A Few Examples of Gigantic Change Failures

Organizations fail when they run out of money and other resources. But going bust is the end of the story, not the beginning. There are many reasons why organizations run out of funds, but the two primary culprits are failure to recognize the need for change and failing at change. Failing to recognize the need for change can arise from complacency, irrational exuberance, or events that are beyond control (natural disasters, for example). These failures are important to understand but have already been detailed in such books as Clayton Christensen’s The Innovator’s Dilemma and George Day and Paul Schoemaker’s Peripheral Vision: Detecting the Weak Signals That Will Make or Break Your Company. Here we are more concerned with the second cause of failure, which is failing at change.

In the examples that follow, leaders passed the first test; they became aware of the need for change and were attempting to drive forward strategies that would respond to the challenges and opportunities before them. They failed the second test, however, which was to complete the complex, interrelated, simultaneous changes that were required to achieve success. These well-documented illustrations are only the tip of the iceberg; they reflect a much larger population of change failures around the globe that together are wasting billions of dollars and billions of hours. By studying these efforts, we can learn lessons that will aid us in changing more effectively.

Sensational Mergers That Failed Sensationally: DaimlerChrysler and AOL–Time Warner

Why have the DaimlerChrysler and AOL–Time Warner mergers become the benchmark against which bad strategic combinations are measured? They were large and visible, to be sure. They were household names, and each combination held promise for producing dramatic shifts in how the combined organizations could attack the market. Still, these are not unique promises. What makes them stand out, in my view, is that we expected them to be much better managed and much more successful than they were. Each merger received high praise from business pundits and Wall Street analysts before it happened. All four organizations involved were led by savvy businesspeople. The mergers should have worked, but didn’t.

In the various autopsies that were conducted, the explanation offered most frequently was simple: their cultures didn’t fit together. Although true, part of the logic for the combinations in the first place was that their cultures were unique and supposedly complementary. Leaders on both sides thought that they would be able to leverage their cultures to help the other do more than it could have done alone. But in the end, they couldn’t.

In so many failed mergers, the blame is placed on poor social integration rather than poor strategy. A report issued by McKinsey more than a decade ago said as much. It is not difficult getting the expense duplication or “synergies” out of the combined organization. That is as simple as laying off people and closing redundant offices. No, it turns out the harder part is getting key people to stay and work together productively and aligning systems and processes to serve customers.

An overly simplistic explanation of why sensational mergers fail sensationally is that the people leading the effort look at the merger as an event rather than a process. If you consider a merger an event, the work is done when the papers are signed. Cleaning up afterward is considered, in this view, a simple matter of appointing some people to be in charge, letting others go, and deciding whose information technology (IT) systems will be used for accounting and e-mail.

If instead you understand that consolidation is not an event but rather a process, you know that signing the papers is when the real work begins. In actuality, mergers involve complex, continuous change over time. Think about some of the things that need to happen for the merger to deliver its promised returns: cost savings have to be generated; leaders need to be appointed and gain the trust and confidence of those who must follow them; technical processes and IT systems must be melded together seamlessly; customers and other stakeholders need to receive communications to help them understand how to interact with the new combined organization; duplicate sales forces have to be consolidated without disrupting customer relationships; a single culture must be created that welcomes each person’s contributions regardless of previous loyalties; and boards of directors may need to be consolidated.

This list is only the beginning. As changes work their way into the organization, efforts at every level and eventually by every team must be made to understand the significance of the change and its implications. Because all of this must happen during the same period of time, the change is both complex and continuous.

The DaimlerChrysler and AOL–Time Warner examples are not intended to indicate that mergers are a bad idea. Rather, in these cases, the mergers were strategically challenging and therefore complex. Bringing different cultures and different business models together under one roof is not in itself wrongheaded. Yet leaders must recognize the risk when two entities that are not at all alike are expected to find ways to work together. The DaimlerChrysler and AOL–Time Warner deals were not doomed from the start, as those with the benefit of perfect hindsight might wish to believe. Instead it was an underestimation of the challenge involved and a consequent mishandling of the integration process that led to the sad endings that ultimately occurred.

Staying on top of everything that must change, focusing on the correct priorities, and not allowing an integration effort to completely disrupt ongoing operations is a huge challenge. The difficulty is exacerbated by people from each company not liking one another, as in cases where “the cultures don’t fit together” or when people come from different professional backgrounds (such as print versus digital). What seems straightforward from a distance appears a daunting challenge close-up.

Mergers and acquisitions are not bad ideas. Many of them have been done successfully by companies like Cisco and more recently Yahoo!, which seem to have mastered the social integration process. Yet overall nearly two-thirds of business combinations still fail, mostly because we are not fully prepared to handle the complex, continuous change that mergers and acquisitions involve.

Can There Be Too Much Innovation? The Case of Polaroid

It can safely be said that at one time Polaroid was the most creative company in the world. Its dazzling innovations in polarization and instant photography, led by founder Edwin Land, caught the attention of consumers and investors alike. The story of the company’s growth is truly a tribute to Land’s genius. Before he was finished, Land held more patents than anyone in history except Thomas Edison, and it could be argued that many of his patents were much more complex. Yet Land’s prowess as an inventor led to the company’s eventual demise.

