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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.
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1. For example, see D. Miller, “The Icarus Paradox” (New York: HarperCollins, 1990); G. Johnson, “Rethinking Incrementalism,” Strategic Management Journal 9, no. 1 (January/February 1988): 75-91; and E. Romanelli and M.T. Tushman, “Organizational Transformation as Punctuated Equilibrium: An Empirical Test,” Academy of Management Journal 37, no. 5 (October 1994): 1141-1166.
2. David Teece wrote about dynamic capabilities originally in D.J. Teece, G. Pisano and A. Shuen, “Dynamic Capabilities and Strategic Management,” Strategic Management Journal 18, no. 7 (August 1997): 509-533. He has expanded his explanation in D.J. Teece, “Explicating Dynamic Capabilities: The Nature and Microfoundations of (Sustainable) Enterprise Performance,” Strategic Management Journal 28, no. 13 (December 2007): 1320-1.
3. After our study period, Cadbury Schweppes split its Cadbury and Schweppes businesses in 2008, and the Cadbury part was acquired by Kraft Food Inc. in early 2010 for a 50% premium over Cadbury’s pre-bid value.
4. Since November 2010, SSL International has been a part of Reckitt Benckiser, a global consumer goods company headquartered in Slough, United Kingdom.
5. S. Raisch and J. Birkinshaw, “Organizational Ambidexterity: Antecedents, Outcomes, and Moderators,” Journal of Management 34, no. 3 (June 2008): 375-409; and M.L. Tushman and C.A. O’Reilly III, “Ambidextrous Organizations: Managing Evolutionary and Revolutionary Change,” California Management Review 38, no. 4 (summer 1996): 8-30.
6. W. T. Pearce, ed., “Fry’s Works Magazine 1728-1928: Bi-Centenary Number” (Bristol, U.K.: Partridge & Love, 1928): 29.
7. Unilever Ltd. chairman George Cole (interview in the Observer, Jan. 13, 1963, p. 6; Unilever archival reference 5234).
8. See S.L. Brown and K.M. Eisenhardt, “The Art of Continuous Change: Linking Complexity Theory and Time-Paced Evolution in Relentlessly Shifting Organizations,” Administrative Science Quarterly 42, no. 1 (March 1997): 1-34.