Article

Managing Change: Strategies that Work

Seventy percent of change programs fail, according to a 2001 Harvard Business Review article.

By Stan Pace and Gerry Mulvin

First published on novembro 01, 2002
min read


Seventy percent of change programs fail, according to the April 2001 Harvard Business Review article, "Cracking the Code of Change." That's depressing news at a time when more and more companies face upheaval. They fail because leaders shy away from making changes broad enough, deep enough, and above all, swift enough to revive the company. Instead, they administer a series of half-cures, which often serve only to prolong the agony. By contrast, companies that implement fast, focused, and simultaneous change programs can create enormous and long-lasting shareholder value. Consider Italy's SEAT Pagine Gialle, the Italian Yellow Pages. When an Internet start-up began attacking SEAT's core business in business-to-consumer advertising, the company was caught off-guard. New SEAT CEO Lorenzo Pellicioli understood the threats presented by the Internet, but he also understood the opportunities for his business. Pellicioli cut costs dramatically, yielding 100 million Euros in savings in the first year. He introduced customer segmentation and sophisticated marketing programs to a monopoly-oriented organization. Finally, he sold the company's main printing plant (Europe's largest), outsourced manufacturing, and restructured the sales force. The message was clear: SEAT's future rested in sales, communication, and efficiency, not industrial printing. As he shored up the core business, Pellicioli also introduced a series of Internet-based initiatives, including an audio version of the yellow pages. The result? In less than three years, Pellicioli transformed SEAT from a sleepy paper-based monopoly into a consumer-focused publisher with the leading Internet portal in Italy. When SEAT's owners sold the company in September 2000, investors saw a more than thirty-fold return. As a subsidiary of Telecom Italia, SEAT has continued to outperform other players in its industry. The speed and scope of SEAT's turnaround is remarkable. Yet it is consistent with other highly successful transformers. Bain & Company examined 21 companies that successfully transformed their businesses and increased their stock prices by an average of 250 percent a year during and after their transformations. In all of these remarkable stories, management followed similar approaches to change. They focused on results, not process; they replaced key senior management, then reenergized the ranks; and they did it fast and all at once. The best transformers focus first on developing a clear strategy. They establish non-negotiable goals to support that strategy and incentives to reinforce those goals. Then they step back and let managers figure out how to get the results. When Greg Brenneman took over as president and chief operating officer of Continental Airlines in 1994, the company was on the brink of its third bankruptcy and ranked last on nearly every measure of customer satisfaction. To improve on-time arrivals and departures, Brenneman's team offered all employees an after-tax bonus of $65 for every month that Continental was in the top five airlines for on-time performance, and $100 per month if the airline was first. Within months, Continental was near the top of all airlines in on-time performance. The program remains in place today, and so do its results. During the second quarter of 2002, Continental had an on-time arrival rate of 85.2 percent and a completion factor of 99.8 percent. Too many companies in transformation make the mistake of pursuing broad employee layoffs instead of getting at the root of the problem: senior management. Most of the successful transformers we studied didn't start showing meaningful improvement until they made significant personnel changes at the most senior levels. How does a new management team restore confidence and drive to a severely demoralized work force? Make the company a place where people want to come to work again. Then repeatedly communicate a simple, powerful set of messages to employees. Wesley Jessen, a maker of specialty contact lenses, was just breaking even and almost out of cash when Schering-Plough sold it to Bain Capital and the Wesley Jessen management team in June 1995, for a fire-sale price of $6.4 million. At the same time that Kevin Ryan, the new CEO, was replacing executives and reinvigorating operations, he was repeating a concise set of messages everywhere he went to the employees that remained. "We had four statements, seven words," Ryan says. "They were: 'Build volume. Spend effectively. Be accountable. Cash.' No big presentations. This is what we all have to do. Simple." Instead of fading away, Wesley Jessen nearly tripled revenue and grew net income to a healthy 8 percent of sales within two years. The company is now the world's largest maker of specialty contact lenses. Corporate transformation may be the most difficult professional test an executive will face. There is no formula for a successful turnaround, because companies and their challenges vary too widely. But the principles that characterize the most successful transformations-quickly and simultaneously focusing on results, changing senior management, and reinvigorating employees-provide a powerful agenda for taking necessary action.

