Did You Know? 6.0: Change to Thrive

Technology and behavior megatrends are reshaping the world. To advance and grow, organizations need new ways to connect to both employees and customers. Old paradigms are costly. For example, Kodak was #43 on the fortune 500 list in 1975. It went bankrupt in 2012. Borders was #485 in 2000, yet bankrupt in 2011. Those applying four new success skills in the “Business 3.0 Era” can avoid similar fates.

The Industrial Revolution was the largest disruptive transformation in commerce since the Renaissance. Simply, the nature of production was re-invented. Machines replaced hand-tools. Steam and other energy sources replaced human or animal power. Unskilled workers replaced skilled workers. Work performed in the home by the family was now performed in factories with the help of machines.

Silicon emerged, further upending norms. Result: the late 20th-century technology and information revolution—hailed as Business 2.0—drove a socio-economic shift from manufacturing and agriculture to service industries. And it’s continuing. The web, mobile devices, big data and cloud computing are evolving core human experiences, such as how families spend their time, how people work and how societies interact around the globe.

The accelerated pace of change has caused extraordinary economic, cultural and competitive pressures. From robotics to nanotechnology to renewable energy, hyper-competition is now the rule. In particular, comprehending the rate of change and applying the rules of the game have become so challenging, only the most adaptive and fleet organizations will survive. Fixed, top-down plans are dead. Organic, flexible and inclusive methods are now the path to prosperity.

–PETER DRUCKER

“THE GREATEST DANGER IN TIMES OF TURBULENCE IS NOT THE

TURBULENCE; IT IS TO ACT WITH YESTERDAY’S LOGIC.”

#6 IN THE DID YOU KNOW SERIES

BUSINESS 3.0 TECHNIQUES

CHANGE to THRIVEAuthored By Parker Lee, President, XPLANE

It’s easy to understand why it’s hard to get a footing. Massive external forces affect today’s business environment. For example:

• The time to start a new business in the last decade has almost halved, from 51 days in the private sector in 2003 to less than 30 in 2012, creating denser categories.

• The percentage of companies falling from top-three rankings in their industry increased from 2% in 1960 to 14% in 2008. Where success was once assumed, the basics of economics are not always a given now, leading to disparities between industry and profit.

• Urbanization will be a massive demographic trend over the next decade. World population growth is slowing, but will still peak at approximately nine billion by 2050. Cities will double in size as a three billion people move from rural areas. This will result in economic opportunity, but put pressure on environmental, commercial and social systems.

• The connected world is growing exponentially:

• Websites grew from 2.4 million sites in 1998 to 673 million in 2013.

• Mobile use is the single biggest driver of Web development and change, with 6.7 billion mobile subscribers currently generating 13% of all Internet traffic. There are already twice as many “connected devices” (including vending machines, electricity meters and refrigerators as well as phones and computers) as human beings.

In this complex, fluid and even hostile environment, an organization can be viewed as a living organism. To evolve, it must operate as a dynamic, growing system that can learn and adapt over time. This requires cultivating both a performance strategy and a healthy work environment. Adaptation and evolution to what XPLANE calls “Business 3.0” is key to success in the decades ahead.

– JACK WELCH

“WHEN THE RATE OF CHANGE INSIDE AN INSTITUTION BECOMES

SLOWER THAN THE RATE OF CHANGE OUTSIDE, THE END IS IN SIGHT.

THE ONLY QUESTION IS WHEN.”

Business 3.0 organizations require new ways of working—where all employees thrive and are engaged in an integrated, designed, well-coordinated environment and customers are welcomed to shape an organization’s future. In a 10-year Harvard Business Review study of companies and their total shareholder returns, those that outperformed their industry peers excelled in four main management practices:

1. STRATEGY2. EXECUTION3. CULTURE4. ORGANIZATION

Clearly, making the move to a more nimble and adaptive culture is essential. Implementing four new success skills can help your organization gain a Business 3.0 edge.

OUTPERFORMANCE IS ACHIEVABLE. FOUR NEW SUCCESS SKILLS POINT THE WAY.

