantly improved our understanding of how they work. Studies consistently report that about three-quarters of change efforts flop—either they fail to deliver the anticipated benefits or they are abandoned entirely.
Because flawed implementation is most often blamed for such failures, organizations have focused on improving execution. They have embraced the idea that transformation is a process with key stages that must be carefully managed and levers that must be pulled—indeed, expressions such as “burning platform,” “guiding coalition,” and “quick wins” are now common in the change management lexicon. But poor execution is only part of the problem; our analysis suggests that misdiagnosis is equally to blame. Often organizations pursue the wrong changes—especially in complex and fast-moving environments, where decisions about what to transform in order to remain competitive can be hasty or misguided.
Before worrying about how to change, executive teams need to figure out what to change—in particular, what to change first. That’s the challenge we set out to investigate in our four-year study of 62 corporate transformations.
When companies don’t choose their transformation battles wisely, their efforts have a negative effect on performance. Consider what happened after Ron Johnson took over as CEO of J.C. Penney: He immediately gave store design and pricing an overhaul to attract younger, trendier customers. Sales sank by a quarter, and the stock plummeted by half.
Johnson’s first priority should have been a better integration of JCP’s in-store and online operations. At that time customers could not find in the stores what was being showcased online, and vice versa. The two channels were run separately, each with its own merchandise and supply chain. Johnson’s eventual replacement, Marvin Ellison, recognized the misalignment and restored JCP to profitability. Under Ellison’s leadership, JCP became nimbler and more responsive to customers looking for deals (who had left in droves because of Johnson’s changes). The retailer redesigned its shopping app to make it easier for in-store customers to find discounts, improved its website, and caught up with rivals by offering same-day in-store pickup of items ordered online.
As JCP and many other companies have learned, the costs of setting off on the wrong transformation journey are significant: First, underlying problems will persist and worsen as attention is invested elsewhere (JCP fell further behind in online sales as it freshened up store design). Second, new problems may emerge (JCP alienated loyal, deal-driven customers with its new pricing strategy and saddled itself with more than $5 billion of debt, which hampered its ability to invest in technology). And third, the executive team risks undermining employee commitment to future initiatives (Ellison had to remobilize a workforce still traumatized by JCP’s near collapse under Johnson). Having “fixed the plumbing,” Ellison’s leadership team has turned its attention to making JCP more relevant to shoppers in the coming decade. Although it has averted disaster, the company still has a lot of work to do. After a rough holiday season in 2016, the executive team decided to close almost 140 stores to compete more effectively with online retailers. The need for transformation is ongoing.
So how can leaders decide which changes to prioritize at the moment? By fully understanding three things: the catalyst for transformation, the organization’s underlying quest, and the leadership capabilities needed to see it through. Our analysis of stalled transformations suggests that failing to examine and align these factors drastically reduces the odds of producing lasting change. In this article we illustrate this dynamic with several classic case studies that provide enough distance to observe and compare clear, verifiable outcomes. We also offer tools to help diagnose what’s needed in your company’s transformation efforts.
The Catalyst: Pursuing Value
The trigger for any corporate transformation is the pursuit of value. Ideally, that entails both improving efficiency (through streamlining and cost cutting) and reinvesting in growth. But many transformation efforts derail because they focus too narrowly on one or the other.
In some cases, attempts to streamline the business through productivity improvements, outsourcing, divestments, or restructuring undermine growth. The cuts are so deep that they hollow out capabilities, sap morale, and remove the slack that could have fueled new endeavors.
Consider Norske Skog, once the world’s largest newsprint producer—now, according to Bloomberg, the third largest in Europe, in a dwindling market. Hit by falling demand for paper more than a decade ago, the Norwegian company was forced to divest unprofitable operations across four continents. Thanks to its profitability improvement program, it became so good at identifying where to make cuts that it was praised by BusinessWeek in 2009 for turning “shrinking into a science.” But although the company has survived, it has not found a way to rebound. Like many companies in contracting or commoditizing industries, it is stuck in turnaround mode, with its share price consistently in decline. By contrast, its Swedish-Finnish paper rival Stora Enso also went through several rounds of painful restructuring but has since reinvented itself as a renewable-materials company.
In other cases, reinvestment in growth spins out of control. Lego had this problem. The Danish toy maker made two large-scale attempts to transform itself through greater innovation. The first, launched in 2000, delivered a wealth of freewheeling experimentation that over the next few years drove the company to the brink of bankruptcy. The second, launched in 2006 (once the company had recovered its financial stability), catapulted Lego past the two U.S. giants Hasbro and Mattel to become the world’s most profitable toy company by 2014, with margins greater than 30%. Why the big difference? The second time around, under then CEO Jørgen Vig Knudstorp, Lego maintained a dual focus on growth and discipline. The company set up a cross-functional committee (the Executive Innovation Governance Group) to fund, monitor, and strategically coordinate innovation activities, ensuring that they remained “around the box” rather than drifting way outside it.
This example brings us to a larger point about catalysts for change: While you’re striving for growth, discipline—through governance, metrics, and other controls—allows you to stay on track later on, after you have chosen your journey’s direction. Without such controls in place, your company can easily lose its way. This often happens through the hasty purchase of an overpriced or tough-to-integrate “transformative acquisition” that is meant to redirect the strategy but just ends up sucking value out of the corporation. Hewlett-Packard is a notable recidivist in this domain: Recall its ill-fated acquisitions of Compaq, EDS, and Autonomy.
But how can you and others on the leadership team figure out what kind of transformation to pursue, once growth opportunities or declining performance has alerted you to the need for major change of some kind? That’s the second step in the process—defining the quest.
The Quest: Choosing Your Direction
Next the organization must identify the specific quest that will lead to greater value generation. Executives increasingly use the term “transformation” as shorthand for “digital transformation.” But the ongoing digital revolution does not itself constitute a transformation—it is a means to an end, and you must define what that end should be.
Studies and analysis that we have conducted show that most corporate transformation efforts are either derivatives or combinations of five prototypical quests:
- Global presence: extending market reach and becoming more international in terms of leadership, innovation, talent flows, capabilities, and best practices
- Customer focus: understanding your customers’ needs and providing enhanced insights, experiences, or outcomes (integrated solutions) rather than just products or services
- Nimbleness: accelerating processes or simplifying how work gets done to become more strategically, operationally, and culturally agile
- Innovation: incorporating ideas and approaches from fresh sources, both internal and external, to expand the organization’s options for exploiting new opportunities
- Sustainability: becoming greener and more socially responsible in positioning and execution
Each quest has its own focus, enablers, and derailers, and each requires the company to do something more or different with its operating model, customers, partners, internal processes, or resources. “Going digital” can support any of the five quests, and all of them call for discipline.