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Emerald Group Publishing Limited
Copyright © 2008, Emerald Group Publishing Limited
Five ways to transform a business
Article Type: Quick takes From: Strategy & Leadership, Volume 36, Issue 3.
These brief summaries highlight the key points and action steps in the feature articles in this issue of Strategy & Leadership.
Osvald M. Bjelland and Robert Chapman Wood
A large number of well-documented business change/transformations have been studied and compared not only to the standard change model but also to non-mainstream ideas about transformation. The result: five distinct, reproducible ways (transformation processes) of radically altering organizations. Each has important strengths that make it appropriate for particular purposes. If a leader senses a need for major change, an understanding of the five ways will be an important aid to going forward.
The five transformation processes
Each approach is explained, including pro- and con- aspects.
Holism transformation following the standard model
The ambidextrous form
In practice, hybrid versions of the five change models occur when circumstances require. Furthermore, some leaders may use as many as three or four of the five transformation processes in turn to renew their company.
Choosing the right approach
It is possible to list four fairly simple questions that can sort out which of the five kinds of transformation are most likely to be appropriate for a particular company at a particular time.
Question #1. Can you clearly define the change you seek? If yes, even if it is just a partial picture, it’s worthwhile to consider three different ways of pursuing your goal:
A holistic transformation following the standard model of planned organizational change
Change through use of the ambidextrous form
Transformation through acquisition.
Question #2. Can you buy the competences you need?
If yes, then acquisition may be central to transformation. If no, ask the third question.
Question #3. Must the whole organization be transformed, or will a core continue to exploit the old ways? If the whole is to be transformed, use the standard change models, practicing holism. If a core will pursue old ways, use the ambidextrous form, creating different kinds of units for different jobs.
Question #4. If you cannot define the desired change clearly, then ask: Should you pursue a new but stable positioning or a capability for continuing strategic revolution?
If you seek a new, stable position, follow Collins’ Good to Great process.
If you need continuing revolution, pursue improvisational transformation: Improvise, then learn from what works.
Regardless of which course is adopted, managing transformation requires alertness about whether the path chosen is the right one, and a non-dogmatic willingness to change. In industries that reward adaptability to change, understanding paths of business transformation is an essential leadership skill.
Case: Sun Ray’s struggle to overcome innovation traumaJay Moldenhauer-Salazar and Liisa Välikangas
Until now there has been little attention paid to the emotional costs of innovation failures, and in particular, how prior innovation failures hinder subsequent new, related innovation. The saga of Sun Microsystems’ Sun Ray computer illustrates the devastating impact of institutional innovation failure trauma.
The new Sun Ray offering replaced the earlier JavaStation product. As it was launched, the Sun Ray endeavor encountered the classic “innovator’s dilemma” problems that are well known to those who attempt to champion disruptive innovations. The result: despite its many strong competitive advantages, the Sun Ray computer has unsuccessfully struggled to catch hold with customers. To a large degree the causes are Sun Microsystems’ inability to learn from its earlier innovative JavaStation failure and to recover from the trauma of that failure.
In organizational literature, trauma is seen as a possible byproduct of discontinuous change, such as downsizing, that has a high personal cost. A crisis that necessitates severe measures for which the organization (and consequently, its employees) is not prepared will likely cause trauma. The intense negative impact of trauma is far reaching.
Therefore, managers need to address the conditions under which innovation is likely to cause trauma. The Sun Ray case cannot fully define these conditions but it can suggest the existence of the phenomenon and guide its discovery. With innovation trauma, there is the personal devastation that innovators feel, often together with a team of colleagues. This situation potentially leads to a degree of hopelessness about whether innovation will ever work in the company. Interestingly, as the Sun Ray case suggests, major parts of the organization can experience innovation trauma together.
Causes of innovation-failure induced trauma
Based upon the study of Sun Ray, some notable sources of innovation trauma are discussed:
Unrealistic expectations of success.
Loss of control.
Six ways to minimize innovation trauma
Going forward, learn from others’ mistakes: sensitized managers to practices that are detrimental to derailing innovation teams at critical junctures. And, beyond avoiding such damaging mistakes, develop proactive management practices to prevent major trauma and consequent innovation paralysis. Six ways to do so are offered.
