Strengthen Your Change Muscle for Competitive Advantage

To create a competitive advantage in an increasingly uncertain and unpredictable world, building an organizational change muscle is as important, if not more so, than having a great strategy, well-run operations, or the right talent. While the ability to react quickly to emerging trends, threats, and opportunities has been necessary for successful businesses for centuries, the pace of change in the past few decades has made it the most critical element for success.

The blacksmith’s foundry had to adapt to new technologies and customer demands on the scale of centuries, while car companies of the mid-20th century had to adapt to changing regulations and customer preferences on the scale of decades. Today, adapting to external changes is an almost constant need that takes place on the scale of months, if not weeks. It is, of course, not enough just to know that you need to adapt; you must also know what adaptations are necessary, how to make those changes, and how quickly they must be made.

The form of organization that we are familiar with today dates to the industrial age, when reliability, consistency, and stability were core requirements. Many of our management systems and processes, and much of our thinking, still reflect this desire for control, with a predilection for minimizing deviations rather than maximizing change. Our biology and evolutionary history also bias us toward the status quo and stability. Additionally, a few misplaced beliefs about what makes organizations successful prevent us from creating adaptable systems.

Overcoming these limitations requires a deliberate approach to building a more adaptable organization. Our research and experience have uncovered three key elements to overcoming these barriers: effective management systems, employees at every level equipped with change capabilities, and an adaptive culture.

Effective Management Systems

Systems — whether planning, budgeting, or talent — evolve as an organization grows. These systems are largely designed for stability as companies evolve from being more ad hoc, nimble, and flexible to being more rigorous, repeatable, and consistent. In a faster-changing context like today’s, these systems must be more change-friendly. But a number of myths, both implicit and explicit, impede the design of adaptable systems.

Myth 1: Employees need detailed policies and procedures to have clarity and to ensure that they act in the best interests of the organization.

At the advent of the industrial age, the role of employees was to follow orders. The vast majority of jobs were repetitive in nature, and there was little to no advantage to workers in trying new ways of doing things. Organizations have been slow to abandon the idea of a select few deciding what to do while the vast majority follow instructions in the form of standard operating procedures and policies.

Jason Fried and David Heinemeier Hansson explain in their book Rework, that “Policies are organizational scar tissue”: A perfect example of how this scar tissue develops is United Airline’s response to 2017’s viral video showing Dr. David Dao — a passenger who had to be involuntary removed from the flight after boarding — being dragged off the plane. Implausibly, then-CEO Oscar Munoz pointed to a lack of policies and procedures as the issue, not the judgment exercised by employees. A belief that this sort of an incident can be solved by more training and policies is what leads to a proliferation of procedures that add little value.

In contrast, companies like L.L. Bean, The Ritz-Carlton Hotel Co., and Netflix are known for giving their employees significant autonomy in making decisions in the best interests of customers. This principles-based approach is far more effective when employees are faced with new and changing situations almost constantly. We aren’t suggesting that adaptability requires throwing away the employee handbook, but adaptable organizations lean more heavily on guidelines and principles. When they do rely on rules and policies, they provide a clear rationale for why and how they enable business success.

Myth 2: Information is power, and sharing it too broadly can be disruptive.

We have yet to meet a leader who says they don’t value transparency, but how information is handled in most organizations says something else. Organizations largely operate on a need-to-know basis, under the assumption that sharing information too broadly will lead to its misuse and unnecessary fear or complacency. This “you can’t handle the truth” thinking is flawed and also dangerous in a faster-changing world. If employees don’t know how the business is performing or what leaders are expecting and prioritizing, they can’t help identify threats and opportunities or behave in ways that enhance agility. Additionally, in the absence of information, employees are likely to fill the void with anxiety-causing rumors.

We saw the impact of transparency and information-sharing in how a global consumer products business restructured its manufacturing footprint. Rather than following the usual model of keeping all information within a small decision-making team, the leader of the reorganization openly shared the rationale for making changes, the criteria by which decisions were made, and the broad timeline for execution. Involving people from the start allowed them to make better decisions about what products to move to which facilities, how best to ramp down production in plants that would be shut down, and how best to support employees with transitions. When the plants were closed, employee productivity on the final days was as high or higher than it had been before the announcements. The reorganization team hit all of its financial metrics, and 96% of employees said they had been treated fairly and were well supported in the transition.

Information systems that are more change-friendly, like in the example above, are geared toward sharing information transparently, making it easier for anyone to access important data, and encouraging employees to share knowledge freely.

Myth 3: Leaders are inherently better decision makers.

In his book Thinking, Fast and Slow, Daniel Kahneman wrote, “A remarkable aspect of your mental life is that you are rarely stumped.” We are quick to assume we have an answer, even when we don’t — and this is truer of individuals in positions of leadership. In most cases, good decisions require inputs and information that may not be obvious. The impact of this overestimation of an individual leader’s ability to make well-informed, sound decisions is reflected in the high number of mergers that fail to increase shareholder value. The driving force behind the infamous Daimler-Chrysler merger was Jürgen Schrempp, Daimler-Benz’s chairman at the time, who saw the possibilities. But the merger floundered from the start: It would only return value through deep integration, but the engineers and brand teams weren’t involved in helping to bridge the cultural divide. The deal was eventually undone.

Those closest to a decision’s inputs and impacts are likely to be in the best position to understand the trade-offs of a given choice and also identify the best way to implement that choice. The caveat to this delegated decision-making is that it requires individuals to know the guardrails and to have clarity on organizational priorities and strategy, which requires the right information systems. So if you want better, faster decision-making, start by ensuring that everyone in the organization understands the priorities and objectives, then let those closest to the decision make the choice, or at least consult them thoroughly before making the call.

