Corporate Transformation Without A Crisis

Like individuals, organizations change continuously, reacting to developments in their markets and to the arrival and departure of key people. In a large company, these changes go on more or less unnoticed. But sometimes a company must change more quickly than this gradual evolution allows; it needs a break with the past, an accelerated pace of change'a transformation.

Successful corporate transformations and their leaders - Lou Gerstner at IBM, Ferdinand Pièch at VW, John Reed at Citibank - become the stuff of business legend. Transformed companies have achieved unprecedented competitive power, a pride in everything they undertake, and outsized returns to shareholders. What chief executive officer wouldn't want all of these things?

Rather oddly, it is the leaders of companies in crisis who may be best placed to achieve a true transformation. David Simon and John Browne could transform British Petroleum from one of Britain's weakest industrials into one of its strongest because the company faced imminent ruin. Steve Jobs rescued Apple Computer from collapse. By contrast, most transformations undertaken in noncrisis conditions end up failing: employees' attitudes and behavior remain unchanged, ambitious targets slip downward, and the program is finally abandoned, leaving the company worse off than it was before. Especially when things are going well, executives are justifiably reluctant to undertake transformation programs. They know that failure to act may condemn the company to slow decline and eventual collapse, but they also justifiably fear the uncertain outcome of a transformation process.

The leader of such a program faces a daunting challenge: nothing less than creating a new corporate reality that changes the way employees, customers, and investors perceive and experience the company. This future reality must be so clear and impressive that it seems not only better than today's reality but also necessary, even inevitable.

Principles of transformation

Can a company be transformed without first experiencing a crisis? We believe that the answer is yes if the leaders understand what makes individuals and groups transform their view of reality. The successful transformations we have encountered all met the four conditions described below; in every failure we have analyzed, at least one has been missing.

1. Everyone is both actor and observer

Transformations call for more than superficial levels of change: well-grooved habits must be questioned and discarded and new ones learned. But it is hard for people to achieve the objectivity needed to question and change their daily routine while they are still actively immersed in it.

Ronald A. Heifetz, an expert on leadership at Harvard's Kennedy School of Government, rightly observes that the leaders and participants in a transformation must combine frenetic activity on the "dance floor" with composed observation and reflection from the "balcony above."1 In our experience, however, corporate leaders in a transformation tend to stay on the floor and dance ever faster. Yet the full cognitive and emotional complexity of the transformation process can be managed only when its leaders have sufficient opportunities for reflective observation. In the long run, everyone with significant involvement in the company's transformation has to make a trip to the balcony.

The most energetic proponents of change are often naturally drawn to the balcony: nonexecutive directors who share financial analysts' point of view or new leaders recruited from outside the company largely because of their detachment. But in the absence of a crisis, this perspective is difficult for most senior managers to achieve'the pressure of day-to-day events renders detached observation a rare luxury'and if it is difficult for senior managers, it is much harder for rank-and-file employees. Yet without the balcony perspective, these employees will experience a transformation program as something imposed from above, and the program will fail.

2. Each individual crosses a threshold of conviction . . .

The transformation of a large company requires thousands of employees to adopt a new view of its future, a future they must regard as essential. Before employees can arrive at this deep conviction, three things must be absolutely clear to them.

First, the "why" of the transformation program, as well as the "why now," must persuade them; the benefits of success and the penalties for failing to act must be equally obvious. Second, the company's new future'the "where to"'must be clear and exciting to everyone. Third, each employee must understand the personal benefits of the program: the leadership must have credible answers to that natural question, "What's in it for me'" To inspire genuine conviction, the program's rationale and goal must withstand the toughest scrutiny from the most cynical observer right from the start.

3. . . . and of experience

We may have given the impression that leaders can create a compelling new reality simply by mustering the arguments in its favor'with the odd trip to the balcony to check on progress. But our experience of personal learning and transformation actually suggests that this picture is incomplete. Human beings master complex new activities (heart surgery, golf, cookery) not by reading or thinking about them but through experience. A corporate transformation too requires the rank and file to have direct, nonabstract experience, for leaders can't transfer their own through speeches, documents, and videotapes; each individual must re-create it personally. Leaders can, however, create a "disposition to experience," and later in this article we suggest several ways of doing so.

