The Inside Baseball of Corporate Transformation
Every transformation story is a drama. The ebb and flow of interpersonal relationships are what determines whether it becomes a tragedy. Ron Boire contributed to this piece.
Hired to transform a company? The odds are against you
A recent McKinsey global survey found that only 26% of executives they questioned considered their efforts to address specific performance problems and to sustain that performance over time to be successful. Let that sink in — 74% of the time, the initiative fails.
This is the irony. We acknowledge that transformations often fail, that the wrong people are often put in charge of transformations, and that the “C-Suite” is probably ill-equipped to pursue such an effort. Nonetheless, we somehow expect heroic leaders to magically bring major change efforts to fruition within the time and financial expectations of key investors and other constituencies. When things don’t work out fast enough, a symbolic sacrifice is made of whoever’s name was on the initiative, somebody new gets handed the hot potato, and the cycle begins anew.
This article is derived from a boatload of experience in organizations large and small, public and private. The reality is that your success as a transformative change agent is going to be driven by people, political and organizational issues.
The stories we seldom hear
The stories that reach the business press seldom reflect the reality of transformation work. Our colleague Phil Rosenzweig calls this the “halo effect.” When something succeeds, the leader is a brilliant visionary. Let things go wrong, and the person is clearly an idiot.
Remember when ABB’s CEO, Percy Barnevik, was being heralded as Europe’s answer to Jack Welch, with a cutting edge matrix design for ABB and a culture of smart risk-taking? The Harvard Business Review praised him in 1991 for creating “a new model of competitive enterprise.” When the company’s fortunes fell in the early 2000’s, the same person was called arrogant and out of touch, the company was exposed as a disorganized mess, and criticism piled up.
The real stories of success and failure are seldom discussed. It’s entirely possible for a great strategy to run headlong into bad luck — ask anybody in the travel business today. Ask the team at Microsoft who worked on the Kin phone (a victim to internal politics). Ask the people at Nokia who came up with an iPad like device years before the introduction of the iPhone only to see it languish.
It’s also possible for terrible, dictatorial, petty, misguided, and poorly aligned management to get great results. Casino developer Steve Wynn, for instance, was lauded as a genius in business until revelations of misconduct brought him down.
The fall of Blockbuster
Consider a public example we do know about — the winding down to irrelevance of Blockbuster. The conventional wisdom is that its inbred management team didn’t understand the importance of DVD’s and subsequently of streaming, and missed the boat by failing to acquire Netflix at a pivotal moment for $50 million in 2000.
We know, from public sources, that while these issues were part of the story, they weren’t the main reason that CEO John Antioco was shown the door, his efforts at transformation were abandoned and the company was eventually sold for scrap.
By the time he took the top job at BlockBuster, in 1997, Antioco was known as a skilled and experienced transformation leader — having led such efforts at 7-Eleven, Circle K, and Taco Bell. That same year saw the advent of the commercial DVD, and even before that, observers were chattering about video on demand. The company was already struggling with valuation — Viacom sold a chunk of its holdings in an IPO at a depressed price in 1999. In 2004, Antioco finally determed to “jump into the online business by combining the convenience of on-line and the instant gratification of the on-store premises.” He also proposed to eliminate late fees. The two moves were going to cost $200 million each. Blockbuster’s corporate owner, Viacom, didn’t have the appetite for that investment and unloaded its remaining stake. Activist investor Carl Icahn detected an opportunity, launched a campaign, obtained major influence at the board and essentially backed an approach to dismantle the very transformation initiatives that could have saved the company.
What we get wrong about leadership performance during a transformation
Assuming capable, competent top-level leadership, why might a transformation leader be forced out? We describe specific situations to watch out for and propose a few remedies that have more to do with humanity than with business strategy.
The “J” Curve of Performance
In the popular imagination, great leaders help a company move fleetly from one “S” curve of success to the next, going from strength to strength. Doesn’t happen, pretty much ever. The trouble is, as Geoff Moore has pointed out, is that there is a nasty bit in the middle when performance is depressed. If you’re being tapped for transformation duty, it is nearly impossible to avoid. Realize that this is not a problem that is going to disappear because it’s difficult stuff, and don’t fall into the temptation to pretend it won’t happen.
