How do you succeed with transformation?

Overview

  • What are the facts regarding your current situation?
  • What is driving the need for transformation?
  • What is the scope of transformation?
  • Corporate leadership must always be transforming itself.
  • What are the success principles for transformation?

This article (supported by a one-page slide) is intended to enable discussion and action planning among owners/shareholders, boards of director, CEO, and advisory board. The approach and action plan will be unique to the specific situation of each corporation.  There is no one-size-fits-all answer.

What are the facts regarding your current situation?

The first step in understanding whether or not transformation is required is to assemble the facts regarding the current situation. The corporate leadership should agree on the facts.  Based on the facts, you can then discuss whether or not transformation is required.

Facts are needed to persuade people in the company to support and drive transformation. People will naturally resist change, and the greater the perceived change, the greater the resistance. Sustainable transformation will not result from dictating that people change.

Facts can include the following:

  • What is your strategy?1
  • What is your plan to achieve your strategy?
  • Assemble historical facts and current forecasts (or scenarios) regarding market size and market profitability.
  • Understand the customer via active questions, including after each interaction. Survey the customers to determine: whether or not they would recommend your company; their satisfaction relative to competitors and degree to which needs are being met relative to competitors. Tools such as Survey Monkey are low cost or free.
  • Understand the customer via data analysis of customer interactions.2
  • Assemble key historical financial results information and analyze for factors such as growth rates.
  • Compare financial results to competitors. SMEs3 can find financial benchmarks at Industry Canada (ic.gc.ca/smeresearch)

What is driving the need for transformation?

Once you have the facts, you can then assess and discuss the implications.  Is there a need to transform and what is that need?  Corporate leadership needs translate the overall corporation’s need for transformation into why individuals in the company must change.  For example, decreasing profits for shareholders will not be a personally relevant need for call centre staff.

Sometimes corporate leadership is driving transformation in order to stay ahead of the competition.  Other times, corporate leadership is driven to consider transformation due to external forces.  Four forces often lead to transformation:

  • The company is not changing as fast the ecosystems4 of the customers and the company.
  • There is decreasing market size, market share, and customer satisfaction.
  • The business model and corporate leadership are not competitively differentiated.
  • The financial results are not competitively differentiated.

What is the scope of transformation?

Once the need for transformation is clear, then you determine the scope and type of transformation. Consider the types of required transformation in the context of both the strategy and purpose of the corporation.5  Your short-term actions should always be taken in the context of the longer-term direction.

You need to be able to explain to those who need to change, and others, why the scope and type of transformation will be required.  For example, if you are going to offshore your call centre and terminate the existing employees, why must that be done?  Employees in other parts of the organization may worry that they too will be terminated.

Is the scope and type of transformation consistent with your corporation’s values?  If not, you are harming the purpose of having values, as well as harming trust in the leadership.

Consider which type of transformation is required and the scope of your company’s transformation.  Is the scope:

  • Who the target customers are and their unmet needs?
  • The customer experience?
  • The customer value proposition?
  • Some or all of the business model?
  • Corporate leadership?
  • A fundamentally new strategy?

There are five different types of transformation.  Components from each type may need to occur at the same time.  Successful companies are always undergoing some degree of transformation.

  • Restructuring: Often fast financial changes such as selling assets.
  • Turnaround: Often fast changes to processes, people and technology while focused on the same customers and needs.
  • Operational transformation: Components of the business model are improved. This results from the natural evolution within customer and company ecosystems. Focus on the same set of customers with only small changes to needs.
  • Business model transformation: The business model requires fundamental changes. The focus is on the same customers but their needs have major changes.
  • Strategic transformation: New customers with new needs requiring a new business model. Think of Google changing from the best search company to developing the Android smartphone operating system.

Corporate leadership must always be transforming itself

Corporate leadership (the board of directors, CEO, advisory board, and C-Suite) must also be continuously transforming.  Stakeholders and third parties are transforming how they internally operate and interact with their ecosystem, and their expectations of your corporation. Competitors (both current and new marketplace entrants) are changing.

