Transforming Organizations: Why Firms Fail
Transforming Organizations: Why Firms Fail
The following is a summary taken from the opening chapter in “Leading Change” by John P. Kotter.
By any objective measure, the amount of significant, often traumatic, change in organizations has grown tremendously over the past few decades. Although some people predict that most of the reengineering, re-strategizing, mergers, downsizing, quality efforts, and cultural renewal projects will soon disappear, I think that is highly unlikely. Powerful macroeconomic forces are at work here, and these forces may grow even stronger over the next few decades. As a result, more and more organizations will be pushed to reduce cost, improve the quality of products and services, locate new opportunities for growth, and increase productivity.
To date, major change efforts have helped some organizations adapt significantly to shifting conditions, have improved the competitive standing of others, and have positioned a few for a far better future. But in many situations the improvements have been disappointing and the carnage has been appalling, with wasted resources and burn-out, scared, or frustrated employees.
To some degree, the downside of change is inevitable. Whenever human communities are forced to adjust to shifting conditions, pain is ever present. But a significant amount of the waste and anguish we’ve witnessed in the past decade is avoidable. We’ve made a lot of errors, the most of which are these.
Error #1: Allowing Too Much Complacency
By far the biggest mistake people make when trying to change organizations is to plunge ahead without establishing a high enough sense of urgency in fellow managers and employees. This error is fatal because transformations always fail to achieve their objectives when complacency levels are high.
If complacency were low in most organizations today, this problem would have limited importance. But just the opposite is true. Too much past success, a lack of visible crises, low performance standards, insufficient feedback from external constituencies, and more all add up to ”Yes, we have are problems, but they aren’t that terrible and I’m doing my job just fine,” or “ Sure we have big problems, and they are all over there.” Without a sense of urgency, people won’t give that extra effort that is often essential. They won’t make the needed sacrifices. Instead they cling to the status quo and resist initiatives from above. As a result, reengineering bogs down, new strategies fail to be implemented well, acquisitions aren’t assimilated properly, downsizings never get at those least necessary expenses, and quality programs become more surface bureaucratic talk than real business substance.
Error #2: Failure to Create a Sufficiently Powerful Guiding Coalition
Major change is often said to be impossible unless the head of the organization is an active supporter. What I am talking about here goes far beyond that. In successful transformations, the president, Division General Manager, or Department Head plus another five, fifteen or fifty people with a commitment to improve performance pull together as a team. This group rarely includes all of the most senior people because some of them just won’t buy in, at least at first. But in the most successful cases, the coalition is always powerful – in terms of formal titles, information, and expertise, reputations and relationships, and the capacity for leadership. Individuals alone, no matter how competent or charismatic, never have the assets needed to overcome tradition and inertia except in very small organizations. Weal committees are usually even less effective.
Efforts that lack a sufficiently powerful guiding coalition can make apparent progress for a while. The organizational structure might be changed, or a reengineering effort might be launched. But sooner or later, countervailing forces undermine the initiatives. In the behind-the-scenes struggle between a single executive or a weak committee and tradition, short-term self-interest, and the like, the latter almost always win. They prevent structural change from producing needed behavior change. They kill reengineering in the form of passive resistance from employees and managers. They turn quality programs into sources of more bureaucracy instead of customer satisfaction.
Failure here is usually associated with underestimating the difficulties in producing change and thus the importance of a strong guiding coalition. Even when complacency is relatively low, firms with little history of transformation or teamwork often undervalue the need for such a team or assume that it can be led by a staff executive from human resources, quality, or strategic planning instead of a key line manager. No matter how capable or dedicated the staff head, guiding coalitions without strong line leadership never seem to achieve the power that is required to overcome what are often massive sources of inertia.
Error #3: Underestimating the Power of Vision
Urgency and a strong guiding team are necessary, but insufficient conditions for major change. Of the remaining elements that are always found in successful transformations, none is more important that a sensible vision.
Vision plays a key role in producing useful change by helping to direct, align, and inspire actions on the part of large numbers of people. Without an appropriate vision, transformation effort can easily dissolve into a list of confusing, incompatible, and time-consuming projects that go in the wrong direction or nowhere at all. Without a sound vision, the reengineering project in the accounting department, the new 360-degree performance appraisal for human resources, the plant’s quality program and the cultural change effort in the sales force either won’t add up in a meaningful way or won’t stir up the kind of energy needed to properly implement any of these initiatives.
Sensing the difficulty in producing change, some people try to manipulate events quietly behind the scenes and purposefully avoid any public discussion of future direction. But without a vision to guide decision making, each and every choice employees face can dissolve into an interminable debate. The smallest of decisions can generate heated conflict that saps the energy and destroys morale. Insignificant tactical choices can dominate discussions and waste hours of precious time.
In many failed transformations, you find plans and programs trying to play the role of vision.
In unsuccessful transformation efforts, management sometimes does have a sense of direction.
A useful rule of thumb: Whenever you cannot describe the vision driving a change initiative in five minutes or less and get a reaction that signifies both understanding and interest, you are in for trouble.
Error #4: Under-communicating the Vision by a factor of 10 (or 100 or even 1,000)
Major change is usually impossible unless most employees are willing to help, often to the point of making short-term sacrifices. But people will not make sacrifices, even if they are unhappy with the status quo, unless they think the potential benefits of change are attractive and unless they really believe that a transformation is possible. Without credible communication, and a lot of it, employees’ hearts and minds are never really captured.
