Mastering Strategic Renewal

long range planning

Long Range Planning 34 (2001) 159-178 www.lrpjournal.com

Mastering Strategic RenewalMobilising Renewal Journeys in Multi-unit Firms

Henk W. Volberda, Charles Baden-Fuller and

Frans A. J. van den Bosch

How do large multi-unit firms in a deconstructing world reconcile the conflicting forcesof profits for today and flexibility to adapt for tomorrow? Profits for today requiresorder, control, and stability: adaptation for tomorrow requires flexibility and creativity inthe value-added system. Large firms in many industries are confronted with thischallenge of exploration and exploitation. In the European financial services industriesthese conflicting tendencies are increasingly obvious. Existing large financial playersseem well placed to exploit the present but ill suited to adapt to the future. Why isthis so, and what can be done about it? We consider the mechanisms of selection,adaptation and co-evolution that take place between levels within the firm andbetween the firm and its environment, and from this identify four ideal kinds ofstrategic renewal journeys that organisations can adopt as a way of coping withincreasing environmental pressures. We label these journeys: emergent, directed,facilitated, and transformational. We show how these ideal types represent differentoptions for top, middle and front-line managers, and we identify how each type differsin its capacity to cope with the changing environment. We illustrate our renewaljourneys with examples from Dutch (ING and Rabobank) and British financials (Barclays,Lloyds and Prudential) and other organisations such as GE, IBM, Intel, Novotel andPhilips. We suggest that for mobilising renewal in well-established financialinstitutions—once protected but now exposed to the winds of change—managers haveto recognise that many of the current journeys are unsuitable for the future. �c 2001Elsevier Science Ltd. All rights reserved.

IntroductionHow do large multi-unit firms renew? How do they reconcilethe conflicting forces for change and stability? How do they

0024-6301/01/$ - see front matter �c 2001 Elsevier Science Ltd. All rights reserved.PII: S 0 0 2 4 - 6 3 0 1 (0 1 ) 0 0 0 3 2 - 2

Henk W. Volberda is Professor

of Strategic Management and

Business Policy at the

Rotterdam School of

Management, Erasmus

University Rotterdam. He is co-

director of the Strategic

Renewal Centre. Corresponding

address: Department of

Strategic Management &

Business Environment,

Rotterdam School of

Management, Erasmus

University Rotterdam, P.O. Box

1738, 3000 DR, Rotterdam, The

Netherlands. E-mail:

[email protected]

Charles Baden-Fuller is

Professor of Strategy at City

University Business School,

London and part-time

Professor at the Rotterdam

School of Management,

Erasmus University Rotterdam.

Frans A. J. van den Bosch is

Professor of Management at

the Rotterdam School of

Management, Erasmus

University Rotterdam.

Mastering Strategic Renewal160

respond and learn at the same time as promoting order and con-trol among their units? In many industries there are powerfulforces towards change—such as the arrival of new technologies,new competition, and globalisation—which necessitate explo-ration. On the other hand there are short-term competitiveforces demanding stability, such as the need to exploit what theorganisation has and avoid risky unproven projects.

These conflicting forces are clearly evident in European finan-cial services industries. The industry is globalising with a con-verging of incumbent players (such as banks and insurancecompanies) and new entrants, particularly telecommunicationsfirms and large retailers. Most large well-established financialfirms recognise that strategic action is required on all fronts.Considering the changing landscape of the financial services sec-tor,1 the need for strategic renewal is higher than ever before.

This paper describes four idealised journeys of renewal, whichmanagers in multi-unit firms can use as a guide to their thinking.Two of these journeys are clearly associated with what manybanks are doing today, and two represent more clearly possiblepatterns for tomorrow. The “ideals for tomorrow” have alreadybeen adopted by leading-edge organisations in other fast-movingturbulent environments such as silicon chip making. For eachjourney, we will define the appropriate managerial roles, specifythe knowledge design, and elaborate on the pacing of renewal interms of risk, speed, and competitive positioning. We also showthe intellectual and organisational antecedents for each journey,and with this analysis give insight into the rationale behind suc-cessful journey selection.

Rethinking strategic renewal: a co-evolutionaryperspectiveStrategic renewal can be broadly defined as the activities a firmundertakes to alter its path dependence. Important parametersof a journey of renewal include: the behaviour of managers ateach level of the organisation in response to each other (top-down or bottom-up); the way they view investing for tomorrowversus milking profits today (exploration versus exploitation);and the way in which they share knowledge with each otheracross organisation boundaries (intra-organisation learning).Until now managerial theories on renewal consider either apurely selective or adaptive perspective.2 Selection perspectivesview renewal as highly restricted by resource scarcity, conver-gence to industry norms, and structural inertia. In other words,the strategic activities of successful firms are very similar andlimited to strengthening and exploiting their existing core com-petencies. By contrast, adaptation perspectives suggest that firmscan and do change, overcoming their rigidities. That is, successfulfirms learn to behave differently and explore new competencies.

