Organizational Change in the Past,

Organizational Change

In the past, many organizations with a huge potential for success failed because they feared change. Instead, some of these organizations remained committed to the types of behavior that initially brought them success, refusing to change with their growing business demands. However, while many organizations have been hampered, or even destroyed, by a failure to make those changes necessary to cope with today's rapidly changing corporate environment, other companies have thrived because of a willingness to embrace modern corporate changes. A brief overview of recent examples of companies that have embraced change in the recent past, demonstrates the importance of corporate flexibility and organizational change. In addition, examining successful change highlighted the fact that internal corporate change, while responsive to external factors, could also help shape external factors; allowing a company to benefit from the type of external changes that are presenting challenges to its competitors. Furthermore, experience has demonstrated that those companies that most actively resist change are the companies that actively resist long-term success:

Long-term success demands constant reinvention. Research done by Mackey and others shows that most fast-growing companies hit a point somewhere over $50 billion in revenue at which they falter. By then, growing apace demands billions of new sales every year. Rarely is the original, unchanged business model up to the job. The only way around the challenge: Nurture the next growth platform long before it's needed.

One of the secrets of expansion in the business world has been for existing companies to meet expanding customer demand. For years McDonald's was the world's fast food leader. At one point in time it opened a new location somewhere in the world every few hours. For a long time McDonald's strategy worked; it outpaced all of its competition in the fast food market in both number of locations and profitability. However, as one might expect, McDonald's eventually reached a saturation point in the market. "While overall revenue kept climbing, the new sites stole customers from existing locations." The result was an unacceptable decline in same-store sales, which had the effect of reducing the profit potential of each additional location. The era of endless expansion was over. However, it took new leadership to recognize that McDonald's had to change its focus. In 2004, James Skinner became McDonald's new CEO and he ushered in a new era of expansion for McDonald's, which focused on increasing the company's responsiveness to customer need rather than simply expansion. Instead of looking for new business locations, Skinner focused on finding new business opportunities in existing locations, by looking for unmet need in the fast-food market.

One of the interesting aspects of McDonald's change depended upon the nature of a franchise-based corporation. In order to institute organization-wide change, McDonald's had to convince thousands of small business owners to embrace organizational change. One of the first things that McDonald's recognized was that there were several unmet needs in the fast-food market. First, they realized that there was a market for food that existed outside of traditional meal hours. Therefore, one of the first pushes that McDonald's corporate office made was to encourage its individual restaurant owners to expand business hours. Mere expansion of hours was not the goal; the corporate office wanted the individual business owners to go 24/7. The problem with that strategy was that each restaurant that went to a 24/7 business day had to reorganize its individual business. Payroll, utilities, staffing, and management all had to undergo significant changes in order for these individual businesses to move to 24-hour service. Not surprisingly, the corporate decision was met with some hesitation by individual business owners. These doubts seem founded when the initial move to 24/7 did not result in an immediate increase in profits. However, owners who hung in through the transition period saw an increase in profits.

Of course, McDonald's new business strategy was not focused solely on expanding business hours. Instead, it focused on four different areas, all of which required a change in corporate mentality. For a while McDonald's was innovative about foods, but did not do thorough market testing, almost as if they believed that consumers would purchase almost anything. However, after the failure of several ideas, such as the McSalad Shaker, McDonald's realized that new foods had to be easy to eat, easy to prepare because of high turnover, and quick. In addition, while McDonald's has continued to search for new products; it also turned to other ways to meet customer demands, which included changing restaurant design and style and incorporating elements like coffee bars into some restaurants. These changes, while difficult for some of the individual restaurant owners to embrace, have brought a significant upswing in corporate image and profitability, demonstrating the importance of flexibility in the corporate world.

Like McDonald's, Disney had incredible brand recognition and a history, though not a recent one, of tremendous corporate success and growth. However, recently Disney's troubled corporate culture had made it less and less successful. While many have sought to credit Michael Eisner's successor Bob Iger with the corporate turnaround, Iger has given a tremendous amount of credit to Eisner, by acknowledging that Eisner laid the groundwork for Disney's recent remarkable profits. However much respect Iger may have had for Eisner, that respect did not extend to Eisner's corporate structure:

Behind the scenes he has upended Eisner's centrally planned company, hacking away at the bureaucracy and unshackling a group of veteran executives to plot their own courses. Putting Disney movies and ABC shows on the iPod is not just groundbreaking. it's a reflection of a faster-moving and more aggressive Disney.