Innovation is always a hit-or-miss proposition, and yet many companies rely on successful innovations for their continued survival. Those who believe that the process of innovation can be designed and managed to produce outputs like a predictable production line have never been close to the action. Even elaborate stage-gate models that many organizations use to make decisions about where to invest their innovation dollars do not guarantee success. Stage-gate models help us choose among innovations, but the creation of the innovations themselves is still more art than science. One never knows when the next breakthrough will come.

Not knowing when or whether you will succeed at a task that is critical to survival introduces complexity. Innovation leaders face a continuous stream of decisions that they must make based on partial information. Bets are placed before concepts are fully tested. Investments are made in research, development, manufacturing, and distribution only to later discover that things don’t go as planned and that other, potentially more attractive alternatives have emerged. Leading an organization that runs on innovation requires that you understand something about dealing with complex, continuous change.

At Polaroid, Land had done this for years. From one unimaginable success to the next, he seemed to have the golden touch. His reputation for accomplishing what others thought impossible grew, as did sales. Few on the board were prepared to challenge his decisions given his role as founder and inventor of all that Polaroid had become.

Unfortunately, with success, Land’s ego also grew. He became convinced that only he could see the future and that others who warned him against taking certain actions were simply not his equals. Such was the case when Land decided to bet everything on inventing a chemically based process for taking instant movies, even as videotape was emerging as a product in the commercial realm. Despite strong warnings from his closest advisers, Land underestimated how quickly videotape would evolve from an expensive product that only businesses could afford to a ubiquitous and moderately priced consumer good. His own product, although capable of allowing consumers to take instant movies, was inferior and inflexible in comparison to digital photography’s recording and playback capabilities. Land won his personal battle to bring the product to market, but he lost the war. The losses associated with Land’s big bet were the beginning of the end for Polaroid. Land was ousted, and those who followed were overtaken by the shift from chemical to digital photography.

Although this story is not repeated often, lesser versions of failing to manage complex change during innovation occur frequently. Some leaders get locked into ideas, chase imaginary deadlines, disregard negative signals, and ignore the outside world as they try to recover sunk costs. They trust their experience to guide them rather than listen to what others are trying to tell them.

When innovating, we shouldn’t shut out information about the world. Instead we need to be open to learning and prepared to change directions as the situation dictates. Pharmaceutical companies that have deep expertise in the formulation of chemically based drugs know that they must consider shifting into biologics and gene therapies. Educators recognize the need to adopt new curricula. Almost every business has considered how to take advantage of the opportunities the Internet provides to create new business models. Still many are failing to make the changes they know are necessary. Concluding that you are headed in the wrong direction and doing something about it are different things. Your speed of response is essential, as is understanding how to manage complex, continuous change.

Going Global: Procter & Gamble Enters Brazil, and Walmart Enters Germany

The market for business and consumer goods has gone global. It’s not surprising that large companies want to expand their markets into new territories to find sources of growth that compensate for slower growth in markets where saturation and fierce competition have eroded profit margins. The challenges associated with “going global” are often underestimated. As in the cases of mergers and innovation, some leaders who should know better believe that going global is as simple as replicating what has worked elsewhere. Procter & Gamble and Walmart—huge firms with long histories of success—learned that following a formula when entering a new market is not always a recipe for winning. Each had to pull out of countries it tried to enter in the face of stiff competition, government regulation, and consumer disinterest. Disney nearly failed in France but is slowly turning around its European operation after learning a great deal about how different cultures prefer to be fed and entertained. Disney learned and then went on to do much better in its expansion into Japan.

Going global automatically creates complexity that must be managed. Adapting products to fit the local market is only the first step. Working within the legal structures of other countries requires adaptation; distribution channels must be established; talent must be hired and trained; determining where the power to make operational decisions rests is a frequent source of conflict between headquarters and regional leaders; translating internal and external documents is harder than one might imagine; learning from local experiences and responding to the moves of local competitors requires continuous adjustment; political conflicts disrupt plans; and so on.

We are going global and will continue to do so, but we must be smarter about what that entails and better about managing the complex, continuous change that is necessary.

Improving Operations: Hershey’s ERP and Royal Bank of Canada’s Outsourcing

In 1996 Hershey’s began installing a new enterprise resource planning system to reduce costs, increase efficiency, and modernize its IT infrastructure. Like many others, Hershey’s discovered that switching to a new ERP system required more than hiring external consultants and waiting for them to “flip the switch.” The reason that the Hershey’s case stands out is that the failure to implement the new system on time caused major problems with delivering products to customers, resulting in a 12 percent drop in quarterly revenues compared with the previous year.

