Few companies decide to adopt new strategies without being forced to by financial trauma. What can we learn from those rare companies that achieve both successful major change and superior long-term financial performance?
Companies that are able to radically change their entrenched ways of doing things and then reclaim leading positions in their industries are the exception rather than the rule. Even less common are companies able to anticipate a new set of requirements and mobilize the internal and external resources necessary to meet them. Instead, the momentum of and commitment to the prevailing strategy usually prevents companies from spotting changes such as a shift in either the market or the technology, and leads to a financial downturn — often a crisis — that, in turn, reveals the need for change. Few companies make the transformation from their old model to a new one willingly. Typically, they begin to search for a new way forward only when they are pushed.
This raises two important questions for corporate managers. First, is decline inevitable? And second, do companies really need a financial downturn to galvanize change, or can they adopt new ways of doing things when not under pressure? Management theorists have observed that decline, while perhaps not inevitable, is at least very likely after a period of time.1 For this reason, some say it’s critical for organizations to develop new dynamic capabilities deliberately rather than relying entirely on their historic capabilities.2
The Leading Question
How do some companies achieve successful strategic transformations?
- Successful transformers build alternative coalitions internally.
- They create a tradition of constructively challenging the status quo.
- They exploit “happy accidents” to make needed strategic changes.
In order to understand how some companies continue to perform at high levels even as they modify their strategies over time, we studied 215 of the United Kingdom’s largest public companies. We measured performance by, among other things, profits and returns on shareholder funds and on total assets over the 20-year period from 1984 to 2003. Some of the consistent high performers operated in relatively safe and stable markets; such companies were therefore mostly able to maintain high levels of performance without making major strategic changes. Our goal, however, was to draw insights from the small subset of high performers that successfully transformed themselves.