Corporate leadership must always be learning and aware of developments within the customer and company ecosystems.  Restructuring, turnarounds, and strategic transformation may require new leadership, with different values, skills, experiences, and capabilities.

“Boards are ultimately responsible for the long-term success of their organization.”6 If your corporation is performing more poorly than the competition, then you should assess what transformation should occur with your board of directors: role changes, process changes, or people change?

What are the success principles for transformation?

There are five sets of inter-related success principles.  The odds of transformation success decrease quickly if even one principle is not effectively adopted.

#1 Urgency and Trust:

Everyone in management understands why they must personally change and why the status quo is not an option. The urgency is based upon the facts of the current situation and a rationale regarding the scope and type of transformation.  Without trust among and with corporate leadership, transformation fails because people will not believe what they are being told.

 #2 Strategy and customer understanding:

The transformation must be embedded in the strategy and strategic plan and not be a disconnected silo.  Transformation will require the strategy and strategic plan to change.

The strategy must be clear, easy to understand, and easy for everyone to see themselves in the strategy.  Corporate leadership, employees, key stakeholders, and third parties need to understand the strategy.

Each individual needs to understand how their role is related to customer actions and impacts value generation.

Two-way communications within the corporation, and externally, is critical.  The communications are focused on, and relevant to, the target audiences.  For example, telling the call centre staff (and the rest of the company) that the only reason the call centre is moving offshore is to improve profits will likely increase change resistance and decrease trust with the leadership.  You’ll find it helpful to be able to explain how the company values were used to help make the decision.

A lack of understanding of the strategy and ecosystem is a common factor leading to transformation failure. A McKinsey survey of directors revealed that: 16% strongly understood industry dynamics, 22% were aware of how their firms created value and 34% fully comprehended their companies’ strategies.7 95% of employees were not aware of, or did not understand the strategy.8

Consider whether or not you should use the word “transformation” to describe what will be happening. “Transformation” will produce a set of worries and expectations within the company and externally.

 #3 Accountability and the core team:

Individual accountability for specific results must be clear.  Accountability for results is focused on the customer experience and internal operations.  Changes to these two areas will drive financial results, assuming employees understanding of what drives business value.  The core team must be committed and have the authority to make changes.  Changes could include: policies, compensation approaches, processes, organization structure, and staffing.

 #4 Decision-making and the core team:

All decisions must be based on achieving the strategy.  Often people continue to make decisions based on the old strategy, or even on their own personal strategy (As illustrated above, most employees do not understand the strategy.) Short-term wins and achieving visible results with 3 months is key.  The longer it takes to achieve some results, the lower the employee commitment, and the greater the change resistance.

The accountability for making decisions and achieving results remains with line management. The transformation officer and transformation office are enablers but do not have profit and loss accountability for items in the budget.  You need to ensure that the right people are on the decision-making core team.

 #5 Integrate transformation into the business, and utilize existing planning and management processes.

Hiring, promotions, terminations, compensation and talent development must be based on the strategy.  You may need interim talent to deal with aspects of the transformation. This talent is not part of the long-term strategy.

Improve existing management processes to achieve long-term sustainable results.   A transformation office, and transformation officer, are crucial as long as the focus is on putting in place sustainable planning and management processes.  A transformation office that works outside of existing planning and management processes will not only create resistance to change but will also not produce sustainable change.

What do you do if you are a SME?

The same principles apply for a SME.  The amount of effort and approach will be appropriate to the organizations size.  For example, if you have 30 people all working in a large open office environment, the change management effort may be simple – you won’t have a transformation officer and transformation office, etc.

Conclusion

The world is transforming at ever increasing speeds.  The need for transformation increases, while the facts show that transformation usually fails to create long-term sustainable value.  The principles for achieving transformation success prove to be difficult to achieve for most organizations.

Your next steps

To enable discussion with your board of directors, CEO, and advisory board download the following one-page slide:

How do you succeed with transformation 2018 05 11

Your corporation can assemble the facts on the current situation and determine what is driving the need for transformation.

Your board of directors, CEO, and advisory board can discuss what type of transformation is required.  Does your corporation have the skills to do this or do you need short-term outside assistance?