However, Iger has refrained from some of the changes that promote the most fear in management. He did not replace Eisner's team of executives, but merely unleashed them from Eisner's central control. In fact, the reduction of centralized control has become a hallmark of the new Disney, and may become a hallmark of Hollywood CEOs. What Iger seemed to realize was that it was not the personalities involved in Disney that made the environment toxic, but the environment itself:

One of the first things Iger did was make the Monday morning meetings less autocratic.

Where Eisner held court, Iger encourages a conversation. Even his office is more inviting. Out went the drabness of the Eisner years. In came airiness, family photos, and a cigar store Indian Iger found in the basement of the ABC building in New York. He hangs his suit jacket in it.

These changes were not merely superficial, for example, Iger took steps to encourage visits from his people and also made the efforts to get out and talk to his employees. In addition, he has taken the bold step of talking to former Disney executives who may have the ability to give him insight into how to run Disney successfully without Eisner. These changes have made an incredible difference in the corporate environment, infusing people with a positive attitude that seems to bode well for future success.

However, neither McDonald's nor Disney have embraced the same type of change as some of the more innovative and successful companies, because their approaches to business have always focused on the financial bottom line. Today corporate change is as likely to involve concerns other than profit; and these concerns have actually been shown to boost profitability. For example, Unilever made the environment and social concerns a main part of its corporate strategy, which has helped its bottom line. Unilever was not the only company to recently shift towards a more eco-friendly approach. On the contrary, companies as diverse as Dow Chemical, Nintendo, Toyota, GlaxoSmithKline, and Target have all concentrated on environmental and social concerns, which have paid off for those companies. One need only look at the history of corporate polluting in America and workforce exploitation worldwide to realize that focusing on real sustainability presented a major change for these corporations. However, more and more CEOs have been embracing sustainability, and have recognized that doing so "can help avert costly setbacks from environmental disasters, political protests, and human rights or workplace abuses."

However, even when changes have been successful, they have not always been welcomed. One important example of this truism was Klaus Kleinfeld's being named the CEO of Siemens. Prior to Kleinfeld joining Siemens, the company was well-respected for its "engineering prowess but derided for its sluggishness." Kleinfeld's entry as CEO changed that image: "just two years after Kleinfeld took over the Munich electronics and engineering behemoth, Siemens is on track to hit its aggressive internal earnings targets for the first time since 2000." However, workers at Siemens have not celebrated Kleinfeld's success; on the contrary, his efforts have been met by internal discontent and protest. Some discontent was to be expected; in order to change Siemens' performance; Kleinfeld had to restructure the organization. For example, "he spun off underperforming telecommunications-gear businesses and simplified the company's structure. And when one group of managers failed to deliver, he broke up an entire division." In fact, Kleinfeld's biggest change was adding accountability to every level of the corporate structure, which threatened jobs from production through management. The result of Kleinfeld's tremendous changes was been a thriving company, but a demoralized workforce. This result highlighted the problem with instituting change and the types of internal resistance innovative managers have been forced to deal with when overhauling failing companies.

In fact, one of the primary concerns that employees have had when there has been any type of major corporate restructuring has been the fear of layoffs. When Spirit Aerosystems spun off from Boeing and was purchased by Onex Corp., its employees feared that layoffs were imminent. While there were some lay-offs, the majority of the employees were retained and were also highly compensated for their role in helping make Spirit's IPO successful. The retention of so much of the workforce reflected a major change in corporate strategy; cooperation between workers and management. This change was exceptionally notable because the motive behind Boeing's decision to spin-off Spirit was largely motivated by Spirit's high operating costs. However, by cooperating with the union to reduce job classification complexity and secure a wage reduction, Onex may have been able to transform a money-losing plant into a money-maker. They did this by sketching "out a scenario where workers could earn some $30,000 in stock and cash over five years as long as the IPO was successful." While Spirit's long-term success has yet to be determined, the IPO was a tremendous success. The IPO raised $1.4 billion, and "each Machinist is about to receive $61,440 in cash and stock." Furthermore, industry analysts have predicted that Spirit can expect to see financial success for the next few years.

