Mastering Transformation

January 2008
2008, Innosight LLC

Transformation.
have sown. Their organizations, from executives down through to the rank and le, have been motivated and compensated to focus on incremental improvement. These Companies are increasingly recognizing improvements are measured quarterly and that mastering transformation is becomannually along competitive performance ing a competitive imperative. As formerly parameters established years before. To exisolated markets collide and competitors pect this system to create the breakthrough from emerging markets hone disruptive apinnovations that power transformation is proaches, product lifecycles are shrinking simply unrealistic. Years of continuous imand competitive advantage is dissipating provement training have caused corporate more rapidly than ever before. The averinnovation muscles to atrophy. age length of time a company spends on To ascertain the scope of the transformathe Standard & Poor 500 list has shrunk from 30 years to about 10 years. Long-term tion challenge, Innosight surveyed more survivors under-perform market indices. than 300 managers, directors, vice presidents, and senior leaders from a wide range Companies are accumulating hordes of of companies (see About the Research cash, making massive acquisitions and buying back stock because they cant create for more information). We asked these practitioners whether their company was organic growth. A Managing Director at walking the talk around their transformaCredit Suisse said, Corporate America is the growth stock that cant grow. tion eorts. Did they have the necessary focus, tools, and talent to drive meaningCase studies of sweeping organizational ful growth from within? Their answers are transformationNokia moving from sobering for any executive telling investors rubber boots to mobile phones, Kimberly about their deep commitment to growth Clark shifting from a paper provider to a through innovation. consumer packaged goods leader, Apple f the rst step to success is to admit sextupling its stock in ve years after a you have a problem, signs are positive. decade of stagnation, Google going from Eight-ve percent of our respondents say a technology company to an advertising the need to transform is well understood. powerhouse, Procter & Gamble hopping Unfortunately recognition and success from soaps, to laundry, to skin care, to are not synonymous: only 43 percent health careshow that success is possible. But the breathless hype behind these stories of respondents feel their rm is making above-average progress (see Perspectives obscures a brutal reality: most eorts at On Transformation on the following page). transformation fail miserably. Just about Their responses outlined here provide inevery manager has lived through a transformation eort that starts brimming with sight into the constraints on an enterprises unbridled hope and ends in crashing disap- ability to transform and innovate (hint, it pointment. goes well beyond the R&D budget). There are signs of hope, however, as above-averThis unnerving and frustrating realage performers demonstrate how allocating ity should not be a surprise. After years resources and focusing on tangible opporof pervasive continuous improvement tunities can be useful starting points. This programs, executives are reaping what they

he word oozes with potential. Shed the skin of the old and embrace the new. Emerge better, stronger, and more powerful.

2008, Innosight LLC

report blends together the survey responses with Innosights eld work and research to provide guidance for companies seeking to master transformation. A multi-faceted problemm How do you transfer intent into sustainable and reasonable organizational action? One of the survey respondents suggested this is the most important question to answer to make progress on transformational eorts. This question lies at the heart of most organizational struggles around innovation. It is clear that practitioners bent on transformation face a steep challenge. They have to address a multi-faceted problem with unclear answers and inadequate tools. Our research and eld work over the past 10 years suggests that transformation requires four interlocking elements: dedicated resources, lead opportunities, tools and processes, and appropriate mindsets. Transformation is about change, so the resulting acronymDeLTAis appropriate. We asked survey respondents detailed questions about 11 specic factors that t into these four categories. Dedicated resources Human resources dedicated to transformational eorts. In many organizations, the scarcest resource isnt money, its time. Companies that dont dedicate human resources to transformational eorts are unlikely to succeed. Financial resources dedicated to transformational eorts. Organizations can struggle with transformation because natural forces within the company allocate nancial resources towards core initiatives. Dedicated nancial resources can avoid this trap. Senior management engagement and leadership. It is hard to overcome the hurdles inhibiting transformation unless senior management actively engages. Transformation is rarely accidental.
2008, Innosight LLC