Is there only one type of transformation required?

  • Restructuring often focuses on financial engineering, carried out by accounting firms or investment banks.
  • Turnarounds (to catch up to the competition), are often carried by an executive with deep industry experience.
  • Operational transformation brings in functional expertise, e.g. Artificial Intelligence experts to help change the customer experience, or to enable analysis.
  • Business model transformation or strategic transformation, may need an interim transformation officer (and in very large organizations a transformation office).

Your corporation may need components from different types of transformation.

Has the transformation been expected for some time (and part of the strategic plan), or is there a sudden need for transformation?  Corporate leadership must discuss why the company suddenly needs transformation.  What changes to management processes and corporate leadership are required to reduce the risk of future unexpected transformation.

Footnotes

1 What your successful company will look like in the future. What does future success look like to: customers, shareholders, other stakeholders, third parties, and society? What will be the future business model?

2 “How to get customer feedback without asking the customer.”, James Allen, Bain website, May 04, 2008

3 Industry Canada definitions: Small business: < $5 million in revenue, < 100 employees, Medium business: between $5 million and $20 million in revenue, 100 to 499 employees.

4 A business ecosystem is the network of people and organizations, including stakeholders and third parties directly and indirectly involved in the delivery of a specific product or service through both competition and cooperation. The idea is that each entity in the ecosystem affects and is affected by the others, creating a constantly evolving set and nature of relationships in which each entity must be flexible and adaptable in order to survive, as in a biological ecosystem.

5 What is the purpose of the corporation and why does it exist? Is the only purpose of the corporation to create wealth?  Is there a higher purpose, either to a community or to society?  Or you may conclude the only purpose is to create wealth for shareholders and the C-Suite.  Peter Drucker said: “Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

6 “Does your board really add value to strategy?”, Professor Didier Cossin and Estelle Metayer, IMD Global Board Center

7 “Corporate Boards need a facelift”, Eric Kutcher, McKinsey, May 04, 2018

8 “Creating the Office of Strategy Management”, Harvard Business School; paper 05-701, by Robert Kaplan and David Norton

Further reading

  • “How to beat the Transformation Odds”, McKinsey Survey, April 2015
  • Leading Change: Why transformation efforts fail”, John Kotter, Harvard Business Review, January 2007
  • “The Transformations that work – and why”, Hans-Paul Bürkner, Lars Fæste, Jim Hemerling, Yulia Lyusina, and Martin Reeves, Boston Consulting Group, Henderson Institute, November 2017
  • “With High Stakes, Accelerate the Transformation”, Simon Henderson, Migul Simoes de Melo, Lodewijk de Graauw, and Drew Woodhouse, Bain, 2016
  • What is business transformation?”, koorandassociates.org
  • Your company will fail.”, koorandassociates.org

What is business transformation?

Overview

  • Transformation may include up to five types of changes.
  • Corporate leadership must always be transforming itself.
  • What is driving the need for transformation?
  • Company is not changing as fast as customer and company ecosystems.
  • Decreasing: market size, market share, and customer satisfaction.
  • Business model and corporate leadership not competitively differentiated.
  • Financial results not competitively differentiated.
  • Transformation usually fails.

This article (supported by a one-page slide) is intended to enable discussion and action planning among owners/shareholders, boards of directors, CEOs, and advisory boards. The approach and action plan will be unique to the specific situation of each corporation.  There is no one-size-fits-all answer.

Transformation may include up to five types of changes.

There are five different types of transformation.  Components of each may be occurring at the same time:

Restructuring

The business is under major short-term financial pressure. The actions taken may include: reducing debt, selling assets, selling the company, reducing the number of customers or meeting fewer of their needs, and shrinking the business model.

Turnaround

There need to be fast improvements to processes, people, and technology.  The company remains focused on the same set of customers with the same set of needs.

Operational Transformation

Components of the business model are improved.  This results from the natural evolution within the customer and company ecosystems.1 New technologies, business practices and skills evolve and become commonplace.  Customer needs evolve requiring changes to the customer experience. This continuous evolution requires continuous operations transformation. The company remains focused on the same set of customers with the same set of key needs.  The overall business model improves but is not fundamentally changed.