Seventy percent of change programs fail, according to the April 2001 Harvard Business Review article, "Cracking the Code of Change." That's depressing news at a time when more and more companies face upheaval. They fail because leaders shy away from making changes broad enough, deep enough, and above all, swift enough to revive the company. Instead, they administer a series of half-cures, which often serve only to prolong the agony.

By contrast, companies that implement fast, focused, and simultaneous change programs can create enormous and long-lasting shareholder value. Consider Italy's SEAT Pagine Gialle, the Italian Yellow Pages. When an Internet start-up began attacking SEAT's core business in business-to-consumer advertising, the company was caught off-guard.

New SEAT CEO Lorenzo Pellicioli understood the threats presented by the Internet, but he also understood the opportunities for his business. Pellicioli cut costs dramatically, yielding 100 million Euros in savings in the first year. He introduced customer segmentation and sophisticated marketing programs to a monopoly-oriented organization. Finally, he sold the company's main printing plant (Europe's largest), outsourced manufacturing, and restructured the sales force. The message was clear: SEAT's future rested in sales, communication, and efficiency, not industrial printing.

As he shored up the core business, Pellicioli also introduced a series of Internet-based initiatives, including an audio version of the yellow pages.
The result? In less than three years, Pellicioli transformed SEAT from a sleepy paper-based monopoly into a consumer-focused publisher with the leading Internet portal in Italy. When SEAT's owners sold the company in September 2000, investors saw a more than thirty-fold return. As a subsidiary of Telecom Italia, SEAT has continued to outperform other players in its industry.

The speed and scope of SEAT's turnaround is remarkable. Yet it is consistent with other highly successful transformers. Bain & Company examined 21 companies that successfully transformed their businesses and increased their stock prices by an average of 250 percent a year during and after their transformations. In all of these remarkable stories, management followed similar approaches to change. They focused on results, not process; they replaced key senior management, then reenergized the ranks; and they did it fast and all at once.

The best transformers focus first on developing a clear strategy. They establish non-negotiable goals to support that strategy and incentives to reinforce those goals. Then they step back and let managers figure out how to get the results.

When Greg Brenneman took over as president and chief operating officer of Continental Airlines in 1994, the company was on the brink of its third bankruptcy and ranked last on nearly every measure of customer satisfaction. To improve on-time arrivals and departures, Brenneman's team offered all employees an after-tax bonus of $65 for every month that Continental was in the top five airlines for on-time performance, and $100 per month if the airline was first. Within months, Continental was near the top of all airlines in on-time performance. The program remains in place today, and so do its results. During the second quarter of 2002, Continental had an on-time arrival rate of 85.2 percent and a completion factor of 99.8 percent.

Too many companies in transformation make the mistake of pursuing broad employee layoffs instead of getting at the root of the problem: senior management. Most of the successful transformers we studied didn't start showing meaningful improvement until they made significant personnel changes at the most senior levels.

How does a new management team restore confidence and drive to a severely demoralized work force? Make the company a place where people want to come to work again. Then repeatedly communicate a simple, powerful set of messages to employees.

Wesley Jessen, a maker of specialty contact lenses, was just breaking even and almost out of cash when Schering-Plough sold it to Bain Capital and the Wesley Jessen management team in June 1995, for a fire-sale price of $6.4 million. At the same time that Kevin Ryan, the new CEO, was replacing executives and reinvigorating operations, he was repeating a concise set of messages everywhere he went to the employees that remained. "We had four statements, seven words," Ryan says. "They were: 'Build volume. Spend effectively. Be accountable. Cash.' No big presentations. This is what we all have to do. Simple."

Instead of fading away, Wesley Jessen nearly tripled revenue and grew net income to a healthy 8 percent of sales within two years. The company is now the world's largest maker of specialty contact lenses.

Corporate transformation may be the most difficult professional test an executive will face. There is no formula for a successful turnaround, because companies and their challenges vary too widely. But the principles that characterize the most successful transformations-quickly and simultaneously focusing on results, changing senior management, and reinvigorating employees-provide a powerful agenda for taking necessary action.