In this paper, we investigate journeys of strategic renewal ofmulti-unit firms by considering environmental selection jointlywith managerial adaptation, viewing strategic renewal as an ongo-

ing journey instead of a discrete shift from one state to another.Combining several degrees of selection and adaptation allows usto develop a coherent managerial framework of four idealisedrenewal journeys, and, in doing so, to provide answers to thefollowing questions:

� When is renewal a selection and/or an adaptation process?

� What roles do managers at the corporate and unit level playin these renewal journeys?

� How do these roles fit with the environment and the need torespond to turbulence?

� What are the benefits and risks of each ideal type?

In this paper, we consider the renewal path of units (and hencethe whole firm) that depend on the interactions between topmanagement and front-line or business unit managers. We lookat three levels of analysis in the journeys of renewal—the environ-ment, the headquarters or top management of the multi-unit firm,and the front-line or business unit managers—and at how theyco-evolve on the journey. Using March’s idea of exploration-exploitation as a metric for progress, we see strategic renewaljourneys as multi-level co-evolutionary processes taking placeover time and leading to adaptations designed to align com-petencies with the environment and increase competitive advan-tage.

For academic readers, we summarise the basis for our thinkingin Table 1. For the selection journeys, we mention the key contri-butions of population ecology, institutional theory, evolutionarytheory and the resource-based view. On the side of adaptationwe mention dynamic capability theory, behavioural and learningtheories, and theories of strategic choice.3

We move beyond simple adaptation-selection debates to sug-gest that there is scope for more pluralism. Instead of focusingon naıve selection or pure adaptation processes, we consider thejoint outcomes of managerial adaptation and environmental selec-tion, viewing adaptation and selection not as wholly opposedforces but essentially interrelated as if opposite poles of a con-tinuum. Our approach draws heavily on the ideas of co-evolutionthat are now gaining ground in the academic literature, but havenot yet made their way sufficiently into managerial practice. Thisco-evolutionary approach stresses the possibility of multiplepaths, the central idea of this paper.

We identify four ideal renewal journeys, labelling them Emerg-ent, Directed, Facilitated, and Transformational. Each ideal jour-ney can be related to the academic ideas of selection, adaptationand co-evolution. Each is relevant to the multi-unit firms, butoffers different approaches to managing the interactions betweenthe front-line and top management, and between the overall firmand its environment. Although others have proposed many

Long Range Planning, vol 34 2001 161


Table 1. Theories of Selection versus Adaptation Journeys. Source:Adapted from Lewin and Volberda (1999)

Theories on Journeys of Strategic RenewalMainly Selection Journeys Mainly Adaptation Journeys

� Population ecology: Renewal � Dynamic capability theory: Renewaljourneys are based on and limited journeys are promoted by firms’

to accumulation of structural and latent abilities to renew, augment,

procedural baggage through and adapt its core competence overretention processes (Hannan and time (Teece et al., 1997).

Freeman, 1977, 1984; Aldrich and

Pfeffer, 1976).� Institutional theory: Renewal � Behavioural theory of the firm:

journeys result from coercive, Renewal journeys are determinednormative, and mimetic primarily by the availability and

isomorphism. Renewal is achieved control of organisation slack and by

through maintaining congruence the strategic intent to allocate slackwith shifting industry norms and to innovation (Cyert and March,

shared logics (DiMaggio and 1963).

Powell, 1983; Greenwood andHinings, 1996).

� Evolutionary theory: Renewal � Learning theories: Renewal journeys

journeys are based on as a process of alignment of firm andproliferation of routines and environment based on unique skills

reinforce incremental for learning, unlearning, or

improvements (Nelson and relearning (Argyris and Schon, 1978;Winter, 1982) Fiol and Lyles, 1985; Huber 1991).

� Resource-based theory: Renewal � Strategic choice theories: Renewal

journeys are converging journeys as a dynamic processtrajectories of exploitation of subject to managerial action and

unique core competencies environmental forces (Child, 1972,

(Penrose, 1959; Learned et al., 1997; Hrebiniak and Joyce, 1985;1969; Wernerfelt, 1984). Miles and Snow, 1978).

typologies for strategic change,4 we suggest ours moves knowl-edge further forward. We go some way to connect managerialaction with the important concepts of variation, selection andadaptation. By doing this, we scope out a more rigorousapproach to the managerial renewal agenda. The key aspects ofthese four ideal types—sources of variation, locus of unit selec-tion, exploitation/exploration balance, knowledge design, andcompetitive positioning—are summarised in Table 2.