– JOHN CARTER, TCGEN

“THE FOCUS MUST SHIFT TO INNOVATION, AS SIMPLY ‘IMPROVING’ OUR

WAY OUT OF THIS BY TWEAKING COST STRUCTURES, ENHANCING

LOGISTICS AND IMPROVING CUSTOMER SERVICE WILL NOT GIVE

SHAREHOLDERS THE KIND OF RETURNS THEY EXPECT.”

Firms have struggled to find their way in the watershed of change. Hewlett-Packard, despite being a long-time industry competitor, has been plagued by near-constant market and strategy miscues. This includes purchasing aging, out-of-date companies—and what appears to be an inability to gauge consumer’s needs and respond. To avoid these traps, companies need to streamline strategy and make deliberate decisions to become more agile.

“… [HP] will never come close to reclaiming its former glory unless [leadership] can answer the real question: “ ‘What is HP?’ ” For a decade now the company has sometimes seemed more like a tawdry reality show than one of the world’s great enterprises... Simply put, Hewlett-Packard has lost its way… profits in 2011 were 19% lower than in the previous year.”

—James Bandler, tech.fortune.cnn.com

– MARK ZUCKERBERG

“THE BIGGEST RISK IS NOT TAKING ANY RISK. IN A WORLD THAT’S

CHANGING REALLY QUICKLY, THE ONLY STRATEGY THAT IS

GUARANTEED TO FAIL IS NOT TAKING RISKS.”

SUCCESS SKILL 1 : DELIVER A STRAIGHTFORWARD STRATEGY.

HOW

Conversely, Southwest Airlines has a clear vision and a differentiated strategy. Foremost: the airline has a strong grasp on market needs. Its strategy, goals for business success and good management practices engender a relatively happy workforce (staff noted for their dedication; pilots who are compensated more highly any other airline’s) and a simple operation format: one type of plane. In 2009, 86 million passengers flew Southwest, more than any other airline in the U.S. 113 million flew in 2013. Southwest retains more than 15% of the domestic airline market and is consistently rated highest in customer service.

The opportunity amid the chaos is huge. Strategy execution can clearly be a competitive advantage, and figures bear this out. For example:

• A recent Balanced Scorecard report at Harvard University revealed that only 10% of employees understand their company’s strategy. Further, even at companies that made an attempt to implement, 6 in 10 staff didn’t think that important strategic and operational decisions were quickly translated into action.

• In a recent McKinsey Quarterly survey of 2,207 executives, only 28% said the quality of strategic decisions in their companies was generally good. 60% thought that bad decisions were about as frequent as good ones.

• A study of over 400 companies found that 49% of the leaders reported a gap between their organization’s ability to formulate strategy and its ability to deliver results.

The opportunity: with few companies meeting their outlined goals, a good strategy can raise the odds of success by helping managers make the right choices internally and in the marketplace. One of the most effective elements is clear communication. This helps assure that all involved have a tangible idea of the decisions and actions they’re responsible for.

Execution is a notorious and perennial challenge. Despite good intentions, nearly 7 in 10 change initiatives fail. 29% of change initiatives are launched without any formal structure, dooming them to failure from the outset.

Surprisingly, the simple awareness of the need to be prepared and proactive about change is not the issue: 80% of CEOs anticipate substantial or very substantial change within the next three years. But they rated their ability to manage change 22% lower than their expected need for it. The importance of executing well cannot be overstated, given the fragile state of the majority of change management undertakings.

The will to innovate pays off. Procter & Gamble (P&G) has long recognized innovation as the backbone of the company’s growth and has built it into the fabric of its operations.

• P&G spends close to $2 billion annually on R&D, approximately 50% more than its closest competitor. Each year it invests another $400 million in foundational consumer research towards innovation, carrying out some 20,000 studies involving more than 5 million consumers in nearly 100 countries.

• Though a 177-year-old company, it maintains its rank as one of the most innovative global companies (#24). In the face of global economic volatility and dwindling consumer confidence, P&G maintains a commitment to the new, driving enduring business growth.

SUCCESS SKILL 2 : EXECUTION AND PROCESS: INNOVATE AND RESPOND

– MALCOLM GLADWELL

“INNOVATION—THE HEART OF THE KNOWLEDGE

ECONOMY—IS FUNDAMENTALLY SOCIAL.”

