Developing skills in strategic transformation

Citation

Stockport, G.J. (2000), "Developing skills in strategic transformation", Measuring Business Excellence, Vol. 4 No. 4. https://doi.org/10.1108/mbe.2000.26704daa.005

Developing skills in strategic transformation

Developing skills in strategic transformation

Did you ever hear the story about the newly appointed CEO who is handed three sealed letters containing advice from the previous incumbent? He is advised to open each of them in turn but only when the organisation faced a strategic crisis. Shortly after his appointment, the first strategic crisis appears and tearing open the first letter he finds the advice, "Blame your predecessor". This he does, and the crisis quickly subsides. Some two years later, a second strategic crisis arises and the CEO hurriedly opens the contents of the second letter which suggests that he should "implement a new strategic planning system". He does this and disaster is again thankfully avoided. About five years go by and he faces yet another strategic crisis. The CEO deliberates for a while about whether he should open the third envelope or try and avert the crisis himself. But the crisis is of such epic proportion that he decides to open the third envelope which advises him to "prepare three envelopes". A number of lessons can be learned from this story such as strategic crises and transformation are a recurring part of business life. Furthermore, it may prove wise for organisations to try to transform themselves strategically before rather than after a crisis arrives. What is missing from the tale, however, is how the CEO could have developed his skills in strategic transformation and how they might have been fine-tuned over time. Consequently, this article intends to be of practical use to any manager who must develop these skills. This is achieved through discussing two case studies, Marks & Spencer and Intel, and these provide contrasting examples of how organisations can either be reactive or proactive in managing strategic transformation. Lessons learned from these cases are pulled together in order to come up with a number of questions/statements that interlink and combine to form a strategic transformation framework.

Defining strategic transformation

Business history has become a graveyard of former business success stories that have failed. It has been found that in 1991, between 60-70 per cent of the Fortune 100 largest global companies did not exist at all or in any form similar to what they were like in 1970 (Hamel and Prahalad, 1995). Trying to identify the reason(s) why they failed has become a major preoccupation of many business school academics. Unfortunately, what we are left with is a number of possible hypotheses and a number of lessons learned in hindsight typically after a business has failed. But any manager will tell you that managing is not about managing in hindsight, but rather is about learning from the past, managing the present and preparing for the future. This distinction is key for defining and understanding strategic transformation. Strategic transformation is about the ability of an organisation to transform itself to ensure long-term survival. This suggests a radical change in the markets and customers an organisation serves and the products and/or services it offers. Furthermore, it implies a major change in internal matters such as structure, systems, staffing and perhaps, even culture. The accepted wisdom and way of doing things within an organisation may have to change in order for it to survive.

Organisational lifecycle

Figure 1 shows that an organisational lifecycle is typically S-shaped and Handy (1994) calls this type of curve a sigmoid curve. Handy makes the point that this same S-shaped analogy can be made for a product lifecycle or even a managerial career. Figure 1 shows that an organisation grows up to point (A) but eventually starts to wither and die at point (B). From a strategic transformation standpoint, point (A) is the most important point on the curve because it represents the last point possible for an organisation to transform itself strategically before it starts to wither. After point (A), strategic transformation will be reactive rather than proactive and the organisation will be forced to change. Hamel and Prahalad (1994) argue that the successful organisations of the future will be foresightful and opportunistic rather than reactive. Grove (1997) defines point (A) as a strategic inflection point and it is at this point an organisation will either grow to new heights or it will decline. Therefore, it is important for managers to agree that their organisational lifecycle is probably S-shaped too and they must make a judgement as to where they are on the curve.

Figure 1 - Organisational lifecycle

...From a strategic transformation standpoint, point (A) is the most important point on the curve because it represents the last point possible for an organisation to transform itself strategically before it starts to wither. After point (A), strategic transformation will be reactive rather than proactive and the organisation will be forced to change...

By point (A) I do not mean a particular point in time but rather a strategic window of time, an opportunity during which strategic transformation can take place. This strategic window of time could be months or years. Grove (1997) makes a telling point when he discusses the changes which took place from the old vertical computer industry structure (around 1980) where organisations such as IBM were vertically integrated from manufacturing chips and computers to having their own operating system, application software and sales and distribution to the new horizontal computer industry structure (about 1995) where organisations specialised on a particular part of the vertical chain e.g. Compaq and Dell in the manufacture of computers. This radically changed the rules of the game within the industry and organisations had to change their strategy away from offering a full range of services for particular clients to one based on market share growth and economies of scale. He says:

Even in retrospect, I can't put my finger on exactly where the (strategic) inflection point took place in the computer industry. Was it in the early 80s, when PCs started to emerge? Was it in the second half of the decade, when networks based on PC technology started to grow in number? It's hard to say (pp. 42-3).

