![Read the Spring issue of MIT SMR, now
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It's not easy to make significant changes to the way you do
business. Relatively few companies are able to make major changes in strategy
unless they are prodded to by financial pressure. The
Spring issue
of MIT Sloan Management Review, out today, features a special
focus on strategy and shows how companies can achieve successful major change
and long-term financial gain.
Read the
issue online >>
Achieving Successful Strategic Transformation
By Gerry Johnson, George S. Yip and Manuel Hensmans
March 20, 2012
Few companies
decide to adopt new strategies without being forced to by financial
trauma. What can we learn from those rare companies that achieve both
successful major change and superior long-term financial performance?
Cadbury’s leaders had long sought to foster a corporate culture characterized by candor.
Companies that are able to radically
change their entrenched ways of doing things and then reclaim leading
positions in their industries are the exception rather than the rule.
Even less common are companies able to anticipate a new set of
requirements and mobilize the internal and external resources necessary
to meet them. Instead, the momentum of and commitment to the prevailing
strategy usually prevents companies from spotting changes such as a
shift in either the market or the technology, and leads to a financial
downturn — often a crisis — that, in turn, reveals the need for change.
Few companies make the transformation from their old model to a new one
willingly. Typically, they begin to search for a new way forward only
when they are pushed.
This raises two important questions for corporate managers. First, is
decline inevitable? And second, do companies really need a financial
downturn to galvanize change, or can they adopt new ways of doing things
when not under pressure? Management theorists have observed that
decline, while perhaps not inevitable, is at least very likely after a
period of time.
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For this reason, some say it’s critical for organizations to develop
new dynamic capabilities deliberately rather than relying entirely on
their historic capabilities.
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The Leading Question
How do some companies achieve successful strategic transformations?
Findings
- Successful transformers build alternative coalitions internally.
- They create a tradition of constructively challenging the status quo.
- They exploit “happy accidents” to make needed strategic changes.
In order to understand how some companies continue to perform at high
levels even as they modify their strategies over time, we studied 215
of the United Kingdom’s largest public companies. We measured
performance by, among other things, profits and returns on shareholder
funds and on total assets over the 20-year period from 1984 to 2003.
Some of the consistent high performers operated in relatively safe and
stable markets; such companies were therefore mostly able to maintain
high levels of performance without making major strategic changes. Our
goal, however, was to draw insights from the small subset of high
performers that successfully transformed themselves. Among other things,
we wanted to understand the role of history — for example, which
management processes and capabilities do companies need to develop over
time.
As a result, we decided to focus on three companies that had made
successful strategic transformations and compare them with three
companies from similar industries that were also successful but hadn’t
been required to make a dramatic shift. The first pair, Cadbury
Schweppes and Unilever, were longtime international leaders in packaged
goods, both with roots extending back to the 19th century.
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The second pair, Tesco and J Sainsbury, were major players in the
United Kingdom’s supermarket industry and are among the largest grocery
retailers in the world. The third pair, Smith & Nephew and SSL
International, operated globally in the market for medical devices and
related products.
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How did these companies perform relative to each other? Cadbury
Schweppes was clearly dominant over Unilever; it outperformed Unilever
every year except 1984, when its performance was only marginally weaker.
In the second matchup, Tesco slightly underperformed Sainsbury during
the first 10 years of the study before catching up in the middle years
and then pulling ahead. Sainsbury had been the industry leader, with
consistently high performance, but by the end of the 1990s its
performance declined. Although its weak performance spurred Sainsbury’s
management to take action, Tesco continued to outperform Sainsbury after
2003. Finally, Smith & Nephew easily outperformed SSL International
every year except 1995, when it was marginally weaker.
All six of these companies exhibited success factors of well-managed
companies. Nevertheless, Cadbury Schweppes, Tesco and Smith & Nephew
all displayed the rare combination of making strategic transformations
and, at the same time, achieving strong performance year after year for
20 years relative to industry peers around the world. This prompted us
to choose them to examine in depth. These companies, we found, had three
fundamental advantages over their peers: They were able to build
alternative coalitions with management, create a tradition of
constructively challenging business as usual and exploit “happy
accidents” to make strategic changes. Together, these advantages helped
them establish the virtuous cycle of strategic transformation that their
counterparts could not. (See “A Virtuous Cycle for Strategic
Transformation.”)