The emergent renewal journey: follow themarketThe ideal emergent journey of renewal is rooted in the assump-tion that some managers believe that they should be essentiallyoutwardly orientated or passive, their role being to amplify mar-ket forces and market signals for the benefit of the unit managers.For example, top managers set their business units’ targets basedon profits, rather than internal processes such as speed of new

Table 2. Idealised Renewal Journeys of Multi-Unit Firms. Theoreticaldifferences regarding (1) source of variation; (2) locus of unit selec-tion; (3) exploitation/exploration balance; (4) knowledge design; (5)competitive positioning

Top Management is Top Management isPASSIVE with respect ACTIVE with respect toto Environment Environment

Frontline and Emergent Renewal Directed RenewalMiddle 1. Market 1. Hierarchy

Management are 2. External selection 2. Top management

PASSIVE environment(Stable competition) 3. Unbalanced: strong 3. Balanced: Matching

bias towards exploitative andexploitation explorative units

4. Market knows best: 4. Top management

No organisational knows best andknowledge integration orchestrates

(less connected units) organisational

knowledge integration(reasonably coupled

units)

5. Following industry 5. Adapting to industryrules rules

Frontline and Facilitated Renewal TransformationalMiddle RenewalManagement 1. Co-evolution 1. Shared sense-making

are ACTIVE 2. Internal selection 2. Top-, middle and(Hypercompetition) environment front-line

management

3. Balanced: exploitative 3. Unbalanced: fromand explorative units strong exploitation

level each other out towards strongexploration and vice

versa

4. Front and middle 4. Organisation knowsmanagement best: high

challenge “market organisational

knows best” and knowledge integrationorchestrate (tightly coupled

organisational units)

knowledge integration(loosely connected

units)

5. Influencing industry 5. Changing industryrules rules

product development, and then typically reward their middle andunit managers with bonuses closely linked to these targets. INGbank in the early 1990s matched this ideal type.

The emergent journey is the consequence of this reactive mar-


Effective co-ordination

does not easily take

place without active

management


ket approach to variation, selection and retention. Regardingvariation, typically top managers do not encourage unit man-agers to engage in extensive search for new ideas and new busi-ness models: rather they stress the risks of straying outside thecompetence boundaries. If variation is required, top manage-ment undertakes this task by purchasing units from other organ-isations or from the capital market. ING’s acquisition of BaringsBank matches this behaviour. The top management perceived amarket opportunity to purchase a good quality organisation fora nominal sum. According to top management, such a move didnot come from below, but rather from entrepreneurial behaviourat their level. At the lower levels, many of the units within INGduring the early 1990s were conservative with respect to inno-vation—unit managers being more concerned with today thantomorrow.

Expansion and contraction of existing businesses (called selec-tion and adaptation) are undertaken in a similar spirit that isessentially outward looking or market-orientated. Units will beselected “in” or “out” by a process that is typically profit-driven:those that cannot yield a return above a benchmark are sold orclosed. Barclays’ behaviour during the 1990s is indicative of anemergent renewal journey. In the last decade, it shed thousandsof jobs, scaled down its investment banking activities, andavoided splurging on risks.5 Barclays is accompanied by manyother UK banks that have shifted their focus from viewing branchesas a collective asset, and now assess each branch on a stand-alonebasis, closing branches that do not meet profits targets.

Most large firms face pressures to create synergies betweenunits. In the emergent journey, the behaviour of top manage-ment is typically paradoxical. For example, in the UK in the late1980s many banks took over estate agents, and there were press-ures for house sales agents to be involved in selling add-on fin-ancial services. Yet top management did not fundamentally alterthe organisations’ processes or remuneration measurement sys-tems to make the synergies happen faster, and instead let unitsorganise the synergies in an organic fashion. As a result, mostfirms found that despite profit-related incentives, the hoped-forsynergies did not materialise. This is no surprise to managementscholars, who have long argued that effective co-ordinationacross functional and organisational boundaries does not easilytake place without active management.6 Such intervention goesagainst the outward-looking philosophy, top management typi-cally believing that managerial intervention will degenerate intomanagerial meddling and disruption.

Where is creativity in this journey? Of course front-line man-agers will be brimming with ideas, but they are encouraged tothink within the business. If they create new units these are typi-cally sold rather than developed. However top managers seethemselves as entrepreneurs who are free to range over a wideterritory. They are often active in the market for acquisitions andsales (as mentioned above) and, taking a trader’s attitude, theytypically buy and sell elements of their portfolio in reaction to

or anticipation of market trends. They may buy-in units that arein the early stages of development. Long-run success depends onan active market for new units, which is more common in Anglo-Saxon than traditional European or emerging economies.

The emergent journey has low administrative costs,7 and iscommon among many high-performing conglomerates in stablemature environments. Units often perform very well in the shortterm, selecting carefully among their capabilities to achieve maxi-mal returns. Failure has clear sanctions: when a division or unitis “selected-out”, it is closed, sold, or finds its resources with-drawn. ICI, the UK chemical giant, has recently been followingthis philosophy in the way it has reshaped its portfolio of busi-nesses.

