The Truth About Change Management That Everyone Gets Wrong

Although academics and consultants are working hard to significantly improve our understanding of corporate transformations, only a small portion of these efforts prove successful. According to research, roughly three-quarters of transformation projects either fail to deliver the expected results or are abandoned entirely.  

Because poor implementation and execution are typically cited as the root cause of this failure, many companies focus on the execution side of transformation. Companies view transformation as a process that must be managed correctly and effectively. As a result, concepts such as 'burning platforms,' 'guiding coalitions,' and 'early wins' have become popular recently. However, weak execution accounts for only part of the problem. Our analysis suggests that misdiagnosing problems is an equally significant issue. Organizations often address the wrong change points. Companies operating in particularly complex and rapidly changing environments can make mistakes about where to focus to remain competitive. 

Executives need to determine what to change, and more specifically what to change first, rather than how to change. This is the fundamental issue we encountered in our four-year study examining 62 corporate transformation processes. 

If companies fail to establish the right fronts in the transformation battle, their efforts will negatively affect performance. Consider what happened after Ron Johnson became CEO of J.C. Penney. As soon as he took office, Johnson changed store designs and pricing to attract younger, trend-conscious customers. As a result, sales dropped 25 percent and the stock value was cut in half.

Johnson's first priority should have been better integrating JCP's in-store and online operations. At that time, customers could not find products shown online in stores, and products available in stores could not be found online. Both channels had their own supply and inventory systems, and these systems did not communicate with each other. Marvin Ellison, who replaced Johnson, recognized the mistake and restored JCP's profitability. Under Ellison's leadership, JCP became leaner and more responsive to bargain-seeking customers. (These qualities had eroded due to Johnson's changes.) JCP updated its app to help in-store customers find products more easily, improved its website, and caught up with competitors by introducing same-day in-store pickup for online orders. 

As JCP and many other companies have learned, the cost of embarking on the wrong transformation journey can be substantial. First, the underlying problems that are overlooked continue to exist and worsen as attention is directed elsewhere. (JCP fell behind in online sales while focusing on stores.) Second, new problems can emerge. (JCP alienated its loyal, deal-oriented customer base due to its new pricing strategy and accumulated 5 billion dollars in debt, losing its capacity to invest in technology.)  And third, employees' capacity to generate ideas for the future was disrupted. (Ellison had to rebuild the workforce that Johnson had decimated.) Ellison's leadership team, while repairing burst pipes, focused their energy on positioning JCP to meet the expectations of the next decade's customer base. Although the company has put the disaster period behind it, much remains to be done. After a difficult 2016 holiday season, management decided to close about 140 stores to better compete with online retailers. The need for transformation continues to make itself felt strongly.

In this case, how should leaders decide which changes to prioritize? At this point, executives need to clearly understand three issues: What are the catalysts of transformation? What is the organization's approach? What are the leadership capabilities to execute these? According to our analyses of stalled transformations, when these elements are not recognized and analysis falls short, achieving a transformation with long-term impact becomes impossible. In this article, we will look together at some cases that support this dynamic and produce clear, measurable results. We will also discuss some tools that can be useful in your company's transformation efforts.

CATALYST: PURSUING VALUE 

At the foundation of any digital transformation lies an effort to achieve value. In an ideal scenario, this requires simultaneously increasing efficiency (by speeding up work and reducing costs) and investing in growth. However, many transformation efforts go off track due to excessive focus on one of these two elements. 

In some cases, trying to accelerate work through efficiency gains, outsourcing, delayed investments, or restructuring can hinder growth. In some companies, habits run so deep that they erode capabilities, lower morale, and dry up resources that would fuel new initiatives. 