One of our poster children for a company that managed this really well is the transformation that took place at Adobe, when it switched from a licensed desktop software business model to a software as a service model. While many factors were involved and made a difference, one of the of most significant was the alignment of the executive team around the need to make the shift, and the tireless efforts of their legendary CFO, Mark Garrett, to sell the transformation story to analysts and other stakeholders.
Most businesses that require investment today to generate returns tomorrow have to navigate J-curves. When Apple launches the iPhone “14” sometime in 2023 with the latest 5G technology, very few people will understand that the “product” has likely been on the drawing board and in some phase of development for two years. Most people assume that a product launched in the Fall was developed in far less time than it actually took.
It’s not just high-technology that has this kind of J-curve cycle. Traditional fashion has almost as long a cycle. This Fall’s product line was launched in January planning meetings 21 months earlier. It’s a force of nature that can’t be overcome by wishful thinking or unrealistic promises. Patient ownership that recognizes the time to invest in the next “J” curve is while you’re still delivering on a past one is crucial. The J-curve is a well known phenomenon in private equity and venture capital investment, and impatience on the part of these investors has been blamed for underinvestment.
Impatient investors can lead a company can go into a doom loop. Consider a product line brought in to revitalize an older portfolio. Even with the best results, the team will suffer through reduced sales and likely lower gross margins for at least 18 months. Its easy to see how ownership can become disenchanted with leadership when there is little that can be done to have a quick impact.
Investor hunger for lucrative returns
Many companies going through a transformation have found themselves owned partly or wholly by investors whose primary motivations are financial. As we saw in the case of Blockbuster, when a transformation requires investment, such investors are likely to balk — and if they are powerful enough, they can derail the program.
This is a particular issue within the private equity space, where funds are focused on seven year or shorter time horizons. In theory, private equity invests in companies that are inefficient, takes them private, uses managerial expertise to turn them around, and reaps the rewards from the markets when the improved company is sold back to the public. In reality, for most private equity firms, the pressure for quick returns is notorious, to the detriment of the companies they have invested in.
As Joe Nocera, a reporter for BloombergBusinessWeek wrote, “have we finally reached the point where we automatically assume that every new retail disaster has been caused by a private equity firm? Yes, I believe we have.” While he was analyzing the disastrous turn of events at Fairway Markets after its owners cashed out by selling to a private equity firm, he could have written nearly identical articles about Toys R Us, Payless Shoe Source, Sports Authority and many, many others. In a report glumly entitled Pirate Equity, a group of non profits linked PE activity to the loss of over 1.3 million jobs. Another study found that, the probability that a company would face bankruptcy after being acquired by a private equity firm was about 20%.
Ron’s experience at Toys R Us is illustrative — the company was purchased by three investors in 2005, two private equity firms and a real-estate mega firm Vornado Realty Trust. The investors had conflicting agendas, different funds flow expectations and expectations for the return of capital. By 2007, interest expenses consumed 97% of the firm’s operating profit, leaving it struggling to make the investments needed to upgrade stores, build out a digital presence and otherwise update the brand. Despite the fact that revenues through the recession didn’t drop that much, all that debt left the company essentially handcuffed. Even though leadership’s strategy was praised and it was credited with architecting a turnaround, the debt burden eventually proved to be an overwhelming obstacle.
Even though key constituents may say they want transformational change, many balk in the moment when it becomes clear what that actually means. Even though the research is unequivocal — you get better returns from more uncertain investments — fear of the unknown often leads Boards and other influential players to resist making transformational moves.
A complication with boards can also be the issue of risk and time horizon. Given the nature of litigation, activist pressures and the growth of stakeholder influence boards can be reluctant to endorse transformational programs that may be perceived as risky or they simply don’t fully comprehend. A board member that may be serving for a handful of years may be highly resistant to taking chances that may drive them back into litigation years after they exit their board assignment.
Combating fears like these requires firstly acknowledging that they may be a barrier, and secondly open and candid discussion of people’s hesitancies.