The emergent journey is usually defended in terms of its suit-ability to dealing with mature slow-moving environments, withlittle evidence of synergies between units that cannot be donethrough the market. The benefit of the emergent approach is inavoiding the myopia of being wedded to particular ideas ornotions; a trap that mature firms can fall into even in matureenvironments. Historically many financial service firms such asBarclays and ING have adopted this approach when the industrywas stable: it is doubtful if this journey is so suited to volatileenvironments where there is a need to build synergies.

The directed renewal journey: top managementshould be in controlIn directed renewal journeys, top managers believe they havesome power over their environment and that strategy making inlarge complex firms involves multiple levels of management ina more co-evolutionary manner. In this perspective, renewaljourneys are driven by a priori managerial intentions cascadingdown. A key role for top management is to provide the purposeor strategic intent in guiding journeys of renewal of multi-unitfirms. As a result of top-down strategy making, multi-unit firmsmake their strategy changes deliberately, adapting to changes intheir competitive environment, with top management explicitlymanaging the balance of exploration and exploitation by bring-ing in new competencies to some units while utilising well-developed competencies in others.

The directed renewal journey model assumes that the multi-unit firm is purposeful and adaptive. Top management sets goals,scans the environments, searches for alternatives, chooses one,and monitors the process. In this ongoing sequence, “strategyformulation” precedes “strategy implementation”, with ideally,management in the role of a “rational actor” issuing directives.It requires an exhaustive analysis before action is taken, and thatmanagement holds a considerable amount of power and hasaccess to complete information. For successful implementation,management must orchestrate local rejuvenation, diffusionamong units and push units towards goal achievement.

This directive approach of top management fits with the pre-


Top management

argues that careful

co-ordination is vital


scriptions of classical administrative theorists8 It also matches theperspective of Prahalad and Hamel,9 who argue that strategicrenewal depends on the strategic intent of the CEO or corporatemanagement and should be based on superior industry foresight.O’Dell and Grayson10 point out that with these situations, seniormanagement has to commit resources to make things happen,and to become actively involved in the process: they cite Chevronand Rank Xerox, both associated with a hierarchical style, andthe typically tightly controlled multinational also falls into thiscategory.

Directed journeys of renewal have been very evident inrecently privatised utilities in Europe. Top management typicallyhires outside consultants to fulfil their responsibility of teachingthe multi-unit firm the new competitive rules set by the industryregulator. There is little opportunity for middle management tolearn, as they have to conform to new rules rather than createthem.11 During the first half of the 1990s, Rabobank fits thisjourney. Top management in this co-operative bank grouporchestrated organisational change processes that enabled knowl-edge-integration among loosely coupled units. Top managementdeliberately aimed at becoming a completely customer-drivenorganisation. The period of Lloyds/TSB under Sir Brian Pitmanalso resembles the ideal-type directed renewal journey. Hisindustry foresight resulted in Lloyds/TSB growing from thesmallest of the UK clearing banks into the most successful andprofitable financial player in the UK. His influence was so strongthat Lloyds’ managers were prone to make decisions on whatthey thought Pitman might think, instead of relying on theirown judgement.12

Directed renewal typically results in interference in the wayunits are structured, and the way they allocate resources intern-ally. Top management may have a preferred organisation design(such as the matrix) and a capital allocation rule (x% to newproducts, y% to improving processes). Top management typi-cally argues that highly integrated firms need direction and hier-archy for regulation of internal change and that careful co-ordi-nation is vital to avoid different units going off in differentdirections. The risk of “paralysis by analysis” is always present,making this journey difficult in dynamic, rapidly changingenvironments. Directed renewal appears to be particularly suitedto firms experiencing steady growth or decline, where the bene-fits of hierarchy in terms of formal planning and control can befully realised.

All of the above suggests that directed journeys of renewal areless suitable for organisations facing permanent turbulence,where boundaries between markets and units are being brokendown. Although such directed trajectories can be very speedy,they often cannot cope with the diversity of knowledge requiredfor variation, adaptation and selection and for the pressures ofintegration.

These first two ideals represent journeys that have been typical

in the traditional managerial history of European financial ser-vices firms, fitting in easily with the established managerial mind-set and experience of top management in this environment. Ourthird and fourth journeys are much less common in matureenvironments, and represent significant challenges to traditionalmanagement thinking. What to do in situations when followingthe market is not enough or top management is not in control?Such more hypercompetitive landscapes require front-line andmiddle management to take a more active stand. They are morecomplex, co-evolutionary and subtle approaches to management.

