corporate transformation without a crisis

NOAH WOODS

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Jonathan Day is a principal in McKinsey’s London office, and Michael Jung is a director in the Viennaoffice. Copyright © 2000 McKinsey & Company. All rights reserved.

ike individuals, organizations change continuously, reacting to develop-ments in their markets and to the arrival and departure of key people.

In a large company, these changes go on more or less unnoticed. But some-times a company must change more quickly than this gradual evolutionallows; it needs a break with the past, an accelerated pace of change—atransformation.

Successful corporate transformations and their leaders—Lou Gerstner atIBM, Ferdinand Piëch at Audi, John Reed at Citibank—become the stuff ofbusiness legend. Transformed companies have achieved unprecedented com-petitive power, a pride in everything they undertake, and outsized returns toshareholders. What chief executive officer wouldn’t want all of these things?

Rather oddly, it is the leaders of companies in crisis who may be best placedto achieve a true transformation. David Simon and John Browne could

Jonathan D. Day and Michael Jung

The art of leading deep corporate change can be learned. The trick is to help each member of the company discover a new reality.

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transformationwithout a crisis

Corporate

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transform British Petroleum from one of Britain’s weakest industrials intoone of its strongest because the company faced imminent ruin. Steve Jobsrescued Apple Computer from collapse. By contrast, most transformations

undertaken in noncrisis conditionsend up failing: employees’ attitudesand behavior remain unchanged,ambitious targets slip downward,and the program is finally aban-doned, leaving the company worseoff than it was before. Especiallywhen things are going well, execu-

tives are justifiably reluctant to undertake transformation programs. Theyknow that failure to act may condemn the company to slow decline andeventual collapse, but they also justifiably fear the uncertain outcome of atransformation process.

The leader of such a program faces a daunting challenge: nothing less thancreating a new corporate reality that changes the way employees, customers,and investors perceive and experience the company. This future reality mustbe so clear and impressive that it seems not only better than today’s realitybut also necessary, even inevitable.

Principles of transformation

Can a company be transformed without first experiencing a crisis? We believethat the answer is yes if the leaders understand what makes individuals andgroups transform their view of reality. The successful transformations wehave encountered all met the four conditions described below; in every fail-ure we have analyzed, at least one has been missing.

1. Everyone is both actor and observer

Transformations call for more than superficial levels of change: well-groovedhabits must be questioned and discarded and new ones learned. But it is hardfor people to achieve the objectivity needed to question and change their dailyroutine while they are still actively immersed in it.

Ronald A. Heifetz, an expert on leadership at Harvard’s Kennedy School ofGovernment, rightly observes that the leaders and participants in a transfor-mation must combine frenetic activity on the “dance floor” with composedobservation and reflection from the “balcony above.”1 In our experience,

118 THE McKINSEY QUARTERLY 2000 NUMBER 4

Most transformations in noncrisisconditions fail: both attitudes andbehavior remain unchanged andambitious targets slip downward

1See Ronald A. Heifetz, Leadership Without Easy Answers, Cambridge, Massachusetts: Belknap Press,1994.


however, corporate leaders in a transformation tend to stay on the floor and dance ever faster. Yet the full cognitive and emotional complexity of thetransformation process can be managed only when its leaders have sufficientopportunities for reflective observation. In the long run, everyone with sig-nificant involvement in the company’s transformation has to make a trip tothe balcony.

The most energetic proponents of change are often naturally drawn to thebalcony: nonexecutive directors who share financial analysts’ point of viewor new leaders recruited from outside the company largely because of theirdetachment. But in the absence of a crisis, this perspective is difficult formost senior managers to achieve—the pressure of day-to-day events rendersdetached observation a rare luxury—and if it is difficult for senior man-agers, it is much harder for rank-and-file employees. Yet without the balconyperspective, these employees will experience a transformation program assomething imposed from above, and the program will fail.

2. Each individual crosses a threshold of conviction . . .

The transformation of a large company requires thousands of employees to adopt a new view of its future, a future they must regard as essential. Before employees can arrive at this deep conviction, three things must beabsolutely clear to them.

First, the “why” of the transformation program, as well as the “why now,”must persuade them; the benefits of success and the penalties for failing toact must be equally obvious. Second, the company’s new future—the “whereto”—must be clear and exciting to everyone. Third, each employee mustunderstand the personal benefits of the program: the leadership must havecredible answers to that natural question, “What’s in it for me?” To inspiregenuine conviction, the program’s rationale and goal must withstand thetoughest scrutiny from the most cynical observer right from the start.