Case: How El Al Airlines transformed service strategy with employee participationRam Herstein and Yoram Mitki
The El Al Airline case study suggests that any attempt by a company to change its service culture and to reach high-quality standards should be led by a planned strategy, which fully involves employees, utilizing their knowledge and experience.
The logic followed was this: adopting a new service culture required the cooperation and training of the company’s 6,000 employees. The first step in the process of changing their employees’ behavior patterns was an in-depth analysis of current service. This study revealed that El Al had a reputation for providing poor service and not fulfilling the needs and expectations of its passengers. Intensive attempts in recent years to improve service had not led to any fundamental enhancement in the company’s image. Also found was that line managers regarded employees as a tool to be exploited and easy to be replaced.
El Al management realized that in order to create a new service culture it must treat its employees as a critical resource, and obtain their cooperation and involvement in achieving the new objectives. The management, therefore, adopted the following four guiding principles:
Employees are the company’s most valuable assets.
Employees and management share a common goal and, therefore, must work together harmoniously and cooperatively.
Rewards and incentives are essential tools for motivating employees and encouraging initiative and excellence.
Employee participation is a key factor in the creation of a premium-service culture. Under this approach, company employees would use their unique perspective of the pre-flight, in-flight, and post flight experience to help design the new service and become “ambassadors” of the new culture.
Lessons and applications
El Al gave new significance to the concepts of stakeholder participation and cooperation by deciding to shape the new service culture together with its employees (internal customers), who would than transmit this new culture to the service-receiving community (external customers). The exercise proved that company employees know customer needs very well, and their rich experience enabled them to transform management’s service vision into an action program. Accordingly, the cooperation of the employees also shortened the time period required to transform the existing culture. Such cooperation created trust between them and the management, and removed communication barriers and pockets of resistance that generally make it difficult to carry out significant changes.
The Sears acquisition: a retrospective case study of value detectionJoseph Calandro Jr
Many M&A deals create shareholder losses because the acquiring company paid too much or the selling company under priced their business. This case introduces the base-case-valuation concept, which is derived from the modern Graham and Dodd valuation methodology, familiar to alternative investment firms, such as hedge funds but seemingly little known in corporate M&A circles. It demonstrates how base-case-valuation could be utilized in M&A by way of a case study of the Sears acquisition in 2004.
The Sears acquisition deal offers valuable lessons:
Corporations that evaluate acquisitions only through the use of traditional valuation techniques, such as equity multiples, miss strategic knowledge.The Graham and Dodd (G&D) method assesses value along a unique continuum structure, which facilitates focused valuations of assets (NAV), earnings (EPV), competitive advantage (franchise value), and growth in the context of one overall framework. The comprehensive nature of that framework reveals embedded elements of value, which at times can be underestimated or overlooked by practitioners of traditional forms of valuation. The identification and exploitation of overlooked value could be a contributing factor to M&A successes, such as the Sears acquisition.
Companies that engage in deals with alternative-investment firms using the G&D method will need to understand how they are computing value.A detailed analysis of Sears’ net asset value and earning power value (two of the four levels in the G&D analysis) are presented, illustrating the mechanics and demonstrating how embedded elements of value can be effectively identified and quantified.
The modern G&D approach can be successfully employed in M&A and be utilized in the formulation of an M&A-negotiating strategy, shareholder-communication plan, and performance-improvement plan.
In practice, many valuations stop after just two levels of value because many companies do not operate with a sustainable competitive advantage. When NAV and EPV turn out to be relatively close, as they did in the Sears case, that pattern can be referred to as base-case-value because the companies that reflect it are generating profits consistent with the cost of their capital and, as such, are valued at a level that is relatively consistent with the reproduction value of their assets. Despite the common occurrence of base case value, that pattern can present a lucrative M&A opportunity, if the acquisition is priced appropriately. The Sears acquisition proves this point.