A Tradition of Creating Alternative Coalitions
Although many executives recognize the need to exploit current
capabilities while developing new ones, few are very effective at
managing this conflicting set of activities. Moreover, most of the
advice emanating from scholars who write about “organizational
ambidexterity” lacks a historical dimension.
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The companies we studied that transformed themselves had an unusual
ability to maintain steady performance while pursuing strategic change.
They did this by creating parallel coalitions of senior executives. The
first group, typically the more senior one, focused on reinforcing
current capabilities, strengths and successes. The second group, usually
younger but still senior, actively looked to develop new strategies and
capabilities. This parallel system came to be an accepted part of how
the company operated. It was encouraged and eventually
institutionalized. In particular, the second group often anticipated
strategic drift that would leave the company increasingly misaligned
with a changing environment.
For instance, the original Tesco model was to “pile it [the
merchandise] high, sell it cheap.” Founder Jack Cohen instigated this
and perpetuated it through a personal command-and-control management
style. Nonetheless, in the 1960s an alternative coalition was created to
pursue more modern logistical and operations practices. The new forces
introduced Tesco to a corporate model of management control. During the
1970s, the alternative coalition acquired more and more nonfamily
members, who receive credit for modernizing Tesco in the 1980s and
1990s. Ian MacLaurin and his team of operations-oriented managers
developed their ideas over many years, and they were ready to take
charge once the limitations of Cohen’s approach become evident. They did
away with the old business model featuring reward stamps when Cohen and
his associates stepped down at the end of the 1970s.
In contrast, Sainsbury’s was unable to find a way to go beyond the
formula that had made it successful in the 1990s: store configurations
that helped maximize sales per square foot, an emphasis on fresh
produce, yearly growth of 20%, family control and heavy reliance on a
CEO who was widely acknowledged as an intuitive retailer. While this
recipe had served the company well, the deeply entrenched business model
and management style were difficult to change.
Of the three companies that made successful transformations, none had
to reach outside the organization for top leadership. In a sense, they
grew their own “outsiders” by encouraging intrapreneurial talent and
giving individuals space to comply with their formal job duties while
they experimented with and refined their knowledge of alternative
approaches to business.
A Tradition of Constructively Challenging Business as Usual
Most companies say they encourage challenges to business as usual or
even to the core tenets of the business model. What is less clear is
whether and how they actually do it. At companies that achieved major
transformations, the development of alternative coalitions frequently
occurred in the context of fundamental conflict. At both Tesco and Smith
& Nephew, the conflicts were open. Tesco experienced boardroom
battles between family members and, later, between the two coalitions of
managers. Smith & Nephew endured a major showdown between the
“textile traditionalists” and those who wanted to develop new business
ideas. At both companies, over time the conflicts became less intense
and more respectful.
Constructive challenging at Cadbury Schweppes had a much longer
legacy. Cadbury was founded in the early 1820s by Quakers, and its
leaders had long sought to foster a corporate culture in which “candor,
freedom of speech … a spirit of toleration and liberty … (were) the
dominant notes.”
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This cultural tradition was strong, and the merger in 1969 with The
Schweppes Co. reinforced it. The two corporate cultures clashed. As
former executives reported to us in our interviews, Schweppes people
described Cadbury executives as enterprising “choirboys” and “teetotal”
Quakers, while the Cadbury side referred to the Schweppes executives as
“gin-and-tonic-drinking Londoners” and people with a “short-term” or
“cowboy” approach.
At Unilever, in contrast, the internal struggle that might have
occurred in 1929 when Margarine Unie merged with Lever Brothers was
suppressed through the development of a range of balancing measures that
were worked out between the Dutch and British holding companies. As
Clive Butler, a former Unilever director, noted, “From the merger in
1929, our strategy has suffered from the need to control the balance
between the Dutch and British sides of the business.” The ability to
collaborate and innovate internally across corporate and business levels
was hampered by equalization agreements and silo-creating resource
allocation decisions — most notably about product and geographical
responsibilities. At the same time, the company’s legacy of engaging in a
wide variety of businesses all over the world fostered a growing
disconnect between any corporate strategy and what the business units
did. As a result, Unilever units pursued all kinds of businesses and
strategies that did not together make up a coherent companywide
approach. For example, the company had literally thousands of brands
applied inconsistently to products across countries. Hence, there was a
widespread view that Unilever was “a fleet of ships doing all kinds of
different things, all over the place.”
