As the Age of Disruption heats up, corporate boards can expect to face ever-increasing pressure to become more strategic. Directors already feel the heat from several sides, ranging from activist investors proposing alternative strategies to business journalists and commentators demanding to know where they were every time a strategic lapse in management thinking is exposed. And let’s not forget the seemingly endless stream of academics, consultants, and advisory bodies urging boards to be more active overseers.
Simply put, the advice just keeps on coming—with much of it pushing boards to become “co-creators” of strategy. In 2014, the influential National Association of Corporate Directors (NACD), representing some 17,000 directors of U.S. companies, published a report with 10 recommendations calling on boards to “shape and monitor” strategy development.
Many corporate directors agree. According to an NACD survey, about two-thirds of directors think boards should improve their contribution to developing strategy and monitoring its execution. But over half of the respondents also indicated that they often lack the time and understanding to do so. This sentiment is reinforced by a McKinsey study indicating that only one in five directors claims to have a complete understanding of the company’s current strategy. No surprise, then, that only three in five directors polled by PwC say their board strongly challenges management’s strategic assumptions.
So, what are the obstacles to greater board involvement in strategy?
Part of the problem is that the management team does not necessarily welcome the additional input, preferring instead to see its strategic plans quickly approved. Around half of the directors in the latest NACD survey note a glaring need for improvement in the quality of information provided by management. They complain that the information they receive from management does not provide sufficient transparency about problems and is hard to interpret.
Yet, however well briefed they are, board directors will always struggle to keep up with or push back on the management team. This is especially the case when there is a significant departure from current strategy. And yet, it is at these junctures that the outside and long-term perspective role of the board is critical. The foremost role of a board, when a company faces dramatic change, is to make sure that the top management team embarks on the right change. If the focus is wrong, flawless execution won’t help—in fact, it generates additional problems. The board must ensure that the tough discussions take place upfront.
This is easier said than done. Although there is plenty of advice on how to avoid screwing up the transformation process, there is curiously little direction on how to pick the right transformation. Perhaps, the rationale is that the choice is “kind of obvious” or else so specific that it defies categorization—neither of which is true.
The lack of guidance is particularly problematic for non-executive directors, who need help to cut through the clutter of information, symptoms, and alternative remedies that the top management team presents to them. A recurrent theme in our program for board members, and in a recent roundtable of international CEOs, was how boards can contribute to the strategy debate. The problem remains that boards have neither a template nor a common vocabulary for assessing a proposed transformation strategy.
“Another common mistake is to focus just on the top few hundred executives, while disregarding the managers on whom transformation success really depends.”
Our own research—based on a four-year study of 62 corporate transformations—provides boards with a tool to diagnose gaps or misalignments in the strategy. Our empirical findings show that current transformation efforts cluster around seven core journeys, each with a different focus, as well as different enablers and blockers. Analysis of stalled transformations reveals that these seven journeys are not created equal. It turns out that the most successful transformations actually involve three journeys—not just one.
The Transformation Sandwich
We identified a three-layered architecture that characterizes winning transformation efforts, consisting of two imperatives and a choice. Using a sandwich as a metaphor, the choice is like the sandwich filling that provides the special flavour or focus of the transformation effort. The two imperatives are outer components, like the bread of a sandwich, without which you risk a messy outcome.
Imperative 1: The Pursuit of Value is the trigger for any transformation: the realization that, with changes, the organization can do significantly better than it is doing currently. This encompasses two phases: the recapture of lost value (through streamlining and cost cutting) and the creation of new value (through re-investment in growth). Many transformation efforts get derailed because they focus too hard on one or the other.
In some cases, the transformation never takes off because the push to recapture lost value through restructuring (e.g., productivity improvements, outsourcing, divestments, and redundancies) undermines the subsequent pursuit of value creation through growth. The initial moves end up cutting so deep that they hollow out capabilities, sap morale, or remove the slack that could have fuelled new endeavours. For example, under new CEO Ronald Boire, Barnes & Noble cut store personnel and aggressively reduced in-store inventory. When Boire was dismissed, after 11 months on the job, the chairman conceded that the struggling bookseller had “shot itself in the foot” with these moves.