Business Model Transformation

The business model requires fundamental change.  The focus is still on the same customers, but their needs have changed.

Strategic Transformation

There are new customers with new needs requiring a new business model.  Think of Google.  It started out to be the best search engine.  Now Google produces the Android operating system, smart phones and has been working on driverless cars.

Successful companies are always undergoing some degree of transformation.  Why?  The customer and company ecosystems are evolving (sometimes quickly) and the company must keep pace.  It is hard to be successful if you are addressing the customers’ past needs with historical solutions.

Consider the types of required transformation in the context of both the strategy2 and purpose of the corporation.3   Your short-term actions should always be taken in the context of the longer-term direction.

Consider what type of transformation is required and the scope of your company’s transformation.  Is the scope:

  • Who the target customers are and their unmet needs?
  • The customer experience?
  • The customer value proposition?
  • Some or all of the business model?
  • Corporate leadership?
  • A fundamentally new strategy?

Corporate leadership must always be transforming itself.

Corporate leadership (the board of directors, CEO, advisory board, and C-Suite) must also be continuously transforming.  Stakeholders and third parties are transforming; how they internally operate and interact their ecosystem and their expectations of your corporation. Competitors (both current and new marketplace entrants) are changing.

Corporate leadership must always be learning and aware of developments within the customer and company ecosystems.  Restructuring, turnarounds and strategic transformation may require new leadership, with different values, skills, experiences, and capabilities.

What is driving the need for transformation?

There are two core reasons for transformation:

Transformation may be internally driven by the passion of corporate leadership to stay ahead of the competition.

External changes and poor financial results force corporate leadership to consider transformation.

The following are four external changes forcing transformation.

Company is not changing as fast as customer and company ecosystems.

The customer and company ecosystems are evolving.  Ongoing transformation is required to keep pace.  For example:

  • Customer needs evolve – the millennials may have different needs from retired people.
  • Competitors discover that your customers have some unmet needs and that these needs become more important than the needs your company’s solutions were addressing.
  • Technology is regularly evolving. The internet, big data, Artificial Intelligence, etc.
  • New business processes, practices, and models emerge. Think of the newspaper industry.  In the mid 1800s newspapers did not have advertising and made a profit based on the customer payments.  Then advertising came along and customer payments no longer covered costs.  Then, customers could receive much of their news in a digital format and the advertisers left many of the traditional newspapers.
  • External trends which will disrupt your strategy and business model (shareholders objectives, competitors, suppliers, the economy, regulations, workforce demographics, politics/government, industry consolidation, new entrants, etc.)

Decreasing: market size, market share, and customer satisfaction.

It can be hard to succeed if the overall market size (revenue and profits) is decreasing.  Think about Blackberry and its focus on phones with keyboards.  Decreasing market share can be a warning.  Market share focus is on profits, not revenue or units.  The company with the largest revenue does not necessarily have the largest share of profits. Decreasing customer satisfaction, relative to competitors’, will shrink the company.  In some industries, every company provides poor customer service.  Think about telecommunications services for residential customers.

Business model and corporate leadership not competitively differentiated.

The business model and corporate leadership may have been competitively differentiated at one point, especially at a time when the company was growing and beating the competition.  Corporate leadership may have made decisions to not enhance the business model (“If it isn’t broken, don’t fix it”).  The values and capabilities of corporate leadership may not have kept pace with the competition.  Corporate leadership can actually deteriorate if succession is not carefully planned and executed.

Financial results not competitively differentiated.

As the above three reasons are occurring, your company’s financial results will eventually be impacted. If your financial results are not competitively differentiated, some or all of the above three will have already occurred.

Transformation usually fails

  • Major changes almost always fail. 12% of change programs succeed; 38% produced less than half the expected results; 50% diluted the value of the company.4
  • Efforts to recover a poor business (i.e. transformation) typically fail. Fortune 500 (1998-2013). 33% of the companies grew; 35% went bankrupt or were acquired; 32% stalled.  Only 10% of the stalled companies recovered.  Of the recovered companies, 75% returned to the core business and 25% redefined their business model.5
  • Only 30% of mergers and acquisitions increase shareholder value.6

Will your transformation deliver long-term, sustainable change?  Corporate leadership transformation is critical to enable sustainable change.