INNOVATORS

P&G

R&D

IS RANKED 23RD ININNOVATION GLOBALLY– SPENDING MORE ON

THAN MOST OFITS COMPETITORS

In stark contrast, Kodak’s decline and fall demonstrates the failure to develop the appropriate buffers to keep competition from imitating and replicating one’s strategy, and a failure to deploy corporate resources and capabilities to emerging market opportunities. Kodak’s core film business was threatened, and it had a 15-year head start to figure out its response but couldn’t capitalize.

Kodak faced the “technological discontinuities challenge.” When new technologies emerge, competition is fierce, threatening core business models and profit margins. Kodak did not take decisive action to combat these transformative challenges.

UNDERSTANDING THE VALUE OF INNOVATION AND THE PROPER EXECUTION OF STRATEGY IS ESSENTIAL. TWO TIPS:

• Much more than an occasional creative eruption, innovation is the engine of long-term business growth. To generate consistent returns and sustain performance, companies must continually refresh their portfolio of offerings and the business models that drive them.

• Clear understanding of organizational change—and defining how change is executed— makes companies more than twice as likely to be successful in sustaining positive change within their business.

KODAK

ONCE COMMANDING 90% OF FILM SALES

ONLY RECENTLY EMERGED FROM A 2012 BANKRUPTCY FILING

A positive culture is at the heart of healthy organizations. In a 2013 Booz & Company global study, 86% of C-level executives and 84% of all managers and employees said workplace culture is key to their organization’s success. 6 in 10 saw culture as a more important ingredient than either strategy or operating models.

Cultural health drives financial success. According to the 2013 Gallup Report, “State of the American Workplace,” 70% of employees are not engaged or are actively disengaged. Gallup estimates that this costs the U.S. $450-$550 billion each year in lost productivity! The study further found that organizations with an average of 9.3 engaged employees for every actively disengaged employee experience 147% higher earnings per share versus their competition.

SUCCESS SKILL 3 : OPEN CULTURE, ENGAGED EMPLOYEES

– LOU GERSTNER, FORMER IBM CEO

“CULTURE ISN’T JUST ONE ASPECT OF THE GAME, IT IS THE GAME.”

LOWERLABORCOSTS

LOWERHEALTHCOSTS

AND A240%RISE INPERFORMANCE-RELATEDBUSINESSOUTCOMES

EMPLOYEES WHO ARE ENGAGED, AND ENJOY A CULTURE WITH GOOD WORKING RELATIONSHIPS, PERFORM MORE EFFECTIVELY.

They:• Incur six fewer sick days per year

• Cut labor turnover costs in the US by $2.3 billion

• Yield a 300% increase in business innovation

CULTURE DOESN’T JUST HAPPEN. IT’S INTENTIONALLY CREATED. A recent study by the Human Capital Institute (HCI) found three interdependent components necessary for effective engagement. This “trifecta of engagement” represents the shared responsibility among the organization, the manager, and the individual employee:

• Senior organization leaders set the vision and tone, and their actions represent the entity as a whole

• Managers lead by example, and are a primary influence on the day-to-day work environment

• Employees must be open to engagement efforts by the organization, and must be willing to emotionally invest themselves in their work

Further, HCI’s research indicated that these critical workplace characteristics drive employee engagement:

• Challenging and exciting work

• An environment of mutual respect

• Openness to new ideas and collaborative processes

• Clear communication about how every organizational role contributes to its success

Zappos is consistently known as one the best places to work in America, has over $1 billion in revenue, and possesses a world-renowned workplace culture. Zappos utilizes a culture book, an open environment for questions, a life coach, and offers employees payment to leave the company if they wish to pursue opportunity they can’t find at Zappos. The firm encourages managers to socialize with teams outside the office, building communication and trust. The company’s founder says the operation depends on it:

“Our number one priority is company culture. Our whole belief is that if you get the culture right, most of the other stuff like delivering great customer service or building a long-term enduring brand will just happen naturally on its own.”