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Although the need for British-Dutch balancing operations dwindled with
the internationalization of the corporate executive and nonexecutive
teams, the tendency to circumvent conflict remained.
At the companies that transformed themselves successfully, a
tradition of open conflict had a way of evolving into constructive
challenging. Over time, the vying for dominance became
institutionalized. This was not just a matter of senior executives
advocating different points of view; it also involved management systems
that embedded such processes across the organization. In contrast, the
comparator companies we studied never established a tradition of
constructive challenging.
A Tradition of Exploiting Happy Accidents
Not only did new ideas and alternative ideas continually surface in
the companies that made successful strategic transformations, but they
were aggressively pursued. Thus, the companies were well positioned to
turn problems into opportunities. Significantly, we found that
alternative leaders were able to accelerate the pace of transformation,
not by forcing the issue but by leveraging what we call happy accidents
to gain a broad platform of support. Happy accidents are unanticipated
circumstances or events that ultimately support transformation in the
direction favored by the leaders-in-waiting. For instance, at Smith
& Nephew, Chris O’Donnell pressed hard for the articulation of a
clearer strategic framework when he took over as CEO in 1997. It’s
likely that resistance to change would have won the day if not for a
happy accident: O’Donnell’s predecessor had invested heavily in the
fast-growing Asian economies to placate disgruntled shareholders. The
company started with a new division in Japan in 1990, and also invested
in manufacturing plants in Malaysia and offices in China. Just as
O’Donnell took over, the East Asian currency crisis hit, wiping out 40%
of the company’s profits in 18 months. O’Donnell reacted by initiating
comprehensive reviews of strategy and manufacturing, which led to
decisions to exit smaller businesses and focus resources on global
medical sectors. In the face of the economic turmoil, most of the
critics who had resisted O’Donnell’s agenda came around, making possible
the company’s successful transformation in subsequent years.
At Cadbury Schweppes, the poor performance of the U.S. confectionery
business triggered a hostile takeover bid by General Cinema in 1987.
Ultimately, the episode turned out to be a happy accident. It resulted
in an increase in the share price, which generated money for
acquisitions and functioned as a poison pill that allowed the Cadburys
to refine their long-term focus. It also spurred Dominic Cadbury to
accelerate the pace of transformation — not just by divesting the food
and hygiene businesses, but also by giving alternative leaders within
Cadbury Schweppes the opportunity to initiate exciting new developments.
These included the Coca-Cola Schweppes Beverages joint venture, the
relocation of the beverages headquarters from London to Stamford,
Connecticut, and the refocusing of the confectionery division.
Grocery retailer Tesco established and integrated new ways of working that became a catalyst for continuous transformation.
A similar situation occurred at Tesco. In June 1977, management
launched Operation Checkout — across-the-board price cuts intended to
generate volume and gain market share. The campaign was ridiculed in the
press for having narrow operational objectives, and it proved so hard
to manage that it almost destroyed the company. It turned out to be a
blessing in disguise, however, because it forced the old guard to accept
the need to change logistical, distributional and property investment
processes. Tesco’s board had approved Operation Checkout, which was led
by Ian MacLaurin, under a narrow operational mandate. When the campaign
turned out to have very strategic consequences, the old guard could not
cope anymore and turned the strategic command over to MacLaurin and
David Malpas. They and other alternative leaders, by force majeure, were
granted the power to complete the ambitious strategic transformation
plans they had envisioned years before. Family resistance to the new
team’s plans crumbled, and a decisive shift from family control to a
process of distributed managerial engagement and change began.
Successive alternative coalitions at Cadbury Schweppes, Tesco and
Smith & Nephew alike each took advantage of four major (different)
happy accidents during the last four decades. Their counterparts
Unilever, Sainsbury and SSL International, lacking a tradition of
anticipation, were unable to convert problems and crises into happy
accidents. They dealt narrowly with problems on their own rather than
using them as triggers for broader changes. For example, Sainsbury
steadily struggled with its increasing loss of market share to Tesco but
did not change its business model or management approach. Similarly,
Unilever gradually lost market position to Procter & Gamble but
failed to develop a more aggressive strategy and style.