In other cases, the re-investment in growth lacks focus and spins out of control. Many transformation efforts burn through cash chasing upscale customers, trying to reactivate innovation, or expanding into distant markets—all of this while neglecting the core business. Without a clear focus on value, a corporate transformation may flounder, even though the destination is correct. A common example is the hasty pursuit of an overpriced or tough-to-integrate “transformative acquisition” that is meant to redirect the strategy but just ends up sucking value out of the corporation. There are numerous examples (e.g., Compaq, EDS, Autonomy), but HP stands out as a repeat offender.
Imperative 2: The Pursuit of Leadership Development is what makes the change stick. A corporate transformation differs from other large-scale changes in its emphasis on establishing new ways of perceiving, thinking, and acting throughout the organization. To serve as multipliers in the transformation process, executives at all levels must understand and model the new mindsets and behaviours, so that employees know how to function in the new context.
Organizations must assess the leadership competencies they have versus those they will need, so that the leadership development focus remains consistent with the chosen transformation strategy. Consider the case of GE in the wake of the global financial crisis of 2008–2009. Though regarded as a paragon of leadership development, the company was suddenly forced to rethink how it was equipping its next generation of leaders for a context of growing volatility and complexity. GE realized that its leadership development setup was overly focused on implementation, and not enough on growth. To support the strategic pursuit of new businesses and new markets going forward, the company identified a new set of traits on which its leaders would be assessed and rewarded. These included external focus, clear thinking, imagination and courage, inclusiveness, and expertise. We have seen many transformations run out of steam because, despite solid investment in leadership development, they fail to re-adjust their efforts to emerging needs.
Another common mistake is to focus just on the top few hundred executives, while disregarding the managers on whom transformation success really depends. Matti Alahuhta, the former CEO of the Finland-based elevator and escalator company Kone, was discussing the company’s strategic drive to get closer to customers, as he noted: “At the moment, our most important leadership program [aims to] develop the leadership skills of our first-line managers. We have almost a thousand offices in different parts of the world. And the leaders of these small offices are the people who work with customers all the time. So their role is truly essential.” By the time Alahuhta stepped down, five years later, annual revenues were up 60 per cent, profits had more than doubled, and the stock price had almost tripled. Where corporate transformation is concerned, leadership development is not a hierarchical concept. It’s about building a distributed leadership capability at all levels of the organization and making sure that managers exhibit the right leadership, no matter where they are.
The Choice: The compelling journey is at the heart of any corporate transformation. While value generation and leadership development represent the indispensable outer layers of the sandwich metaphor, the transformative quest is the distinctive filling. Based on our investigations, corporate transformation efforts can be grouped under five basic areas: global presence, customer focus, nimbleness, co-innovation, and sustainability. A transformation requires the company to do something more, or different, with its operating model (global presence), customers (customer focus), partners (nimbleness), internal processes (co-innovation), or resources (sustainability).
Setting aside the pursuit of value generation and leadership development (the focus for “value generation” is assets; for “leadership development,” it is employees), ongoing transformation efforts are either derivatives or combinations of quests for a greater amount of the following five qualities:
- Global presence enables the company to become more international in its mindset, as well as in market reach, by reconfiguring the operating model.
- Customer focus provides tailored solutions to users by reconfiguring the customer experience.
- Nimbleness helps the company become more strategically, operationally, and culturally agile by reconfiguring business processes.
- Co-innovation accesses multiple sources of ideas and approaches by reconfiguring R&D partners.
- Sustainability helps the company become greener and more socially responsible by reconfiguring resources.
Executives may be surprised by the absence of digitalization from this list. However, “going digital” does not constitute a transformation by itself; it is rather a means to an end. In this respect, it can feed into any of these five basic quests to help reconfigure the internal or external aspects of the organization (see Exhibit 1). Also, the five quests are not set in stone. Over time, as these themes become widely integrated, they will lose relevance as differentiators and give way to new quests, just as earlier quests for quality or safety have. Value generation and leadership development, however, will remain constant.
