Chapter 1 Excerpt for The CEO Playbook for Strategic Transformation
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THE CEO’S BIGGEST CHALLENGE: THE PROMISE AND PERIL OF STRATEGIC TRANSFORMATION
ONE OF MY first jobs was at IBM in its Strategic Studies unit. It was the mid-1980s—a glorious era for IBM. The company’s market cap made it the most valuable firm on the planet, and it dominated in virtually all its markets. Rivals used to lament, “IBM is not the competition, it’s the environment.” Its competitive advantage seemed unassailable. The company had incredible talent, including Nobel prize–winning scientists, and a continuous flow of technology advancements and innovative products.
But IBM stumbled badly when it missed the industry shift from mainframes to PCs. Many today are still unaware of just how dire the situation became and how close the company was to going under. (More about the underlying reasons for decline in chapter 6.) By the time Lou Gerstner was hired as CEO to replace retiring John Akers, IBM was losing more money than any company ever had up to that point in U.S. history—it reported an $8.10 billion loss in 1992 alone.1
What did Gerstner do? Well, he didn’t have experience in the computer industry, but he had a record of transforming companies. He had turned around RJR Nabisco, and before that, he had rebuilt American Express. At IBM, Gerstner wasted no time launching what he called Operation Bear Hug, an initiative to reconnect IBM’s senior leaders with customers and encourage them to listen more intently. Bear Hug revealed that customers wanted a new value proposition from IBM, one focused on integrated solutions (i.e., one-stop shopping for all things computing). The industry was changing rapidly, and the possibilities in computing were exploding. Customers needed someone to stand between them and that overwhelming confusion of opportunity. IBM promised that it would.
To make good on this promise, Gerstner restructured the company to get rid of bloat, selling off any part of the business that was noncore and assiduously eliminating excesses. But he did more than just slash costs. His reengineering initiative focused on improving process efficiencies, quality, and speed to market. The company began building new capabilities in hardware, software, supply chain, customer relationship management, and global services—the aspects most critical to IBM’s promise of integrated solutions. Gerstner also made some difficult decisions to transform the venerated IBM culture to focus more on teamwork, execution, and winning business.
From its near-death experience, IBM emerged transformed. With a new strategy and a new market position, it was a new organization with new capabilities, wrapped in a new culture. Within two years, Gerstner’s strategic transformation made IBM competitive again, with revenues in excess of $78 billion and a stock price that had quadrupled. By the time Gerstner retired in 2003, IBM’s stock price had increased by 800 percent, and the company had regained its position as a technology leader. In truth, the company is not as dominant as it once was, but the story of Gerstner’s transformation is still one of the classic lessons in strategic leadership.
On a personal level, my experience with IBM was life-changing, and it set me on a new course professionally to understand the phenomenon. I confess that in those early years my assumption was that great companies were enduring, and I had an implicit checklist of what made for a great company. You know the list—profitability, market share, brand, leading products, great talent, strong culture, and so on. IBM had all of that, but its rapid decline nullified that checklist. Great companies can falter quickly, and no one is immune. Since that time, my professional focus—and the reason for this book—has been to figure out how organizations can build opportunities for breakthrough performance, and to delineate the role of leadership in bringing that about.
THE NATURE OF TRANSFORMATION: DIGITAL AND MORE
A CEO has no task more significant than undertaking strategic transformation. Why? Because large-scale strategic change involves major decisions about how to engage the external world and equally big decisions about how to organize internal operations. It truly requires a “total enterprise” perspective. The stakes are high, the prospects offer risk and reward obvious to all, and the chosen strategy sets the organization on a new path for the future. It is exciting.
And it typically doesn’t go well.
IBM’s experience illustrates that both inside and outside the organization, there are powerful forces reshaping businesses and industries—forces that compel leaders to dramatically rethink their enterprise. The impact is game-changing. For example, organizations today spend over $4 trillion a year on technology upgrades as part of the “digital revolution.” Technological innovation is disrupting industries, creating new industries and new competitors, and changing the nature of competition.2
But while digital is part of the equation, there is more to strategic transformation than technology. Strategic transformation means altering the organization’s strategy, structure, technology, and culture to meet the shifting demands of the environment. This is not middling change at the margin.
