Why Companies Transform: Standing Still Is Not An Option

It is not the strongest of the species that survives, nor the most intelligent, but the one most adaptable to change.

- Charles Darwin

A few days ago, Bill Utt, (Darden MBA 1984) dropped by to teach a class. Bill is the CEO of KBR, the Fortune 300 engineering, construction, and military contracting firm. Appointed CEO in 2006 as KBR was spun off from Halliburton, he encountered three distinct challenges as he prepared the company for life as a stand-alone company. It had an organization structure with levels of accountability that were too broad and undefined. He wanted to implement a clear and understandable culture of risk awareness. And he sought to create management information systems that would permit greater transparency, cost awareness, and financial discipline. Bill wrote to the students that “I expected that it would take two years to complete the three challenges…one thing I have learned over my career is that it is easy to develop a strategy and to find the organization’s deficiencies; however, the hard part is in the implementation and having the focus, determination and stamina to see these successfully through.” During his class session Bill described no fewer than three organization structures of senior leadership at KBR that he implemented between 2006 and 2013.

These visits got me thinking: why do businesses reorganize? And why are they such a prominent and recurring feature on the corporate landscape? New senior leaders are appointed. Lines of reporting are changed. Administrative procedures and information systems are updated. Boxes are moved around on the organization chart. Critics claim that this is all terribly distracting and of doubtful value. A Dilbert coffee mug says, “Change—What We Do To Give The Illusion of Progress.” If, as the critics allege, reorganizations are so bad, why do they remain such a regular and prominent feature of business life? Possible answers are the subject of this post.

Transformations, Restructurings, Reorganizations

Anecdotally, we know that businesses restructure or reorganize operations rather frequently to accomplish many possible ends: focus, diversify, save money, meet a crisis, and/or exploit an opportunity. A restructuring program at General Mills spanned two decades and consisted of many discrete transactions.[i] The restructuring of Thorn-EMI lasted 13 years.[ii] Walter Isaacson’s biography of Steve Jobs recounts how Apple Computer restructured repeatedly to stay ahead of changes in computing technology. And perhaps the most prominent example of corporate reinvention is Corning Glass, which renewed its organization several times over decades in response to changes in products, technology, and competition.

 

Seeking the Positive Motive for Reorganizations

Reorganizations and restructurings are a response to strategic threats and opportunities. Competition, technological change, and the product life-cycle can bring a challenging new phase of the firm’s existence—and reorganizations are a typical response. For instance, the economist, Joseph Schumpeter, wrote,

“The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process…The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization, that capitalist enterprise creates…The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. …Every piece of business strategy acquires its true significance only against the background of that process and within the situation created by it. It must be seen in its role in the perennial gale of creative destruction.”[iii]

 

Schumpeter’s explanation hints at a number of specific reasons why a firm might reorganize:

· Seize leadership, improve response time, or simply regain its mojo. The iconic business leader, Lou Gerstner wrote that the reorganizations that really matter are transformations that are “really fundamentally changing the way the organization thinks, the way it responds, the way it leads. It’s a lot more than just playing with boxes.”

· Sharpen strategic focus. A “transformation” can bring a portfolio of unrelated business activities into focus. A portfolio of disparate businesses requires senior management to master a wide variety of industrial concepts. But a portfolio organized around a focused strategy can exploit executive expertise in neighboring businesses. This motive proved to be decisive in the dismantling of conglomerate firms in the late 20th Century. And it helps to explain the reorganizations of multinational corporations, as they shifted among a structure based on countries or regions, a structure based on products or industries, or a matrix structure. How you organize the firm explains what you think is important.

· Improve accountability. A reorganization can help to align authority with responsibility, and ultimately, with results. Having a manager who wakes up every day to ask how to advance the firm in a strategically important area—and empowering that manager to do something about it—are key to gaining good results.

· Strengthen managerial incentives. A new structure can focus management attention on the efficiency of the business and align their interests more tightly with the success of that unit.

· Improve transparency. Often, a restructuring is associated with the implementation of new forms of reporting and measuring results of a business unit. This produces better feedback to managers and faster decision-making.

· Allocate scarce resources more effectively. Better accountability, incentives, and transparency often result in the better use of time, talent and treasure: fewer wasted meetings, a greater sense of personal impact on the enterprise, and wiser allocation of capital.

· Bring “fresh eyes” to bear on a persistent problem or new opportunity. When the game changes, it may be necessary to bring in leaders who will be more effective under the new rules. When the Internet stole classified advertising away from newspapers, publishers awakened to the fact that they did not know much about online advertising. And the availability of “big data” meant that news organizations would need to develop new talent to tease insights out of new data sources. These kinds of changes produced significant changes in management and organization structure.

