Success breeds success. In a growing and buoyant market, business tends to come to you and profits tend to be solid and growing. Ultimately, success can breed failure. When organizations enjoy solid growth in vibrant markets, over time the company tends to become complacent. It stops listening to its customers and the market. It gets fat. It becomes inefficient. It believes that the past success is proxy for future success. It believes that it is invincible.
A great example of success breeding failure is IBM in the 70s and early 80s. In spite of the market telling IBM that it wanted software and hardware solutions in smaller computers, IBM doggedly pursued a strategic path that relied on selling large mainframe computers. Its inability to see the market signals and the fact that the market rules were changing, wiped $46b off IBM’s shareholder value.
Another example of IBM being out of touch with its operating environment was when Bill Gates did his defining deal with IBM to sell his operating system MSDOS, on all IBM personal computers. Notwithstanding that IBM had started manufacturing personal computers, it nevertheless believed that it should not own the operating system. This one decision destroyed value for IBM shareholders in perpetuity and made Bill Gates one of the richest men in the world.
The above examples occurred at a time when markets were relatively stable and changed slowly over time. With the advent of the internet, information is available in real time and virtually everyone has access to this knowledge. As a consequence, both individuals and companies are becoming smarter and more sophisticated. Furthermore, as the world globalizes, the world is becoming a smaller place where trade borders and barriers are being eroded. Because of the internet, events, discoveries and incidents become known instantly they occur. People power is becoming persuasive. Individuals operating from home are competing with multinational conglomerates. Social media can build or destroy organizations, brands, products and people very quickly. In short, traditional business rules have and are rapidly changing.
Today, organizations need to be nimble and agile if they are to be sustainable and thrive over time. Yet, how many of our large, well known companies are nimble and agile? Regrettably, most of the organizations that we have worked with across over 50 industries suffer from corporate inertia. Indeed, many suffer from what we call, strategic drift. Strategic drift occurs when there is a substantial time lag between changes in the market and concomitant changes within the company. Accordingly, the organization becomes unaligned with its served markets and lose market relevance. For further information, see the Concept of Strategic FIT.
Overcoming inertia and strategic drift are necessary conditions for achieving operating agility.
Inertia arises out of inaction. And inaction is grounded in organizational culture. Many organizations build silos in which departments and functions operate independently rather than interdependently. Management create performance reward structures that encourage individuality and independence. Each department and function across the organization attempts to optimize, and in the process sub-optimizes the performance of the organization as a whole.
In addition, executives feel disempowered and unable to make decisions without getting approval from management . Red tape and bureaucracy plague organizations and weigh them down.
Furthermore, corporate politics frequently leads to individuals making conservative decisions to cover their backside rather than putting themselves ‘out there’ by going on risk. Fear of being ostracized, making mistakes and self-preservation are all drivers of inertia.
Finally, inertia arises because people are not passionate enthusiastic about the company. They subordinate company interest in favor of personal interest. The principal cause of this, is a lack of emotional investment in the vision. Establishing a compelling vision that gets people out of bed in the mornings and one in which every employee knows and understands what they need to do to make the vision a reality is, perhaps, the most difficult leadership task that executives encounter. When employees become emotionally invested in the vision, they develop a motivation, passion and enthusiasm that is enduring because they have their eyes on the prize and not the price.
The good news is that silos, lack of empowerment and politics are all the result of leadership and company policy. These issues can therefore be overcome relatively easily. Getting people invested in a compelling company vision has proven to be much more difficult. See our Strategic FIT Leadership Module for further information
Overcoming Strategic Drift
There are four necessary conditions, all of which must be present to overcome strategic drift:
1. Strong leadership;
2. The ability to identify soft signals of a changing environment;
3. Have strategy in the heads and hearts of every level of leadership; and
4. The capacity for change
1. Strong leadership
Leaders at every level in organizations generally do not appreciate how much their followers see them as role models and attempt to emulate their behavior and actions. This means that the leader’s behavior and actions duplicate – both good and bad.
Also, leaders often do not fully understand the impact that they have on their direct and indirect reports. Excellent leaders ensure that their company is capable of quickly refocusing its efforts to be better positioned to respond to changes in demand and prevent unnecessary profit swings. See our Strategic FITS Leadership Module for more details.
2. The ability to identify soft signals of a changing environment
Not many companies regularly engage in environmental scanning. The process of environmental scanning reviews all the potential political, economic, social, technological and global forces and trends that are likely to drive future market changes.
The trick is to identify the prime independent variables that will cause change. All other variables tend to be the effect of changes to independent variables. There are only likely to be three (3) to five (5) independent variables in play at any one point in time. Once you have identified the trends or forces that will cause change, the trick is to set up a mechanism to monitor each of these variables so that you identify soft signals of change that can trigger a change of direction, strategy, or tactics.
3. Have strategy in the heads and hearts of every level of leadership
In the 50s, 60s and 70s, strategy was generally the domain of the strategy department. Strategies were developed that remained stable over time. Today, because we operate in an environment that is volatile, turbulent and changes extremely quickly, every level of leadership needs to have the strategy in their heads and hearts so that they can make decisions and act quickly.
One way to give executives a sense of how they might act when the rules change overnight, is to engage in the process of scenario planning. During this process, executives evaluate the robustness of the company’s capabilities and strategies under any scenario.
In 1998, we were working with the executive of a global hotel group in Australia. As part of the strategy development process, we posed the question “What happens if China goes to war with Taiwan?” The executives laughed because they could not see the relevance between the question and their business. We rephrased the question by asking “What happens if your Asian business dries up overnight?” This question got their attention as the Australian portfolio was heavily dependent upon it custom from Asian business and leisure travelers. A few months later, the Asian Crisis appeared out of left field that rapidly decimated hotels that relied on Asian travelers. The following January, the writer met the CEO of the hotel chain who said “Thank goodness we thought about the consequences of an Asian shock. We were able to move more quickly, more purposefully and more deliberately than our competitors. We have mitigated the risks and the potential downside to our business.”
4. The capacity for change
Leading change has proven to be extremely difficult and frequently does not deliver the results that were initially envisioned. To ensure that change ‘sticks’ and that it is well managed, leaders need to ensure that they have four elements in place all at the same time. These elements are:
a. Pressure for change. Without pressure for change, there is no sense of urgency. Accordingly, without pressure for change, the result is denial.
b. Having a shared vision. Without a compelling shared vision, people do not see ‘why’ change is necessary. Resistance to the change is the result.
c. Capacity for change. Our personalities, past experiences, role models, culture and environment all frame the way in which we approach change. Being able to understand individuals’ readiness for change and how different people react to change is a leadership imperative. Leaders need to meet people where they are, which means that you can only implement change at the rate of the slowest people in the team. Without capacity for change, leaders will explore around the fringes but will not go far enough.
d. Actionable first steps. Finally, if we don’t DO anything, nothing will change. Without consistent and persistent action, there can be no commitment. See our Framework for Leading Change in the store for more information.
Leaders are responsible for overcoming corporate inertia and ensuring that their organizations retain market relevance. To do this, they need to ensure that they inculcate operating agility into the corporate culture.
Operating agility necessitates that organizations have the strength and memory of an elephant and the eyesight, speed and hunting ability of the eagle. As a leader, it is your responsibility to breed this hybrid animal.