Some of the best companies have done this very well: think Amazon or Apple. Others have struggled: think Sears, Kodak, Blockbuster (the list goes on . . . ). The truth is that change is difficult. And strategic change is especially difficult.
Here are a few sobering facts:
• Since the year 2000, more than half the Fortune 500 firms have declared bankruptcy, been acquired by another company, or simply ceased to operate because of industry disruption.3
• An IBM study of more than 1,500 executives showed that enterprise transformation ranked among their top concerns. The surveyed CEOs said their need to lead change is growing, but their ability to do so is shrinking.
• McKinsey found that over 70 percent of strategic change initiatives fail to achieve their objectives.
• Research by Willis Towers Watson showed that even when change initiatives are successful, the gains are sustained only 25 percent of the time.4
Take a moment to reflect on these data. The pattern is startling. Industries are being upended. Perennially, top firms are faltering and failing. CEOs see transformation as essential, but they’re playing catch-up. Unfortunately, the vast majority of their change efforts prove unsuccessful or are short-lived.
The Promise of Strategic Transformation
But the news isn’t all bad. Some market leaders use strategic transformation to propel themselves forward, accelerating their lead and building competitive advantage. They get out in front of change, creating disruption for others.
A study by Boston Consulting Group (BCG) found that nearly 25 percent of companies undergoing transformation were top performers before the transformation as well as after. Strategic transformation can galvanize the organization around a promising future and align everyone in the firm toward the shared goals of enhanced value, innovation, and world-class capability.5
Why don’t more organizations embrace this enlightened perspective?
The problem is that we often hold on to outdated assumptions about the process of change. Conventional wisdom used to be that transformation was undertaken only as a last-chance “Hail Mary” to save a company that was underperforming and out of options. This thinking was premised on the idea that successful organizations build a strong foundation that endures in the face of disruption and challenge. Even the phrase sustainable competitive advantage that we use in the world of strategy implies that change reveals a loss of advantage.
As a result, many CEOs are reluctant to engage in transformation unless there is a “burning platform” and the company is in crisis. In such cases, change is probably not strategic, but merely reactive, and the journey will be more difficult—and painful—for the CEO and everyone associated with the company.6
Fortunately, this way of thinking is increasingly archaic. In the BCG study, fewer than half the organizations undergoing transformation were chronic underperformers. Some were approaching change with a real sense of urgency, and some did so as part of an ongoing adaptive process. Either way, the transformation represented a new trajectory—and an opportunity for greater success.
But transformation is challenging. And its track record across companies is not great. There are three fundamental reasons why companies struggle with this.
Complexity Is Confounding
First, enterprise transformation is difficult because it has a lot of moving parts. When teeing this up with management teams, I almost always begin by asking, “What is the most significant organizational change you have been through? What made it difficult?” Executives frequently say that the biggest challenge of change is making sure all the elements—structures, processes, technologies, talent, and culture—are synchronized with each other and the competitive world outside.
Organizations are complex. And there remains a significant gap between the intuitive idea of “change” and the realities of many elements that are interlinked and mutually dependent. When transformation efforts fail, it is most often because these elements are not synchronized: Some are stuck in the past, while the others forge the future. The system binds up, coherence is lost, and performance suffers. You’ve undoubtedly seen this.
The trouble is that while many managers recognize the complexities, they often don’t truly understand them. In my experience, very few see the big picture of the entire enterprise. And if they do get a sense of this, they often see it only from their vantage point. In some ways, this is to be expected, given the way organizations are structured, departmentalized, and specialized. But if managers don’t comprehend the complexity in its entirety, or if they get mixed messages from different corners, they will misread some of the key interdependencies needed for transformation. Worse, they might misdiagnose the problem and make changes in unnecessary or harmful ways, unleashing a barrage of unintended consequences that reverberate negatively through the organization.