In addition, many major corporate changes have occurred in the recent past, which has made it impossible to determine the impact of those changes. Antonio Perez, a former contender for the top position at Hewlett-Packard recently unveiled a plan to change Kodak's approach to computer peripherals. For years, printers have been created to be inexpensive to purchase, with the real profits coming from ink replacements. However, Kodak decided to change its approach in a dramatic fashion. While its new printers will be more expensive than those offered by competitors, the printers are geared towards printing photos, ink will be formulated to last for 100 years, and the replacement cartridges will cost half of other replacement cartridges. Interestingly enough, this change has not only challenged Kodak's existing business plan, but the business plan for the entire printer industry: "Those companies now rely on a razor-and-blade strategy, often discounting machines and making most of their profits on replacement cartridges." While this strategy has been successful, Kodak listened to consumer complaints, which centered on the high cost of ink, and decided to challenge the existing business model. Of course, this challenge was essential for Kodak; with falling film sales, the once-successful company had to do something to shore up falling profits, and it chose to focus on printers. However, to do so, Kodak had to focus on a formula change from ink-based to pigment-based, so that the ink could last longer, showing that internal changes in a company could be driven by external factors.

Even luxury brands, which have traditionally relied upon consistency and dependability for the majority of their sales, have had to move away from brand-name recognition in sales. One example of a luxury brand struggling to remain relevant in the modern world, which has seen a proliferation of upstart luxury brands in the past decade, was Chanel. However, rather than languish like other luxury brand companies, Chanel took an aggressive position; it chose to create a global leadership position to coordinate its worldwide efforts, and hired Maureen Chiquet in that position. Chiquet took an unusual stance; when discussing the launch of a new perfume, Chiquet made it clear that getting a huge share of the market was not her goal; instead she wanted the launch to concentrate on making the perfume appear exclusive and special. She also focused on consumer research, which has traditionally been neglected by luxury brands. What she found was that Chanel's marketing concentration had been missed out on the younger wealthy consumer. To change this, Chiquet has encouraged the sale of Chanel by the independent high-end boutiques that the young and the wealthy frequent. Although Chiquet has placed Chanel's focus on luxury goods, Chiquet has also employed strategies from her time at the Gap, and has encouraged merchants to buy more of the must-have items that they think will sale.

One reason that many companies have cited for avoiding change has been a concern that they will upset their existing management and workforce, compromising any success that has been earned. However, innovative leaders have recognized that some conflict in the workplace is inevitable. In a recent column, when asked by a reader how to pick a successor for his company, Jack and Suzy Welch encouraged the reader not to fear the changes that such a decision would create in the business environment. They pointed out that losing good leaders was a natural result of picking one person as a successor, and that such a result was not to be feared. On the contrary, the Welches asserted that "their departure will actually be a favor- for them and the company...because...keeping failed candidates around is too often disastrous. Each candidate's sense of letdown, compounded by the bad vibes of his or her followers, enervates the organization." The Welch's approach was interesting because it spoke of a reality that has oftentimes been unaddressed when discussing corporate change; even positive change can have negative short-term and long-term consequences, both for a corporation and for the people it employs, but that has not been a sufficient reason to avoid that change.

In addition, the Welches have addressed another reason that many leaders avoid change; the fear of looking stupid. Every employee, from the CEO of a company to its lowest-paid workers has made mistakes. Rather than ruining a person's reputation, the Welches suggested that acknowledging mistakes and making the changes necessary to correct them, may actually increase a person's reputation. They believe that "any company worth its salt will reward managers when they acknowledge they've hired wrong and swiftly repair the damage." While the Welches were speaking specifically of staffing mistakes, any type of mistake that has been costing a company productivity or placing an unfair burden on certain members of the staff has earned the same type of treatment.

The problem with a fear of change has been that companies who refuse to change fall behind their competitors. Even innovative companies can face these challenges. For example, when Dell launched its business model, it was nothing short of revolutionary. Dell's concept, which was "to bypass the middleman and sell custom-built computers directly to the consumer," changed the face of computer sales. Despite its innovative beginnings, or perhaps because of them, Dell fell prey to a problem that has plagued many successful companies: complacency. "While Dell broadened its product line, it never dealt with the vast improvements in the competition or used its lead in direct sales and the cash generated to invest in new business lines, talent, or innovation that could provide another competitive edge." Ultimately, it was Dell's inability to create new growth that made it lose its supremacy in the market place. Recently, Dell's founder, Michael Dell, came back on board as its leader, to help the company regain its former position in the marketplace. However, it has yet to be seen whether Michael Dell has what it takes to bring Dell back into such a position, because he had continued to adhere to Dell's old business model. Dell has continued to embrace a people-intensive growth strategy, focusing on hardware services, which happens to be the slowest-growing segment of the computer industry. Furthermore, Dell has yet to find more profitable growth areas. Although Dell's leaders have not been able to find these areas yet, they do seem to have come to the realization that they are going to have to embrace change if they are to succeed.