3. . . . and of experience

We may have given the impression that leaders can create a compelling newreality simply by mustering the arguments in its favor—with the odd trip tothe balcony to check on progress. But our experience of personal learningand transformation actually suggests that this picture is incomplete. Humanbeings master complex new activities (heart surgery, golf, cookery) not byreading or thinking about them but through experience. A corporate trans-formation too requires the rank and file to have direct, nonabstract experi-ence, for leaders can’t transfer their own through speeches, documents, and

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videotapes; each individual must re-create it personally. Leaders can, how-ever, create a “disposition to experience,” and later in this article we suggestseveral ways of doing so.

4. The process balances redundancy and control

Mistakes and surprises are inevitable in a transformation process. Industriesdon’t stand still waiting for companies to transform themselves. Championsof the process become disenchanted and leave. Often the program revealsweaknesses that the company had not anticipated. Unless a transformationprogram is configured to accommodate these unwelcome surprises, it can all too easily come undone in midcourse. Such a failure can be disastrous,

since a company whose transforma-tion fails before it is complete rarelytries again.

Anticipating the unexpected whendeveloping the program’s design and resources can make failures lesslikely. Objective formal reviews of

progress (reports from the balcony, so to speak) can help leaders spot prob-lems before they become acute. Bringing more leaders into the program than are needed at each stage can improve the transformation’s resilience todepartures. Linking the compensation of managers to the program’s successmakes them less likely to leave when complications arise. Launching parallelinitiatives in different parts of the company increases the chance that keyideas will survive. Finally, arranging meetings where people from differentbusiness units, divisions, or regions compare progress and perspectivesmakes it easier to identify and correct problems.

Stories of transformations

If these are the conditions of a successful transformation, what should leadersdo to create them? To help individuals cross their threshold of conviction,the leaders must provide a “screenplay” for the drama to come—a storyshowing why the company must transform itself, where it is heading, andhow it will get there. The story must be so convincing and vivid that itsreaders will want to help it come true. Effectively framed, such a story canhelp people strengthen their conviction and start experiencing “the newworld” even before it arrives.

A transformation born of crisis writes its own story. Before a crisis hits, it ismuch harder to create an authentic story explaining why a company should


Failure can be disastrous, for a company whose transformationfails before it is complete will rarelyattempt to transform itself again


transform itself. Nonetheless, even if a transformation isn’t driven by a crisis,it is important to clarify and write down the story. Giving it this formalembodiment forces the top leadership of a company to think it through andensures that its central elements will remain similar no matter who is actu-ally telling it.

A transformation story is neither a writer’s gimmick, such as a “retrospec-tive from the future,” nor an anthology of reflections from managementsages. It is nothing like the mountains of documents and presentations thatso often accompany change programs. The great transformation stories areoften short, and some are surprisingly unpolished. We encourage top man-agers to write their transformation stories themselves rather than delegatethe work to a communications unit or an advertising agency. Authenticityand directness are far more important to a story than are fine prose or clever visuals.

Although each story’s specific form will vary, we envision a transformationstory in three chapters, corresponding to the why, where, and how of thetransformation.

Chapter 1: Why does the company need this?

Almost always, the story of a transformation acknowledges the events thattriggered it: the company must take drastic action because its financial posi-tion is weak, say, or because the competition has gained in power, or becausetechnology has revolutionized the industry. But these are oftenonly symptoms of deeper problems. If the transformationprocess is to address those problems, they too must beincluded in the story, which must explain why and howthe financial situation became weak, the competition gainedstrength, or the new technology blindsided the company.

Such brutal honesty is difficult and therefore rare, for it leadsto awkward questions about the company’s previous deci-sions and current leaders. But a shared understanding ofthe actual cause of the current state of affairs is essential to a transforma-tion. Putting hard truths on the table makes some people uncomfortable, but avoiding those truths puts success at risk.

Chapter 2: Where is the company heading?

The second chapter, which calls for true creativity, outlines the company’sfuture and makes it so convincing that it seems destined to happen. Many



companies derive their “destiny” from the triumphs of other companies andfrom known facts: surveys, benchmarks, best practices. Such companiesassemble their future piece by piece. But in our experience, a future thatmerely imitates what others have achieved, no matter how great their results,rarely inspires employees.

Instead, the company needs a genuinely new and superior idea for a product,a quality standard, a technology, or a managerial model. Such ideas varyfrom company to company, but in all cases they must be capable of giving ita decisive competitive superiority. Of course, companies can learn from theircompetitors. Nonetheless, the ideas that drive a transformation always movebeyond what others know.

Chapter 3: How can the company reach its goal?