Consider Norske Skog, once the world's largest paper company and today, according to Bloomberg, the third largest company in this troubled European sector. The Norwegian company, hit by declining demand for print media, was forced to close unprofitable businesses on four continents. The company launched a profitability improvement program and became so adept at identifying which costs to cut that Businessweek magazine in 2009 described it as 'the player writing the science of downsizing.' But although the company survived, it was unable to achieve a serious turnaround. Like many companies in industries operating on a contracting and subcontracting basis, it got stuck in turnaround mode, and its shares began rapidly losing value. By contrast, its Swedish rival Stora Enso, after going through a painful restructuring process, reinvented itself as a company producing renewable materials. 

As seen in some other examples, investing in growth can also lead to derailment. Lego experienced this problem firsthand. The company made two attempts to transform itself through major innovations. In the first attempt launched in 2000, the experimental moves brought the company to the brink of bankruptcy. Thanks to the second attempt in 2006 (by which time the company had moved past the previous period's financial collapse), Lego surpassed Hasbro and Mattel in 2014 to become the world's largest toy company and pushed its margins above 30 percent. So what was the difference between these two attempts? In the second attempt under CEO Jorgen Vig Knudstorp's leadership, Lego adopted a dual approach focused on both growth and discipline. The company established a cross-functional committee (the Executive Innovation Governance Group) to fund, monitor, and strategically coordinate its innovation activities. This committee was responsible for keeping these activities within the defined framework. 

This example brings us to an important point about the catalysts of change: While pursuing growth, discipline (achieved through governance, metrics, and other control elements) keeps you on the right course. Without such controls, your company can easily lose its way. This situation is particularly evident in 'transformative acquisitions' aimed at redirecting strategy, and such acquisitions typically absorb and destroy company value. A good example in this area is Hewlett-Packard. Recall the company's ill-fated acquisitions of Compaq, EDS, and Autonomy.

So how will you and others on the leadership team know what to prioritize in the transformation process triggered by signals such as growth opportunities or declining performance? This brings up the second step in the process: knowing what you are pursuing... 

APPROACH: DETERMINE YOUR DIRECTION

In the next step, the organization must define a specific pursuit aimed at creating greater value. Executives use the term 'transformation' as if it were an abbreviation for 'digital transformation.' However, the ongoing digital revolution is not a transformation itself but a path leading to a defined goal, and what matters is defining this goal. 

According to our analyses and research, many corporate transformation efforts are derivatives of the following five approaches:

Global Expansion: Increasing access to markets and becoming more international in terms of leadership, innovation, talent flow, skills, and best practices.
Customer-Centricity: Understanding customers' needs and creating not just products and services but enriched insights, experiences, or outputs (integrated solutions).
Agility: Speeding up processes and improving the way work is done to become more agile strategically, operationally, and culturally.
Innovation: Bringing together ideas and approaches from fresh sources both within and outside the organization to increase the company's ability to identify and evaluate new opportunities.
Sustainability: Becoming greener and more socially conscious in both positioning and execution. 
Each approach has its own focus, enabling factors, and pitfalls, and each requires companies to make changes in their operating model, customers, business partners, internal processes, and resources. 'Digitalization' can be at the center of any of these five approaches, and all of them require discipline. (See the box 'Understanding the Five Approaches.')

Now, let's return to the story of paper giant Stora Enso to see how it defined its approach. The transformation catalyst was the significant decline in paper demand alongside increasing digitalization. Stora had to not only cut costs but also change its focus. 

Top management members consulted with executives from different units and levels of the company and held lengthy discussions. After their evaluations, they concluded that efforts toward agility, expanding global presence, or strengthening customer focus would not be very effective in an already declining sector. On the other hand, the company developed products with strong sustainability characteristics, such as eco-friendly packaging materials for the rapidly growing e-commerce sector. The company's biggest opportunity was to shift its strategy toward renewable and bio-based materials. This was a highly valuable pivot. Traditional paper products now account for only 8 percent of Stora's profits, and the company's share value has tripled since November 2011. 