-Tony Hsieh, CEO of Zappos

As with strategy and execution, getting to a vibrant culture isn’t easy. There are plenty of examples where poor company culture has hindered corporate success. For example:

• RadioShack, a once-revered brand, is representative of chronic mismanagement and a confusion about its role in the marketplace. Internally, employee confidence was also undermined by the firing of hundreds of employees by email, for example.

• App maker Zynga’s focus only on “a culture of growth” rather than “the company’s unique ideas, set of passions, and purpose” has failed so far as a long-term strategy for success. To build cultures that generate strategic value, organizations need to incorporate values, principles, behaviors and trust, which in turn will help employees want to address what matters, such as (in Zynga’s case) a recent “apocalyptic” drop in monthly average users.

It’s essential to have a good plan in place if the goal is to create a culture of employee engagement. The most significant challenges to implementation are, paradoxically, people-oriented. But changing mindsets and re-shaping corporate culture can be achieved through carefully managed processes, vision-based goals and transparency.

Trust in organization leaders cannot be assumed. In fact, surveys reveal that 4 in 5 Americans do not trust corporate executives. Equally unsettling, half of all managers don’t trust their own leaders! Further, a lack of management commitment, passion, and involvement are the greatest barriers to change, which in turn can lead to organizational failure.

One might think, how about a reorg? Fewer than 1 in 3 major reorganizations produced any meaningful improvement in performance and some actually decreased company value. That’s because most attempts center on success stories for the company, not the culture—such as beating the competition, industry leadership, share-price targets and so on. This creates significant energy for change in only about 20% of the workforce. Buy-in by a majority fails.

What’s shown to work? Invite everyone to act as if they own the business—quite literally giving them a “business within the business.” In other words, empower people. When you reorganize the structure of a business to be more organic than hierarchical, you align employee incentives with the ambitions of owners and management. Rewards are real and tangible. Short-term and long-term benefits are in balance. Staff are rewarded when they are good stewards of the business.

One example is Morning Star, the world’s largest tomato processor with annual revenues of $700 million. It’s succeeding due to an egalitarian and balanced organizational structure. Crew manage themselves, and report only to each other. Morning Star employees write personal mission statements that describe how they will contribute to the company’s goal, and there is a strong sense of mutual accountability.

Conversely, one of the factors that contributed to Nokia’s well-publicized disarray was its homogenous structure and culture. Nokia’s top executives were of similar age, ethnic origin and background, and this hampered their ability to develop a multifaceted analysis of a changing international environment. The company simply lacked the capacity to adapt in a decisive and committed way. Combined with too-frequent, poorly implemented, organizational structure changes, Nokia went from a king in the mobile world to a technology history footnote.

SUCCESS SKILL 4 : BALANCED AND FAIR ORGANIZATIONAL STRUCTURE.

– DAVID STEIN, CO-CEO OF RYPPLE

“ IF YOUR COMPANY HAS A TRADITIONAL HIERARCHICAL STRUCTURE,

AND YOU WANT TO SATISFY MORE CUSTOMERS AND EXCITE MORE

OF YOUR EMPLOYEES, FLATTEN THAT STRUCTURE. REALLY. REMOVE

THE UNNECESSARY BARRIERS THAT STAND IN THE WAY OF RESULTS.”

SUMMARY:

To survive and prosper in today’s hyper-changing environment, organizations need a new operating model. At XPLANE, we call this new way of working Business 3.0—where an organization recognizes itself as a complex, dynamic, growing, organic system that strives to be nimble and learns to adapt over time. Business 3.0 organizations cultivate both strategic performance and a healthy work environment, where all employees excel in strategy, execution, and organization. With aspirational core values intrinsic to their strategy and workplace culture, organizations can excel in the Business 3.0 era.

– WINSTON CHURCHILL

“ HOWEVER BEAUTIFUL THE STRATEGY, YOU SHOULD

OCCASIONALLY LOOK AT THE RESULTS.”

Did You Know? is a regular thought leadership platform that explores ways for organizations to shape successful futures. For more of XPLANE’s views on Business 3.0 success and staying in step with change, visit xplane.com/didyouknow