At Barnes and Noble we knew we had to transform in order to survive. Barnes & Noble had a long history of operating Starbucks cafés within the stores. These cafés were highly successful and created an environment where customers could relax, enjoy a cup of coffee and a snack which, by the way was very profitable. In fact, one of the most profitable departments within the chain was the coffee shops.
Before Ron arrived at Barnes & Noble, a great deal of work had been done around the concept of expanding the food offering at the stores to include better dining as well as beer and wine. As you might imagine, the potential of dramatically expanding the hospitality side of the business could have been intimidating to the leadership team as well as frontline employees. To overcome this, we engaged a broad cross-section of the leadership team as well as the stores team in the pilot concept, built prototypes of new designs within warehouse space with the assistance of store personnel, engaged highly successful outside culinary experts who created tasting events for the team and held numerous meetings with the most senior team members as well as a cross-section of the organization. The result of all this work was presented at the Barnes & Noble investor day on June 23th 2016 and was extremely well received by investors as well as the broader team. The stock closed up over 7% on the day the new concept was announced. Nonetheless, key constituents didn’t support the strategy and pulled back.
Lack of comprehension.
A corollary to fear is mistrust. We often forget that Board members and other key constituents’ ability to figure out what is going on is a function of their own experience. Many of the issues sparking the need for transformation — new technology, the digital revolution, the needs of diverse and unfamiliar customer segments — are foreign to them. A leader for whom these are familiar subjects may be intimidating or frightening, and eventually dispatched for a ‘safer’ choice.
Don’t assume that Board members and other key constituencies have the same fluency that you do with critical topics. Just because they’re not asking questions doesn’t mean they understand what’s going on. It can be helpful to work with the board on programs that provide education, perspective and allies so that they can get more comfortable with new issues. Entities such as the National Association of Corporate Directors and Extraordinary Women on Boards can also provide useful opportunities for helping board members learn what they need to know to support your success.
Remember, too, that different Board members are moving along at different paces. Check in frequently, check for understanding and check that you’re not leaving them behind.
Internal struggles can be a huge challenge. With the rise of the Internet and the resulting distribution of music moving from physical media to digital streaming on the horizon, Sony’s Walkman and Discman franchises were in great peril. In September of 1992 Sony introduced a technology called MiniDisc that was essentially bridge technology between traditional analog devices and digital devices, that were incapable of digitally recording, to the future of flash recording. Given Sony’s substantial investment in the music industry the introduction of any device that could make nearly perfect digital copies of content was highly controversial. A few years after the introduction of the MiniDisc Ron was appointed president of the Personal Mobile Products Company at Sony Corporation of America with the assignment of improving Sony’s sales and profitability within the U.S. market. A key component of that growth strategy was establishing MiniDisc as the de facto digital standard.
In order to establish MiniDisc (MD) as a viable digital standard it was critical that it have the ability to connect to a personal computer and rip songs from the computer to the recordable MD. This of course presented tremendous political problems given Sony’s ownership of Sony Music and the pressure brought by artists to prevent any reproduction of their content. As you might imagine, resistance within the electronics group to such a potential disruption of the music business was extremely high.
Clearly Sony Electronics, Inc. was not going to develop a product that would directly interface with a computer to transfer songs. However, they still needed to compete with upstart competitors that were doing just that, most notably Napster, that not only allowed people to rip songs to the medium but to do so for free!
Ron approached his mentor at Sony Electronics, Fujio Nashida who was President of the electronics group in the U.S. Nashida was initially highly resistant to the idea of connecting MD to a computer however after much conversation and illustration of how the product could be developed in a way that was being respectful of copyrights, Nishida agreed to arrange a meeting with the legendary Shizuo Takashino. Takashinoi-san was one of the original collaborators on the Walkman and still a force to be reckoned with it with as the de facto head of all things audio in the Sony world. Ron developed the pitch and flew to Japan for meetings with Takashino-san’s staff in preparation for a meeting with Takashino himself. Nishida played a key role in convincing Takashino-san, not to allow them to produce an interface for MD to PC, but not to not forbid us from creating an alliance with a third-party to produce an interface. This very Japanese solution allowed Sony to structure an alliance with an Australian company that produced the interface and necessary software to allow MD to record from a computer.