But what happens if an organisation resists the temptation to change and ends up at point (B) in Figure 1. Here, it typically attempts to make short-term operational improvements but Porter (1996) argues there is a productivity frontier that represents the sum of all existing best practices at any given time. For example, there may be a maximum manufacturing output capability using state-of-the-art technology and this technology can be purchased by me-too competitors. Consequently, longer term survival will only be possible through strategic transformation. Furthermore, at point (B), people become far more resistant to change. They distrust the organisation when rumours start to circulate about possible job losses and drag their feet when senior management calls for commitment to any proposed changes. Unfortunately, when this happens, strategy within an organisation becomes political rather than creative and innovation becomes stifled.

The art of strategic transformation

I label strategic transformation an art because organisations, like people, become better at doing something with continual practice over time. When learning to drive a car all learners move through the four sequential stages:

1. 1.

   unconscious incompetence;

2. 2.

   conscious incompetence;

3. 3.

   conscious competence; and

4. 4.

   unconscious competence.

Similarly, I believe that when organisations are developing the art of strategic transformation they too move through these four organisational mindset changes as denoted in Figure 2. An organisation does not suddenly become strategic. These are skills that are learned, developed, fine-tuned and even acquired. In order for strategic transformation to become an art it must become part of the unconscious competence mindset of the organisation. During stage 1, unconscious incompetence, organisations have no strategic transformation skills and are not even aware of their importance. Over time, they become aware of their significance (stage 2, conscious incompetence) although they are still not developed. During stage 3, they develop a conscious competence in strategic transformation that could happen, for example, through introducing a strategic planning system and learning from it. Finally, strategic transformation becomes a natural way of managing the organisation and a part of everyday business life. Strategic transformation becomes part of their unconscious competence, stage 4.

Figure 2 - The art of strategic transformation

The following considers two contrasting examples of how organisations can either be reactive or proactive in managing strategic transformation.

Marks & Spencer– the Grande Dame of British retailing

It is a little surprising to me that Marks & Spencer now provides an example of an organisation that has been reactive to the need for strategic transformation and this was hardly thinkable a couple of years ago. It had always been known as the Grande Dame of British retailing and had a brand name synonymous with quality mass merchandise clothing and food and value for money. Marks & Spencer shares had always been viewed by the UK financial institutions as safe and steady shares based on their yearly incremental growth in financial performance. But the facts speak for themselves. Pre-tax profit for 1998-99 has fallen by some 40 per cent compared with the previous financial year and the share price has fallen from 660p to around 400p (Cape Times Business Report, 1999). As one employee said (UK Management Today, 1999):

We find ourselves having to redefine who we are and what we stand for.

Since becoming CEO in February 1999, Peter Salisbury, has sacked nearly a quarter of the company's senior managers. Applying the S-shaped sigmoid curve to Marks & Spencer (Figure 3) shows that it has strategically transformed itself in the past. Derek Raynor modernised Marks & Spencer when he took over in 1983 (point (A)) and turned it from what had been akin to a family company into a plc. Sir Richard Greenbury, on the other hand, professionalised the company from 1988 (point (B)) and made the company far more aware of the need for greater financial and operational controls. One of his first acts was to fire 600 staff. So, where did the company go wrong? Figure 3 also shows a new dotted curve beginning at point (C) and the old curve continuing on until point (D). In reality, Marks & Spencer had missed the opportunity to transform itself strategically at point (C) and found itself having to be reactive at point (D).

Figure 3 - Marks & Spencer

Looking for clues

There are many clues as to why Marks & Spencer did not read the signals for change and did not radically alter its strategy. First, its long track record of financial success probably led to inbred complacency. Second, its brand image had led it to bask in the admiration of the UK financial institutions, its retailing peers and the loyalty of its customers for years. Third, its philosophy that Marks & Spencer was a tribe had encouraged their staff to stick together even outside work. This had resulted in a lack of diversity within the company and a lack of will to challenge the accepted wisdom and way of doing things. Fourth, some of their business principles could be challenged such as the long-term refusal to advertise. Fifth, some of the strategic decisions regarding overseas purchases such as Brooks Brothers in the USA in 1988 or the move into Canadian chain stores were questionable. Sixth, it can be suggested that the Greenbury legacy of implementing controls had resulted in over control from the centre and a lack of decentralisation and empowerment. Seventh, the company had overly ambitious plans for growth from 1998 through massive investment (some US$3 billion over three years) in order to increase selling space by nearly 25 per cent. The company wrongly assumed that trading from its established businesses would be sufficient to underpin the company's financial needs during this period of planned expansion. Eighth, there had been worries that Marks & Spencer had lost its way in buying, and womenswear, in particular, was starting to look drab. Ninth, it had failed to monitor and assess its competitor threats properly and different competitors had been nibbling away at its clothing and food segments for some time and some had now become major competitor threats.