The facilitated renewal journey: increase varietyof renewal initiativesIn the facilitated renewal journey lower levels of managementare active in the choices for and mechanics of renewal. Top man-agement’s role is to create a strategic context for nurturing andselecting promising renewal initiatives by ensuring the maximumincentives for front-line initiative. The logic of this journey isthat front-line managers have the most current knowledge andexpertise and are closer to the routines and sources of infor-mation critical to innovative outcomes, and that top manage-ment can act as retrospective legitimiser13 or judge and arbiter insupport of lower-level initiatives. Compared with the emergentjourney, in this type of renewal journey multi-unit firms arelikely to show a more balanced portfolio of units in terms ofexploitation units and exploration units (see Table 2).

In the facilitated renewal journey, top management movesaway from having profits targets and market share as being thesole objectives for measurement, and takes a more balancedinternal–external perspective adding factors such as the fre-quency of new product and service introduction, and the oper-ation of goals such as the share of revenues from new ideas. Inaddition, top management may intervene in guiding the struc-ture of units, suggesting or directing forms of organising. Theestablishment of the branchless Prudential bank in 1995 wasorganised along the lines of this journey. This bank was built bythe people who were going to run it. Because of the desire forflexibility, planning was done step by step instead of followinga masterplan. The co-involvement of the future managers andemployees, and the project’s “no-blame” and forward-lookingculture helped ensure its success.14

Another well-documented example of facilitated renewal jour-neys where top management encourages selecting out and lowermanagement handles new unit creation can be found in Burgel-man’s study15 of the reshaping of Intel’s business in the 1980s.He shows that it was not the corporate strategy but the “internalselection environment” that caused a shift from memory chipstowards the microprocessor business. He conjectures that thehigher the correspondence between the internal selection criteria(that is set by the top management) and external selection press-ures (how the industry segments are evolving and how tech-


These organisations

appear to be in a

perpetual state of

adaptation


nology is changing), the better the selection mechanism guaran-tees the co-evolution of a multi-unit firm’s competencies withthe sources of competitive advantage of the industry.

In facilitated renewal journeys top managers look for varietygenerators to facilitate venture creation, which parallels or antici-pates older more mature activities being dropped. At the simplestlevel, we can think of isolating a flexible unit from the rigidoperating core. This principle was applied at Citibank’s Kallitheabranch in Greece, also called the “banking laboratory” by Citi-bank executives. This branch was used to develop the US bank’sworld-wide consumer operations, and has pioneered new elec-tronic services such as 24-hour telephone banking and paperlessdeposits and withdrawals.16 IBM also isolated a unit when theIBM PC was developed, as the mainframe logic was strongly pre-served in IBM’s culture and prevented entry into the new PCmarket. While at first IBM was very successful with this isolationstrategy, it found that transferring these new capabilities fromthe flexible mode to the rigid operating core was very difficult.IBM could not exploit these capabilities in its operating corebecause it lacked communication channels and common mentalframes. Similarly, Eastman Kodak, Philips, and Xerox have hadonly modest success from their internal venturing and new busi-ness development programs.

Stronger variety generators involve the continuous splitting ofgroups into separate units. Hewlett Packard, Johnson & Johnson,and Origin are examples of firms that have developed mech-anisms to set up new units. This encourages entrepreneurs topursue their ideas in separate divisions, while the older, moreestablished units provide continuity and stability. Overall, theseorganisations appear to be in a perpetual stage of adaptation,never really rigid or planned as long as new units are being regu-larly created from within. Their internal selection mechanisms(e.g., 70 per cent of HP’s sales have to be represented by productsintroduced or substantially modified in the past two years) bringcosts, such as the difficulty of integrating the new ideas back intothe old organisation. But they also bring some benefits, as newideas are typically insulated from the inertia of the centre, andhave the possibility to flourish without being suffocated.

In comparison with emergent renewal, facilitated renewaljourneys allow much more potential for learning across the firm’sunits. Yet the thinness of the top management group and thelack of significant resources devoted to moving knowledge canmake intra-corporate learning more limited than in other jour-neys. While the facilitated journey is far more difficult for topmanagement to handle, it has the potential to yield far greaterresults when the environment is turbulent and there is a needfor co-ordination between units. Teece et al.17 argue that organis-ations driven by strong internal selection are typically narrowlydiversified and can operate effectively in rapidly moving tra-jectories, as technological inter-dependence encourages unitsinto knowledge sharing without the need for direction from topmanagement. However, top management’s lack of direct control

over the organisation makes it difficult for the multi-unit firmto engage in any large-scale developments that require centralco-ordination or synergy across units. Facilitated renewal istherefore appropriate in highly complex and dynamic marketswhere deliberate strategy of any kind becomes difficult.

