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Thursday, February 4th, 2010

The 8 Mistakes To Avoid When Transforming Your Business

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Is part or all of your business in the need of a transformation — A truly radical change?

My smart friend Daniel Neukomm riffed on Harvard Professor John Kotter’s theories on mistakes commonly made in corporate transformations (hint: if you AVOID these mistakes, you can indeed transform your business) –  enjoy!

Introduction

While a professor at Harvard Business School, John Kotter had the opportunity to gain valuable insight into an array of companies ranging in both size and scope.

In doing so, he identified eight key stages of transformational development in which companies failed to manage the change process. He theorized that those companies that had been successful did so only by effectively negotiating all eight steps.

He further noted that those firms who skipped any of those steps, or failed to recognize the importance of them were sacrificing quality and effect for speed of change, giving the illusion of being quick but in realty building a platform for failure.

In addition to illustrating a series of opportunities to fail, Kotter also provides some insight as to how to overcome these commonly experienced errors.

The Eight Mistakes To Avoid When Transforming Your Business

Transformation Mistake #1: Not Establishing a Great Sense of Urgency

The lack of a sense of urgency of transformation is the leading cause of why, and the primary stage of where business fail at effectively managing change.

Many companies struggle simply to be able to identify the need to change when circumstances arise that warrant doing so. Firms are constantly exposed to the need for change, from the emergence of new foreign markets to the presence of new, more powerful competition in the marketplace.

Kotter notes that more then 50% of companies fail at this initial stage for numerous reasons. Most notable of those significant reasons of failure at this early stage is the gross overestimation of current and prior efforts of urgency by corporate executives.

Many senior managers feel that they have already recognized and leveraged the existing need for urgent transformation and as such lack the necessary motivation to shift the rate of change into high gear.

Another important factor is the imbalance between those who dictate change and those who simply implement change. Firms with too many managers and not enough leaders often experience this dynamic and it adversely affects the ability to change efficiently.

Kotter’s Tips on Establishing A Sense of Urgency

Kotter offers the relatively simple solution of implementing mechanisms that establish a sense of urgency among employees. He further states that the need to aggressively achieve cooperation is essential as this impacts a firms ability to identify and discuss potential threats and pending crisis. The need to be able to clearly identify the market, and its competitive realities is also mentioned as a key solution to lack of urgency.

Transformation Mistake #2: Not Creating a Powerful Enough Guiding Coalition

Creating a powerful coalition is essential to guiding practical and effective transformation within a firm. The lack of importance placed on the need to achieve collective support is the second stage of error as cited by Kotter.

He states that in both large and small firms alike there is an increasing need to build support across a wide range of people involved in both the decision making and implementation process. Many firms believe that just having the senior management team on board with new ideas for change is enough.

In fact, there are many moving variable in the dynamic for change and as such many different roles, and the people who fill them, are required to achieve efficient transformational change.

For example, large firms undergoing aggressive transformation into a new market require the support of investors, board members and product development staff, but perhaps key customers as well.

Furthermore, due to the broad scope of support often needed to implement dramatic and effective change standard hierarchical structures are not enough to ensure success. (Kotter, 1995)

Kotter’s Tips on Creating a Powerful Coalition

Solutions to this stage of error range from instilling more power in those who already hold leadership roles, to the simplicity behind creating a more team oriented environment. (Kotter, 1995)

Transformation Mistake #3: Lacking a Vision

Lacking a vision can be an obstacle in almost any process, and most certainly in a corporate environment. Without a clear and defined vision it is not hard to imagine the difficulty experienced in trying to convey instructions and instill motivation in others to perform.

Furthermore, the lack of a clear and concise vision can be equally de‐habilitating, as broad sweeping goals can be difficult to break down into measurable achievements.

This lack of clarity can also trickle down into incompatible projects stemming from misdirected resources and undefined goals. (Kotter, 1995)

Kotter’s Tips on Strengthening Your Vision

Kotter offers some relatively straightforward and simple solutions to the absence of a clear and concise vision. Ensuring the existence of a vision is obviously at the top of the list as this is the source of the problem.

Many companies have visions that are bland and generic, often open to interpretation which in turn leads to misunderstanding.

Kotter suggests that having a vision that can be communicated clearly, to anyone, in less than five minutes is essential to having that vision realized.

Transformation Mistake #4: Under­communicating Your Vision

The absence of an easily understandable vision can cause confusion in the workplace and hinder fluid change in any organization.

Even with a clear and concise vision, the ability to communicate it effectively to everyone in the company can is vital to facilitate its purpose.

Kotter points out three patterns in which companies fail to effectively communicate the vision.