Perspectives on Transformation
% who agree or strongly agree

All gures in percentages. n=260

Lead opportunities Selection of opportunity areas for new growth eorts. Companies bent on transformation sometimes think they ought to let chaos reign. Innosights experience is that the strategic selection of opportunity areas is a critical component of success. Development of new business models and approaches in specic opportunity areas. Doing what weve always done is rarely sucient to power transformation. Companies need to develop new approaches and at times even challenge their core business model. Capability to scale new growth businesses that power transformation. Generally speaking, the development of ideas involves an exploration period and an exploitation period. Managing the second part of this development process is critically important to realize the full impact of transformation. Tools & Enablers Utilization of new tools to assess and shape transformational ideas. Any wellrun company has a set of tools that help it manage ideas in its core business. These tools can be ill-suited for more nascent op3

portunities, where judgment and intuition are critical. Unique and dierent process for transformational initiatives. Standard processes and procedures can subtly re-shape transformational ideas so they resemble what has been done before. Separate processes can allow initiatives to realize their transformational potential. Appropriate metrics and incentives for transformational eorts. What gets measured gets done. Even the best intentioned companies can struggle if they do not have appropriate metrics and incentives to support their transformational eorts. Appropriate mindsets Formal approaches to overcome internal resistance to transformational eorts. Left to their own devices corporate antibodies can severely impact well-intentioned transformational eorts. Specic approaches can help defend against these antibodies.

A Pervasive Imperative We invited more than 3,000 practitioners to take part in this survey and were pleased that more than 300 elected to do so. The broad demographic spread of the participants reects our assertion that innovation is indeed at the top of everyones list. Representatives from companies with less than $100 million in annual revenue to rms generating more than $50 billion in revenue responded. Respondents spanned more than a dozen industry sectors including technology, health care, nancial services, consumer goods, retail, manufacturing, electronics, government, and more.
V.P. 20%
The organizational role of the participants also varied dramatically. In keeping with Senior our goal of a practitioners perspecExecutive tive, the weighting is biased towards 18% middle-managers. Invitees included individuals from all functional areas from R&D and product Manager management to sales, marketing, 37% nance, and HR.

Director 25%

Mechanism to teach the new mindsets required for transformation. Getting transformation right can require taking actions that can appear counter intuitive or even antithetical to the instincts of most managers. Developing a common language can address this issue. None of these factors are silver bullets. When given the chance to evaluate each criterion independently, 90 percent of respondents said ve factors are somewhat or very important and 80 percent of participants said all 11 criteria are somewhat or very important (see the chart, Factor Importance, in the right column). This is consistent with our eld experience that suggests that transformation really is a multi-faceted eort. Throwing money at the problem isnt sucient if you dont have the right ideas, tools, and leadership. Tools and leadership are worthless without resources. The wrong mindsets can sink the most well thought out transformational eorts. Simply trying to create a compelling mission statement or adopt new
2008, Innosight LLC

The rapid response and depth of comments provided in the open form questions indicated to us that there is indeed a widespread organizational imperative. All layers of management recognize the changes in the competitive landscape and are seeking actionable response plans. Factor Importance
Importance (% 4 or 5)

PARTICIPANT MIX

n=260

97 96 95 94 91 88 87 87 87 82 81

100
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philosophies is clearly insucient to drive transformation. A few leadership memos and the addition of innovation progress to the monthly metrics package are clearly insucient: cultural change does not occur through PowerPoint. Implementation Gaps Across the Spectrum How are companies doing addressing these factors? We see more diverse answers to this question. The chart to the right shows implementation gaps measuring the dierence between a factors importance and the degree to which companies report implementing the factor. All gures are indexed so the largest overall gap represents 100. While there are gaps across the board, ve factors clearly stand out as having the most pressing gaps: Teaching new mindsets Managers conceptually understand that organizations need to think dierently in order to act dierently. Trying to change mindsets that have ossied after years of following particular patterns and approaches is dicult, however. Our experience suggests starting with a small group of people, and utilizing tangible projects to allow people to live new mindsets. Mission statements or platitudes are not enough. You must create the space for people to act in dierent ways and experience for themselves how dierent ways of thinking can be valuable. Metrics and incentives Typically, a companys metrics and incentives encourage doing what has been done in the past. These metrics and incentives can penalize managers who act dierently and take even well thought out risks. Our eld work suggests developing comprehensive innovation metrics that look at inputs, the innovation process, and outputs, and provide discrete ways to measure discrete types of opportunities. Innovation is risky, so it is also important to avoid penalizing good failure, when a team learns early that their idea is not viable.
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Implementation Gap

