Saving the Company: A New Strategy For The Age Of Radical Change

By Jerome Want and Richard Teerlink

"Maximize the "change forces" that inform company and industry strategy. Readers should take heart; leaders can significantly improve organizational health and success." — Publisher's Weekly

Create a culture within your organization that can weather any storm. In the age of radical change, entire industries, not just companies, are failing to anticipate and adjust to rapidly changing competitive conditions. Companies with a track record of sustained success have learned that adapting to—and creating—change are the most effective tools for ensuring the long term success of a business enterprise. That ability is built on the platform of a high performing, ethical, business organization—culture.

Few terms in the American business lexicon are more ignored and misunderstood than corporate culture. The inability to build and maintain high performing organizations and leadership teams has ruined the careers of many senior business leaders, forced countless lost jobs and careers, as well as the loss of market share and shareholder value.

Unlike any other book, Saving the Company demonstrates how a business enterprise's culture can become its strongest resource. Learn how to better understand business culture as the critical tool for managing and creating change in an increasingly unpredictable world.

• Language: English
• Publisher: Beaufort Books
• Release date: Jan 9, 2017
• ISBN: 9780825307607

Book preview

PART I

ORGANIZATIONS AND THE AGE OF RADICAL CHANGE

1

THE AGE OF RADICAL CHANGE

Today, companies have to radically revolutionize themselves every few years just to stay relevant.

—NOLAN BUSHNELL, Founder of Atari

NOT SINCE THE industrialization of America has the business world undergone so many challenges, dislocations, and turbulence—what I call RADICAL CHANGE. When I authored Managing Radical Change: Beyond Survival in the New Business Age more than twenty years ago, some of the major change forces at that time came from the consolidation of industries, the emerging Chinese economy, the flight of manufacturing jobs overseas, and a nascent internet industry, which was used primarily for intra-company communications. In addition, the telecom industry was deregulated, creating seven new Fortune 500 companies that have been consolidated into three today (and those companies have out-sourced most of their traditional telecom operations to cable companies and other contractor companies).

International economic and financial change forces have had a major impact on how companies and industries conduct business today. Twenty years ago, the Euro did not exist and the Chinese economy had minimal impact on the global economy. Today, the slowing of the Chinese economy, the second largest in the world, affects economies around the world and its currency, the yuan, will become part of an international basket of currencies along with the dollar, the euro, the sterling pound, and the yen. These financial change forces must now be taken into account as standard operating practices for the business world as well as for the government and non-profit sectors.

At the start of the twenty-first century, a major change force was Y2K. Billions of dollars were spent on updating industrial software and computers just to keep computers running on the internet. The internet is now ubiquitous and can be found in virtually every American home (and has replaced the USPS for most mail) as well as in homes in both developed and developing nations around the globe, principally through smart phones. The internet also drives global commerce, not just communications. If one can create a computer application (app) they can create a company, virtually overnight, around the app.

It is hard to find a company of any size that is not dependent upon e-commerce. Finish Line, a sports retailer, found that it lost $32M to its competitors during the 2015 Christmas season because it was not set up to properly accept and process online orders fast enough. It decided to close a full quarter of its six-hundred stores, as store sales were sagging, while having to invest in a more responsive e-commerce system. This major loss for the company was derived from a failing business culture. The internet has also jumped from desktop and laptop computers to small wireless phones and other devices that can be carried in a pocket, allowing the user to access any information required while away from the home or office allowing them to find better deals in stores and making purchases from their cell phones.

In addition, we have a social media industry (which arose out of both the internet and the tech industry), that did not exist twenty years ago, which links people to each other around the world. Two of the most valuable companies in the world, Google and Facebook, are social media enterprises that have created a global public forum. That in turn, has propelled a huge proportion of manufacturing towards producing increasingly miniaturized, but more powerful components for smaller electronic devices.

Evolving technology has also changed manufacturing practices through robotics and, most recently, 3-D printers. Pharmaceutical companies are starting to produce drugs with industrial 3D printers to improve quality across large-scale production. As a result, cyber security has become a burgeoning new industry as government agencies and private companies alike find that their secrets and proprietary technology are being stolen by other people and governments from all around the world. Exotic new capabilities from the world of computing, such as Big Data and Artificial Intelligence (AI), will change how we work and plan.

Entirely new industries are being created as other industries falter. Just five years ago, the car sharing industry emerged through Zipcar and City Car putting pressure on traditional car rental companies by providing better and faster service, product immediacy, and economy without the usual hassle while reducing the need for personnel. The UBER’s and LYFT’s of the world are now challenging traditional taxi companies in major cities while employing thousands of people to use their own cars as part-time taxi drivers (the ethics and legality of that industry are being challenged in courts and by city councils). Recognizing a new investment opportunity in this industry, General Motors has taken a financial stake in LYFT while Avis decided to purchase Zipcar Inc. These are examples of how traditional, even bureaucratic companies are learning from the old adage, if you can’t beat them, join them or in today’s capitalistic economies, buy them.

