A 2019 study found that the average digitization level across all industry sectors was only around 25% of their ultimate potential. But, the pandemic has now made the case for accelerating the digital transformations firms and economies were forced to make to help them cope with the crisis. But, how successful are such major transformation likely to be?
A few months ago I received an email from the Harvard Business Review recommending a classic article from its 50 Best Selling collection that could shed light on this important and timely question, - Leading Change: Why Transformation Efforts Fail, originally published in 1995 by (now emeritus) Harvard professor John Kotter.
“Over the past decade, I have watched more than 100 companies try to remake themselves into significantly better competitors,” wrote Kotter. These included large and small organizations, US and non-US based, some that were on their knees and some that were doing quite well. “But, in almost every case, the basic goal has been the same: to make fundamental changes in how business is conducted in order to help cope with a new, more challenging market environment.”
The 1985-1995 decade referenced by Kotter was also marked by major technology changes, - e.g., the explosive growth of PCs, the client-server model of computing, the advent of the Internet and World Wide Web; as well as major economic changes including the rise of global supply chains, outsourcing and offshoring.
Kotter presciently predicted that the business environment would become increasingly competitive. It was thus important to analyze what distinguished successful corporate changes. “The most general lesson to be learned from the more successful cases is that the change process goes through a series of phases that, in total, usually require a considerable length of time. Skipping steps creates only the illusion of speed and never produces a satisfying result.”
But, a second general lesson is that critical mistakes in the change process can have a devastating impact. Even very capable organization often make at least one major error. Based on his real-world experiences, his article outlines eight such major errors. Let me discuss four that I found most relevant based on my own experience having lived through IBM’s major transformation in the 1990s.
Not Establishing a Great Enough Sense of Urgency
“Bad business results are both a blessing and a curse in the first phase. On the positive side, losing money does catch people’s attention. But it also gives less maneuvering room. With good business results, the opposite is true: convincing people of the need for change is much harder, but you have more resources to help make changes.”
In an interview at a 2007 conference, then WSJ technology columnist Walter Mossberg asked me whether IBM’s near-death experience in the early 1990s was a major factor in the company’s subsequent successful transformation while so many other IT companies didn’t make it. It clearly was.
Transformative change is very difficult for established companies. Already consumed with managing their existing operations, they may see the transformations needed to keep up with rapidly changing technologies and markets as more of a distraction than an opportunity. But, a major crisis should be an opportunity to implement the actions needed to survive. As Rahm Emanuel famously said in a 2008 interview: “You never want a serious crisis to go to waste.”
Strong leadership is required to rally a company into action. “A paralyzed senior management often comes from having too many managers and not enough leaders,” said Kotter. “Management’s mandate is to minimize risk and to keep the current system operating. Change, by definition, requires creating a new system, which in turn always demands leadership. Phase one in a renewal process typically goes nowhere until enough real leaders are promoted or hired into senior-level jobs.” IBM’s recovery only started when Lou Gerstner became chairman and CEO in April of 1993.
Lacking a Vision
“In every successful transformation effort that I have seen, the guiding coalition develops a picture of the future that is relatively easy to communicate and appeals to customers, stockholders, and employees,” noted Kotter. “A vision always goes beyond the numbers that are typically found in five-year plans. A vision says something that helps clarify the direction in which an organization needs to move… Without a sensible vision, a transformation effort can easily dissolve into a list of confusing and incompatible projects that can take the organization in the wrong direction or nowhere at all.” This was the case at IBM prior to Gertner’s arrival.
It’s very hard to transform a large complex organization through business-as-usual objectives, - e.g., growing revenue and profit, cutting expenses, improving quality, developing better products and services. You need the passion of a clear, compelling vision that captures everyone’s imagination. While the target is sometimes unique to the company, it’s often easier if the vision is based on a technology or market strategy, like the Internet, that everyone has heard of, is talking about and will embrace sooner or later.
In 1995, having implemented a set of actions to ensure IBM’s survival, Gerstner turned his attention to the daunting tasks of setting the company’s future direction. In Who Says Elephants Can't Dance?, his excellent chronicle of IBM’s transformation, Gerstner explained his decision to embrace the Internet in the Fall of 1995 as the centerpiece of IBM’s strategic vision:
“I decided to declare e-business as our moon-shot, our galvanizing mission, an equivalent of the System/360 for a new era. We infused it into everything. It provided a powerful context for all of our businesses. It gave us both a marketplace-based mission and a new ground for our own behaviors and operating practices - in other words, culture. Most important, it was outward-facing. We were no longer focused on turning ourselves around. We were focused on setting the industry agenda again.”
Undercommunicating the Vision by a Factor of Ten
“Transformation is impossible unless hundreds or thousands of people are willing to help, often to the point of making short-term sacrifices, wrote Kotter. “Employees will not make sacrifices, even if they are unhappy with the status quo, unless they believe that useful change is possible. Without credible communication, and a lot of it, the hearts and minds of the troops are never captured.”
Transformative changes are generally based on new, innovative ideas that few may understand in their early stages. It’s thus important to explain what’s unique and different about the new innovation to key constituencies, including clients, partners, analysts, reporters, and, most important, the company’s own employees. Effective communications is thus essential.
Not Anchoring Changes in the Corporation’s Culture
In Who Says Elephants Can’t Dance?, Gerstner wrote: “I came to see in my time at IBM that culture isn’t just one aspect of the game - it is the game. In the end, an organization is nothing more than the collective capacity of its people to create value. Vision, strategy, marketing, financial management - any management system, in fact - can set you on the right path and can carry you for a while. But no enterprise - whether in business, government, education, health care or any area of human endeavor - will succeed over the long haul if those elements aren't part of its DNA.”
Many companies are not able to turn themselves around when a new technology disrupts their strategy and business model, not because they do not know what to do, but because the culture of the institution does not embrace the change. While companies often say that their culture is about the pursuit of lofty goals like outstanding customer service, teamwork, excellence, and shareholder value, most of the really important rules of culture are not written down anywhere. Successful institutions almost always develop strong cultures that reinforce those elements that make the institution great. But, when the environment shifts, it is very hard for the culture to change. The culture then becomes the key impediment to the institution's ability to adapt.
IBM, like many large businesses, used to be very inward-looking, preferring to do everything within the company if at all possible. Embracing the Internet, its open standards and overall outside-in approach turned out to be much more than a technology change. It was a culture almost diametrically opposite to its previous one. It truly made IBM much more open to new ideas from external research and open source communities, and more willing to work closely with other vendors, partners and customers. It paved the way for a much more collaborative approach to innovation, as demonstrated by the company’s embrace of Linux a few years later.
“In the final analysis, change sticks when it becomes ‘the way we do things around here,’ when it seeps into the bloodstream of the corporate body,” wrote Kotter in conclusion. “Until new behaviors are rooted in social norms and shared values, they are subject to degradation as soon as the pressure for change is removed.”
As the pandemic crisis recedes in the months and years ahead, it’ll be interesting to see whether the transformations firms were forced to make in 2020 take hold and accelerate or whether things snap back to the way they were.
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