Almost every enterprise that has undergone a major reengineering effort, including the installation of a new ERP system, can tell stories about delays, cost overruns, and performance promises that were not kept. Software vendors and consultants will explain that the delays were due not to issues on their side but rather to the failure of the enterprise to provide the support or clear direction needed for work to be done on time. They aren’t wrong. Few organizations are fully prepared for the magnitude of the changes involved in such efforts. Not long after commencement, it becomes clear that the systems being redesigned and automated require process changes, not simply plugging data into computers. These process changes require changes in job responsibilities, job descriptions, capabilities, rewards, and even in some cases organizational design. Once it is in place, maintaining and updating the system requires constant attention. There are costs associated with all of this as well as disruptions to operations. A single change triggers the need for multiple changes in the systems that it touches. What appears straightforward is much more complex than imagined.

Because the magnitude and complexity of the change is underestimated, resources are not budgeted appropriately. Cost overruns are the result. In addition, because some leaders believe they can outsource to vendors the design and installation of new systems, they fail to plan for the attention that will be required of their own people. They add the extra work required on top of other responsibilities, only to find that people become overloaded and something else suffers. Change is not free, even when outsourced.

At Royal Bank of Canada (RBC), a simple change became a complex one as a decision was made to outsource IT work to India, resulting in the reduction of about 40 positions in Canada. That in itself is certainly not news; outsourcing has become common practice. What was different in this case was how the change was handled. The employees who were being let go were asked to train their Indian replacements, who came to Canada on temporary work permits that may or may not have been acquired properly (this is still being contested). The long-term employees’ outrage caught the attention of the media, which raised questions about the bank’s commitment to providing work for Canadians and its sensitivity to the feelings of its employees. It seemed a clear case of greed: a huge, successful, profitable institution saving a few dollars at the expense of the little guy. RBC tried to improve its image by investing in charitable activities, and perhaps not surprisingly the CEO resigned.

The lesson from Hershey’s and RBC is that even when business leaders think changes will be simple and straightforward, they can become much more complex than imagined. We should never think that one change will not affect anything other than what it is designed to do. Organizations exist in an ecosystem of ongoing relationships with their employees, customers, partners, investors, and communities. It is impossible to isolate changes into neat compartments that do not touch other elements of this ecosystem.

Nor should we ever presume that because a change went well in another organization it will go smoothly in ours. Seemingly simple changes can easily get out of hand, demanding much more time, money, and attention than we predict. When this happens with multiple changes that are occurring at the same time, the result is a systemwide change breakdown, sometimes with catastrophic results.

Adopting New Strategies: Lehman Brothers and Bank of America/Merrill Lynch

It is fashionable and necessary to adopt new business strategies and business models as markets evolve. Given the increased speed with which the world changes and the heightened competition to exploit new ideas that generate growth, it is not surprising that organizations sometimes adopt strategies that are not fully pressure tested. It’s move or die; but a wrong move can be disastrous, as Lehman Brothers found out.

In the years leading up to its 2008 bankruptcy, Lehman leveraged heavily to buy into real estate, leaving it vulnerable to a turndown in the housing market. This was compounded by Lehman’s taking a strong position in the subprime mortgage market, the sector most likely to fail under such circumstances. On losses of $2.8 billion in the second quarter of 2008, the value of Lehman stock decreased by 73 percent. Lehman tried to sell its assets to several other banks but ultimately could not. Bankruptcy was the inevitable result. The government chose not to step in, and Lehman was allowed to disappear, in turn affecting its customers, including nearly a hundred hedge funds that used Lehman as their prime broker. The global fallout was massive, helping trigger a deep worldwide recession that lasted several years.

Usually, when strategies fail, organizations simply write off the losses and move on. In this case the losses were too big; Lehman literally bet the bank on the subprime mortgage strategy. Overconfidence? Misinformation? Poor decision making? A profound disregard for goodwill? There are several competing explanations for what happened at Lehman. What is undeniable is that no strategy is guaranteed to work in a world that is as interconnected and volatile as the one we live in today. The idea that a strategy will work can become so compelling that, like the other missteps we’ve discussed, we can oversimplify the challenges associated with execution. We want the strategy to work, but we don’t understand fully what it will take to make it work or what factors are legitimate threats to its success. As a result, we don’t pay attention to warning signs, listen to the voices or critics, or prepare satisfactory escape options.

Leading strategists like Rita McGrath from Columbia Business School rarely talk about “formulating a strategy” anymore. They know that the idea that a strategy can be formulated and executed without needing to adapt it over time is outdated. In a world of complex, continuous change, experts like McGrath, Donald Sull, Shona Brown, and Kathleen Eisenhardt now emphasize that capturing a strategy on paper is only the starting point of a complex change effort that will continue for as long as the strategy is pursued. No matter who formulates the strategy or how much we pay for it, no one can predict the future. As soon as we start executing, the world will change. That’s why long, expensive strategy building can become a trap. We feel that we have invested so much time, money, and effort into developing the strategy that we must continue to pursue it, even when there is clear evidence that it no longer makes sense. Instead we should, as Steven Krupp and Paul Schoemaker tell us, invest in strategy as an ongoing learning process.