  1. Many firms often attempt to utilize a single communication to instill a new vision in every employee, such as a meeting or an intra‐company memo.
  2. Corporate directors continuously repeat the vision through speeches to employees who often do not have a clear understanding of what is being stated.
  3. Both the vision and the corporate officers who communicate it to the employees can be clear and concise however those very same senior officers do not act in accordance with the vision. This combined effect often leads to the breakdown of implementation of the companies overall objectives, resulting in broad inconsistencies throughout the organization. (Kotter, 1995)
Kotter’s Tips to Effectively Communicating Your Vision

The most obvious solution to this issue is to implement a system whereby directors not only communicate the vision but also lead by example and execute the stated vision consistently.

Furthermore, all available vehicles should be utilized to deliver the vision to all stakeholders of the organization.

The solution to this potential issue seems rather elementary yet still is not widely practiced. (Kotter, 1995)

Transformation Mistake #5: Not Removing Obstacles To Your New Vision

Communication itself is not enough on its own to instill the goals laid out by the visions of the company to encourage and facilitate change. Numerous obstacles exist for corporate officers in their quest to see their visions brought to fruition through the actions of employees.

Major contradiction of interests seems to present the greatest barrier for progress, most notably incentive based performance pay structures. Many of these incentive programs reward individual performance over the performance of the company, presenting a difficult position for managers. (Kotter, 1995)

Carter’s Tips for Removing Obstacles To Your New Vision

Solutions for this problem lay in the design and structure of the system as it pertains to the vision of the company. No longer can a corporation have an aggressive vision and an incentive based pay structure that does not reflect the long‐term goals of that vision.

Designers of corporate incentives must take into account how the system may derail the likelihood of integrating the vision. (Kotter, 1995)

For example, if the vision of a health company is to provide medical treatment, incentive programs cannot be structured to reward saving the company money and reducing the bottom line by paying more to those employees who refuse to provide medical services.

Unfortunately, this is largely the practice of US medical insurance firms.

Transformation Mistake# 6: Not Systematically Planning And Creating Short­-term Wins

Many companies experience turbulence in the transformation process by not creating short‐term goals. More firms have trouble in keeping employees motivated to achieve long‐term goals due to the lack of immediate return on efforts being made in the short‐term.

Kotter mentions that most people will not commit to the entirety of the project if there are not results in some measurable returns within the first 12 to 24 months.

If results are not seen within this immediate period, employees will often loose the drive necessary to achieve the long‐term goal. Managers who dissect such big picture goals into smaller more manageable tasks will often see greater results from their employees efforts implying that this may be an effective solution to the problems arising form lacking short‐term structure in the change process. (Kotter, 1995)

Kotter’s Tips on Planning & Creating Wins

Kotter offers some simple yet valuable insight yet again in this stage of transformational change by suggesting that managers break up longer‐term, more complex goals into short‐term, more manageable targets.

The creation of the short‐ term wins in this context so long enables a more momentum driven process, typically allowing for more accurate achievement of the longer‐term goal.

Establishing visible and more measurable performance improvements and then rewarding employees for achieving those milestones will enhance the corporation’s ability to implement change and realize transformational fluidity.

Transformation Mistake #7: Declaring Victory Too Soon

While establishing short‐term wins is key to the success of managing change there are also some disadvantages which can arise form this strategy as well. Kotter points out while short‐term wins are encouraged there is some danger in give incentives to employees to reach a larger volume of small scale project achievements.

This danger arises from employees and managers alike striving for accomplishments that have emotional and financial bonuses attached because there will be a need to declare victory sooner than what is best for the organization.

There is an ironic relationship between those who resist change and those who support stated in Kotter’s theory. He mentions that while change initiators are quick to declare themselves victorious in their ability to effectively manage change is often the change resistors who step in an solidify a failure.

This is due to the fact that such resistors are looking for any opportunity to stop the change process and declaring victory provides that opportunity.

Kotter’s Tips on Declaring Victory

In an effort to solve the issues surrounded by premature victory celebrations Kotter points out that managers should focus instead on their increased credibility to implement change into systems, structures and policies.

Moreover, managers should promote those employees who recognize and implement the vision of the organization, establishing a momentum driven transformation process and achieving long terms goals rather then racking up points on a project score board.

He further states that the transformational process needs to be constantly reinvigorated with new projects, themes and new agents to implement them in order to capitalize on momentum.

Transformation Mistake #8: Not Anchoring Changes in Your Corporate Culture

Perhaps the most interesting error mentioned by Kotter is the inability of a corporation to solidify whichever new process of change deemed effective.