4. The process balances redundancy and control

Mistakes and surprises are inevitable in a transformation process. Industries don't stand still waiting for companies to transform themselves. Champions of the process become disenchanted and leave. Often the program reveals weaknesses that the company had not anticipated. Unless a transformation program is configured to accommodate these unwelcome surprises, it can all too easily come undone in midcourse. Such a failure can be disastrous, since a company whose transformation fails before it is complete rarely tries again.

Anticipating the unexpected when developing the program's design and resources can make failures less likely. Objective formal reviews of progress (reports from the balcony, so to speak) can help leaders spot problems before they become acute. Bringing more leaders into the program than are needed at each stage can improve the transformation's resilience to departures. Linking the compensation of managers to the program's success makes them less likely to leave when complications arise. Launching parallel initiatives in different parts of the company increases the chance that key ideas will survive. Finally, arranging meetings where people from different business units, divisions, or regions compare progress and perspectives makes it easier to identify and correct problems.

Stories of transformations

If these are the conditions of a successful transformation, what should leaders do to create them' To help individuals cross their threshold of conviction, the leaders must provide a "screenplay" for the drama to come'a story showing why the company must transform itself, where it is heading, and how it will get there. The story must be so convincing and vivid that its readers will want to help it come true. Effectively framed, such a story can help people strengthen their conviction and start experiencing "the new world" even before it arrives.

A transformation born of crisis writes its own story. Before a crisis hits, it is much harder to create an authentic story explaining why a company should transform itself. Nonetheless, even if a transformation isn't driven by a crisis, it is important to clarify and write down the story. Giving it this formal embodiment forces the top leadership of a company to think it through and ensures that its central elements will remain similar no matter who is actually telling it.

A transformation story is neither a writer's gimmick, such as a "retrospective from the future," nor an anthology of reflections from management sages. It is nothing like the mountains of documents and presentations that so often accompany change programs. The great transformation stories are often short, and some are surprisingly unpolished. We encourage top managers to write their transformation stories themselves rather than delegate the work to a communications unit or an advertising agency. Authenticity and directness are far more important to a story than are fine prose or clever visuals.

Although each story's specific form will vary, we envision a transformation story in three chapters, corresponding to the why, where, and how of the transformation.

Chapter 1: Why does the company need this'

Almost always, the story of a transformation acknowledges the events that triggered it: the company must take drastic action because its financial position is weak, say, or because the competition has gained in power, or because technology has revolutionized the industry. But these are often only symptoms of deeper problems. If the transformation process is to address those problems, they too must be included in the story, which must explain why and how the financial situation became weak, the competition gained strength, or the new technology blindsided the company.

Such brutal honesty is difficult and therefore rare, for it leads to awkward questions about the company's previous decisions and current leaders. But a shared understanding of the actual cause of the current state of affairs is essential to a transformation. Putting hard truths on the table makes some people uncomfortable, but avoiding those truths puts success at risk.

Chapter 2: Where is the company heading'

The second chapter, which calls for true creativity, outlines the company's future and makes it so convincing that it seems destined to happen. Many companies derive their "destiny" from the triumphs of other companies and from known facts: surveys, benchmarks, best practices. Such companies assemble their future piece by piece. But in our experience, a future that merely imitates what others have achieved, no matter how great their results, rarely inspires employees.

Instead, the company needs a genuinely new and superior idea for a product, a quality standard, a technology, or a managerial model. Such ideas vary from company to company, but in all cases they must be capable of giving it a decisive competitive superiority. Of course, companies can learn from their competitors. Nonetheless, the ideas that drive a transformation always move beyond what others know.

