STRATEGY & INNOVATION ARTICLES

A growing realism is setting into corporations around the world. Times aren’t getting better any time soon. Times aren’t getting more stable any time soon.

So the question turns from, “When will things return to normal?” to “What do we do now in the face of the ‘new normal’ of constant change?”

Charles Darwin serves as a useful guide in today’s tough times. Darwin noted that the species that survived weren’t necessarily the strongest or the smartest, but the ones that are most adaptable to change. Similarly, a recent annual survey Innosight conducted in conjunction with Forbes magazine highlighted how managers increasingly recognize the new corporate imperative: transformation.

Close to 600 managers from more than 150 different organizations, ranging from sole proprietorship to behemoths like Microsoft, P&G, and Toshiba took the survey. More than 100 respondents were from billion-dollar-plus companies, although there were only negligible differences in response between large and small companies.

A huge majority – almost 80 percent of respondents – said that their organizations recognized the need to transform. Close to 70 percent of survey-takers reported their companies had already committed to transformation. Today’s tough economic climate hasn’t dampened the desire for transformation; both figures were virtually unchanged from the last annual survey Innosight administered in 2007. Further, close to 80 percent of this year’s respondents reported that today’s economic environment has increased the need for transformation.

My forthcoming book, The Silver Lining, describes how one way to think about what transformation looks like is to visualize what a classically trained musician has to do if he wants to become a competent jazz player. He has to stop some behaviors, such as precisely following sheet music. He has to change the way he uses his ears, listening for unexpected changes. And he has to start a new behavior — improvisation. Fortunately, the musician has the right skills to make the transition, but it requires thinking and acting differently.

Mastering transformation requires mastering innovation. Transformation comes from entering new markets and leaving old ones. Almost any company that has transformed itself has done so through disposing of some businesses and innovating their way into others.

A classic example is IBM, which was struggling in the early 1990s. Over the past two decades IBM has shed long-time core businesses, like consumer printers, hard disk drives, and personal computers. It has created innovative growth businesses in markets such as services and grid computing. Some of these innovation efforts have been organic; some have involved small and large acquisitions. The company has thrived by being willing to break from its past to confidently confront today’s challenges.

Companies rarely transform themselves through cost-cutting or improved operational effectiveness. Operational effectiveness is necessary to compete, and world-class operators can create competitive advantage, but in almost all cases operational effectiveness is insufficient to stave off disruption and drive long-term competitive advantage. But being the best-run buggy whip manufacturer in the world isn’t worth much when disruptive forces rip through an industry.

Innosight’s field work and research suggests that there are common elements to organizational transformations (see Figure 1, below). An organization must start with a clear and compelling blueprint for transformation. That blueprint is supported by four interlocking categories, with 12 specific elements:

• Dedicated resources. Transformation doesn’t happen by accident. Companies must allocate people and dollars to transformational efforts. Also, senior leaders must actively engage in transformational efforts that might run against normal operating procedure. 
• Lead opportunities. Innovation and transformation go hand in glove. Companies need to select opportunity areas that have the highest potential to drive transformational growth, develop new business models to win in those opportunity areas, and scale new growth businesses. 
• Tools and enablers. For transformation efforts to “stick,” companies need to have the right tools, processes, metrics, and incentives. Without these enablers, transformation efforts can fall prey to the “sucking sound” of the core. 
• Appropriate mindsets. Innovation is an intensely human process, but companies often overlook how important it is to have formal efforts to overcome internal resistancteach new mindsets, and build a culture that supports transformation.

Given the complexity of the challenge, it is not surprising that many survey respondents reported struggling with transformation efforts. Only 12 percent of survey takers said they strongly agreed with the statement, “Our organization is making above-average progress transforming itself.” However, that figure was up from 10 percent in 2007.

The bad news? There’s no silver bullet for transformation. Both leaders and laggards reported struggling to successfully put the transformation pieces together. Survey respondents answered detailed questions about the 13 discrete pieces of the transformation equation described above. How important is the factor to successful transformation efforts? Did they conceptually know what to do? Were they successfully implementing that factor?

As Figure 2 (below) shows, more than 80 percent of the respondents said that 11 of the 13 factors were important (interestingly, the importance of many factors decreased from 2007). However, more than 50 percent of respondents reported successfully implementing only three of the 13 factors — engaging senior management, selecting opportunity areas, and creating a blueprint for transformation.

There are two pieces of good news. First, the scores related to conceptual understanding and implementation generally increased from 2007 (the 2007 survey did not ask about a strategic blueprint or conducive culture for transformation).

Further, analyzing the leaders — companies that report making solid progress on innovation — provides a useful way to guide companies just beginning their transformation efforts. Figure 3 shows the gap between companies that report making the most progress and companies that report making the least progress. While there are gaps across the board, companies that report making above-average performance lap the field when it comes to senior management engagement, setting strategy, and allocating resources.

This reinforces an Innosight viewpoint that transformation must start at the top of the house. If the Chief Executive Officer and his or her team aren’t running point on transformation, efforts are likely to stumble.

Once leadership is engaged, consider the following six pointers:
 

1. Create a clear and compelling blueprint for change. Ideally such a blueprint clearly describes the transformation imperative, and identifies what options are on and off the table.
2. Translate that blueprint into meaningful resource allocation decisions. Mission statements don’t transform anything. People have to spend time and money driving transformation.
3. Ask yourself what you will stop doing in order to shift resources in support of transformational efforts. Take a hard look at whether in-process innovation efforts or even existing businesses need to be shut down or spun off.
4. Pick a handful of “demonstration” projects to show how acting differently leads to different results. Culture is a lagging, not a leading variable. Demonstration projects can help to show the power of new approaches.
5. Support early success efforts with metrics, processes, and structures to allow transformation to “stick.”
6. Bring in outside voices to shake up the status quo. Einstein once defined insanity as doing the same thing and expecting different results. Outside perspectives can help to ensure that companies can successfully break from their past.

Success is possible. Respondents noted that companies like IBM, Hewlett-Packard, Procter & Gamble, and Google seem to have successfully transformed themselves in recent years. And generally survey respondents reported progress compared to respondents to a similar survey Innosight conducted in 2007.

Transformation is increasingly becoming an absolute corporate necessity. If your company has recognized the transformation imperative but is struggling to make progress, take heart. You are not alone. But don’t stop your efforts, because no corporate initiative is more important in today’s challenging markets.