The Rewards of Tradition
We have already noted how the companies that successfully transformed
themselves reaped financial benefits, but what about their strategic
success? By the late 2000s, all three companies were in superb strategic
and competitive positions, with well-defined management processes.
Cadbury Schweppes had grown from a modest-sized national competitor into
a global leader in two of the most competitive industries in the world,
and it eventually became a keenly sought acquisition target. Tesco,
meanwhile, established and integrated new ways of working that became a
catalyst for continuous transformation. It launched multiple retail
formats, significantly reduced the size of its headquarters staff,
streamlined management layers and began an international expansion,
becoming one of the most successful multinational retailers. Tesco is
widely regarded as one of the best-managed companies in the United
Kingdom.
Smith & Nephew, for its part, has repeatedly made changes and
explained them to investors in ways that retain their confidence. Its
tradition of transformation has helped the company stay a step ahead of
changes in the competitive environment, and engage in a self-paced
rather than forced transformational process. This has resulted in more
than 20 years of above-average growth and provided a buffer against the
rapid changes in technology and the market that are inherent in the
medical devices industry.
Developing Traditions for Transformation
If companies are to sustain high performance and transform their
strategies, they need to foster alternative management coalitions and
value constructive tension and challenges to the status quo. We have
developed eight recommendations for accelerating these changes.
1. Build on history. The first thing to recognize is
the importance of valuing history and building on it. In the cases of
Tesco and Smith & Nephew, the contestation we saw was built on
conflict, even emotional conflict, decades ago. Over time, consciously
or not, the skirmishing evolved into a more respectful tug of war. In
the case of Cadbury, a tradition rooted in the company’s Quaker past was
reinforced by a clash of cultures that followed the merger with
Schweppes. Building on history requires managers to reflect on the
evolution of their organization and the legacy they can draw on. Which
traditions are present, at least in embryonic form, and which ones are
absent? In the light of the answer, what new steps could be taken?
2. Select and develop a new generation of leaders.
All good companies carry out succession and talent planning. But too
often they focus too much on maintaining the current mold. In a company
that’s serious about transformation, succession planning requires
building
different capabilities. New generations of leaders
need to be groomed and encouraged to develop alternative coalitions and
business models. Of course, this is easier said than done. To make it
happen, current leaders must nurture replacements who will question,
modify or even be willing to reject the company’s heritage. In the late
1990s, Tesco CEO Ian MacLaurin and managing director David Malpas
recognized this quality in Terry Leahy, a young manager who would become
a major change agent. Malpas explained to us his approach to management
talent-spotting: “I used to categorize youngsters in two [groups]:
those who believed the corporation was a corporation and they worked for
it, and those who believed it was their business.” As much as he valued
the former group, it was the latter group that he looked to for the
next generation of leaders.
3. Accept and encourage constructive mobility. In a
similar vein, it’s important to accept and encourage constructive
mobility in management. This does not necessarily mean bringing in
outsiders to run the business: On the whole, the successful transformers
developed their own managers and leaders internally. However, rather
than appointing the most predictable successors, companies need to adopt
a deliberate policy of cultivating internal talent. In other words, in
addition to fostering alternative coalitions, welcoming challenge and
encouraging divergent perspectives on the future of the business,
managers should identify leaders who, while respecting the past, have a
distinctively different view of the future.
4. Ensure that decision making allows for dissent.
There’s a fundamental difference between an organization built to
maintain consensus around a dominant logic and one where managers
naturally challenge it. Butler, the former Unilever director, recognized
that Unilever “had many layers of people that were clever enough to
think of many reasons why a new idea wouldn’t work.” Tesco’s Malpas, on
the other hand, described Tesco as an organization where new ideas took
on momentum across different levels of managers: “You have bright people
who have ideas and want to mold the business their way, so an
initiative gets to the boss at the next level who embraces it, and it
becomes his scheme; it gets to the next level and he embraces it, and it
becomes his scheme. How the hell do you stop it?” A decision-making
process that allows for dissent and challenge works only among people
who can live with, and indeed welcome, challenge.