The transformational renewal journey: mobilise acompany-wide renewal processIn the transformational renewal journey, top management stillbelieves that it can influence the environment, but also believesin working closely with the lower levels. Involvement of front-line managers is seen as essential to the renewal process, and, inthis sense, the journey can be described as holistic, with a closelink between collective cognitions and the process of strategicrenewal.18 The question of what drives renewal thus depends onthe socially constructed reality of organisational participants, areality defined through collective sense-making in which percep-tions are affirmed, modified, or replaced according to theirapparent congruence with the perceptions of others and otherlevels. Weick19 described this sense making as enactment, mem-bers of organisations actively forming or enacting their environ-ment through their social interaction. A pattern of enactmentestablishes the foundation of the firm’s organised reality, whichin turn shapes future enactments. Renewal in this perspective isdriven by the development of shared strategic schemas or collec-tive frames of reference.20 However, such shared strategicschemas are difficult to change and may delay necessary renewalin strategy, leading to decreased performance or even failure.

Calori and Baden-Fuller21 described in some detail the changeprocesses at Novotel, one of the largest hotel chains in the world.This organisation had clearly followed the transformational pathin the way it had managed renewal. The processes were led fromthe top, but involved very considerable involvement from all lev-els, not just to participate in the changes, but also to shape thedirection of the process. This involvement improved the qualityof the result and increased the speed of the process.

Transformational renewal journeys are associated with sig-nificant unlearning, new ways of thinking and new mindsets, dif-ferent paths of technology, and particular kinds of corporateentrepreneurship. Corporate entrepreneurship literature suggeststhis journey is a holistic exercise that eventually involves thewhole business: requiring systemic rather than piecemeal changesin the multi-unit firm. This change may cascade through theorganisation, and it is quite clear that organisations can move incycles between one extreme (exploitation) to the other(exploration), with periods of systemic exploration when theorganisation is renewing and changing its skills and com-petencies.22 This renewal journey therefore is likely to be charac-terised by an imbalance between exploration and exploitation(see Table 2).

The journey of transformational renewal is transparent when



applied to the small unit, especially the start-up. There, a singleentrepreneur is seen as the driving force of the innovation pro-cess imbuing a spirit into the whole enterprise, collecting andmotivating like-minded individuals. The lack of tight commit-ments and relatively low sunk costs enable these units to under-take radical change easily.

Recently, considerable attention has been paid to the success-ful regeneration of mature units, or whole complex organis-ations, especially those in a crisis or facing decline. Here theliterature has generally pointed to the existence of a chief execu-tive, or team that has championed renewal. Kotter and Heskett23

provide a discussion of systemic change processes in British Air-ways and other organisations. Also, Whittington et al.24 foundin a European panel study those large firms able to realise sys-temic and complementary changes enjoyed high performance.

In these cases, it is clear that the top management team is ledby a chief executive who is much more than an administrator;he or she is a transformational leader who drives the processfrom the front but involves others and brings them along too(see Table 2). Transformational renewal demands that the wholeorganisation must be involved if radical change encompassingnew technologies and new processes is to be accomplished. Forthe multi-unit firm this journey is quite different from directedrenewal. Besides transformational leadership, it emphasises theimportance of the middle manager as an entrepreneur who con-nects the various levels of the organisation. This is not the caseof one level driving another, but of team-working among levelsand functions.25 Collective sense-making is an important require-ment for knowledge integration processes as highlighted by Non-aka and Takeuchi26 and Grant,27 and is a key component of theintegrative processes that seek to maximise organisation learning.

Transformational renewal journeys are often associated withnarrowly defined technological trajectories, for example, largemultinational firms, where all the divisions are in a closely relatedbusiness and the environment is evolutionary but punctuated byoccasional radical shifts. In such cases the importance of intra-organisation learning is often high (transmitting best practicefrom one country to another). When occasional radical shifts arenecessary, the firm can rise to the challenge.

Changing the firm’s destiny: developmentjourneys of financial firmsOur four journeys of renewal differ fundamentally, each implyinga different solution to the tensions between top, middle andfront-line management. Each journey is based on different theor-etical assumptions about the source of variation (market, co-evolution, hierarchy, collective sense making), the locus of unitselection (external selection, internal selection, top managementintentions, shared schemas), the mix of exploration and exploi-tation activities (balanced, unbalanced), the level of knowledgeintegration (less-connected to tightly-coupled units) and com-

petitive positioning (following to changing industry rules).Although these are ideal journeys—“pure” examples of the typi-cal components of a specific type of each journey—understand-ing their structures and implications and appreciating the differ-ences between them can be a potent source of understanding formanagers of firms in the real world, whose journey of renewalmay be hybrid forms of two or more of the ideals. This is illus-trated in the CEO commentary on strategic renewal at Rabobankin this issue. Another reason why firms may be hard to categoriseis that they may move through different periods, each character-ised by a different renewal journey. Such meta or developmentjourneys of renewal form part of the portfolio of strategic choice.