Returning to the realm of the practical, how can the company use the diag-nosis of the first chapter and the new idea of the second to transform itself?There are many technical details to spell out concerning tasks, phases,timing, and responsibility. But while detail is important, it is not sufficient to answer the question of how the company will achieve its goals. Transfor-mational learning comes, ultimately, from personal experience. The leaders’experience, which should be embedded in the story, must be internalizedwithin every participant in the process. Each participant must undergo an“identity transition.”

Although orchestrating thousands of these individual identity transitions is an enormous challenge, doing so will make the process of change self-sustaining. Once individuals begin to experience the early realities created by the transformation story, they will often try to do what it takes to com-plete it on their own.

Making it real

Getting thousands of people to move across that threshold of initial experi-ence is undoubtedly the hardest task facing a management team that leads acorporate transformation. We have observed many situations in which a top-management group has discovered the causes of the present problems of acompany and developed a convincing vision of its future. These leaders havecaptured that experience in a powerful transformation story and struggled to help many thousands of employees, business partners, and customers dis-cover the logic of the transformation for themselves. After all, the company’sleaders, as we have already noted, cannot know or experience anything onanyone else’s behalf.



The challenge

Here the leaders face a contradiction. On the one hand, identity transitionsmust be highly personal, arising from real-life experience. On the other, thetransformation won’t succeed unless the transition is carefully choreographedfrom the center. Indeed, central leadership is essential to any transformation.Only a few people in most organizations have the stamina, ambition, andideas to develop and communicate an effective transformation story. Only apowerful central group can guide the process through the risks and setbacksencountered during every transformation. Only central controls can preventchaos. Ultimately, however, the transformation must proceed without centralleadership. To acknowledge the need for a not-yet-existing reality is to makea conscious, free decision. Individ-uals must make this decision forthemselves.

The most common approach to alarge-scale transformation processinvolves central definition and man-agement. That approach sometimesworks in a crisis. To prevent the threatened closure of a factory, its workersmay well accept draconian staffing cuts. To save a company from a hostiletakeover, managers may allow core businesses to be sold. But without acrisis, these prescriptive methods run into trouble, for the shared convictionthat permits a company to endure setbacks and complications can’t be cen-trally imposed.

Hence the rise in recent years of attempts to use a “cascade” process—inwhich each round of discussions engages new people in a dialogue about thetransformation—to persuade every organizational level of the need for radi-cal change. Although this approach usually persuades more employees of thestory’s necessity than do prescriptive methods, it has practical drawbacks,especially in large organizations. It isn’t easy to arrange conversations with50,000 employees. As the cascade works its way down through the organiza-tion, the dialogue it creates loses spontaneity. Overstretched lower-level man-agers may have too little feeling for the transformation process to touch theiraudience. The leadership group may try to bypass them by using a video pre-sentation, but the dialogue then turns into prescription.

Are there other ways to resolve the problem? The leadership group can’ttransform individuals, but it can do much to foster their readiness to accepta transformation. The leaders can remind people of past events to spur themto re-create former glories or, for that matter, to avoid former mistakes. They


Only a powerful managementgroup at the center can guide atransformation through the risksand frustrations of the process


can encourage employees to visit other organizations to see and feel the newways of working. And by painting a vivid picture of the future, they can giveemployees a feeling for a world that does not yet exist.

New approaches

Such actions create a disposition to embrace change. But do the leaders haveto be personally involved in creating this disposition? Are there other ways

to encourage the focused and disciplined patterns of dialogue,thought, and action that transformation entails? Somestriking cases of success suggest that there are.

St. Luke’s. Consider the case of an extraordinarily successful UK advertising agency, St. Luke’s. Each of its

clients has a specific room in the agency’s building.2 Jointlydesigned by the client and the St. Luke’s team, the room

is filled with the collective knowledge of the client’ssituation, advertising campaigns, products, and so

forth. Each client room in St. Luke’s is different. Theessence of the agency’s knowledge is presented, sometimes on wall displays,sometimes in electronic form, and sometimes in the furniture and colors. In each case, the room captures the work of the joint agency-client team in a way that others can see and personally experience.

St. Luke’s guarantees its clients 24-hour-a-day, seven-day-a-week access to its building if they agree to enter only their own client room, which thusbecomes a place where executives and line managers at many levels canexperience a new corporate identity. Each of these rooms, providing con-stantly changing yet concrete access to the joint view of reality envisioned by St. Luke’s and the client, is far more tangible and immediate than theusual paper or slide campaign presentation.

Ford Motor. In the course of a sweeping global transformation program, Fordhas developed a novel approach that fosters identity transitions. Drawing on the story drafted by the company’s leaders, all managers, following a centrally defined process, develop individual interpretations of the task ofchange at Ford. This individual perspective, which Ford calls a “teachablepoint of view,” provides the content of a workshop at which the next groupof employees is encouraged to create its own teachable point of view.3 In


2See Andy Law, Open Minds, London: Orion Books, 1998, published in the United States as CreativeCompany, New York: John Wiley & Sons, 1999.