Choosing the right approach can be difficult. Should the company expand into new regions, get closer to customers, become faster, or focus more on sustainability? Executives sometimes say 'let's do all of them,' but managing this mix is difficult. The right approach must be important and clearly distinguished from the others. In some examples we analyzed, we saw that companies adopted dual approaches (customer-centricity and agility, or innovation and sustainability). A dual approach can work as long as these components can be aligned with a general focus.

When multiple organizational focus points are in question, top executives may disagree about which priority should be selected. To prevent this, we developed a 15-question assessment. (See the box 'Approach Assessment.') In our research and consulting activities, we have seen that this tool can help executives conduct their own systematic assessments and thus make better decisions about transformation. For example, at a French company we worked with, 200 top executives participated in a 'transformation session' and filled out an assessment form indicating the enabling and hindering factors for each potential approach. This and the approach assessment helped prioritize priorities and ideas across different parts of the organization, from top management to field teams.

CAPABILITIES: BUILDING LEADERS

Finally, the company must develop leaders who will execute the chosen approach. The sustainability of the transformation depends on this. 

At this point, we can again look at the Stora Enso example. Jouko Karvinen, who served as the company's CEO until July 2014, recognized that his management team, composed entirely of Northern Europeans each with many years in the sector, would be useful in reducing costs in the core business area but might struggle to identify new growth areas. Karvinen, in close consultation with HR senior executive Lars Haggstrom, established a parallel leadership team called 'Pathfinders,' consisting of a dozen executives from different units of the company. This team was tasked with identifying sustainability opportunities that were getting lost between silos and, more broadly, challenging existing ways of doing business. The Pathfinders team was renewed annually and composed of different people. Initially designed to bring a different perspective to top-level decision-making processes, this structure later evolved into a program to find and develop change ambassadors who would serve as internal consultants within the company. The Pathfinders program became the center of the company's new leadership development activities.

"Choosing the right approach is not easy. This approach must be compelling and prioritized."

If companies do not place sufficient importance on leadership development, the depletion of fuel for transformation efforts becomes inevitable. Executives and managers at every level must determine which perspectives and behaviors will carry the company to the desired direction and then create a framework where employees know how to act in each context. 

Any misalignment between leadership development efforts and the transformation approach disrupts value creation. The importance of these two sides being aligned is clearly illustrated in the story of two Asian rivals in the personal computer space.

In 2008, Taiwan's Acer and China's Lenovo were the third and fourth largest companies by global market share, following HP and Dell. By 2015, Lenovo had moved to first place, while Acer had dropped to sixth. Both companies had similar approaches, both wanting to increase their global reach. They pursued similar strategies: trying to capture value-creation opportunities and acquiring Western competitors to expand their global presence. Lenovo acquired IBM's PC business unit in 2005. Acer acquired Gateway in 2007 and Packard Bell in 2008. However, the fundamental difference between Lenovo and Acer was their perspective on senior leadership development. 

Acer's board of directors had difficulty accepting the logic of 'de-Taiwanization.' The board opposed CEO Gianfranco Lanci's plan to hire foreign talent specialized in mobile technologies and triple the engineering staff. (Lanci soon left Acer to head Lenovo's PC unit.) As of 2010, six of Acer's 24 top executives were foreign; by 2013, this figure had dropped to three out of 23. During the same period, the two foreign members of the board also left, and the board became entirely Taiwanese. As a result, top management's decision-making approach became extremely cautious and inward-looking. For example, in 2016, the head of the cloud computing unit was the founder's son. A TechNews headline asked: 'Is Acer becoming a family business?'

By contrast, leadership development at Lenovo was structured in complete alignment with the company's global expansion approach. In 2010, six of the nine-member top management team were foreign. The company's Chinese CEO Yang Yuanqing moved to the United States, and the rest of the team dispersed to different parts of the world. The team began meeting each month in a different strategic country. Aware of some difficulties due to the team members' diverse backgrounds, the CEO sought help from a coach to support the executives on cross-cultural issues. Wanting to highlight diversity as a competitive element in both hiring and operations, Lenovo elevated the position of vice president of cultural integration and diversity to the C-suite level. As a result of these efforts, purposeful acquisitions and partnerships were realized with German, Japanese, Brazilian, and U.S. companies, and Lenovo succeeded in globally penetrating new software and service categories.  