Consider GE’s corporate revitalisation guided by its CEO JackWelch, Philips’ corporate change initiated by Jan Timmer andfurther accelerated by Cor Boonstra, or Novotel’s renewal led byPellison. The starting point of these companies seemed to be aperiod of stasis where both top and front-line managers had beenpassive and where the financial community was threatening toimpose market selection. New CEOs arrived and pushed directedrenewal. Typically they began with a process of competencedevelopment led by the CEO, which introduced new concepts,communicated them in an understandable manner through theuse of metaphors and analogies, and reiterated them repeatedly.Consequently, new capabilities such as speed, simplicity, andmarket responsiveness were passed down the organisation almostas an order or instruction to be followed. Following these periodsof top-down directed renewal, the organisations have moved onto another period, where top management shows more trans-formational leadership and other management levels are involvedin order to create system-wide change (transformationalrenewal). Finally, top management becomes more of an orches-trator, facilitating decentralised entrepreneurship, and the jour-ney is more like that of facilitated renewal.

As was pointed out earlier, for many financial service firmsinertia prevents the renewal journey being altered in a funda-mental manner. Although firms cannot make such transitionsvery often, we argue that it is indeed possible. We alreadydescribed that the Dutch Rabobank Group followed a directedrenewal journey in the first half of the 1990s. Top managementaimed to orchestrate the integration of organisational knowledge.The organisational units were not very tightly connected. As theRabobank Group grew in size due to acquisitions, such as theco-operative insurer Interpolis in 1990, it came to resemble alarge centralised organisation. Organisational units began tocomplain that the corporate centre, Rabobank Nederland,became too powerful by imposing its product-driven strategiesupon organisational units such as the local banks. In the secondhalf of the 1990s, Rabobank Group tried to change its renewaljourney towards transformational renewal (see Table 3). In 1996,the predecessor of the present CEO pointed out:

The hierarchical, pyramidal structure, with its tendency touniformity, belongs to the past.… Traditional organisation


Firms may move

through different

periods, each

characterised by a

different renewal

journey


Table 3. Development Journeys of Financial Firms

Top Management is Top Management isPASSIVE with respect ACTIVE withto Environment respect to

Environment

Frontline and Middle Emergent Renewal Directed Renewal

Management arePASSIVE (Stablecompetition)

ING Rabobank

Frontline and Middle Facilitated Renewal Transformational

Management are ACTIVE Renewal(Hypercompetition)

concepts start from concentration of knowledge at the top,to be directed downwards via the hierarchy. Owing to thedistribution of knowledge it has become impossible andunnecessary to manage organisations from the top….Hence, it is better to think in terms of the network concept.The organisation as a system of relations between people,who collectively want to realise a shared idea.28

This transformational renewal was further accelerated throughthe corporate-wide decision-making process to revitalise the co-operative foundation of the Rabobank which resulted in a newambition statement and strategic orientation in 1999. Accordingto Rabobank’s Annual Report of 1999, a top priority was thecreation of synergy between the organisational units, and a moredecentralised management approach resulting in a reduction ofthe size of the corporate centre. Furthermore, it was decided thatthe network character aimed at in the new ambition statement,was better captured by the new name “Rabobank Group” insteadof the previous name “Rabobank organisation”.

ING also altered its dominant renewal journey during the lastdecade, from merely emergent towards a facilitated renewal jour-ney (see Table 3). Due to large-scale merger and acquisition pro-cesses, ING emerged in the beginning of 1990s as an all-financecorporation consisting of a collection of unconnected divisions(Postbank, ING Bank, Nationale Nederlanden) each subject to itsown external market forces. ING’s top management only stressedfinancial performance criteria and did not actively redesign itsmultiple divisions. During that period ING clearly followed theemergent renewal journey. However, during the second half ofthe last decade and in particular in 1999 and 2000, top manage-ment took a much more active attitude in creating an internalselection environment reflecting external market forces (quasi-selection) and the managers of the organisational units had amore active role in terms of stimulating knowledge integrationamong formerly loosely connected units. At present ING’srenewal journey is in transition from emergent renewal towards

facilitated renewal. This renewal journey is rather exceptionalcompared with most of the major European banks. Citibank isone of the few large international incumbents that operates inthis mode. As Kelly and Allison29 pointed out in their effort touse complexity science to explain the developments of Citibank:“Everyone at Citibank talked of the externally focused competi-tive atmosphere, which had internally emerged from the peopleand their patterns of interaction.” Furthermore, they observedco-evolution at micro- and macro-levels and both a clear stra-tegic intent and room for exploration at the unit level withinCitibank.

