Strategic Transformation

Changing While Winning

M. Hensmans, G. Johnson, G. Yip

• Publisher: Palgrave Macmillan
• Year: 2012
• ISBN:
  9781137268464
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Very few companies are successful in undertaking strategic transformation while maintaining long term superior financial performance. This book, by leading strategy experts, draws upon extensive interviews with business leaders andinsights from companies faced with this challenge.

PART I

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What’s the Problem?

CHAPTER 1

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The Challenge of Change

Every decade has at least one: IBM in the 1980s, General Motors and Marks & Spencer in the 1990s, Dell, Nissan, Sony, BP, Toyota, and Nokia in the new millennium. The pattern is so familiar that it has come to seem inevitable. A company that is admired and respected as a paragon of its industry falters and runs into financial crisis. Hero becomes zero. Shareholders rebel, managers are sacked, and ultimately major change ensues. What is going on here? Why don’t organizations see what’s coming, or if they do, why don’t they react until the 11th hour? Why does it take a crisis to induce change?

Success is a paradox. Naturally, success is ardently desired and pursued, then feted and envied when achieved. But along with the applause come invisible dangers. Not surprisingly, successful businesses, usually to the approval of shareholders, seek to build on their success; the impulse is to go on doing what they are good at, only more so. But over time their very success seems to blind them to the changing reality of their business environment. Imperceptibly, their picture of what is happening diverges from real events. They “drift;” indeed, in this book, borrowing from other studies, we refer to the phenomenon as “strategic drift.” Performance declines, sometimes gently, sometimes less so, until the inevitable eventually has to be faced and radical change takes place.

This is of course a hugely inefficient and wasteful pattern of change. For customers, managers, suppliers, and workers alike, the damage is immense. Jobs, shareholder value, the supply chain, and the economy as a whole all suffer. Sometimes the business itself disappears, either being swallowed up by another or going out of business altogether. Gary Hamel calls this a third-world dictatorship model of change and adds: “A turnaround is a transformation tragically delayed – an expensive substitute for well-timed adaptation.” If the pattern is indeed inescapable, it is also highly regrettable. So, is it inevitable? Some argue it is, that it is the natural evolution of businesses. Or is it avoidable? Can businesses both build on their success and also transform the basis of their success? Before going any further, we need to dig a little deeper into these issues.

THE PROBLEM OF STRATEGIC DRIFT

Why is our research important? We believe that it raises major questions about the received wisdom that managers use to guide responses to one of their most significant challenges: managing strategic change.

Not surprisingly, most company strategies are based on what has been done in the past – especially if it was successful – and change only gradually. For example, for decades until the early 1990s, Sainsbury’s formula of selling superior-quality food at reasonable prices made it consistently one of the top-ranking retailers in the world. Under the patriarchal guidance of a succession of Sainsbury family chief executives, it steadily extended its product lines, enlarged its stores, and widened its geographical coverage, without ever deviating from its tried-and-tested methods – refusing to branch out into clothes or other non-food items, for example. Most successful businesses resemble Sainsbury’s. They go through long periods of relative continuity during which established strategy changes, but only incrementally, building on what has been successful in the past.

Without necessarily being conscious of it, firms develop a “dominant logic,” a way of doing business, unique to each, around which all the different aspects of the business tend to cohere. It is “a way of doing things around here” that is at the same time a major asset and a major potential liability. The benefit is that those who work in it, or indeed deal with the organization, know where it is coming from and how it operates. The approach may have been the foundation of success in the past. The disbenefit is that it can be so dominant that it not only crowds out any other way of doing things, but also denies or smoothes out contrary evidence, with the result that the dominant logic remains unchallenged. What was previously a source of strength becomes the opposite – the invisible bars of a prison from which it is very hard to escape.

There are good reasons why this should be so. It does not make sense for strategy to change faster than the markets in which a company operates. Why should managers change a winning formula, especially if it is built on capabilities that have yielded advantage or innovation in the past? Clever managers may have learned how to spin variations around their successful formula, in effect experimenting without moving too far from their comfort zone or capability base. So they will argue with some justification that their organization is in fact changing.

The tendency, then, is for strategies to develop incrementally on the basis of the dominant logic of businesses, but to fail to keep pace with a changing environment, a tendency that has been described as “strategic drift.”¹ Problems do not arise because organizations fail to change at all, but because the rate or nature of change of strategy lags behind the rate of change in their environment. Thus, while Sainsbury’s continued on its well-trodden way, rival Tesco, starting from a much less successful base, was developing much larger stores with a wider range of goods, including non-food. It was also modifying its distribution logistics and supply chain. There was no single point in time when Tesco “changed.” The modifications took place over many years – and Sainsbury’s managers were well aware of them.

So changes in the market do not need to be dramatic or invisible for drift to occur. The problem was that, as with many organizations, Sainsbury’s strategy failed to address the changes. Why not? There are several contributory reasons.