The Wrong Ingredients
Our analysis revealed three common reasons for a transformation being stalled or derailed. Using our sandwich metaphor, these three flaws are described below:
- The overstuffed sandwich: Some companies overreach, focusing on too many themes at once. The ensuing whirlwind of strategic initiatives leaves employees overwhelmed and unsure of priorities. A good example is Carrefour’s 2009 overambitious seven-themed transformation, under incoming CEO Lars Olofsson. The result was confusion, loss of market share in the home market, and a 53 per cent plunge in share price in one year. The CEO was ousted within two years of taking the job.
- The open sandwich: The leadership team identifies an inspiring transformative theme, such as global presence, while neglecting one of the two imperatives. For example, the team does not properly figure out how globalization will deliver more value, which was the case for several huge retail chains that were forced to reverse their global expansion strategies. The equivalent failing in leadership development is pursuing a globalization strategy without doing anything to internationalize the senior management team.
- The empty sandwich: The leadership team might call it a transformation, but there is no discernible filling or mobilizing theme. Value and leadership development become ends in themselves—generic pursuits without a clear strategic focus. The company gets stuck in an efficiency trap, based on repeated cycles of cost cutting and productivity improvement measures to remain profitable. It’s a familiar pattern in a shrinking or commoditizing industry; an endless turnaround dressed up as a transformation.
The underlying point is that leadership teams need to be mindful of all three facets. Transformations falter when top teams neglect a facet or misalign facets. In addition, transformations can also run into trouble when there is perfect alignment on the wrong quest.
To counteract these problems, boards need to encourage proper debate on the different priorities and the most suitable response.
Choosing the Right Transformation
The choice of focus may be muddled because different parts of the organization (e.g., businesses, regions, functions, levels) sense different problems, opportunities, and priorities. When there is weak internal consensus on which way to move forward, the organization can easily fall for the wrong change, having been seduced by strategic moves that worked for competitors or by a forceful CEO or consultant who comes in with a ready-made solution (previously implemented elsewhere). In such cases, the transformation effort is liable to misfire because it was not the product of deep deliberation or shared conviction, and it does not address the central issue, thereby allowing it to persist and worsen.
When asked which of the five themes are relevant to their organizations, executives often reply “all of them.” However, as noted earlier, that would be too much to handle. Often, the challenge is not deciding what to change, but what to change first. A diagnostic tool can help to surface the multiple perceived challenges as sensed by different parts of the organization, from the boardroom and C-suite to front lines (see Exhibit 2). This allows for a more concrete discussion of which challenges are most pressing and likely to deliver a competitive edge, and how many hurdles the organization can realistically tackle at once, given its leadership capability. The self-diagnosis exercise won’t identify the best solution, but it will support a smarter discussion, making the bulk of critical information visible at a glance.
Robust discussion can be painful, even though execution is commonly portrayed as the hardest aspect of transformation. In fact, the discussion that precedes the choice—reaching a consensus about which change to pursue—is equally challenging. But sidestepping the conflict and discomfort—by deferring the choice to someone else, for example—only reduces the chances of selecting the right transformation objective. To change successfully, you need a team and a board that are united.
For example, Switzerland-based Bossard, a leader in industrial fastener and assembly technology with clients including John Deere and Tesla, held a deep-dive workshop that brought together Bossard’s entire top team and board. In the workshop, two major alternatives emerged. To capture more value, the company could either strengthen relations with its existing customer base by entering the spares and repair services market or join the spread of industrial OEM customers and establish a more global presence. Bossard chose to pursue the latter option, sensing that it would be a big game changer for the company.
For boards and top teams, talk is the work. According to the head of finance of an Italy-based fashion group who used the framework to drive debate, “Our discussions highlighted areas where we perhaps were not as aligned as we thought and emphasized common pain points regardless of where you sit in the organization…. The reflection drove convergence about what we needed to do and stop doing.”