Another example of change in that industry has been seen in Bill Ford’s interest in Tesla Motor Car Company. Ford’s Chairman has taken a keen interest in the Silicon Valley company and made several visits since its inception in 1999 to gain new ideas to apply to Ford’s efforts at change. If he is only looking at its manufacturing processes and electric vehicles then he is missing the most critical component of Tesla’s success as a New Era business—its culture. (See Figure 3.1 Hierarchy of Organization Performance in Chapter 3).

No industry is experiencing more stress and radical change than the broader mining industry and the coal mining industry, in particular, which is clearly in its death throes with the demand for cleaner energy. Exemplary of that industry’s demise was Arch Coal Company’s (one of the largest and oldest of US coal companies) filing for Chapter 11 bankruptcy protection in January 2016 to save $4.5B as it has closed mines, laid off miners and reduced pay and retirement benefits for their remaining workers.

The oil and gas exploration sector cannot be far behind as solar and wind are increasing their share of the energy market and the automobile industry is being pushed to make more energy efficient vehicles with an emerging reliance on electric cars. More than thirty small oil companies owed a combined $13B at the start of 2016 and the collective oil industry is losing $2B in revenue each week. In January 2016, oil prices dipped below $30 a barrel, their lowest level since the oil bust of 2003, which lasted for years. According to Wolfe Research (WSJ January 11, 2016), as many as a full third of oil and gas exploration companies could fail if prices do not rebound to $50 a barrel by 2017. If those companies want to survive, they need to change their business cultures rather than relay on the Saudis.

HIERARCHY OF CHANGE FORCES

When business leaders and their boards do try to respond to change, they usually reach for the usual fads, fix-its, and magic bullets, which rarely provide an effective response to the very strategic issue of change. Companies and entire industries must first understand these change forces before they can take reasoned and effective action in response. To better understand the different change forces, it helps to understand their significance by putting them into different tiers of strategic importance.

FIGURE 1.1

Hierarchical Order of Change Forces

First Order Change: External Change on Companies and Industries

First order change is driven by the most strategic change forces that usually come from outside the business world. They include technological/scientific change, global competition and economic change as well as availability and scarcity of resources. Increased or decreased regulation has always been a major change force for the business world.

Twenty years ago, I would have ranked technological change as a second tier change force, but we have seen how it has radically changed existing ways of conducting business while creating entirely new industries. One industry that has experienced significant change through technology has been the retail sales industry. As brick and mortar store sales have flattened, online purchasing has rapidly increased. As a result, many prominent retail chains are closing stores, which has impacted owners of malls while mall construction has been halted. Macy’s announced that it would close forty stores in early 2016 and Walmart will close two-hundred sixty-nine stores (mostly new Walmart Express stores that never appealed to customers). That, in turn, will lead to thousands of lost jobs.

Economic change has had a huge impact on companies and industries. In 1999, most of Europe’s major economies united into the Euro Zone with a common currency called the Euro. That has had a major impact on how they do business with each other and with countries outside the Euro Zone, such as China and the United States. There have been major advantages from that union that include making it easier for other countries to do business with this one common currency and standard of business practices. It has also made it easier for countries within the Euro zone to conduct business with each other using one common currency. However, disadvantages have been seen in smaller, less developed member countries (Portugal, Italy, Greece and Spain, known as the PIGS) which have had trouble managing their debts which forces more prosperous countries like Germany and France to bail them out. For that reason, Europe’s second largest national economy, the UK, has been unwilling to join the Euro zone. Economic change forces have enormous impact on how individual businesses conduct business and in the case of the Euro zone, they cannot be separated from political influences.

Government, legal, and pan-global change forces are also considered First Order Change Forces. Most significantly, NAFTA and the newly negotiated Trans-Pacific Trade Partnership linking a dozen countries from around the Pacific Rim will change the way that companies conduct business. Legal changes by Congress or the courts can also have a major impact on business conditions. One of the most important change forces in the United States has been the Affordable Care Act, which has altered how large and small businesses alike provide health care coverage to their employees as well as how health insurance companies implement the new law. This has been a boon to some companies and a burden to others.

Changing demographics are also a First Order change force. In the US, an emerging millennial generation, as they are called, is demanding that fossil fuels be replaced with cleaner, more sustainable energy sources. This in turn is starting to impact the fossil fuel industries and their influence will only increase as they gain more political and purchasing power. This same generation is flocking to urban centers where jobs are more plentiful. This in turn creates a greater demand for services by the UBERs, LYFTS, and Zipcars of the transportation sector as urban residents feel less of a need to own their own cars. The millennials are also demanding more services through their smaller communications devices.

An increasingly prosperous younger generation around the globe is also creating more demand for consumer goods. This was first seen in post-war Japan and now in the increasingly affluent younger populations in China and India.

