Many leadership books and business articles discuss why change efforts fail and how to overcome barriers to change that inevitably appear. But are they adequate as guidance?
Often, companies fail not because their change efforts fail but because they don’t initiate change until it is too late to succeed. Kodak, Blockbuster, Sears, Victoria’s Secret and Nokia are well-known public company examples.
Among privately held companies, an example of failure to change is the precast-prestressed concrete industry. The industry’s products include the “Lego” blocks of commercial construction commonly used in parking decks and bridges and building cladding that resembles natural stone or brick. From the 1940s through the early 1990s, the industry’s products started to commoditize, meaning that buyers (the general contractors) made purchase decisions mainly on price. With commoditization came industry consolidation (as it always does) by the larger, publicly owned companies with the capital to acquire competitors or expand internally.
Many companies not acquired went out of business. Others succeeded only when demand exceeded industry supply. Yet Finfrock of Orlando, Fla., remained independently owned and grew exponentially (in revenue, employees and profit margins). It is now Central Florida’s largest design-builder and contractor. To expand its market, it recently invested $36 million to build a plant in Miami, creating an additional 200 high-paying jobs. CEO and owner Robert Finfrock preached to his peers the benefits of selling completed buildings to owners versus parts to general contractors. But none listened and followed his company’s successful example of moving up the food chain.
Why do independently owned companies fail to change? And what might boards do to avoid these pitfalls? Here are five main reasons private companies fail to change.
Fear of failure. Robert Quinn, in Deep Change: Discovering the Leader Within, coined the term “the tyranny of the in-basket.” Operational management is familiar, so leaders can stay busy and feel accomplished merely by operating the company. Change is messy and the path is unknown. Uncomfortable with the unknown, leaders remain stuck with what they know. Victoria’s Secret executives knew how to create women’s underwear with sex appeal and steered away from products that would advance comfort, an emerging trend.
Inertia due to mistaken measures of success. Leaders pride themselves on financial performance. If the numbers are good, why not keep doing what worked in the past? But finances are a lagging indicator of success. They reflect the past. They do not predict the future. Sears’ catalog, for example, was profitable until it wasn’t, because of the rise of Walmart. The stores were profitable until the rise of big-box category killers like Home Depot.
Blinkered lenses. Just like the carriage horse that can only look ahead, leaders do not look beyond their industry boundaries and customer base to understand emerging changes. Customers are satisfied until they find something new, an option that often comes from outside their traditional list of options. Blockbuster lost market share to Redbox and Netflix (initially in their mail DVD days). Both offered convenience that movie watchers found more beneficial than visiting a video store.
Resistance of the dominant coalition. Every organization has a most influential function, business unit or product offering. If adaptation to new circumstances threatens its financial resources or the positional power of its leader, the company will resist change. Kodak had digital technology, but its film business (once its profit center) was the dominant coalition.
Failure to deliberately think about the longer-term future. Companies often start their strategy work before budgeting. It’s no wonder then that the future becomes next year, and strategy becomes near-term product plans. Significant trends sneak up on them, until it’s too late to create a proactive, effective response.
Underestimating the impact of technology trends. Companies must adopt new technologies as they emerge to avoid significant market disruption in today’s technology-driven economy. Many do not, as they fail to grasp the breadth of potential transformation. Many independently owned companies thought digital transformation was merely creating a website and communicating via e-mail. The winners made their companies digital-first in customer experience, supply chain and offerings. AI is the next wave of change. While independent companies want to avoid being on the bleeding edge of change, failure to understand AI’s implications for productivity, offerings, data monetization and talent will be costly.
Eventually, the need for change becomes apparent. By this time, however, laggard companies lack the resources to change. Proactive companies have captured market share that is not easily given up. That’s the conundrum: The time to initiate change efforts is, in fact, when they may appear least needed.
So how can boards keep their leadership teams from falling prey to these failures to change?
Remember Economics 101, because it drives all markets. All customers buy on perceived value — benefits less the costs to acquire them. The benefits can be tangible or perceived, functional or emotional (as can be the costs). If your organization cannot offer hard-to-copy benefits, it will compete on price, even in custom product or service markets. Only the lowest-cost competitor — often the one with scale or network effects — can sustainably compete on price when this situation emerges. Challenge your leaders as to whether their value propositions are spin or fact and whether they are theoretical or appreciated by customers. Are purported advantages hard to copy? If so, why? Ensure you interact with your organization’s customers or read customer research reports to understand purchasers’ value equations.
Go beyond the SWOT. All companies conduct a strengths-weaknesses-opportunities-threats (SWOT) analysis in their strategic planning. The board must make sure to draw out the future implications of this analysis. What will competitors be doing? How might the weaknesses undermine achieving future goals? What does the SWOT analysis suggest is the key barrier to or opportunity for higher growth? A great strategy is an alignment of resources to address just this. Make sure your leadership team possesses and owns the answer.
Read broadly and ask hard questions. Board members sit in a balcony position. Given the demands of running a company in today’s markets, they should have more of an eye on the outside world than the leadership team can afford. Therefore, feel free to identify risks and opportunities outside the current thinking of leaders. Ask “What if?” questions. One of the highest compliments a director can receive is “She asked questions we did not have answers to … so we had to go back and think more deeply.”
Challenge the leadership team’s notion of what business the company is in. Leaders can get stuck thinking what they do is the business they are in. Blockbuster was a video store (emphasis on the store) rather than a home entertainment provider. The precast companies referenced earlier saw themselves as subcontractors and manufacturers of building components. Instead, a company is a collection of people, history, assets and capabilities that can be reconfigured, with some additions and deletions, into something much better than the current business. Board members play an essential role in the reimagination.
Move board agendas to be more strategic and less financial and operational. Ensure your organization has a solid strategy with key performance metrics tracking its execution and desired impacts. Schedule the strategy work at the start of the fiscal year. Use board meetings to monitor progress. Then, add topics at each board meeting that link to the strategy. For example, the board can ask the leadership team to present an assessment of talent and the development plans for key talent to fill strategic roles. Boards must make sure there is a current and future bench to execute the strategy.
Promote curious leaders to the CEO role and encourage a culture that values questioning. Look again at the reasons companies fail to change. A root cause is a leadership team that lacks curiosity and feels comfort in doing the same things as they have in the past or with merely incremental changes. Markets are too dynamic today for these kinds of leaders. No one wants a CEO who changes things up just for the sake of change. But today’s stellar leaders know that the greater risk is keeping things the same.
Invite inquiring, creative thinkers from outside your industry onto your board. A great board needs a lot of talent — some with industry experience, some with functional expertise and all with the ability to add value across multiple board agenda topics. But make sure you add talented individuals from outside the industry with highly strategic and creative minds to this mix. These people are often not C-suite executives who moved up the ladder in one company or industry. They may have been too curious to do so!