The eight principles of strategic authenticityB. Joseph Pine II and James H. Gilmore
What do consumers really want? Value, yes. To enjoy the experience of their purchase, yes. But, as more companies wrap their offering with “an experience”, it is important that authenticity is understood to be a critical consumer sensibility. In a world where purveyors of goods and services increasingly offer deliberately and sensationally stage purchasing experiences and ill-conceived innovations, consumers often choose to buy or not buy based on how genuine they perceive an offering to be. Any fakery, phoniness, or manipulation that becomes associated with your offering will harm the brand.
Executives must therefore learn to understand, manage, and excel at delivering authenticity. Pushing employees to do the impossible and forcing customers to view a completely “new you” means that you, as a company, are aiming outside of the realms of possibility for what you are today. Moreover, it means forgoing those possibilities that are both profitable and perceived as authentic.
So how can leaders tell the difference between bogus and authentic business opportunities without having to suffer through a customer rebellion, storm of bad press, and stockholder disaffection? Offered is a short case study of the Walt Disney Company, a global experience powerhouse, to show that authenticity will not result when a company strives for a strategic position that is not achievable.
Understanding strategic limits
The execution zone is the set of decisions and actions that a company can make and still be perceived as true to self. For companies that try to operate outside their execution zone there is little likelihood that the resultant offerings will be perceived as authentic.
Defining your execution zone
With the Disney lesson in mind, use the following eight principles to guide you in delineating where exactly your own “execution zone” lies, and thereby stake out viable, powerful, and compelling competitive positions strategies that are both achievable and authentic.
Study your heritage.
Assess industry growth positioning.
Gauge your trajectory.
Know your limits.
Stretch your execution capabilities.
Scan the periphery.
Formulate your strategic intention.
Bottomline: To discover your company’s authentic opportunities, use the eight principles to peer into your future until you determine where you should go. And then treat that future not as a destination but as a guide to the path before you. Such a process provides the best means of ensuring you not only have a future but that it will be an authentic, vigorous, and prosperous one.
Defending corporate reputation from litigation threats Helio Fred Garcia and Anthony Ewing
Class action litigation has the potential to severely damage the image customers have of a company (brand), often with calamitous consequences for its strategy. Such risks increase when the plaintiff is represented by some of the more aggressive and sophisticated lawyers. Often these lawyers use all of the instruments of influence to embarrass and persuade large corporations to settle large lawsuits before they ever reach a courtroom.
Companies that cede the litigation communication advantage to their adversaries commit a fundamental mistake. They fail to understand the threat they face.
Corporations facing class action litigation need to understand two essential principles in order to protect themselves from such aggressive and determined adversaries:
It is more than a legal fight.
Plaintiffs’ lawyers count on corporate defendants to act (and communicate) in predictable and often counterproductive ways.
It’s more than a legal fight
Litigation (and all supporting communication) is at its core a battle for the hearts and minds of the stakeholders. It is a simultaneous public relations and political war being waged against the defendant company. The company must show up to defend itself on all fronts. For example, when journalists cover litigation, their purpose is not to seek justice but to tell an interesting story that their audience will want to read or watch. In turn, public awareness and sympathy draw the attention of politicians, who may decide to take sides or even promote legislation.
Plaintiffs’ lawyers count on corporate defendants to act (and communicate) in predictable and often counterproductive ways
Plaintiffs’ lawyer tactical plans include: 1) striking at the point of least expectation and least resistance; 2) keeping the opposition off balance; 3) seizing, retaining and exploiting the initiative; and 4) using the opposition’s strength against it.
How to defend reputation in litigation
Understand the context of the fight.Litigation is a business problem with many elements legal, reputational, financial and operational.
Identify the likely assault.Draft definitive, compelling refutation to the likely assault, and do it fast.
Pre-empt your adversary.To succeed, corporate leaders should plan to: seize, retain, and exploit the initiative to define both the position of your adversary and that of your organization before the adversary does.
Act quickly to control the terms of the discussion.
Communicate forcefully.There is lots of room to maneuver between self-defeating silence and self-destructive bluster.
Catherine GorrellPresident of Formac, Inc. a Dallas-based strategy consulting organization (firstname.lastname@example.org) and a contributing editor of Strategy & Leadership.