Myth 4: With careful analysis and thought, it’s possible to predict the future.

The belief that successful leaders and companies can predict the future, set a clear direction, and stay the course doesn’t encourage people to reevaluate assumptions or to start, stop, and change direction. Yet study after study has shown that our ability to predict the future is, shall we say, imprecise. Many planning, budgeting, and resource allocation approaches are still built on the idea that we can be accurate in our predictions. These processes leave no room for pivots and don’t actively question the assumptions that underpin plans.

The capital plans at many organizations were built in an era of very low interest rates. In a recent conversation with health care CFOs, they expressed frustration with other leaders in their institutions who weren’t proactively evaluating their capital allocations in this new environment. Scenario planning, where not one but many paths are considered and the best is picked based on well-articulated assumptions, helps set the expectation that changes will happen. In this example, if the capital plans for those health care institutions were built in multiple interest rate environments, it would be easy to know what changes would be necessary and when. Adaptive companies may seem like they are always two steps ahead, but the key is not the ability to predict which way the wind will blow but rather the ability to sense the prevailing winds and adapt quickly to ride with them.

To design management systems that are truly agile and able to keep up with the pace of change, leaders must overcome these myths. The exact form of a planning or performance management system for a given organization will vary, but for a company to be agile, leaders must put principles over policy, distribute information widely, push decision-making down, and expect changes.

Employees Equipped With Change Capabilities at Every Level

Building an organizational change muscle requires knowing how to change, not just among a few individuals but across the organization as a whole. Leaders must deliberately and proactively empower employees to identify needed pivots by sharing the approaches, frameworks, and tools they can use while instilling an understanding and commitment to business objectives and priorities. Individuals who are able to (1) describe a compelling vision for change or a new idea, (2) understand the stakeholders who could be influential, (3) generate buy-in, and (4) identify the impact the change will likely have and where resistance might come from are far more likely to be able to lead efforts that address threats and opportunities.

After two big publishing houses merged, we saw how people who have greater change capabilities can have a positive impact on businesses’ performance. Seeking to use the change to spark new ideas, leaders encouraged everyone to get involved in the integration. One big idea came from a junior sales rep who had noticed that when there was more buzz around certain titles from unknown authors among retailers and on social media, it was indicative of a potential bestseller. Couldn’t the sales team of thousands deliberately create excitement around a title and author? She started small, with a handful of eager volunteers promoting a few titles through their own and corporate social media accounts. By enlisting more colleagues and creating excitement around this new marketing approach, she generated support for finding other undiscovered gems. Each title was more successful than the last; the fifth received a prestigious award and was made into a major motion picture. Without the change skills that helped people buy into the idea, it could very well have ended up, as so many promising ideas do, in a suggestion box, never to be implemented.

The ability to lead change is an underappreciated skill set. As the above example demonstrates, organizations that prioritize the development of employees’ change muscles see a measurable return on that investment both in employee behavior and on the bottom line.

An Adaptive Culture

The most successful organizations have a level of cultural adaptability that their less-successful competitors do not. In their 1992 book Corporate Culture and Performance, John Kotter and James Heskett compare the performance of a set of companies exhibiting “performance-enhancing cultures” to a control set of similar companies without such cultures. The original research showed five times more revenue growth over a decade among the companies with a performance-enhancing culture. We recently updated this 30-year-old research. Of the 10 companies in the high-performing group, eight are still in business and have averaged a 5.6% compound annual growth rate (CAGR) over the past 20 years. In the comparison group, only six are still operating; they have averaged a 0.7% CAGR over this same period. What’s more, a company with a performance-enhancing culture outperformed one without it in 5 out of 6 cases.

What constitutes a performance-enhancing culture? In addition to being strong (that is, culture has real influence across the organization) and fit for purpose (culture is aligned with organizational strategy), these cultures integrate an awareness of internal and external dynamics, encourage smart risks, and care deeply about customers, shareholders, and employees. Such organizations see change as a constant, strongly value people and processes that can create useful change, and encourage leadership from more people.

This adaptive culture can be intentionally shaped through an approach that starts with new actions, not with leaders identifying or articulating a desired culture. Rather than merely stating a desire for more experimentation, it’s encouraged through actions, such as rewarding testing and learning, including the voice of all stakeholders in evaluating success, allowing for more dispersed decision-making, and more. These new actions, when consistent with the business strategy, start to generate tangible results, which can inspire more actions when celebrated early and often across an entire organization. Over time, this cycle of new behaviors generates lasting habits that snowball companywide. Once behaviors become habits, these new ways of working become “how we do it here” rather than isolated or fleeting instances.

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At heart, an adaptable organization is constantly scanning for threats and opportunities and rapidly shifting direction to address them. Information flows unobstructed from all areas and across silos that innovate constantly on products and services and how they operate. These organizations are adept at experimenting with new ideas, stopping unsuccessful ones, and staying externally focused.

Adaptable organizations demonstrate more leadership from more people in the form of aligned, committed action. They don’t rely on a few charismatic leaders to set direction but instead move quickly and flexibly, grounded in shared values, principles, behavioral norms, and aligned objectives. They are attentive to the needs of all stakeholders, not just one or two groups. Research going back four decades has demonstrated a strong, direct link between adaptability and business performance, with adaptable organizations performing an average of five times better than their peers (as measured by revenue growth).

Offering the best product or having a size advantage can confer a momentary benefit, yet the only lasting competitive edge for businesses in today’s rapidly changing world is the ability to adapt in reaction to external changes and change proactively in anticipation of them. An organizational change muscle can be built through an intentional effort to develop change capabilities, encourage an adaptive culture, and reevaluate the faulty beliefs that underpin many of our current approaches and management systems.