Posted : 2013-11-17 13:53
Updated : 2013-11-17 13:53

Lean, but not yet mean

By Kim Yong-bum

"If you don't transform your company, you're stuck." Xerox CEO Ursula Burns said. In an era of increased turbulence, it is not surprising that a number of companies find themselves out of step with market realities and in need of transformation.

To continually renew competitive advantage, companies must follow up a first phase of transformation, which is typically defined by cost cutting and other defensive measures.

These measures are quick and obvious and deliver tangible results, but they are not in themselves a recipe for success. In fact, 75 percent of 48 companies publicly undergoing corporate-transformation efforts ultimately fail. What does a CEO driving a turnaround do after these "easy" measures have been exhausted?

The Boston Consulting Group (BCG) looked closely at the long-term performance of transformation programs by using the method of paired historical comparisons.

This study revealed two common trajectories: short-term recovery with long-term slow decline and, less commonly, short-term recovery with long-term restoration of growth and performance. So what's the formula for the second path?

Chapter one: the turnaround

In theory, companies could preemptively or continuously transform themselves, but that is not often what happens. All the examples had a first phase of cost cutting and streaming which we call chapter one of transformation.

Chapter one does seem to be an essential component of transformation. Streamlining reduces inefficiencies, buys time by addressing short-term financial woes, and frees up resources to fund the journey toward future growth.

A typical chapter one lasts up to about 18 months and is usually successful in restoring total shareholder returns to sector parity levels.

But what about those who try to transform but fail? Many companies run into several of the following traps, which are surprisingly obvious yet seemingly difficult to avoid.

In the early-wins trap, companies declare premature victory after chapter one and fail to declare or develop a second chapter.

In the efficiency trap, they continue with multiple rounds of cost cutting and efficiency improvement measures.

In the legacy trap, they fail to shed core assumptions and practices even when they are self-limiting or no longer relevant.

In the proportionality trap, they make promising moves that are not proportionate to the scale of the challenge. "Dabbling" was a surprisingly common differentiator between the successful and unsuccessful companies we studied.

In the false certainty trap, they believe that the course of action can be rigorously planned in advance, and they overemphasize disciplined implementation of a fixed plan instead of continually iterating in response to new knowledge.

In the persistency trap, companies underestimate the time needed to see results, and, consequently, they let up too soon.

Lastly, in the proximity trap, they undermine the new business by keeping it too close to the core business, even when that closeness triggers competition for resources or conflicting assumptions.

Kodak, for example, fell into the persistency trap. Kodak's chapter one was characterized by multiple, insufficient rounds of cuts and layoffs, steps that degraded morale and failed to attract talent to fuel innovation.

At the same time, even though Kodak had clearly identified a compelling opportunity in a shift to affordable digital cameras, it did not allocate sufficient resources to develop and expand this new strategy.

Falling into the persistency trap, Kodak stifled new projects that did not meet the benchmark economics of its existing legacy film business. The culture of the legacy business prevailed with digital efforts integrated within the company, leaving Kodak ill-equipped to shift to a new business model.

Chapter two: creating lasting change

Whereas chapter one primarily addresses costs, chapter two focuses mainly on growth and innovation. In chapter two, successful companies went beyond necessary but insufficient operational improvements and deployed a new strategy, vision, or business model that they refined over a multiyear period.

Transformations don't follow a cookie-cutter model. They need to reflect the challenges unique to each situation. Nonetheless, we identified eight factors that drive long-term success.

The first factor is turning the page. Companies make a conscious decision to go beyond the efficiency moves of chapter one and refocus on growth and innovation.

Second is creating a new vision. Companies articulate a clear shift in strategic direction, coupled with room for experimentation.

Next is foundational innovation. They innovate across multiple dimensions of the business model, not just in products and processes.

This is followed by commitment. There is persistence from leaders in the face of inevitable setbacks and internal opposition to unproven shifts in strategy.

Fifth is imposed distance. There is a willingness to shift from the historical core business model and its underlying assumptions, often by creating a deliberate degree of separation between the new business model and legacy operations.

Another factor is an adaptive approach. Transformation unfolds through trial and error, with ongoing refinement of a flexible plan.

There is also "shots on goal." Companies do not pin growth hopes on a single move but rather on deploying a portfolio of moves to drive growth.

The last factor is patience. There is adherence to the vision over a multiyear period.

In practice, chapter two worked on Australian airline Qantas's creation of Jetstar. The company demonstrates a successful transformation through foundational innovation.

In 2000, two low-cost carriers disrupted the Australian domestic-aviation market — a historic duopoly controlled by Ansett and Qantas. Twelve months later, Ansett collapsed and Qantas, a traditional airline with a high cost structure, was losing share. From 2003 to 2010, however, Qantas's TSR outperformed both the market and the sector. How?

Qantas first commenced a transformation program to streamline operations, cutting $1 billion in costs over two years. Qantas then layered on chapter two with its launch of Jetstar, a wholly-owned, no-frills, low-cost carrier.

Today, Jetstar is a core driver of Qantas Group's profit. Qantas stayed focused on a key success factor for low-cost carriers: high-asset utilization — that is, maximizing the hours a plane operates, which enables the airline to charge lower fares.

Qantas kept Jetstar's network and value proposition intentionally separate from its full-service offering, and it branded Jetstar distinctly for the leisure traveler.

With its own fleet and profit-and-loss statement — and interactions with Qantas only at the board level — Jetstar flourished unencumbered by the legacy organization and cost structure.

In our study of transformation efforts, we see a remarkable paradox. The pitfalls of transformation are unsurprising, the payoff from doing things right is significant, the goals of transformation are clear and yet organizations repeatedly fail to follow the right path to success.

There are multiple plausible reasons for this. For one thing, short-term cost cutting is easy and provides immediate rewards and it's tempting to believe that more of the same will yield more of the same.

In addition, risk-taking may seem unpalatable at the very moment you are grasping for stability. Leaders can be uncomfortable making the abrupt shift from cost cutting to the discipline of a growth strategy.

The key to new growth will almost by definition seem counterintuitive especially to the architects of the current business model.

Indeed, the two chapters require very different leadership styles and capabilities, one more top-down and operational and the other more creative and empowering.

Kim Yong-bum is a partner and managing director of The Boston Consulting Group.
Transformation demands attention to both the short term and the long term, to efficiency as well as innovation and growth, to discipline and flexible adaptation, and to clarity of direction and empowerment.

Successful transformation requires an ambidexterity of leadership, one that resolves these apparent contradictions and navigates the company successfully through both chapters of transformation.

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