Thinking Critically about Reorganizations

Some firms reorganize, but for the wrong reason. For instance, in Deals from Hell, I wrote about Tyco International. In January 2002, Dennis Kozlowski, CEO of Tyco, announced a radical restructuring plan for the firm that would break Tyco into four segments. The transaction would entail three spin-offs. Kozlowski argued that the firm would be worth 50 percent more after the restructuring.[iv] Securities analysts were mystified by the announcement. Tyco had been the target of SEC accounting investigations. An analyst said, “To me, it smells a little bit fishy. If you are a public company and people are pointing the finger at you, I wouldn’t think your first reaction would be to split up and make things confusing for investors. Here is a clear effort to break up one company and make it a more complicated company.”[v] The spin-off announcement triggered a 58 percent decline in the firm’s share price. But this was only the beginning of a dramatic unraveling of Tyco’s strategy of growth by acquisition. Kozlowski was fired and later indicted on grounds that he looted $170 million from Tyco in unauthorized compensation and $430 million in fraudulent stock sales. The indictment accused him and another executive of running a “criminal enterprise.”

Some research[vi] suggests that restructurings, reorganizations, and transformations are associated with better financial performance. However, the practitioner should scrutinize blanket assertions about the value of these actions. The example of Dennis Kozlowski and Tyco International reminds us to think critically about any proposed reorganization. There are at least four tests to keep in mind:

1. Is it motivated by the purpose, mission, and vision of the organization? This first question helps to fight the evils of sheer impulse and opportunism. If you don’t know where you’re going, any road will take you there. Using reorganizations just to solve tactical problems is the bad road; the good road is to use reorganizations to advance the mission of the firm.

2. Does the proposed structure follow the strategy? Structure should follow strategy—this was the lesson of one of the most influential business books of the 20th Century, Alfred Chandler’s, Strategy and Structure: Chapters in the History of the Industrial Enterprise.

3. Will the implementation of the reorganization bring out the “better” in people? This question addresses the “how” of restructurings and should raise considerations about communication, engagement, accountability, transparency, and incentives.

4. Why now? This invites a consideration of the specific situation of the proposed reorganization. The sudden shift in demand for your products, the entrant of a new competitor into your market, or a change in technology or regulations could trigger a revision of your strategy and thus, a change in the organization structure.

Conclusions for Leaders

Bill Utt reorganized the leadership of KBR three times in seven years because the strategic landscape changed sharply and he felt an enormous obligation to the stakeholders of the firm to get it right. The Global Financial Crisis and Great Recession triggered a slump in construction spending and then a slow recovery. To some extent, the ongoing reorganization of a firm is a discovery process. Bill Utt is candid in admitting that “the hard part is in the implementation and having the focus, determination and stamina to see these successfully through.”

Charles Darwin got it right: the ability to adapt is the key to survival in a world of relentless change. While he was writing about evolutionary biology, his notion is nonetheless relevant to businesses and other kinds of organizations. History is replete with examples of firms that failed to adapt to change. Perhaps they tried to reorganize but didn’t do it effectively, or didn’t reorganize at all. Think of Eastman Kodak and Polaroid confronting the advent of digital photography; integrated steel mills versus the advent of mini mill technology; and more recently, newspaper publishers facing the Internet. Many organizations in society today suffer from ills owing to an inability to change with the times: these include some religious institutions, governments, unions, and yes, universities. As Darwin vividly showed, adaptation is never easy. But for many organizations there is no alternative. Standing still is not an option.


[i] Donaldson, G., 1990. Voluntary Restructuring. Journal of Financial Economics 27, 117-141.

[ii] See: Kaiser, K., and Stouraitis, A., 2001. Reversing corporate diversification and the use of the proceeds from asset sales: The case of Thorn EMI. Financial Management 4, 63-102.

[iii] Schumpeter, J. A., Capitalism, Socialism and Democracy, New York: Harper & Bros., 1950 3rd. Ed., pages 82-84.

[iv] Sorkin, A., 2002. Market place; Investors react negatively to Tyco’s new, and abrupt, breakup strategy. New York Times , January 24. Downloaded from http://query.nytimes.com/search/restricted/article?res=F70810FE355F0C778EDDA80894DA4044.

[v] A quotation of Ron Taylor, Schaeffer Investments in Cincinnati, in Fakler (2002).

[vi] For a summary of such research, see Chapter 6 of my book Applied Mergers and Acquisitions.

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One Response to Why Companies Transform: Standing Still Is Not An Option

  1. Amy says:

    In the restructuring process, one of the reasons (having been through this over six times myself) it takes so long is during the process there is the restructuring of the organizational chart, meetings with HR for the writing of job descriptions and compensation structures, as well as the needs of the new structures. Sometimes jobs are created and sometimes the jobs are phased out, which then leads to the discussion of compensation packages as employees are laid off. There is always a need for restructuring to emphasize efficiency and productivity. However, restructuring can go wrong. Not speaking or illuminating people about the process and a lack of transparency cause morale issues which then leads to turnover. Turnover can be a large expense on a company. The longer that a company can hold on to their employees, the better loyalty and better trained employees they will have. Also, it is important to do a restructuring for the right reasons. It is imperative to look at all sides of the structure and often times it is necessary to have outside consulting come in to the organization to determine the best ways to create efficiency, communication and better processes. Sometimes, it is even necessary for the Head of an organization to go, as it could be seen that the problems of the organization are at the top and stream downward rather than from the bottom up…in actuality, this is usually the case.

    It is imperative for all of the Chiefs to look out for the Soldiers/Citizens of the organization and determine the best ways to move forward. Transparency is a necessity and best serves the organization. When this is not done, employees flee looking for a place that will welcome them despite their best efforts.

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