Three patterns of ineffective communication are common, all driven by habits developed in more stable times. In the first, a group actually develops a pretty good transformation vision and then proceeds to sell it by holding a few meetings or sending out only a few memos. Its members, thus having used only a small fraction of the yearly intracompany communication, react with astonishment when people don’t seem to understand the new approach. In the second pattern, the head of the organization spends a considerable amount of time making speeches to employee groups, but most of her managers are virtually silent. Here vision captures more of the total yearly communication than in the first case, but the volume is still woefully inadequate. In the third pattern, much more effort goes into newsletters and speeches, but some highly visible individuals still behave in ways that are antithetical to the vision, and the net result is that cynicism among the troops goes up while belief in the new message goes down.
Communication comes in both words and deeds. The latter is generally the most powerful form. Nothing undermines change more than behavior by important individuals that is inconsistent with the verbal communication. And yet this happens all the time, even in some well-regarded companies.
Error #5: Permitting Obstacles to Block the New Vision
The implementation of any kind of major change requires action from a large number of people. New initiatives fail far too often when employees, even though they embrace a new vison, feel disempowered by huge obstacles in their path. Occasionally, the roadblocks are only in people’s heads and the challenge is to convince them that no external barriers exist. But in many cases, the blockers are very real.
Sometimes the obstacle is the organizational structure. Narrow job categories can undermine efforts to increase productivity or improve customer service. Compensation or performance-appraisal systems can force people to choose between the new vision and their self-interests. Perhaps worst of all are supervisors who refuse to adapt to new circumstances and who make demands that are inconsistent with the transformation.
Whenever smart and well intentioned people avoid confronting obstacles, they disempower employees and undermine change.
Error #6: Failing to Create Short-Term Wins
Real transformation takes time. Complex efforts to change strategies or restructure businesses risk losing momentum if there are no short-term goals to meet and celebrate. Most people won’t go on the long march unless they see compelling evidence within six to eighteen months that the journey is producing expected results. Without short-term wins, too many employees give up or actively join the resistance.
Creating short term wins is different from hoping for short term wins. The latter is passive, the former active. In a successful transformation, managers actively look for ways to obtain clear performance improvements, establish goals in the yearly planning systems, achieve these objectives and reward the people involved with recognition, promotions, or money. In change initiatives that fail, systematic effort to guarantee unambiguous wins within six to eighteen months is much less common. Managers either just assume that good things will happen or become so caught up with a grand vision that they don’t worry much about the short term.
People often complain about being forces to produce short-term wins, but under the right circumstances that kind of pressure can be a useful element in the change process. When it becomes clear that quality programs or cultural change efforts will take a long time, urgency levels usually drop. Commitments to produce short-term wins can help keep complacency down and encourage the detailed analytical thinking that can usefully clarify or revise transformational visions.
Error #7: Declaring Victory Too Soon
After a few years of hard work, people can be tempted to declare victory in a major change effort with the first major performance improvement. While celebrating a win is fine, any suggestion that the job is mostly done is generally a terrible mistake. Until changes sink down deeply into the culture, which for an entire company can take three to ten years, new approached are fragile and subject to regression.
In the recent past, I have watched a dozen change efforts operate under the reengineering theme. In all but two cases, victory was declared and the expensive consultants were paid and thanked when the first major project was completed, despite little, if any. Evidence that the original goals were accomplished or that the new approached were being accepted by employees. Within a few years, the useful changes that had been introduced began to slowly disappear. In two of the ten cases, it’s hard to find any trace of the reengineering work today.
Declaring victory too soon is like stumbling into a sinkhole on the road to meaningful change. And for a variety of reasons, even smart people don’t just stumble into that hole. Sometimes they jump in with both feet.
Error #8: Neglecting to Anchor Changes Firmly in the Corporate Culture
In the final analysis, change sticks only when it becomes “the way we do things around here,” when it seeps into the very bloodstream of the work unit or corporate body. Until new behaviors are rooted in social norms and shared values, they are always subject to degradation as soon as the pressures associated with a change effort are removed.
Two factors are particularly important in anchoring new approached in an organizations culture. The first is a conscious attempt to show people how specific behaviors and attitudes have helped improve performance. When people are left on their own to make connections, as is often the case, they can easily create inaccurate links.
Anchoring change also requires that sufficient time be taken to ensure that the next generation of management really does personify the new approach. If promotion criteria are not reshaped, another common error, transformations rarely last. One bad succession decision at the top of an organization can undermine a decade of hard work.
Poor succession decisions at the top of companies are likely when board of directors are not an integral part of the effort. In three instances I have recently seen, the champions for change were retiring CEOs. Although their successors were not resisters, they were not change leaders either. Because the boards simply did not understand the transformations in any detail, they could not see the problem with their choice of successors.
Smart people miss the mark here when they are insensitive to cultural issues. Economically oriented finance people and analytically oriented engineers can find the topic of social norms and values too soft for their tastes. So they ignore culture – at their peril.
The Eight Mistakes
None of these change errors would be that costly in a slower moving and less competitive world. Handling new initiatives quickly is not an essential component of success in relatively stable or cartel-like environments, the problem for us today is that stability is no longer the norm. And most experts agree that over the next few decades the business environment will become only more volatile.
Making any of the eight errors common to transformation efforts can have serious consequences. In slowing down the initiatives, creating unnecessary resistance, frustrating employees endlessly, and sometimes completely stifling needed change, any of these errors could cause an organization to fail to offer the products or services people want at prices they can afford. Budgets are then squeezed, people are laid off, and those who remain are put under great stress. The impact on families and communities can be devastating.
These errors are not inevitable. With awareness and skill, they can be avoided, or at least greatly mitigated. The key lies in understanding why organizations resist needed change, what exactly is the multistage process that can overcome destructive inertia, and mostly of all, how the leadership that is requires to drive that process in a socially healthy way means more than good management.
The rest of John P. Kotter’s book “Leading Change” will help you to walk through a major change effort and make it to the other side! The eight-stage process of creating major change is laid out in the book and it is the best resource I have found for this type of effort.