Many firms fail to ensure that years of efforts not be flushed away by a lack of recognition by all employees, including top managers of reasons why change has been
successful.

On many occasions companies failed to ensure that new behaviors were integrated and relied on in the future.

Two important factors are noted for this lack of integration.

  1. Many firms fail to show exactly how the previous change efforts have lead to enhanced performance, leaving the many to make this connection on their own. This can lead to assumptions, or worse, lack of recognition all together as to what aspect of the transformational process were successful and why.
  2. The second factor rests arises when successful change management is not integrated into new management successors. If a successor does not fully grasp the importance, understanding and simple foundations of how and why transformational efforts where successful within the organization he/she can wipe out much if not all of the progress generated under previous management.
Kotter’s Tips on Anchoring Change

Solutions to this problem are readily available to managers.

In the former, simple efforts to communicate the reasons for successful transformation should be made to ensure a clear, broad, company wide understanding of the reasons for success.

An example of this would be the use of company newsletters outlining the relevant information necessary to understand achievements and why they were possible so that al employees can identify opportunities for future success.

In the latter, ensuring that the board of directors understands the reasons behind why a company leader was able to enhance performance through successful change is imperative to ensure that effective processes of change continue under new management. (Kotter, 1995)

Bibliography and References
  • Change Management Class Notes. (June, 2008). International School of Management. Paris, France.
  • Kotter, John P. (1995, April). Why Transformational Efforts Fail. Harvard Business Review.
  • Senge, Peter M. (1990) The Fifth Discipline: The Art and Practice of the Learning Organization. , Random House Publishing, USA.

If you enjoyed this article, you may also want to check out Daniel Neukomm’s other pieces such as: Why The Home Page Is Dying and Porter’s Five Forces.

4 comments so far (is that a lot?) | Continue Reading »


Saturday, October 24th, 2009

Porter’s Five Forces

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I met a guy named Dan Neukomm recently who has a real zest for business-life. He’s got an MBA degree from Paris (where as an American he was a minority) and he has been a key member of a couple of successful start-ups.

He and I brainstormed mutual areas of interests and strategic planning was one of them. He kindly agreed to share his thoughts on one key strategic model: The 5 Forces from Michael Porter.

5-forces-pic-of-daniel-neukomm

Here’s the Q&A — I hope you enjoy it:

Please explain the origin of “Michael Porter’s Five Competitive Forces That Shape Strategy”

Strategic assessment models are utilized by senior management and other stakeholders to assess external factors to direct and efficiently distribute resources driving growth.

While many such models exist, few have become as widely valued and practiced as the Five Forces model, developed by Harvard Business School professor Michael Porter.

This model helps to analyze external variables and structure, primarily at the industry level, which influence the attractiveness of entering and successfully competing in a specific marketplace/industry.

Each of the five forces can be attributed a weighted numerical strength on a scale of 1 to 10 and then added together to determine industry attractiveness.

Please describe each of the Five Competitive Forces?

Porter’s Competitive Forces are barriers to entry, bargaining power of suppliers, bargaining power of buyers, threat of substitutes, and competitive rivalry among existing players.

1. Barriers to Entry

Accurately assessing barriers to entry in a given industry are vital to understanding the ability of a venture to succeed. High barriers to entry almost always directly relate to higher costs, both for the venture under consideration as well as potential competition in the future.

Understanding those barriers can help to effectively identify and leverage market entry routes without removing existing barriers for future entrants to navigate. Examples of barriers include economies of scale, IP protection and government regulatory restrictions.

2. Bargaining Power of Suppliers

The power of suppliers is almost entirely supply side driven, resulting in reduced costs as the competition among suppliers rises, and increased costs as suppliers monopolize the supply chain.

Attractive, high growth markets tend to present low supplier power at early stages of the industry life cycle, steadily increasing as growing volume and high margins attract additional suppliers.

Examples of supplier power include the concentration of suppliers, threat of forward vertical integration, and costs associated with switching suppliers.

3. Bargaining Power of Buyers

Buyer power can have considerable implications and influence on price and is a function basic demand side economics. Buyers can be defined as end consumers in B2C sales or another business in B2B sales. The power of buyers in the marketplace can have two distinct impacts.

First, an increasing number of buyers in the market, resulting from increased demand, results in higher prices. Second, as the volume and demand of buyers increases so does the incentive for buyer collaboration to leverage economies of scale.

This can be further offset by attracting additional suppliers who in turn offer more choice and drive prices back down. Identifying and measuring variables influencing buyer power are necessary for accurately assessing viability and price control.

Such variables include product differentiation, brand identity/value, buyer’s incentives and the threat of reverse vertical integration.