5. Create enabling structures that encourage tension.
Creative tension between opposing views can also be fostered
structurally. When Smith & Nephew bought an R&D facility from
another company, and when Tesco gave responsibility for demographic
profiling to the marketing department rather than the real estate
department, the companies ensured that there would be new and different
perspectives. Such changes alone will not guarantee that alternative
views will be heard and taken seriously — that will depend on the
relevance of the views and who in the organization promotes them. But
changing the structure can make a difference in how people see ideas
internally.
6. Expect everyone to get behind decisions once they are made.
Essential though constructive confrontation, contestation and
experimentation are, there needs to be a point when leadership makes
decisions and the different parties fall in line. This requires what we
call “corporate maturity”: having the confidence to see the value of
dissent while accepting the need to move forward for the wider good.
Taking this position is not an argument for suppressing dissent. Rather,
it’s an argument for appreciating the value of diversity and
recognizing that there are times when top management needs to take
charge. In our research, we found that failures occurred not so much
when top management avoided making decisions but when management
mishandled the internal debate, by stifling it, cutting it short or
failing to build management teams with enough confidence to overcome
doubts.
7. Develop an overarching rationale. Although the
executives with whom we discussed our findings were wary of attempting
to “create cultures,” they agreed that managers needed to develop clear
positions concerning “what we are about.” At Tesco in the 1990s, for
example, managers engaged in spirited discussions about how to balance
the needs of customers with those of shareholders and employees. They
concluded that success required focusing on customers. Dominic Cadbury
noted that the starting point is the company’s values: “These do not
happen by chance, and they can’t drift either. There has to be some
management there.” And values need to be more than words — they should
be believable and evident in top managers’ behavior.
The emphasis on a clear rationale supported by strong values must
allow for the necessary diversity of views and ideas. Sainsbury had in
place a very clear rationale and set of values. Unfortunately, one of
those values was that dissent is dangerous. This offers a lesson from
complexity theory: Organizations need “order-generating” or “simple”
rules
8
that are few in number but sufficiently clear to provide overall
direction while at the same time allowing for differences of views and
ideas.
8. Beware of market size and dominance. Each of the
successful strategic transformers we studied developed some of the
characteristics that helped them succeed while competing against
dominant players in their industries. Indeed, Cadbury Schweppes, Smith
& Nephew and Tesco saw themselves as seriously threatened. This was
not the case for Unilever or Sainsbury, both of which were major forces
in their markets. As Dominic Cadbury, the retired chairman of Cadbury
Schweppes, put it, “Unilever was such a different size that … it would
be infinitely more difficult to galvanize [the company] to think of
itself as an endangered species.” Butler conceded, “Unilever has had to
grow smaller to be like that.” This raises an important question: As
once-threatened companies such as Tesco become industry leaders, will
management lose sight of the very qualities that helped create their
success?
Butler’s comment about the challenge of mobilizing an organization
raises issues about both complexity and size. Tesco was always a retail
business; Cadbury, while operating in a number of different businesses,
was much less diverse than Unilever; Smith & Nephew was less
diversified than SSL International. Complex, diversified organizations
such as Unilever often try to reduce their complexity to realize a
corporate strategy of having the right mix of businesses. We believe
that there is a different reason for reducing complexity: Ongoing
strategic transformation requires relatively focused businesses.
Institutionalizing traditions does not take place overnight.
Therefore, our proposals are the antithesis of short-term management.
The capabilities to avoid strategic drift must be nurtured over the long
term. However, today’s organizations have one important advantage: The
exceptional organizations we studied developed their skills and
traditions over many years — and without the benefit of the lessons we
have drawn from them. Now that we have identified how traditions of
transformation are developed, today’s managers have the opportunity to
build on this experience to establish their own traditions more rapidly
and also more deliberately.
(Reprint #:53308)
Gerry Johnson is an emeritus professor of strategic
management at Lancaster University Management School in the United
Kingdom. George S. Yip is a professor of management at China Europe
International Business School in Shanghai. Manuel Hensmans is a
professor of strategic management at Solvay Brussels School of Economics
and Management at Université Libre de Bruxelles in Belgium. They are
the authors of a forthcoming book on strategic transformation.
The Religion Triumphs All Story: Finally, Lin himself offered the narrative that religion is both a source of struggle and a source of strength in his professional life. The question we ignore is to what extent Lin's Protestant faith makes him seem less "other" to a non-Asian-American audience than his race, especially in the context of current public discourse about politicians who have Muslim names or Mormon faith?
