Leading Off: How to transform your organization: A leader’s guide

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ESSENTIALS FOR LEADERS AND THOSE THEY LEAD

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Brought to you by Alex Panas, global leader of industries, & Axel Karlsson, global leader of functional practices and growth platforms

Welcome to the latest edition of Leading Off. We hope you find our insights useful. Let us know what you think at Alex_Panas@McKinsey.com and Axel_Karlsson@McKinsey.com.

—Alex and Axel

Given the breakneck pace of change in the business world, many leaders are wrestling with how to transform their organizations and secure their longer-term future. Business transformations can involve many factors, such as developing new capabilities or products, adopting new technologies, and inspiring employees to embrace changes in the ways their organizations operate. It’s a daunting challenge: McKinsey research shows that less than one-third of transformations meet their goals of both improving organizational performance and sustaining those improvements over time. This week, we explore a few approaches and insights that can help make transformations successful.

AN IDEA

An image linking to the web page “Defining your ‘true north’: A road map to successful transformation” on McKinsey.com.

Define your ‘true north’

Real transformative change goes beyond restructurings or short-term solutions to boost efficiency. It’s about reprogramming an organization’s DNA, according to McKinsey’s Kevin Carmody, Louisa Greco, and Rob Montgomery. They say that the road map to a successful transformation should begin with leaders identifying a strategic “true north” and articulating a bold aspiration for what their company wants to become. This aspiration should then determine a sequence of steps across four work streams: cost optimization, growth, organizational effectiveness, and digital enablement. By embedding their new strategy into day-to-day operations, leaders can establish their transformations as the new business as usual rather than a side project. “When done right, a transformation becomes a source of continual renewal, evolving and even revolutionizing a business over a series of horizons,” the authors say.

A BIG NUMBER

4.5x

That’s how much more likely midsize companies are to execute successful transformations if they involve a broad cross section of employees in the effort. Midcap companies, or those with $200 million to $2 billion in revenue, are only half as productive as large companies. Senior partner Mauricio Janauskas and his coauthors say that “transformation is an imperative” for these companies to catch up with higher-performing competitors. Midsize businesses face resourcing challenges in a range of areas: limited leadership benches, access to capital, and change-management experience, for example. But midcaps can also have advantages over bigger companies in transformations, including greater agility, faster decision making, and loyal, long-term employees who are willing to take on new roles. The authors note that investing in talent early and cultivating an owner mindset among employees are two critical ways that midcaps can reap the full benefits of transformations.

A QUOTE

“If the board or the CEO, CFO, or chief strategy officer has a lump in their throat when they think about how they will pull this off and how much they’re committing to in their business case, that’s probably an indication that transformation might be the right fit.”

That’s McKinsey senior partner Chris Hagedorn on the use of M&A as a launchpad for transformation in an episode of McKinsey’s Inside the Strategy Room podcast. Hagedorn and partner Alex Liu say that some deals can provide transformation opportunities when executives are under pressure to create more value. One factor for leaders to consider is how a transaction might help them transform their customer strategies. “If you’re trying to access a whole new base of customers, perhaps through a new channel, or you’re thinking about creating an entirely new set of offerings, that would be another marker of transformation because your company’s going to have to do vastly different things,” Liu says.

A SPOTLIGHT INTERVIEW

An image linking to the web page “Reinventing Rolls-Royce: A conversation with CEO Tufan Erginbilgiç” on McKinsey.com.

When he took the helm of the iconic brand, Rolls-Royce CEO Tufan Erginbilgiç realized he needed a strategy for reinventing the 120-year-old manufacturer. In a conversation with McKinsey senior partner Michael Birshan, Erginbilgiç says transformation starts with the understanding that strategic goals aren’t just numbers. They must be translated into clear, relevant initiatives and relentlessly reinforced to give employees direction and purpose. To transform Rolls-Royce, Erginbilgiç emphasized culture change, empowering employees to feel ownership of their roles in turning around the company. “My view is you need to be very consistent—consistent expectations, consistent reinforcement. And use every opportunity possible for performance management,” he says. “You need to continually tell people what good looks like so that there’s a learning process. That’s what changes culture.”

TRANSFORMATION TIMES TWO

An image linking to the web page “Dual transformation: Optimizing the core and building new businesses” on McKinsey.com.

For some companies, transforming their core business may not be enough to achieve sustained growth in the face of new competition, economic disruptions, and other changes in the market landscape. According to McKinsey senior partners Ari Libarikian and Chris Hagedorn and colleagues, those companies can consider building new businesses at the same time to extend their longevity and help them outpace competitors. The value created through a transformation, whether through cost cutting or cash management, can help fund a new business venture. And such new ventures are more than eight times likelier to scale than start-ups, thanks to the advantages of a parent company’s resources and competencies. “The opportunities that emerge when marrying transformation with business building can be powerful,” the authors say.

Lead by developing your transformation strategy.

— Edited by Eric Quiñones, senior editor, New York

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