While ultimately not completely successful, the introduction of this capability was a moderate hit and extended the useful life of MD by a number of years as Sony attempted to develop a viable competitor to Apple’s iPod. Ironically it was Apple that ultimately succeeded in getting endorsement from the music industry to allow digital reproduction of their content and thereby solidifying a platform that would give them near monopolistic control of both the music and music device industries.
Human beings have SCARF needs, Ego, Greed and Worse
Different constituents have different triggers to what makes them feel rewarded or threatened. David Rock, in his 2008 paper “SCARF: A Brain Based Model for Collaborating with and Influencing Others” identified five key, and different factors, that people respond to. The Acronym SCARF summarizes these: Status, Certainty, Autonomy, Relatedness and Fairness. Violate a SCARF issue with a key stakeholder and all the skill in the world isn’t going to save you. What you want to do is reduce the level of threat key constituents experience while maximizing their sense of reward.
Scarf needs aside, human beings are motivated by all sorts of preferences that don’t often appear in articles in business publications. As revelations from everything from the #MeToo movement to more recent anti-union organizing suggest, motivations are not always well aligned with a bright future for the organization in question.
A really depressing example of this took place on the board of a major New York City cultural institution Rita was advising. The President had launched a new program aimed at helping chronically underserved young people gain a level of competency in a way that they could afford in their own neighborhoods. While the program was critically acclaimed, the President was dressed down by one of his most substantial donors and a Board member who basically said that if the program was successful, it would make a fellow Board member (who had publicly supported it) look good and that he wasn’t going to put up with that! The program ended up being significantly cut back.
Timing Disincentives and hidden misalignment
Unless there is a clear crisis, it is often easier (and more readily rewarded) to leaders to hang in there for just a few more years than undertake a painful and difficult transformation effort. There are few animals as resistant to making change happen as a CEO with a 3-year horizon to sailing off into the sunset with a nice, safe, exit package.
Finally, a factor we believe plays an under-noticed part is a fundamental misalignment between strategy, budgets, projects and people.
Sometimes even when a leader thinks they are aligned with the Board or Chairman they are not. One famous example that we know of is of a CEO of a Fortune 500 publicly traded company that was brought in to transform an old-line business. Prior to accepting the transformation assignment, the CEO had multiple long discussions regarding strategy, culture, operations and talent with the Chairman and key executives, including the executive that was currently holding the position. After joining the firm, the new CEO, held weekly meetings with the Chairman and regular meetings with the Chairman and executive leadership team to ensure alignment and progress on key programs. The transformation plan was reviewed in detail at each board meeting and received the support of the board at each meeting. Despite all of the work on alignment and communication, the Chairman called a meeting with the CEO and declared that he knew that he had hired the CEO to transform the company but was “just not going to let him do it.” And, as they say, that was that.
Advice for the next guy…
So, what should a CEO or executive consider or know before he or she takes on such a challenging assignment? First, understand that corporate transformation, whether it be at the divisional level or the broader corporate level, is an extremely difficult and high-risk endeavor. It’s critical that anyone considering a transformation leadership role have a clear understanding of the environment they are entering, including not just the financial and operational capabilities of the organization but even more importantly, the expectations, both explicit and unspoken, of ownership and board members. It is the unspoken or behavioral expectations and predisposition’s that will be a leader’s greatest challenge during a difficult transformation journey.
To gain this understanding it’s critical to spend as much time as possible with the board and any other individuals that may have influence or decision rights over the transformation process and ultimately over your ability to succeed. If possible, it’s important to spend time with your immediate predecessor and the team that is currently in place or was most recently leading the business.
Even with all the diligence in the world a leader taking on a large and/or complex transformation role must know that some of the most important aspects of the transformation will be out of their hands and regardless of their personal performance, the expectations and time-horizons of ownership will have a dramatic impact on their ability to see a transformation to a successful conclusion.