Chapter 3: How can the company reach its goal'

Returning to the realm of the practical, how can the company use the diagnosis of the first chapter and the new idea of the second to transform itself' There are many technical details to spell out concerning tasks, phases, timing, and responsibility. But while detail is important, it is not sufficient to answer the question of how the company will achieve its goals. Transformational learning comes, ultimately, from personal experience. The leaders' experience, which should be embedded in the story, must be internalized within every participant in the process. Each participant must undergo an "identity transition."

Although orchestrating thousands of these individual identity transitions is an enormous challenge, doing so will make the process of change self- sustaining. Once individuals begin to experience the early realities created by the transformation story, they will often try to do what it takes to complete it on their own.

Making it real

Getting thousands of people to move across that threshold of initial experience is undoubtedly the hardest task facing a management team that leads a corporate transformation. We have observed many situations in which a top-management group has discovered the causes of the present problems of a company and developed a convincing vision of its future. These leaders have captured that experience in a powerful transformation story and struggled to help many thousands of employees, business partners, and customers discover the logic of the transformation for themselves. After all, the company's leaders, as we have already noted, cannot know or experience anything on anyone else's behalf.

The challenge

Here the leaders face a contradiction. On the one hand, identity transitions must be highly personal, arising from real-life experience. On the other, the transformation won't succeed unless the transition is carefully choreographed from the center. Indeed, central leadership is essential to any transformation. Only a few people in most organizations have the stamina, ambition, and ideas to develop and communicate an effective transformation story. Only a powerful central group can guide the process through the risks and setbacks encountered during every transformation. Only central controls can prevent chaos. Ultimately, however, the transformation must proceed without central leadership. To acknowledge the need for a not-yet-existing reality is to make a conscious, free decision. Individuals must make this decision for themselves.

The most common approach to a large-scale transformation process involves central definition and management. That approach sometimes works in a crisis. To prevent the threatened closure of a factory, its workers may well accept draconian staffing cuts. To save a company from a hostile takeover, managers may allow core businesses to be sold. But without a crisis, these prescriptive methods run into trouble, for the shared conviction that permits a company to endure setbacks and complications can't be centrally imposed.

Hence the rise in recent years of attempts to use a "cascade" process'in which each round of discussions engages new people in a dialogue about the transformation'to persuade every organizational level of the need for radical change. Although this approach usually persuades more employees of the story's necessity than do prescriptive methods, it has practical drawbacks, especially in large organizations. It isn't easy to arrange conversations with 50,000 employees. As the cascade works its way down through the organization, the dialogue it creates loses spontaneity. Overstretched lower-level managers may have too little feeling for the transformation process to touch their audience. The leadership group may try to bypass them by using a video presentation, but the dialogue then turns into prescription.

Are there other ways to resolve the problem' The leadership group can't transform individuals, but it can do much to foster their readiness to accept a transformation. The leaders can remind people of past events to spur them to re-create former glories or, for that matter, to avoid former mistakes. They can encourage employees to visit other organizations to see and feel the new ways of working. And by painting a vivid picture of the future, they can give employees a feeling for a world that does not yet exist.

New approaches

Such actions create a disposition to embrace change. But do the leaders have to be personally involved in creating this disposition' Are there other ways to encourage the focused and disciplined patterns of dialogue, thought, and action that transformation entails' Some striking cases of success suggest that there are.

St. Luke's. Consider the case of an extraordinarily successful UK advertising agency, St. Luke's. Each of its clients has a specific room in the agency's building.2 Jointly designed by the client and the St. Luke's team, the room is filled with the collective knowledge of the client's situation, advertising campaigns, products, and so forth. Each client room in St. Luke's is different. The essence of the agency's knowledge is presented, sometimes on wall displays, sometimes in electronic form, and sometimes in the furniture and colors.

In each case, the room captures the work of the joint agency-client team in a way that others can see and personally experience. St. Luke's guarantees its clients 24-hour-a-day, seven-day-a-week access to its building if they agree to enter only their own client room, which thus becomes a place where executives and line managers at many levels can experience a new corporate identity. Each of these rooms, providing constantly changing yet concrete access to the joint view of reality envisioned by St. Luke's and the client, is far more tangible and immediate than the usual paper or slide campaign presentation.