TRANSFORMATION PITFALLS

Many transformation projects stall and fail at the approach stage. Top management teams confused about which value to pursue may take the wrong path or expend excessive energy. Or they may take on responsibilities that the leadership structure cannot handle. Our research suggests three common causes of failure:

Ignoring the approach. In companies that cannot create a theme to mobilize themselves, value creation and leadership development can be self-destructive and may not go beyond generic efforts unrelated to strategy. For example, India's Infosys struggled despite having established a world-renowned system for leadership development because it failed to link this structure to the requirements of transformation. As a result, this IT giant had to bring in an outside CEO to establish this alignment.  

Getting caught up in the wrong approach. Boards and senior executives can stray for various reasons: getting swept up in a powerful CEO's vision (like Ron Johnson at J.C. Penney), trying to copy competitors' strategic moves, or following the advice of consultants who support certain approaches. In such cases, the chosen approach backfires because it is not the product of deep analysis or shared thinking, or it fails to address a central issue. For example, Bob Nardelli, who moved from GE to Home Depot, set a strategy aimed at selling materials to contractors as well as individuals to transform the company. The shift in focus toward a new customer base pushed the company's actual concern, declining store sales, into the background. Shortly after Nardelli resigned due to intense pressure from shareholders, the strategy was reversed, the wholesale unit was sold, and focus was placed on the core retail business. Today, Home Depot has jumped from seventh to fourth place.  

Focusing on multiple approaches. If leaders cannot agree on which direction to go, the search for an approach can hit a dead end. Different parts of the company (regions, functions, levels) may see different problems and priorities. Some companies fall into the trap of pursuing many approaches simultaneously or overestimating their leaders' capabilities in a particular area. In 2009, Lars Olofsson, the new CEO of Carrefour, launched seven strategic initiatives, including enhanced innovation, customer engagement, agility, and global presence. As a result, minds became confused, local market share declined, and stock value dropped 53 percent in one year. Olofsson did not even stay in the position for two years. His replacement, George Plassat, analyzed the team's leadership capabilities and concluded they were 'inadequate for mass retailing.' Plassat developed a successful turnaround plan that first halted operations unrelated to the core business and accelerated internal operations. He then revitalized sales in the local market by cutting prices and diversifying stores. Three years later, Carrefour unequivocally regained its leadership in the French market.

GETTING STARTED

It is possible to view value creation and leadership development as the two wheels supporting transformation, with approach as the horse providing direction and momentum. Achieving alignment among these three elements is important for reaching the desired point. 

The approach assessment will support and contribute to alignment in diagnosing the current situation, identifying which transformation will change the rules of the game, and determining potential obstacles and enabling factors. This tool has been tested and validated with more than 500 executives and a dozen companies seeking transformation. The assessment helps address the following challenges:

Facing reality. Creating a structured method to identify and obtain inputs allows executives to look at their companies more objectively and dispassionately. According to Harvard's Dorothy Leonard-Barton, knowledge, capabilities, and activities centralized in the organization can cause stagnation. If this is the case, this information needs to be accelerated or aligned with the overall structure. The more radical the transformation, the higher the risk of such limitations emerging. Facing the harsh reality also requires identifying and addressing blind spots. 

When the HR manager of a European postal services group applied the approach assessment, they encountered an uncomfortable pattern. 'The low scores we received in value, customer-centricity, and innovation were telling us that our company was not listening well enough to the market, customers, or business partners. Though hard to admit, the inertia in our company needed to be addressed immediately.' Similarly, the HR manager of a Japanese food group says that as a result of the approach assessment, topics that previously could not even be discussed came up and were debated. 'It provided a basis for commenting on current reality and helped us discuss how we got to where we are now. Thus, we raised questions to better understand the difficulties we face and were able to develop ideas about solutions.'