4. Threat of Substitutes

The threat of substitutes relates to those products or services that can directly displace or offset the demand and/or consumption of the penetrating product or service being considered.

Perhaps the most considerable implication is the ability for the buyer to directly substitute the product or service for a something similar but equally effective at satisfying demand. Another consideration is the cost incurred by the buyer to switch to the substitute.

5. Existing Rivalry

Those firms currently competing within the target industry whose existing competitive dynamic is dictated by numerous factors define this. These include the concentration within the industry, the differentiation among products/services, the barriers to exit and the growth rate of the industry.

If the market is large and rapidly growing, it is more likely to contain a large number of competitors with a diverse offering of products and services and diluted liquidity values for exit due to the high number of options.

When’s the best time to use the Five Forces framework?

  • A new/existing firm assessing the implications of entering into a new product or service industry.
  • A firm contemplating an investment in a new/existing firm moving into a new product or service industry.

Where ultimately will the Five Forces analysis lead a business to (what results?)?

The Five Forces Model should be utilized for determining market viability as well as identifying and ultimately avoiding potentially risky and costly pursuits.

Most importantly, Five Forces provides a relatively subjective framework with which to input values designed to determine strategic direction and resource allocation accordingly.

Remember, Five Forces is only one strategic assessment model designed to help understand the variables that shape the competitive dynamic of a given industry. As such, other models should be utilized in conjunction so as to paint as clear and concise picture of both internal and external factors for consideration.

Can you give us a Five Forces example?

In 2001, I founded and grew Mountain Oxygen, a company which provided oxygen products, systems and services to visitors of high altitude ski resorts in Utah and Colorado who suffered mild symptoms of altitude discomfort such as fatigue and insomnia.

Our core/primary service was renting oxygen generators via hotels and resorts to guests for the duration of their stay so they could rest, rejuvenate and enjoy their limited and expensive vacation time.

Porters Five Forces directly articulates the assessment I went through to determine the competitive dynamic and ultimate success of this venture and as such is outlined in further detail below.

Since the recreational oxygen market at high altitude ski resorts in Colorado and Utah did not exist prior to Mountain Oxygen, there were relatively few barriers to entry, making the venture appealing and lucrative (i.e. no IP needs, limited gov’t regulation and no competition).

I was able to secure (at a cost) exclusive agreements with ski resorts and hotels to be the sole supplier of such services, giving me considerable control over my buyers allowing my firm to dictate price more aggressively.

Additionally the act of establishing and maintaining non-compete agreements meant that almost impenetrable barriers of entry existed for future competition.

Since there were numerous suppliers resulting in relatively limited power, my costs remained low. Furthermore, the availability of substitutes was also extremely low, entirely due to the specific nature of the need my firm was meeting.

For example, once vacationing in a resort town like Aspen and altitude malaise sets in, the only other option is to retreat to lower elevations as no drug is available that is immediately effective in alleviating adverse symptoms. As such, my firm was the only provider of the only solution!

My business maintained low buyer power as a result of minimal substitute products and lack of competition allowing me to maintain price control and increase margins.

OK, lets integrate the weighted values of the five forces to this model:

  • Barriers to entry: very low for me (2 out of 10)
  • Power of suppliers: very low (2 out of 10)
  • Power of buyers: very, very low (1 out of 10)
  • Threat of substitutes: very low (2 out of 10)
  • Competitive rivalry: none (0 out of 10)

Total weight: 7 out of 50 and as such very, very attractive/lucrative.

Food for thought: The lack of non-compete clauses at host resorts would have meant additional competition and subsequently increased buyer power resulting in lower prices and tighter margins.

This would have increased the weighted value of both power of buyers and competitive rivalry towards 7 or 8 out of ten shifting the over-all industry attractiveness score accordingly.

Mountain Oxygen was split up and sold in 2006 to strategic buyers.

Is there a Five Forces diagram for us to look at?

five-forces-diagram

source

Can you recommend any Michael Porter books?

Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael Porter.

What are your other favorite strategic planning frameworks besides Porter’s Five Forces model?

In addition to utilizing Porter’s Five Forces to assess external industry level dynamics, PEST(O) is useful in assessing external factors at the most macro of levels.

SWOT also helps to identify and match internal strengths and weaknesses to external opportunities and threats. Understanding Michael Porter’s Value Chain (another Michael Porter model) is also useful in measuring and guiding supply chain dynamics.

If someone wanted to get in touch with you, what’s the best way for them to contact you?

You can email me at dneukomm@gmail.com or here’s my LinkedIn profile.

Thanks, Dan!

Note: Check out Michael Porter Wikipeida for more about this leading strategic planner.

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