Ford Motor. In the course of a sweeping global transformation program, Ford has developed a novel approach that fosters identity transitions. Drawing on the story drafted by the company's leaders, all managers, following a centrally defined process, develop individual interpretations of the task of change at Ford. This individual perspective, which Ford calls a "teachable point of view," provides the content of a workshop at which the next group of employees is encouraged to create its own teachable point of view.3 In principle, this process follows the cascade model, but prescribed elements (including detailed instructions for developing teachable points of view) can be used to form dialogues that are genuinely individual.

Johnson & Johnson. Despite years of success, the global heath care company Johnson & Johnson was concerned about avoiding IBM's experience during the 1980s, when it fell from a seemingly unassailable position to near collapse. IBM apparently had the right strategy "in the drawer" all along, but nobody asked the questions that would have prompted the adoption of the strategy.

So J&J's leaders designed a process called FrameworkS to ensure that the right questions were asked.4 The uppercase S in the name emphasizes the importance of bringing many diverse perspectives to the leaders' discussions'the views not just of managers but also of customers, artists, politicians, and so on, in a process that is simultaneously open and directed.

In a typical FrameworkS exercise, 10 to 12 people are invited to become temporary members of J&J's executive committee, which has 9 permanent members. The expanded group meets in a remote location for a full week to address a specific problem. The temporary members of the executive committee, often from the middle ranks of the corporation, are chosen for their ability to bring diversity to its discussions. No one at these meetings pulls rank, and no single opinion carries more weight than any other.

J&J then creates subcommittees and task forces, each directed to study and investigate a particular topic. Ultimately, hundreds of employees will join Ralph Larsen, the company's CEO, involving themselves in the transformation process and immeasurably widening the executive committee's perspective on what must be done.

Catalytic objects

In all three cases just described'and in virtually every successful transformation exercise we have seen in large companies'individual employees did not form a transformational outlook primarily as a result of personal interaction with the CEO. The crucial element is rather a personal experience of what we have come to call "catalytic objects," such as the St. Luke's client room, Ford's structured but freely teachable points of view, and J&J's FrameworkS conversations.

Catalytic objects are "objects" only in the sense that they can be described, deployed, and observed. They are nothing like the inspirational wall plaques or coffee mugs beloved of satirists. Catalytic objects in different transformation programs have almost no formal similarity, but they are similar in function: they help each participant in a transformation process develop a personal version of the story.

Because a catalytic object can be observed and discussed, it fosters the detached perspective that is crucial for deep adaptive change. Actors become observers. They can stand back from the company's past and prospects even as they shape those prospects. Catalytic objects serve to transfer knowledge and simultaneously make it possible to re-create experience. The sequential approach of "tell them the facts, then fire them up" gives way to a faster, more effective parallel process of discovery.

Finally, catalytic objects can be centrally shaped and their development in the organization centrally monitored. They provide the degree of control needed to keep a transformation process on track as well as the redundant message needed to overcome the inevitable noise and transmission failures from the executive suite to the front line.

Catalytic objects thus provide a bridge between a centrally developed transformation story and each individual's personal experience. They solve the problem of faithfully transmitting a critical central message through the vagaries of a cascading dialogue. They allow the transformation process to ring with freedom yet simultaneously to move within boundaries set by the leadership group.

We are only beginning to learn about the best ways to construct and deploy catalytic objects, but our confidence grows daily that they are the key to the "leadership without leadership" that is essential to a successful transformation program.

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In seeking to increase the success rate of corporate transformations, we are less concerned with the names of things ("transformation stories," "catalytic objects," and so forth) than with their functions. Many skilled transformation leaders use these approaches intuitively and implicitly, without a formal nomenclature.

The drama of each corporate transformation unfolds in a different way, and we would be the last people to prescribe a uniform script that must be followed in all cases. We are convinced, however, that success in corporate transformations is more than a matter of luck and that the art of leading them can be learned. In a turbulent competitive environment, this art may be the most important "core competence" of all.