Summary and discussionOrganisations are not static, and often resist attempts at simplecategorisation. While journeys of renewal in practice are highlyidiosyncratic, we used idealised models of journeys as one of theapproaches to this the problem. These idealised journeys com-partmentalise phenomena of renewal of multi-unit firms intoidealised paths that are simple enough for managerial, organis-ational and knowledge attributes to apply. In particular, we haveposed four basic journeys: market selection pressures propellingemergent renewal journeys, management intentions pushingdirected renewal journeys, deliberate variety generation andinternal selection driving facilitated renewal journeys, and collec-tive sense-making allowing transformational renewal journeys.We discussed each of these four journeys in terms of theoreticaldifferences regarding management intentionality, source of vari-ation, locus of unit selection, the exploitation/exploration bal-ance, knowledge design and competitive positioning (see Table2). Based on this assessment we discussed why and how firmsmove between renewal journeys over time (see Table 3).

Journeys of the futureIs one of these idealised journeys more successful than the otherjourneys of renewal? The emergent renewal journey represents anextreme, where top management amplifies market pressures,often enforcing more rigorous standards than would otherwisebe imposed. There is no doubt that for substantial periods oftime, financial firms have done very well by adopting suchemergent journeys.

In contrast, in transformational renewal where the front-linemanagers are working most intensely with top managers, learn-ing is intense and diversity among levels and groups leads tolearning, exploration and rejuvenation. Here, top managementsees its role as overcoming market forces of selection, forcingfast-track adaptive and learning behaviour. As a developmentmodel it sounds ideal, but the resulting path appears to havedrawbacks. We suggest it is poor at dealing with technologicaldiscontinuities and the journey may not sustain over time,because of the supreme effort required for all the partiesinvolved. The firm lurches from states of high exploration to


We gratefully acknowledge thehelpful comments from thereviewers and senior editor,Robert Grant. We also thankmanagers from ING, KPN, Philips,and Rabobank, where variousearlier versions of this paperwere presented and from wheredata were collected. We alsothank Arie Lewin, the membersof the Erasmus Strategic RenewalCentre, the European participantsin research programme“Strategic Renewal in theEuropean Financial ServicesSector” and the researchdepartment of Stroeve SecuritiesBank. All errors are the authors’responsibility.


high exploitation, placing severe demands on managerialcapacity.

On the other hand, scholars specialised in complexity theory30

provide valuable evidence that facilitated renewal may be veryeffective, and could dominate the future landscape. Renewal pro-ceeds most rapidly, they argue, when top management effectssmall probes in a characteristic rhythm, recombining the port-folio of units, so that novelty is deliberately generated withoutdestroying the best elements of past experience. Top manage-ment operates on unit managers indirectly, taking advantage ofthe tendency for myriad local interactions to self-organise intoa coherent pattern. Rather than shaping the pattern that consti-tutes strategic renewal (directed renewal), managers shape thecontext within which it emerges, speeding up co-evolutionaryprocesses.

New empirical research in the financial services industryFor the academic researcher, our paper has important pointers.Are all journeys viable or do some dominate? One reason forour caution is the paucity of good empirical work. Cross-sectional survey-based studies and economic time series model-ling dominate by far the empirical research landscape.2 Untilnow, there have been few very long-run analyses, yet they oftenyield surprising results.31 We clearly need more long-term studiesof how industries and firms co-evolve and emerge over very longperiods of time where several of the journeys of renewal can becompared, not just two at a time.32 Moreover, large-scale longi-tudinal international research programmes such as NOFIA (NewOrganisation Forms in the Information Age) or INNFORM(Innovative Forms of Organising in the 21st century) may behelpful vehicles to create data sources for studying journeys ofstrategic renewal.33

In this issue’s collection of papers on renewal in Financial Ser-vices we take a multi-country approach. Most of the existingresearch on renewal however takes a single country perspective.In this issue, we answer if and how financial institutions changein a European context where there is governmental and regulat-ory influence as well as changing technology and consumer pref-erences. Our approach is simultaneously longitudinal and cross-sectional. The cross-sectional nature is captured by our examin-ation of banks and insurance companies in many Europeancountries: France, Italy, The Netherlands, Sweden, and the UK.These will be examined historically and contemporaneously giv-ing a longitudinal perspective.

Broadening managerial choiceFinally, our journeys point to important lessons for practisingmanagers and those who teach them. By setting up the bench-mark of “selection” where managers are seen as passive actorsdriven by path dependency, we point out that there are realchoices that managers can make, explicitly or implicitly. Thesechoices include four different ideal journeys for renewing the

multi-unit firm. Each of these is distinctive from the others inhaving different benefits and costs. Each choice may differ inefficacy according to environmental stimuli, and each impliesdifferences in roles for top and front-line management. We offerpotential insights into some of the consequences of these choices:by doing so, we hope to help managers in mastering strategicrenewal and mobilising change.

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Mastering Strategic Renewal

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