Leading Transformative Growth
July 16 2012 by Jennifer Pellet
Kodak, Borders, Blockbuster, Tribune—the list of once-prominent companies gone belly up is sobering. More sobering still is the fact that their respective demises might well have been averted, agreed CEOs gathered for a roundtable discussion on the pursuit of transformative growth held in partnership with BTM Corporation. “All of these were big, successful companies,” said Allan Grafman, chairman of Majesco Entertainment and CEO of All Media Ventures. “And every one was done in by the absence of reinvestment and adaptation of technology.”
Transformation is one of the most pressing challenges leaders face in the 21st century. Companies across industries must evolve and adapt to a vast array of external forces—from societal trends to game-changing technology—continually reshaping playing fields. In today’s slow-growth environment, those who fail to do so will, at best, sacrifice competitive ground; and at worst, will ensure their own mortality. At the same time, developing the kind of corporate agility essential for constant evolution is a significant feat, pointed out Faisal Hoque, founder and CEO of BTM and the author of The Power of Convergence: Linking Business Strategies and Technology Decisions to Create Sustainable Success. “It can be easy to do a transformation—to turn a company around—once,” he noted. “But repeatedly transforming a company is a completely different story. That requires a core organizational capability that goes beyond the management team.”
How does a company achieve and maintain that ability? Several roundtable participants underscored the need for constant vigilance—a variation of Intel’s former founder, CEO and Chairman Andy Grove’s mantra “Only the paranoid survive.” As Greg Milano, CEO of Fortuna Advisors, put it, “Spectacular turnaround stories make for interesting stories, but the key is actually not becoming one of those.”
“When your cash flow is still strong, it’s really easy to sit back and say, ‘Boy, we’re great. We’re successful,’” Milano asserted. “But as soon as you’re content, that’s when the problems start. In this world, where we’re pressed for quarterly earnings per share and to buy back stock, the real challenge is to constantly change and invest in the future rather than wait for a problem to happen.”
Drew Industries has been meeting that challenge for more than three decades by making change a principle part of its corporate mission. “In 1979, new owners took over and we had a very general, broad discussion and decided that willingness to change was the most important thing in business,” explained Chairman Leigh Abrams. “We looked back at the people who used to make ice boxes and typewriters. They refused to change because they didn’t want to lose market share, and now they’re all out of business.” Determined to avoid that unhappy fate, the company has since been through six transformations in response to market changes. For example, in 1997, manufactured housing represented 95 percent of Drew Industries’ business. “Realizing that the industry was going to take a major downturn, we shifted our focus to recreational vehicles,” said Abrams. “Today, RVs account for 87 percent of our business.”
In particular, the ability to anticipate and adapt to new technology has been instrumental in the success of many companies. “Interacting with customers, new product offerings, cutting costs, increasing brand visibility—technology can be used in every aspect of your business, noted Hoque. “If you look at almost any industry sector, the leading company is one that used technology in some form [to gain an edge].”
However, big technology bets can also be costly and therefore inherently risky. Several participants acknowledged the need to tread with care lest cutting edge morph into bleeding edge. In agreeing that resisting new technology ultimately derailed companies like Kodak and Borders, Nicholas Pinchuk, CEO of Snap-on Tools, went on to point out that mistakes are far easier to identify in hindsight. “There’s a sad truth about being a CEO, and that is that there is no path to certainty,” he asserted. “At the end of the day, the CEO is there to make a decision that can’t be determined by the facts. The people at Kodak may have been arrogant [about digital technology], but they also may simply have been wrong. The definition of failure or negligence is that, after the fact, it didn’t work.”
The Importance of Anticipation
Conversely, however, the most successful leaders are those consistently able to make the right bets—or turn the bets they make into successes. “Steve Jobs was really good at understanding what the customer’s needs would be in the future—at getting to the place where the puck is going to be, not where the puck is now,” pointed out Doron Grosman, resource partner at Court Square Capital Partners.
Milano underscored the sentiment, adding that Apple’s former CEO seemed uniquely equipped to go beyond predicting consumer needs to actually shape them. “Jobs didn’t wait for people to figure out what they needed,” he said. “He told them.”