All gures indexed to largest overall gap = 100, n=261

100 99 94 92 90 75 65 62 60 59 54

New business models and approaches It was no surprise that survey respondents reported struggling to master new business models and approaches. While managers generally understand the power of business model innovation, few established companies have demonstrated the ability to innovate their business model. A good starting point is to blueprint your current business model and to look for opportunities to do things dierently. Another approach involves looking for opportunities to borrow a proven model from another industry. Ways to overcome resistance Doing things dierently inside established companies is very hard. Powerful internal forces, resident in a companys people, processes, and prioritization schemes, can reshape transformational ideas so they resemble what has been done before. Providing adequate organizational space is critical to make sure these antibodies dont derail transformational eorts. Senior management engagement As noted, transformation does not happen
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accidentally. We never recommend that middle managers try to drive transformation without the active support of their senior leadership team. What can you do if your senior leaders dont yet get it? One approach is to have a focused discussion around early warning signals of long-term struggles. Showing how signals t historical patterns can begin to get senior management aligned around the need to act dierently. hile the largest implementation gaps are generally consistent across different groups, the severity of the gap diers markedly. For example, larger companies are struggling more with teaching new mindsets and overcoming internal resistance, while smaller companies are struggling more to utilize new tools. The starkest dierence, however, is seen between senior managers and the other respondents. Senior managers do not perceive senior management engagement or overcoming internal resistance as critical issues though both were at the top of practitioner responses. This could indicate a disconnect between senior leaderswho feel they are actively engaged and that internal innovators can overcome hurdlesand managers in the trenches who are frustrated by their ability to eectively move forward. The Way Forward Perhaps most distressing to the leaders seeking to transform their business will not be the list of issues themselves but the lack of condence the respondents had in their ability to overcome them. Fewer than 50 percent of respondents said they have the tools and ability to address the most critical gaps; even worse, fewer than 50 percent of respondents report even conceptually understanding how to teach new mindsets, develop appropriate metrics, and overcome internal resistance (see Areas To Address). After decades of focus on continuous improvement, perhaps this uncertainty should not be surprising. Many managers still perceive innovation to be risky and unpredict 2008, Innosight LLC

Areas to Address
% agreeing or strongly agreeing that they have
Conceptual understanding Tools & ability to implement

Teach New Mindsets Metrics & Incentives New Business Models & Approaches Ways to Overcome Resistance Senior Management Engagement Capability to Scale Selection of Opportunity Areas Human Resources Different Process New Tools
n=221

49 44 55 47 71 51 71 62 45 47

35 30 40 31 49 35 53 38 32 32

able. Fortunately, decades of research by Robert Burgleman, Clayton Christensen, Richard Foster, Henry Mintzberg, Michael Tushman and many others, have provided well-grounded theories and practical tools to address these issues (see For More Information in the back of this report for further reading). The theories and tools are proving helpful to at least some companies: More than 100 respondents said that their company is making above average progress on transformation. Where have these above-average performers been focused? Sensibly on dedicated resources and lead opportunities (see Degree Of Implementation on the next page). Why are dedicating resources and selecting lead opportunities a sensible space to start? Consider the companies cited as the leading lights of transformation. Respondents overwhelmingly cite Apple as the company that has done the best job transforming itself in recent years, with GE, Google, Toyota, IBM, and Procter & Gamble close behind. Interestingly, the

creation of new product lines or business units or acquisitions and divestitures drove the transformation of these companies. Apples most obvious success comes from the iPod line of products. P&G has introduced new brands like Swier and stepped up investment in health & beauty products. Google seems to enter a new market every month. IBM has moved aggressively into services. General Electric has bought or sold dozens of businesses over the past few years. Almost always, the best way to start transformation is to develop tangible growth businesses that move the company in a dierent direction. Creating growth businesses can only happen if companies allocate resources towards innovation. After getting points on the board companies can expand their eorts to develop tools and appropriate mindsets. Summary and Implications Transformation is not for the fainthearted. Getting transformation right requires simultaneously managing challenges related to dedicating resources, selecting lead innovative initiatives, creating tools and approaches, and changing mindsets. Companies that have recognized the need for transformation should consider the following lessons from the survey: Ensure you have a very senior champion. Transformation doesnt happen by accident. If senior management isnt actively leading the way, eorts are likely to fail. Focus on resource allocation rst. It doesnt matter if you have great tools and a well-honed process if there are no resources to utilize the tools and no money to fund ideas. Companies making aboveaverage progress on transformation had allocated both human and nancial resources towards transformational efforts to a greater extent than companies making below-average progress. Dont expect immediate success. Given the large number of factors that are
2008, Innosight LLC