Second Order Change: Change within Companies and Industries

Second Order Change is reflected in industry consolidation (mergers), divestitures, change of corporate leadership and ownership and product diversification. A recent example of the latter has been the decision by gun maker Smith and Wesson to diversify into sporting goods in light of increasing pressures to hold gun makers responsible for the wave of mass shootings that have occurred around the country. Many of the First Order Change forces create Second Order Change by forcing companies to consolidate or to break up. Deregulation of the telecom sector inevitably led to the consolidation of the seven Baby Bells into just three companies today as they recognized that their growth (and profitability) were limited by being limited to a set, unchangeable geographic region. They later started purchasing cable and satellite companies, such as the purchase of Direct TV by Verizon in early 2016. This changed the business model of the telecoms allowing them to get out from under oppressive state and federal regulations by outsourcing many customer support functions to these private companies. It also shielded them from many types of legal actions, while simultaneously allowing them to downsize their work forces.

The coal, mining, and oil/gas exploration industries are undergoing the same industry contraction with the need and demand for reduced need and demand for fossil fuels. It is estimated that a third of all energy related companies, now in business, will cease to exist between 2017 and 2020 (Energy Information Administration, 2015). US production of coal decreased in the Appalachian region of the country by 21% between 2014 and 2015 and by 11% in other parts of the country. The Pacific Rim is the only part of the world that is continuing to produce coal at a steady pace as it is farther behind the US and Europe in migrating to other less polluting sources of energy; in the US and Europe more cost effective means of mining are being used that require less manpower. Major coal companies such as Rio Tinto and BHP Billiton announced in late 2015 that they are exiting the coal mining industry all together.

With the oversupply of oil and gas, primarily in the United States, the cost of those energy resources have plummeted. A new term in the industry is Zombie companies. There are about twenty companies that are on the verge of failure since they borrowed money during the exploration boom in the mid 2000s, but now cannot pay off their loans with the recent collapse of the price of oil and gas (Fortune, December 10, 2015). The industry failed to fully understand the consequences of its abilities to apply newer technologies to more easily mine once hard-to-find oil and gas while believing that the price of their product would remain stable. Another example of the industry’s inability to anticipate and manage change was seen in the Keystone Pipeline. As late as 2014, there was a major push to complete the pipeline between the tar sands of Canada to the refineries of the Gulf Coast. With the collapse of oil prices, Canada and its American supporters quietly dropped their demands to complete the pipeline.

The railroad industry has also been impacted by the reduced shipments of coal and oil. As a result, they are no longer shipping the same quantities and are realizing fewer profits. There was a demand to build stronger rail cars for shipping oil after several oil spills from derailed trains. Now, there is very little demand for that product with reduced shipments. As a result, railroads are no longer seen as being a strong investment and there is a demand by investors to consolidate the industry.

Third Order Change: Labor Markets

Third Order Change affects the nature of work and work forces. It is usually dictated by the two previous levels of change. When First Order change forces impact an industry or a corporation, workers are usually impacted. When both the airline and telecom industries were deregulated, their work forces were also impacted and continue to be affected today. In the 1990s, the objective of businesses was to control and reduce labor costs. That was accomplished through robotic automation, outsourcing to companies that would offer lower pay and fewer benefits and ultimately off-shoring of jobs to cheaper labor markets. Frequently, US workers were required to disassemble their factories to be shipped to China and Mexico. In many cases, that has backfired. Substandard overseas working conditions have reflected badly on US companies, especially in the textile industry (practically disappeared in the US) with fires and near slave labor conditions that embarrassed US companies such as Nike, Target, Walmart, and VF (formerly Vanity Fair) that turned a blind eye to overseas work conditions.

Walmart has been repeatedly criticized for its compensation, health benefits, and work conditions. It has slowly responded as a follower rather than as an industry leader. As a result of its predatory culture, it was reported that Walmart loses 500,000 workers each year to turnover (Wall Street Journal, January 21, 2016). Neither has Walmart learned how to provide acceptable customer service to its customers in either the general merchandise area or in pharmaceuticals.

Today, highly skilled technical US jobs are being pruned and off-shored to other countries. In-house accounting functions are being off-shored to India. US companies can also hire skilled foreign workers with a bachelor’s degree and pay them a fraction of what would be paid for a US worker in the same position. This has become a common practice in high tech companies. The downsizing of the work force has also spread to the managerial ranks as middle management is being flattened. Unfortunately, that leaves a gulf between remaining management and front line workers which only serves to isolate senior management from its work force and the market place. Increasingly, consumers are outraged by being forced to deal with foreign workers who lack the same language skills and work ethic.

Workers at all levels can no longer rely on companies for lifetime employment. As a result, workers and managers need to develop innovative behaviors in a radically changing labor market.

1. Workers must be the keepers of their own careers. They can no longer rely on the employer to value a worker’s capabilities and contributions. Workers must take ownership of their skills, knowledge, and abilities.

2. Continuing education has become an