A common management mantra is that managers should “stick to the knitting,” that is, focus on their core competences and stick to doing what they know best. It sounds plausible (remember that “sticking to the knitting” was one of the attributes of Peters’ and Waterman’s excellent companies in In Search of Excellence). The snag is that sticking to the knitting can easily develop into corporate sclerosis or what Dorothy Leonard Barton² calls “core rigidities.” If managers do only what they know best, there comes a time when core competences become so taken for granted, so ingrained, that they are impossible to shift even when they become redundant.

As an example, consider how Sainsbury’s decades of postwar success came to be identified with CEO John (now Lord) Sainsbury, whose empathy with customer needs and intuitive understanding of the details of retailing were legendary. Not only were these skills tacit, but managers, staff, and even retail analysts took for granted that they would be enough to sustain the fortunes of the business into the future. Imperceptibly, taken-for-granted ways of seeing and doing things take root in an organization’s culture. Core assumptions, organizational routines and structures, even the stories people tell each other, all cohere to reinforce “the way we do things around here.” So the Sainsbury way was not just a matter of the formalized buying and distribution systems, or even the undoubted centralized power wielded by John Sainsbury. It was also enacted in his legendary retail “feel,” his attention to detail, his ritualized store visits, the stories staff told about them, and the expectations that they read into them.

In these ways, an organization’s historical legacy comes to weigh heavily on the present. This is encapsulated in the idea of path dependency, where formative early events and decisions establish “policy paths” that effectively condition the future,³ sometimes trumping apparently superior present alternatives. Cadbury was profoundly influenced by its Quaker origins. The founding ethos of Sainsbury’s to provide value for money and good quality endures to this day. Early decisions about how the Dutch and the British would work together in Unilever, not least in the top executive team, indelibly marked the company’s character over decades. Not surprisingly, whether consciously or not, firms develop strategy – which markets and segments to enter, how to build their infrastructure, where to diversify – around path-dependent capabilities that gradually become second nature. Strategies themselves become so deeply grooved that there seems no more possibility of an alternative than there is for a needle on a gramophone track. Thus, in sum, do businesses, not least successful ones, come to be captured by, and victims of, their own dominant logic⁴ – a tendency graphically described by Danny Miller as the Icarus Paradox?⁵

The way in which individual managers perceive the world can also contribute to an imperceptible drift of strategy away from reality. We are all “boundedly rational” – that is, we can only operate within the limits of our knowledge and experience. More formally, we make sense of the world by applying that knowledge and experience in the shape of mental models, beliefs about the way the world works that function as a kind of pattern recognition system allowing us to relate present problems to past events and interpret one in the light of the other. This has major advantages – indeed, we couldn’t function without such models. But there are downsides too. By definition, models are simplifications of reality, rules of thumb that enable us to use partial knowledge to interpret complex situations. The danger of “selective attention,” as it is called,⁶ is that managers use the wrong simplification, or alternatively that they apply the same one to every situation (to a man with a hammer every problem is a nail …), in effect editing out information that does not fit the model. Unfortunately, this sometimes leads to severe errors as managers fail to pick up crucial indicators because they are scanning the environment for known issues rather than unknown ones.⁷ All this will lead to a bias toward continued incremental strategic change.

To continue the Sainsbury story, as Tesco prospered, Sainsbury managers clung to the conviction of their own superiority on the grounds that they were doing better in terms of sales per retail square foot – their traditional yardstick of success. Tesco was by then changing the nature of the game by building much bigger stores. But Sainsbury’s chosen measure gave it no cause to alter its tried-and-tested strategy, or the unshakeable conviction that it was in little danger from what it saw as a downmarket rival offering inferior products.

Office politics and power games can also play a part in entrenching individual positions and fostering compromise around existing strategy. Together, these are powerful forces. Just how powerful is shown by well-documented cases in which managers have been aware of market shifts, well positioned to take advantage of them, even intellectually conscious of the need to alter strategic direction, but still unable to do so. Take, for example, the story of Motorola.⁸ Motorola’s success was built on innovation bubbling up from a wellspring of technological expertise. In the mid-1980s it was the world leader in analogue cell phones, a logical progression from the military walkie-talkie systems it had developed after the war. By 1994 it had a whopping 60 percent share of the US cell phone market. However, that decade saw the arrival of mobile digital technology, which offered clear advantages over analogue including better reception and security, clearly setting the scene for the development of a mass market. Sure enough, consumer demand for digital phones exploded; Motorola, claimed CEO Robert Galvin, “was at the forefront of the development of digital technology.” Yet it chose to stick with analogue for years, lucratively licensing its digital technology to Nokia and Ericsson instead. Incredibly, even when increasing royalties were telling it in the most direct fashion that digital was taking off, and wireless carriers were pleading with it to develop digital devices, Motorola launched and aggressively promoted a new analogue phone. From a once-dominant position, by 2008 the company’s share of the global handset market had sunk to 23 percent, and it continued to shrink.

To make matters worse, the significance of shifts in the marketplace may be easier to spot in hindsight than at the time. Managers will understandably hesitate to alter a winning strategy on account of what seem initially like blips or fads, or a temporary downturn. Then, by becoming more efficient, cutting costs, o...

Table of contents

• Cover
• Title page
• Part I   What’s the Problem?
• Part II   What We Found
• Part III   What We Learned
• Notes
• Bibliography
• Index