Degree of Implementation

% Below Average Organizations agreeing/ strongly agreeing* % Above Average Organizations agreeing/ strongly agreeing*

18 19 19 33 19 13 14 18 7 18 22
* Above average organizations report a score of 4 or 5 on the question of Our organization is making above-average progress transforming itself n=127 Below average organizations report a score of 1 or 2 n=95

important for transformation, pushing for a big bang is likely to lead to disappointing results. Starting small is critical for success. Prioritize tangible projects over intangible cultural change eorts. Companies that identify the need to transform themselves have a choice: start by attempting to change culture or start by focusing on projects whose success could result in a changed culture. The latter approach has a far greater chance of ultimately having impact. After all, culture is a lagging, not a leading variable. Culture changes when people change what they do and how they interact. Tangible projects can be a way to force these changes. Creating new mindsets is dicult, but possible. Developing training modules that build common language or build specic skills, developing internal networks of advocates, and running ideageneration sessions with a cross-functional group of managers can be useful starting points.
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For More Information Anthony, S. D., Johnson M. J., Sineld, J. S. (2008). Institutionalizing Innovation. Sloan Management Review. Anthony S. D., Altman, E. J., Johnson M. J., Sineld J. S. (2008). The Innovators Guide to Growth: Putting Disruption to Work. Harvard Business School Press. Bhid, A.V. (2000). The Origin and Evolution of New Businesses. Oxford, England: Oxford University Press. Burgelman, R. A. (2002). Strategy is Destiny. New York, NY: The Free Press. Burgelman, R.A., Grove A.S. (2007). Let chaos reign, then rein in chaos repeatedly: Managing strategic dynamics for corporate longevity. Strategic Management Journal 28: 965-979. Christensen, C. M. (1997). The Innovators Dilemma. Boston, MA: Harvard Business School Press. Christensen, C. M. and Raynor, M.E. (2003). The Innovators Solution: Creating and Sustaining Successful Growth. Boston, MA: Harvard Business School Press. Christensen, C. M, Anthony, S.D. and Roth, E.A. (2004). Seeing Whats Next: Using the Theories of Innovation to Predict Industry Change. Boston, MA: Harvard Business School Press. Foster, R.N. and Kaplan, S. (2001). Creative Destruction. New York: Currency. Hannan, M.T . and Freeman, J. (1977). The Population Ecology of Organizations. American Journal of Sociology, 82(5), 929964. Hurst, D. K. (1995). Crisis and Renewal: Meeting the Challenge of Organizational Change. Boston, MA: Harvard Business School Press. Mintzberg, H. (1990). The Design School: Reconsidering The Basic Premises of Strategic Management. Strategic Management Journal, 11, 171-195.
2008, Innosight LLC

Tushman, M. L. and OReilly III, C. A. (1997). Winning Through Innovation: A Practical Guide to Leading Organizational Change and Renewal. Boston, Mass: Harvard Business School Press. About Innosight pany that helps companies fuel their ability to create growth through innovation. It was co-founded in 2000 by Harvard Business School Professor Clayton Christensen, one of the worlds leading authorities on innovation. Over the past seven years, Innosight has helped companies like Aetna, Credit Suisse, Dow Corning, E.W. Scripps Johnson & Johnson, Nokia, Pepsi, Procter & Gamble, Syngenta, Time Warner, and Wacker Chemie AG. About the Research to 3,200 individuals on October 31, 2007. More than 300 respondents lled in at least a portion of the survey, with close to 250 respondents completing the entire survey. The 25-question survey included a mix of open-ended and quantitative questions. The rst six questions captured basic demographic information. The next four questions addressed overarching views on transformation. The following 11 questions addressed specic components related to transformation; for each question respondents were asked to address the importance of the component, their conceptual understanding of what needs to be done, whether they had the tools and ability to implement, and whether they had implemented or were implementing this component. Finally, respondents had the opportunity to answer four open-ended questions.
Innosight administered an online survey Innosight is an innovation consulting com-