So, as a starting point, if strategic transformation is to succeed, your approach must help managers see the complexity of the organization, understand how one element depends on another, act to build connections and complementarities, and minimize conflicts to achieve your collective goal. Strategic transformation requires system-level thinking and action. In that sense, it is a design puzzle.
Disruption Is Unrelenting
The second reason transformation is difficult is because (ironically) change is constant. Globalization, digital revolution, geopolitics, economic shifts, regulations, disease, social issues, demographics: All these and more create unrelenting disruption.
Change is no longer an exception; it is the new normal. Some change we refer to as “continuing,” like the steady path of progress in mature technologies of manufacturing. Continuous improvement strategies and optimization models impart a modicum of continuity even during periods of change. But much change is discontinuous, meaning it is abrupt, unexpected, and ill-structured. It is jolting upheaval after a period of calm. Discontinuous change can have great impact, and then recede—but with enduring consequences. Think of the COVID-19 pandemic and its profound global effect.7
Disruption is unrelenting because these discontinuous change events are layered upon one another, creating uncertainty and disorder, altering the calculus of economic, technological, political, and social environments in which organizations operate. It makes predicting the future more difficult, if not impossible.
Because of this volatility, strategy today is less about achieving stable competitive advantage and more about developing adaptive capabilities and energizing innovation in dynamic environments. Traditional strategies based on stable market positions, scale, or legacy advantages are increasingly ineffectual. Established business models run the risk of rapid obsolescence. The demise of organizations creates churn in industries, as dominant players are overtaken by new, agile rivals, leading to even more volatility.
What’s the upshot of all this for leading strategic transformation? Well, at a minimum, we can conclude that traditional assumptions about change as episodic, linear, or sequential (“unfreeze-change-refreeze”) are quickly becoming antiquated. Strategic change is not a “once and done.” In today’s environment, strategy is dynamic, agile, and nimble, and it requires flexible resource deployment. Unfortunately, most organizations aren’t built for change. They’re designed for stability and repetition, and changes are designed to solve yesterday’s problems. Powerful forces lock these firms in place. I would argue that these organizations need not only to update their profiles, but also to upgrade their dynamic capabilities. Transformation is no longer an event; it is a strategic capability.
Think of unrelenting disruption as analogous to “permanent whitewater.” If the outdated image of a successful company is a rowing crew sculling on a placid lake, perfectly synchronized, where only the coxswain faces forward and everyone else has their backs to the future, today’s successful company is ready for permanent whitewater. The brittle shell of a rowboat would splinter in the rapids of, say, the Colorado River. A flexible rubber raft that can bounce through the rapids and off the rocks is needed instead. Given the urgency, every member of the team must turn around, face forward, throw one leg over the edge, and dig in. Teamwork is dynamic, requiring constant adjustment. The ride is thrilling.8
If strategic transformation is going to succeed in an environment of unrelenting disruption and permanent whitewater, your approach needs to build flexibility into the organization membrane to help it adjust and respond. It needs to support everyone as they deal with inevitable uncertainty, and it must help them work collaboratively to focus on what matters most: adapting to the waves of change.
Change Is Risky
The third reason transformation is difficult is simply that change is risky. At a personal level and an organizational level, change incurs costs. You can think of risk as a function of those costs; that is, how much is at stake multiplied by the degree of uncertainty. Individuals are often reluctant to give up old routines or practices that have become comfortable, proved successful, or been reinforced by legacy reward systems. Personal risk may be the number one cause of resistance to change.
But change is risky at the organizational level too. Altering the strategy, structures, processes, systems, and culture in an organization risks endangering the firm’s position in the market, relationships with key stakeholders, resource and information flows, decision processes, and expectations, throwing the organization into disarray and jeopardizing performance.