How Boards Can Contribute
Some organizations are extremely complex, which makes it difficult for board members to develop enough knowledge to add value. Yet, the board has a duty to keep the top management team honest and create a foundation for dialogue about the proposed strategy.
Board members can verify that the executive team has properly debated the priorities it is presenting by asking three simple questions:
- Which of the five themes are you pursuing? If the answer includes three or more objectives (e.g., less complex, more innovative, and more international), it should raise red flags for board directors.
- Can you explain what drives value? For example, if it’s a shift in focus from selling products to providing true customer solutions, additional revenues must outstrip additional expenses and the link to value must be clarified.
- How are you retooling people to support the transformation? There must be enough support (bandwidth and bench strength) to achieve the transformation. New competencies may have to be developed or promoted.
In other words, can the top team convince the board that it has embraced the right priorities by reconciling different perspectives and developing a shared understanding of the underlying causes of the current situation? A useful technique, when posing these three questions, is to project yourself into a future where the transformation has been derailed and try to figure out what happened. This process is known as a “pre-mortem assessment.” Engaging in such debate puts boards in a better position to have the kinds of informed dialogue with senior managers that later make speedy action possible.
The Ratchet Effect
Beyond safeguarding the quality and relevance of the transformation effort, board involvement in these discussions results in a kind of ratchet effect that sharpens the board contribution in two other ways.
First, it improves strategic responsiveness, enabling the board and management to remain consistent. This is particularly important in a fast-moving environment. As Kevin Sharer, CEO of the biotech giant Amgen, once noted, “It’s crucial that the board is thinking with you… [otherwise], you can’t seize opportunities as they come up. Yesterday we got fast approval for an acquisition because the board immediately understood where the company was and how this acquisition fit into our strategic and operational framework.”
The second payoff from the board’s more sophisticated understanding of strategy is that it can also play a more active role in leadership development. Directors can discuss the qualities of internal leadership candidates without the close personal ties that sometimes cloud promotion decisions. They can also help to review (or mentor) top talent to ensure that the leadership development capability matches strategic needs.
In a context where 44 per cent of directors report that their boards simply review and approve management’s proposed strategies, it is time for boards to make a more meaningful contribution. Boards that fail to be proactive in this area are likely to leave opportunities for activist firms to step in and do it in their place. And it’s not just the board’s fault. Executive teams get the boards they deserve.
| Exhibit 1: Five Takes on Digital Transformation
Going digital is not a quest in itself; it is a means to one of these basic ends.
|Global presence: Burberry, the London-based apparel group, needed to reach out to millennials around the world, the luxury customers of the future. It appealed to them by redesigning its website, engaging with them through social media, and launching strong online campaigns.|
|Customer focus: The Swedish ball-bearings manufacturer SKF improved customer outcomes by integrating sensors into its ball bearings to enable predictive maintenance. This has slashed or eliminated machinery downtime for SKF customers.|
|Co-innovation: In white goods, China’s Haier Group is using digital technology to develop new offerings with its external partners. The group is reinventing itself as a set of entrepreneurial platforms that bring together users, suppliers, and researchers to find new solutions.|
|Nimbleness: The Swiss drug giant Novartis harnessed new technologies to become more responsive to health-care professionals. Equipping its entire sales force with iPads gave the salespeople instant access to data, from interactive graphs to patient case studies, with which to engage and respond to physicians around the world.|
|Sustainability: SAP, a leading software solution provider based in Germany, has developed a system to access all the relevant emissions data across its operations. As a result, the company can continuously measure, analyze, and reduce its carbon footprint, and has systematically topped the Dow Jones Sustainability Index for its sector.* It has also leveraged this internal transformation into a suite of analytic software and sustainability services to help its clients measure the impact of their green initiatives.|
* “Focus on Human Rights: SAP Again Named Most Sustainable Software Company,” SAP, September 19, 2018, accessed January 24, 2019, https://news.sap.com/2018/09/sap-dow-jones-sustainability-indices-most-sustainable-software-company.
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