...… its philosophy that Marks & Spencer was a tribe had encouraged their staff to stick together even outside work. This had resulted in a lack of diversity within the company and a lack of will to challenge the accepted wisdom and way of doing things…...

For example, Gap Inc. (from the USA) had stolen market share in the UK in the up-market branded fashion segment which appeals more to young and trendy customers who want to wear fashion labels. They also offer a more attractive shopping experience compared with Marks & Spencer. In their food segment, which accounted for around 40 per cent of UK sales, it now faced strong competition from UK market leaders Tesco and Sainsbury and Marks & Spencer had also lost their competitive price advantage to deep discounters. Finally, it had long been felt that customer services were lacking within Marks & Spencer and it did not accept credit cards apart from their own. Clearly, many reasons can be put forward for why Marks & Spencer was unable to read the signals for change or could not strategically transform itself. What is perhaps most important, however, is what appears to be a lack of a strategic transformation mindset within Marks & Spencer. The lack of an inner shared belief within the organisation that markets and customers do change and will change and the company needed to change the way it thought about mass merchandising.

Starting to challenge accepted wisdom

The initial responses to the deterioration in financial performance were primarily operational changes such as curtailing investment, reducing quantities ordered from suppliers and decreasing headcount. Nevertheless, there are hints that the new CEO, Peter Salisbury, is starting to question the accepted wisdom and way of doing things within Marks & Spencer. For example, they introduced a post-Christmas television advertising campaign and he has started to devolve power down the organisational structure through reducing from eight to seven the lines of management from Salisbury to directors to senior managers to staff on the tills. Perhaps, more interesting, is his suggestion that store managers should think of themselves more as franchisees and should have much more input as to which products are put on the shelves. It has also been suggested that they should sell designer brands. All these possibilities are interesting but they fall a long way short of a strategic transformation mindset – a general strategic thinking mindset within the company that challenging the accepted wisdom and way of doing things is a natural, everyday matter for which everybody should have responsibility. Implementation should be a natural follow-on from this mindset.

INTEL – the foresightful innovator

The Intel case provides a contrasting example to Marks & Spencer in that it has been far more proactive in trying to determine where on the S-shaped sigmoid curve the organisation lies and it has had the leadership foresight as well as the courage to change. Figure 4 shows three strategic inflection points in the organisation's history (and present) and Intel is currently approaching point (C). The company has strategically transformed itself at point (A) (manufacturing computer chips) and point (B) (microprocessors) and, at the time, the strategic transformation to microprocessors was seen as being very risky (Corcoran, 1999).

Figure 4 - INTEL

Moore's Law

From point (B), the pace of growth at Intel has fitted in with Moore's Law. Gordon Moore, one of Intel's founders, but at the time then head of Fairchild Semiconductor Research and Development Laboratory, proposed a principle concerning the pace of semiconductor advances. This law states that the number of transistors on a semiconductor chip doubles approximately every 18-24 months (Yu, 1998). For microprocessors, the doubling of transistors has typically occurred every 24 months but the speed of growth has begun to peter out. For example, Pentium III has 9.5m transistors and growth has only risen 27 per cent in the last two years. There was also a growing realisation that customers no longer needed to keep upgrading to the latest and most powerful PCs.

Strategic leadership

Without doubt, Andy Grove has been a foresightful strategic leader since Intel's inception and this has resulted in a continual search into future possibilities and opportunities. No organisation can predict the future but they can predict a future that is plausible within the boundary of technology advances (using perhaps, Moore's law as a guide) and possible changing customer needs. Intel's new CEO, Craig Barrett, is not strategically transforming the company away from microprocessors (in 1998, they contributed 80 per cent of Intel's US$26 billion sales and all $6 billion profits) but they are developing two more legs on its strategic stool; networking chips for digital communications; and services that will underpin e-commerce (point (C)). In effect, Intel is trying to invent its future rather than having to react to it. In March 1999, Intel acquired Level One Communications, a leader in network-chip technology. About a month later, it announced a deal with Excite to build a Web-based shopping service. It has also put aside some US$11 billion for investing stakes in start-ups and some notable examples are a toy retailer, Etoys, and Inktomi, a developer of Web-searching technology. By pro-actively thinking ahead as to where the next strategic inflection point could be, Intel has had the time to monitor market signals carefully and assess their significance before also acting in time.

Strategic transformation framework

What are the lessons learned from the two cases for developing a strategic transformation framework? I think a number of questions/statements can help managers to fine-tune their strategic transformation skills. Figure 5 shows they are interlinked and combine to form a strategic transformation framework. The figure shows there is no starting or ending point and all parts of the framework are very important. This tool intends to be of practical use to managers.