Few companies, however, can hope to wield that kind of market influence—and to be given carte blanche by their boards to do so. “[The problem] isn’t just that companies make the wrong calls, it’s that boards of large companies have become so risk averse that they only bet on what’s been proven to work in the past,” pointed out Jeff Sonnenfeld, CEO of the Yale School of Management’s Chief Executive Leadership Institute.
“Big companies make too few bets,” agreed Milano. “They pick a few things and then squeeze the rest of the cash flow out of the business. The same big pharma and even the technology companies that we used to think of as innovative are now almost capital goods companies. They just aren’t making enough bets on the future.”
An ability to embrace new technology is only one piece of the transformation puzzle, noted Grosman. “[Most] failures can be attributed to three things: poor use of capital, poor use of technology and poor guidance by owners,” he asserted. “I was amazed when Borders outsourced their electronic book business eight years ago, with Amazon coming on strong. Their board—and owners through the board—approved that.”
Borders is one of many large, successful companies that simply failed to envision the future accurately. To avoid such missteps, CEOs need to devote more energy to understanding consumers and the marketplace and less time appeasing investors, suggested Grosman. “Get out of the boardroom,” he urged. “Get out of your office and hit the road. Spend time with your sales guys and in your customers’ offices so that you learn from them. Stop catering to what the board wants and what investors want and be out there with your customers, your vendors and your own employees—those who really create your business. If you’re able to get into the mind of the customer and assess what his or her future need will be, you have a higher likelihood of being able to create the kind of innovation that can transform your business.”
Transformation in Crisis
All too often, business leaders are charged with driving transformation at a company in crisis. When Monty Sharma stepped into the CEO role at Atkins Nutritionals four years ago, the company was floundering. “Atkins, which was a very popular diet in the early 2000s, had lost its way and focused on becoming a food business,” he explained. “They were coming out with tons of products that had little to do with weight loss and what consumers associated with the brand.” Recognizing the disconnect between what the brand stood for to its one million loyal customers and where management had been taking it, the company’s new owners decided to retrench. “Most people said, ‘You’re crazy to take this back to the dietary—that’s failed,’ but three years later, we have seven million people following the diet,” reports Sharma.
J.M. Allain faced similar challenges when he took the helm of Trans-Lux, a technology systems company that was deeply troubled, in 2010. “Everything was broken, he says. “Our reputation was completely under water, our financials were upside down and our employees had been through a 10-year downslide.”
The situation demanded dramatic action and Allain took it. “We stopped selling, closed the doors and said, ‘We’ll be right back,’” he recounts. “Instead of trying to make little incremental changes, which could very well have hurt us, we decided to stop talking and go into the boardroom and figure it out. When we came back, we had a brand new set of products.”
In addition to redefining the company’s business model to focus on the digital display space, Allain faced the challenge of getting its employees, some of whom had joined the company before he was born, on board with his transformation program. “When you talk about transformation, you aren’t just transforming your company and your products; you have to transform the mindsets of the people who work there,” he noted. “You become a cheerleader, as well. A year ago, I was looking for a COO and my sales pitch was essentially, ‘We’re insolvent, our customers all think we suck and we don’t have any money. We’re working on a restructuring, but it’s a long shot because we haven’t made a really good product in 10 years. When would you like to start?’ Fundamentally, you’re selling a dream that they have to buy into.”
The employee aspect of the transformation equation is a critical hurdle, agreed participants. “As CEOs, we’re often outstanding at things like [financial management] or sales and manufacturing, but grossly inadequate in our understanding of human psychology,” said Grosman. “But when you’re transforming a business, there are tens or hundreds or thousands of hearts and minds that you have to transform. And if you don’t understand the psychology of what it takes to transform an individual from place A to place B, the organization is not going to move. The resistance is going to be enormous.”
Ultimately, successful transformation requires a holistic approach, summed up Hoque. “The organization has to have an operating blueprint—a platform of what its future will look like—that extends all the way from the board and the CEO to management and the line level,” he asserted. “You need to be able to do an impact analysis on how the various pieces fit together and what the impact of moving one piece will be on your financial [outcome].
“Execution comes from creating and managing that blueprint on a daily, weekly, monthly and yearly basis. The board, the CEO, the management team and employees [at every level] have to be able to do that.”