Because of this risk aversion, leaders often view transformative change as unadvisable. The paradox of execution is that many executives focus on the urgency of performance improvement, trying to get the organization to do better, when what they really need is to do is bite the bullet and do things differently (or do different things). Delaying transformation—perpetuating the status quo—has its own set of risks. Doing nothing in the face of disruption may be the riskiest proposition of all.
Don’t get me wrong. Risk assessment and mitigation are vital to any transformation. If strategic transformation is to succeed, it must uncover the underlying sources of personal and organizational risk, and then address the causes of risk aversion. Doing so leads to better engagement and more informed decisions. Managing an acceptable level of risk is inherent to any strategic transformation.
So, if we put this all together, we can conclude a few things. On the one hand, strategic transformation is important because it can set the organization on a new path to higher value and better market performance, enhancing the organization’s capabilities and competitive position. On the other hand, transformation is challenging because organizations—and environments—are complex, with many interdependent elements that are difficult to fully ascertain and even more difficult to manage as a system. When change is unending and volatility leads to increased risk, the organization could lag when it needs to lead, or pause when it needs to push forward. In this context, change may be hard to energize and sustain, as many in your organization experience change fatigue just when the transformation needs to accelerate.
Warren Bennis and Burt Nanus coined the acronym “VUCA” to describe this environment: volatility, uncertainty, complexity, and ambiguity profoundly influence the nature of decision-making, problem-solving, organizational response, risk, and change.9
In this sense, VUCA makes strategic transformation both more important and more difficult than ever. The increasing prevalence of organizations undertaking strategic transformation—and the increasing priority they place on it—is a direct result of these VUCA elements. The unfortunate failure rate, noted earlier, among those efforts is also a function of VUCA elements. It’s not easy to bring order out of chaos. For these reasons, management guru Peter Drucker observed,
One cannot manage change. One can only be ahead of it. In a period of upheaval, such as the one we are living in, change is the norm. To be sure, it is painful and risky, and above all it requires a great deal of very hard work. But unless it is seen as the task of the organization to lead change, the organization will not survive.10
In Drucker’s view, if you’re trying to “manage” change, you’ve already lost. He advised instead approaching transformation as a process of building an organization that perpetually manifests change, one that orchestrates agility from disruption as a source of advantage. That’s a main theme for this book.
Notes
1. Steve Denning, “Why Did IBM Survive?,” Forbes, July 10, 2011.
2. “Gartner Forecasts Worldwide IT Spending to Reach $4 Trillion in 2021,” press release, April 7, 2021, https://www.gartner.com/en/newsroom/press-releases/2021-04-07-gartner-f…; Behnam Tabrizi et al., “Digital Transformation Is Not about Technology,” Harvard Business Review, March 13, 2019.
3. Jeff Boss, “This Study Reveals Why Leaders Derail,” Forbes, May 16, 2018, https://www.forbes.com/sites/jeffboss/2018/05/16/this-study-reveals-why….
4. Lars Fæste et al., “Transformation: The Imperative to Change,” Boston Consulting Group, November 3, 2014; Scott Keller and Colin Price, Beyond Performance: How Great Organizations Build Ultimate Competitive Advantage (Hoboken, NJ: John Wiley & Sons, 2011).
5. Fæste et al., “Transformation: The Imperative to Change.”
6. Thanks to my friend and colleague Shad Morris for reinforcing this point.
7. Alan D. Meyer, Geoffrey R. Brooks, and James B. Goes, “Environmental Jolts and Industry Revolutions: Organizational Responses to Discontinuous Change,” in “Corporate Entrepreneurship,” special issue, Strategic Management Journal 11 (Summer 1990): 93–110.
8. Michael F. Kipp, “Strategic Leadership in Permanent Whitewater,” Handbook of Business Strategy 6, no. 1 (December 2005): 163–70.
9. Warren Bennis and Burt Nanus, Leaders: Strategies for Taking Charge (New York: HarperCollins, 1985).
10. Peter F. Drucker, Management Challenges for the 21st Century (London: Routledge, 2007).