KEY CONCEPT

Do companies need a financial trauma to provoke them into change, or can they adopt new ways of doing things when not under pressure? The history of successful organizations shows us that decline, while perhaps not inevitable, is at least likely. And yet few companies opt willingly to change strategy without being forced to. There are some companies, however, that do – and we can learn a lot from them as this Idea shows.

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IDEA SUMMARY

It is a rare company that is able to anticipate a new set of requirements, mobilize resources to meet them, radically change their ways and reclaim leading positions in their industries. Examining these rare examples can help us understand how their successes can be replicated.

In order to look at how these companies achieve successful strategic transformation, the research cited here studied 215 of the largest British public companies over the period 1984–2003. Comparing the financial performance of each company with its domestic and international industry peers, they used measures of performance that included profit margin, return on capital employed and cash flow to operating revenues.

Ultimately, they focused on three companies that had made successful strategic transformations, comparing them with three companies from similar industries that were also successful but hadn’t been required to make a dramatic shift. The ‘pairs’ were as follows:

• Cadbury Schweppes and Unilever: both leaders in packaged goods, but Cadbury Schweppes was clearly dominant over Unilever.
• Tesco and J Sainsbury: major players in the UK supermarket industry, but Tesco slightly underperformed Sainsbury until the end of 1990s, when its performance declined. After 2003, Tesco outperformed Sainsbury.
• Smith & Nephew and SSL International: both operate globally in the market for medical devices and related products, Smith & Nephew outperformed SSL International.

The three companies that made successful transformations had three fundamental advantages over their peers: they were able to build alternative coalitions with management, create a tradition of constructively challenging ‘business as usual’ and exploit ‘happy accidents’ to make strategic changes. Together, these advantages helped them establish the virtuous cycle of strategic transformation that their counterparts could not.

This can be called the ‘cycle of strategic transformation’:

• Creating alternative coalitions: This is the ability to maintain steady performance whilst pursuing strategic change, by, for example, creating parallel coalitions of senior executives. Of the three companies that made successful transformations, none had to reach outside the organization for top leadership. They grew their own ‘outsiders’ by encouraging intrapreneurial talent and giving individuals space to comply with their formal job duties while they experimented with and refined their knowledge of alternative approaches.
• Constructively challenging business as usual: at the companies that transformed themselves successfully, a tradition of open conflict had a way of evolving into constructive challenging. Over time, the vying for dominance became institutionalized. In contrast, the comparator companies never established a tradition of constructive challenging.
• Exploiting happy accidents: this is a tradition of anticipation, and the ability to convert problems and crises into happy accidents. Successful companies deal with problems on their own rather than using them as triggers for broader changes.

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BUSINESS APPLICATION

If companies are to transform their strategies and sustain high performance they must foster alternative management coalitions, value constructive tension and challenge the status quo. Here are eight detailed ways in which to accelerate these changes:

1. Build on history;
2. Select and develop a new generation of leaders;
3. Accept and encourage constructive mobility;
4. Ensure that decision-making allows for dissent;
5. Create enabling structures that encourage tension;
6. Expect everyone to get behind decisions once they are made;
7. Develop an overarching rationale; and
8. Beware of market size and dominance.

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REFERENCES

Achieving Successful Strategic Transformation. Gerry Johnson, George S. Yip & Manuel Hensmans. MIT Sloan Management Review (Spring 2012)

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