Figure 5 - Strategic transformation framework These questions/statements are:

• •

  Market and financial data that shows a slowing in the rate of growth in sales provides a signal that your market may be changing. This data needs to be analysed in market segment categories, e.g. womenswear at Marks & Spencer. The more up-to-date and quicker the data becomes available to senior managers, the more useful it will be. You should implement information systems that capture data at point-of-sale.

• •

  Practice against a logical extrapolation of the data and rely, in part, on anecdotal observations and your instincts. Have the courage to back your gut-feel. Wisdom is priceless and reward wisdom within your organisation.

• •

  Practice a deliberate process within your organisation of inventing possible futures. Develop scenarios that are plausible within the boundary of existing and future technology and possible changing customer needs. For instance, will there really be a need for Marks & Spencer to have physical buildings for customers to shop in the future? If not, how can their existing strong brand that is associated with quality be used to entice their existing customers as well as new ones to shop via e-commerce? Will you be able to browse through a Marks & Spencer shop on your PC in the future? My answer is yes! At the current time, Marks & Spencer's property portfolio is valued at more than US$7.5 billion. What will be their value if buyer channels change to shopping via e-commerce? Considerably less, I would argue and the timing of the selling of shop properties over time will be a very important strategic decision for Marks & Spencer. Just like it will be for other shop retailers.

• •

  Continually match each scenario with what is actually happening in the market environment. Is the future starting to mingle with the present? What do you have to change within your organisation in structure, systems, staffing and perhaps, even culture? How fast do you have to change? Do you have to overcome resistance to change? If yes, how will you do this?

• •

  Continually monitor your environment. Listen to your sales staff. Talk to your customers. Watch your existing competitors. What did you learn from attending the latest trade exhibition? What are the trade journals telling you? Are there any new entrants? If yes, how are these new entrants serving the market differently and perhaps, better than you are? Do they indicate that the rules-of-the-game are starting to change?

• •

  Develop a culture within your organisation that strategic transformation will be necessary for your continued survival. This mindset could be initially fostered through researching case histories of former great companies that have subsequently failed. Invest huge time and resources to develop this mindset and it is part of everybody's responsibility (and daily job) to have this. Over time, this will become part of the unconscious competence of the organisation. Promote your staff on the basis of their strategic transformation skills. Do not lose these staff to competitors as they are key strategic assets.

• •

  Bring-in new blood into the organisation at all levels. Encourage them to challenge the accepted wisdom and way-of-doing-things. Encourage dissent and constructive conflict.

• •

  Organisations must have visionary, strategic leaders like Andy Grove at Intel. Visions must also be linked to core values within organisations (Collins and Porras, 1994). Organisations must also havethe courage to change. Even if the present is great, the future is just around the corner!

Grove (1997) concludes:

Now, nobody will ring a bell to call attention to the fact that you are entering into such a (strategic) transition. It's a gradual process; the forces start to grow and, as they do, the characteristics of the business begin to change. Only the beginning and the end are clear; the transition in between is gradual and puzzling … What such a transition does to a business is profound, and how the business manages this transition determines its future (pp. 31-2).

Conclusions

This article argues that in order to ensure their longer term survival, organisations must develop skills in strategic transformation. This means more than simply implementing a strategic planning system and it involves a realisation that markets and customers will radically change. It is clear from the two case studies that strategic crises and transformation are a recurring part of business life and organisations can either be reactive or proactive in managing strategic transformation. An organisation's strategic transformation skills must become part of their unconscious competence, i.e. a natural way of managing the organisation and a part of everyday business life. Intel provides an example of an organisation that has fine-tuned its strategic transformation skills over time under the strategic leadership of Andy Grove and Craig Bartlett. How well is your organisation doing?

Gary J. StockportUniversity of Cape Town, Cape Town, South Africa

References

Cape Times Business Report (1999), "Marks & Spencer's annual profit slumps 40%", 19 May, p. 16.Collins, J. and Porras, J. (1994), Built to Last: Successful Habits of Visionary Companies, Century, London.Corcoran, E. (1999), "Reinventing INTEL", Forbes, 3 May,pp. 154-9.Grove, A. (1997), Only the Paranoid Survive: How to Exploit the Crisis Points that Challenge Every Company and Career, HarperCollins, London.Hamel, G. and Prahalad, C.K. (1994), Competing for the Future, Harvard Business School Press, Boston, MA.Hamel, G. and Prahalad, C.K. (1995), Competing for the Future, Harvard Business School Management Productions Video, Boston, MA.Handy, C. (1994), The Empty Raincoat: Making Sense of the Future, Hutchinson, London.Porter, M. (1996), "What is strategy?", Harvard Business Review, November-December, pp. 61-78.UK Management Today (1999), "King Richard: a tragedy in Three Act", April, pp. 78-85.Yu, A. (1998), Creating the Digital Future: The Secrets of Consistent Innovation at Intel, Free Press, New York, NY.