3See Suzy Wetlaufer, “Driving change: An interview with Ford Motor Company’s Jacques Nasser,” HarvardBusiness Review, March–April 1999, pp. 76–90.


principle, this process follows the cascade model, but prescribed elements(including detailed instructions for developing teachable points of view) canbe used to form dialogues that are genuinely individual.

Johnson & Johnson. Despite years of success, the global heath care companyJohnson & Johnson was concerned about avoiding IBM’s experience duringthe 1980s, when it fell from a seemingly unassailable position to near col-lapse. IBM apparently had the right strategy “in the drawer” all along, butnobody asked the questions thatwould have prompted the adoptionof the strategy.

So J&J’s leaders designed a processcalled FrameworkS to ensure that the right questions were asked.4

The uppercase S in the name empha-sizes the importance of bringing many diverse perspectives to the leaders’discussions—the views not just of managers but also of customers, artists,politicians, and so on, in a process that is simultaneously open and directed.

In a typical FrameworkS exercise, 10 to 12 people are invited to become temporary members of J&J’s executive committee, which has 9 permanentmembers. The expanded group meets in a remote location for a full week to address a specific problem. The temporary members of the executive com-mittee, often from the middle ranks of the corporation, are chosen for theirability to bring diversity to its discussions. No one at these meetings pullsrank, and no single opinion carries more weight than any other.

J&J then creates subcommittees and task forces, each directed to study andinvestigate a particular topic. Ultimately, hundreds of employees will joinRalph Larsen, the company’s CEO, involving themselves in the transforma-tion process and immeasurably widening the executive committee’s perspec-tive on what must be done.

Catalytic objects

In all three cases just described—and in virtually every successful transfor-mation exercise we have seen in large companies—individual employees did not form a transformational outlook primarily as a result of personalinteraction with the CEO. The crucial element is rather a personal experi-ence of what we have come to call “catalytic objects,” such as the St. Luke’s


4See Donald L. Laurie, The Real Work of Leaders, Cambridge, Massachusetts: Perseus Books, 2000.

An individual employee forms a transformational outlook primarilyas a result of personal experience,not direct contact with the CEO


client room, Ford’s structured but freely teachable points of view, and J&J’sFrameworkS conversations.

Catalytic objects are “objects” only in the sense that they can be described,deployed, and observed. They are nothing like the inspirational wall plaquesor coffee mugs beloved of satirists. Catalytic objects in different transforma-tion programs have almost no formal similarity, but they are similar in func-

tion: they help each participant in a transformation process develop apersonal version of the story.

Because a catalytic object can beobserved and discussed, it fosters the detached perspective that is crucial for deep adaptive change.

Actors become observers. They can stand back from the company’s past and prospects even as they shape those prospects. Catalytic objects serve totransfer knowledge and simultaneously make it possible to re-create experi-ence. The sequential approach of “tell them the facts, then fire them up”gives way to a faster, more effective parallel process of discovery.

Finally, catalytic objects can be centrally shaped and their development in theorganization centrally monitored. They provide the degree of control neededto keep a transformation process on track as well as the redundant messageneeded to overcome the inevitable noise and transmission failures from theexecutive suite to the front line.

Catalytic objects thus provide a bridge between a centrally developed trans-formation story and each individual’s personal experience. They solve theproblem of faithfully transmitting a critical central message through thevagaries of a cascading dialogue. They allow the transformation process toring with freedom yet simultaneously to move within boundaries set by theleadership group.

We are only beginning to learn about the best ways to construct and deploycatalytic objects, but our confidence grows daily that they are the key to the“leadership without leadership” that is essential to a successful transforma-tion program.

In seeking to increase the success rate of corporate transformations, we areless concerned with the names of things (“transformation stories,” “catalytic


The fine art of leading a corporatetransformation may be the mostimportant core competence in aturbulent competitive environment


objects,” and so forth) than with their functions. Many skilled transforma-tion leaders use these approaches intuitively and implicitly, without a formalnomenclature.

The drama of each corporate transformation unfolds in a different way, and we would be the last people to prescribe a uniform script that must befollowed in all cases. We are convinced, however, that success in corporatetransformations is more than a matter of luck and that the art of leadingthem can be learned. In a turbulent competitive environment, this art may be the most important “core competence” of all.


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corporate transformation without a crisis

Leadership & Management

large company

mckinsey company

company worseoff

new reality

new corporate reality

view of reality

superficial levels of

jonathan day