Discussing priorities. Typically, this assessment surfaces multiple pain points, and the discussion develops around which of these points is most important or which should be addressed first within the framework of the company's current leadership capabilities. Conceptual tools cannot tell senior executives what to do, but they can prepare a more intelligent discussion environment by bringing sufficiently important information to light.

When executives understand where particular groups see opportunities or problems, they escape a fundamental decision-making trap: the choice between pursuing a strategic option or doing nothing... Understanding pressures and problems facilitates discussions and makes it possible to evaluate various solutions. 

Consider the case of Spain's Cosentino, which produces surface products for kitchens and bathrooms. Because the company had built a strong distribution structure in the U.S., the most logical option before it seemed to be to focus on global expansion. However, when the company conducted the approach assessment, the top 70 executives indicated they wanted to focus on innovation. Their aim was to identify potential new trends not only among Cosentino's supply chain partners but also in adjacent areas (the roofing, flooring, and materials sectors). Rather than building a new strong muscle, they focused on developing their existing weak muscles. 

Relating perspectives and priorities and understanding the causality of the current situation is no easy effort. However, avoiding this uncomfortable experience will lead to drifting away from setting the right transformation purpose. As the CFO of an Italian fashion group said: 'As a result of the discussions, we realized that we were not as aligned in some areas as we thought, and we were able to identify pain points regardless of where we were in the organization.'

Joint consultation also creates a sense of contribution and builds greater belief in and support for the chosen action.

Communicating options. Top executives of an organization that has discussed priorities and challenges feel more confident in advocating for a specific action and communicating the message to others. They become better equipped to explain how they reached the judgment in question, indicate which alternatives they evaluated, and explain why this path is the best option on the transformation journey. If employees understand that there is serious and comprehensive analytical work behind the words, they will more readily accept the idea even if they do not like it. 

Mere analysis may not motivate people enough to change their habits. Being able to talk about enablers and obstacles while moving toward an uncertain future can make decision-makers' job easier. This type of behavior gives everyone a shared sense of where the organization stands, why and how it needs to transform, and why this journey needs to be undertaken.

"Leadership teams facing many pain points requiring attention are extremely prone to disagreeing about transformation priorities."

Here is an example of how this works: Top executives of GroupM's South Asia operations, the world's largest media investment group, believed their digital competitors were not only traditional agency networks but also disruptive startups and digital platforms providing direct customer access. As the team intensified consultations, a collaborative innovation approach with potential new competitors emerged. In deeper consultations led by a 'youth committee' composed of employees under 30, choosing the right innovation partner emerged as an important feature. According to C.V.L. Srinivas, CEO of this business unit, one of the main obstacles was getting 'people working in a successful organization to change their perspectives and support change rather than maintaining the status quo.' For this reason, the management team adopted a communication strategy supporting both direct and indirect approaches: They set clear and challenging targets for employees to perform a certain portion of their work digitally, but they also committed to providing employees with support and training tools to achieve this.

IN A WORLD where the shelf life of business strategies is increasingly diminishing, the ability to transform has become a company's most powerful weapon. The innovation approach at Lego under Knudstorp's leadership provided a focus area. However, now as Lego matures in its core markets, it is turning its attention more toward emerging markets, which for the Danish toy giant means becoming a fully global company. 
As serial transformations become the norm, corporate leaders face an important strategic question: How can we execute our next transformation? This article contains clues to the answer to that question...

 

IN SUMMARY *** 

THE PROBLEM
The cause of failed corporate transformations is often cited as inadequate execution. However, misdiagnosing the problem also creates difficulties. 

THE COSTS
When organizations pursue the wrong options or address options in the wrong order, they can worsen existing problems, cause new problems, and burned-out employees become reluctant to support future initiatives.

THE SOLUTION
Before determining their priorities for change, leaders must analyze three points: the catalysts of transformation, the underlying approach, and the leadership capabilities to pursue it...

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