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Thursday, May 27, 2010

It Makes Sense to Adjust

Business transformation is now a continuous process that most companies haven’t mastered. Here’s a formula for managing ongoing change.

strategy+business magazine

by Vinay Couto, Frank Ribeiro, and Andrew Tipping

It used to be that a business transformation was a once-in-a-lifetime event, … But if the recent economic upheaval reveals anything, it is that companies of all sizes, in all industries, are operating in a more volatile, less predictable environment, and that change has become a way of life. …

… A review of businesses faced with “burning platforms” (which are enterprise-threatening events) would reveal that most have failed to make the transformation the situations demanded. …

The problem is that most companies don’t have an adequately proactive road map for transformation. Instead, they attempt change on the fly, reacting to business disruption with equally explosive responses that may not be useful six months down the road or even sooner. …[If] an organization prepares for transformation (perhaps when it is not occurring), steering through it is far less difficult.

Each company’s strategy for approaching transformation falls into one of three categories. These categories in turn determine the level of transformation — the timing and the magnitude — that the company can support.

1. Reactive. This is the default transformation strategy; it is minimal, and has become second nature to most seasoned executives. A change in circumstances provokes a short-term response, generally an abrupt shift that requires little cross-company coordination or follow-up. … Problems arise when executives try to apply this approach to situations that call for more sweeping and highly detailed transformation. …

2. Programmatic. This strategy is more comprehensive and is appropriate when major change is required and a company has sufficient lead time. In such circumstances, the company launches a widespread change initiative across the lines of business that are most affected. A cross-functional program office is set up, tactics are identified, milestones are established, executives are assigned to oversight, a communications program is launched, and progress is tracked.

These programs can be effective in dealing with a contained event or threat, such as a new competitor or a new product from a rival, and their potential reward is greater than that of the reactive approach because they are more forward-looking. But as the name of this category implies, the transformation is a program — a systematic, planned sequence of activities designed to achieve specific goals within a specific period of time — and, thus, the outcome takes longer than a reactive transformation.

3. Sense-and-adjust. This is the most long-term and sustainable strategy, … Unlike the first two approaches, sense-and-adjust is dynamic, constantly and consistently smoothing out volatility in areas of business subject to swift and dramatic change, such as research and development or frontline operations like manufacturing and logistics.

Sensing is an ongoing effort to gather and analyze data on current and future business conditions and, more important, translate it into likely outcomes. The sensing process should …synthesize [planning information] with key performance data to form a single “dashboard” of actionable information that can be used by business unit heads or corporate leaders in functions like IT, HR, or marketing.

A high-quality sensing dashboard offers an early organizational indicator of future business conditions. … For example, a business unit head may use a dashboard to reveal unanticipated decreases in either product unit price or volume that could translate to an overall decline in revenue. Or a logistics firm may place its sensing system on alert for changes in pricing and functionality of handheld computers, wireless communications, mapping software, and the like; the goal would be to determine how and when to start applying these technologies to its own business (and to avoid being blindsided by a competitor).

Adjusting is the process of altering business strategies on the basis of sensed outcomes. In this phase, which is done in tandem with sensing, business unit or department heads assess the data to determine possible resource and capability trade-offs. They explore the impact on people, processes, and technology, and then develop a consensus on the plan that is most appropriate for building or maintaining competitive position. In the case of an unexplained drop in unit prices, the adjustment may be an emphasis on marketing, innovation, or layoffs. And if a company has learned that it could outpace its rivals by implementing a GPS system, a slate of new training programs that teach employees how to use the technology may be just as important as purchasing the equipment itself.

As adjustments are made, the sensing capability picks up and continues the cycle, both scanning the horizon for market shifts and monitoring the execution of these strategic responses. Sensing does little good in the absence of adjusting, and vice versa.

The sense-and-adjust approach to change is not the traditional stutter-step strategic planning process in which business units are summoned every six or 12 months to present their take on the market and their performance expectations. The sense-and-adjust process is continuous, incorporating new information and forecasting outcomes and expectations constantly. Companies that have mastered the skills to handle the programmatic approach and have an organization that is reasonably resilient — … are the best candidates for this sustainable strategy….

For some companies, particularly those without the mature planning processes and deep leadership bench necessary to implement a full-fledged sense-and-adjust strategy, a programmatic transformation can offer a clear path toward that goal. …

If nothing else, all companies must recognize that the pace and magnitude of change is far faster and greater now than ever before and that transforming their business is no longer something they can avoid, defer, or out-manage. Even small moves to increase an organization’s sense-and-adjust skills will reap significant and sustainable rewards.

Author Profiles:

  • Vinay Couto is a partner with Booz & Company in Chicago. He focuses on global organization restructuring and turnaround programs in the automotive, industrials, and consumer packaged goods industries.
  • Frank Ribeiro is a partner with Booz & Company in New York. He focuses on overall corporate transformation and associated capability-building programs to increase an organization’s effectiveness and efficiency.
  • Andrew Tipping is a partner with Booz & Company in Chicago. He focuses on large-scale organizational transformation to increase the effectiveness and efficiency with which companies meet customer needs.
  • Also contributing to this article were Booz & Company Senior Associate Matthew Siegel and Principal Curt Mueller.