What do you do if you are SME (Small Medium Enterprise)?7

An established SME will have challenges additional to those noted above.  A successful SME undergoing rapid successful growth risks corporate leadership: losing touch and understanding of customers, losing focus on the key points of competitive differentiation, changing the vision to something employees and customers cannot relate to, losing focus on cash management, increasing bureaucracy and making decisions slower than the competition.

SME risks arise when a successful SME tries to look and act like a traditional large company.

Conclusion

Transformation is inevitable for every corporation.  Corporate leadership must determine when to transform.  Major transformation driven by customers deserting the corporation or financial distress often often fail.  Ongoing transformation may well succeed.

Your next steps

To enable discussion with your board of directors, CEO, and advisory board download the following one page slide.

What is business transformation?

What are the facts regarding your current situation?

This is the first of three phases:  Phase 1 What are the facts regarding your current situation?  Phase 2 What are the implications?  Phase 3 What is the action plan?

Phase 1

  • What is your strategy?
  • What is your plan to achieve your strategy?
  • Assemble historical facts and current forecasts (or scenarios) regarding market size and market profitability.
  • Understand the customer via active questions, including after each interaction. Survey the customers to determine: whether or not they would recommend your company; their satisfaction relative to competitors and degree to which needs are being met relative to competitors. Tools such as Survey Monkey are low cost or free.
  • Understand the customer via data analysis of customer interactions.8
  • Assemble key historical financial results information and analyze for factors such as growth rates.
  • Compare financial results to competitors. SMEs can find financial benchmarks at Industry Canada (ic.gc.ca/smeresearch)

Footnotes

1 A business ecosystem is the network of people and organizations, including stakeholders and third parties directly and indirectly involved in the delivery of a specific product or service through both competition and cooperation. The idea is that each entity in the ecosystem affects and is affected by the others, creating a constantly evolving set and nature of relationships in which each entity must be flexible and adaptable in order to survive, as in a biological ecosystem.

2 Strategy: What your successful company will look like in the future. What does future success look like to: customers, shareholders, other stakeholders, third parties, and society? What will be the future business model?

3 What is the purpose of the corporation and why does it exist? Is the only purpose of the corporation to create wealth?  Is there a higher purpose, either to a community or to society?  Or you may conclude the only purpose is to create wealth for shareholders and the C-Suite.   Peter Drucker said: “Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

4 “It’s 8-1 against your change program”, Bain website, Managing Change Blog, 2017 June 23

5 “The Founder’s Mentality”, by Chris Zook and James Allen, 2016, page 105

6 “Why most acquisitions fail”, KPMG Webcast, 2017 January 31

7 Industry Canada definitions: Small business: < $5 million in revenue, < 100 employees, Medium business: between $5 million and $20 million in revenue, 100 to 499 employees.

8 “How to get customer feedback without asking the customer”, James Allen, Bain website, 2018 May 4

Further reading

“What Do You Really Mean by Business “Transformation?” Harvard Business Review, 2016 February 29

Why is trust critical for transformation success?

Transformation will fail without trust in the change leadership.  Why is that?

Successful transformation demands that people trust and believe what they are hearing regarding:

  • Why the current situation is not viable in the long-term.
  • Why transformation is needed.
  • What the future looks like and the path to the future.
  • “What in it for them”.

People will naturally have emotional resistance to the major changes they will undergo.  Changes to their day-today work, their environment, their perception of personal identity.

Without trust, people won’t believe what they are told and their emotional resistance creates a dysfunctional organization focused on fighting (overtly or covertly) the transformation.

Going from a slowly-changing business to transformation makes visible:

  • All the issues with lack of trust in management; and
  • Management’s inability to deal with all the emotional factors of trust and resistance to change.

As a result, the benefits of transformation are not achieved.

To enable discussion with your board and management, download the one page slide Why is trust critical for transformation?