The Trouble With Transformation

A successful transformation needs only three things: timing, team, and strategy. You’d be surprised how many great companies get those wrong.

Thee hundred of the most senior officers of a major international consumer goods company met in London to discuss the upcoming transformation plan. The company is sinfully profitable and distributes major brands through small newsstands. The kind millennials don’t visit. The CEO believes the business is about to be disrupted and he wants to transform into a device and app company.

I was invited to comment on the transformation strategy. The question on everyone’s mind was what they should expect?

I told them to expect trouble.

Transformations go wrong because of the timing, the team, and in a very few cases, the strategy. It is why smart people make the same mistakes without the benefit of wise second-guessing.

The following are the three biggest reasons transformations flop:

Interviewing Jeff Immelt at GE headquarters
  1. Transformations Take Too Much Time (and it may already be too late)

GE was one of America’s most storied strategy powerhouses. The company transformed continuously from 2000 to 2019 when former CEO Jeff Immelt took over the reins shortly after 9/11. The succession of crises from terrorism to the disruption of global economies defined GE’s attempts at transformation. The national tragedy ignited the long fuse that led to an inconceivable loss of $500 billion on market value.

But the reality is more complicated.

When a company (or an economy) is under duress, long term plans drift into short term remedies. It reminds me of that famous expression about how you forgot to drain the swamp because it was filled with alligators. Immelt knew all of this. He saw the world as it was going to be, and tried to reshape the company by finding new growth businesses (GE mantra to be number one or two in any sector they entered). He invested in digital, healthcare, and power, all great opportunities.

But as the Treasury Department put the breaks on the profit engine of financial services, those capital intensive projects became unaffordable. There were other problems. The board never got Immelt’s rhythm nor did it understand the pressures he was under. This led to stupid things like Sandy Warner’s (former JP Morgan CEO) doing an end run to anoint a successor. And a gift from the Welch days, the company was American centric and the portfolio was lopsided. It meant that every time a crisis hit, it was like a car caroming around a bend at high speed with no breaks.

Lesson learned: The company evolved but never really transformed.

2. Transformations Happen Too Quickly (and the wrong team is in place)

Lew Glucksman CEO of Lehman Brothers

The bankruptcy of Lehman Brothers on September 15, 2008, represents the high water mark for business failure. It cost shareholders and stakeholders over $600 billion and remains the largest bankruptcy in America’s business history. (I wrote about the government’s role in the bankruptcy). But the failure wasn’t caused by the ’08 Financial Crisis, but a transformation that took place a decade earlier.

Lehman faced a stark choice in the 1990s, a period after Wall Street was required to drop fixed commissions and enter into non-client businesses like prop trading. Lehman had been a white-shoe firm evenly matched with trading prowess. Now civil war broke out between investment bankers and the traders, as Ken Auletta wrote, “Power, Greed, and Glory on Wall Street: The Fall of Lehman Brothers.”

A storied, cigar munching trader named Lew Glucksman fought a brutal winner takes all battle with Lehman’s investment bankers, Pete Peterson and Steve Schwarzman. The bankers departed to form Blackstone. They took with them prudence about risk. But when the Financial Crisis of ’08 hit, Lehman was wired to see everything as a trade. Under Glucksman’s protege, Dick Fuld, the firm doubled down on discounted mortgage securities and ensured bankruptcy a year later.

The firm did not realize that what looked like bargains were toxic, and when leveraged, turned a solid foundation into quicksand. The trading mentality that ran the company was deluded into thinking every market had its bargain basement price. A different perspective might have changed everything, as it did for Goldman Sachs and Morgan Stanley, Lehman arch rivals until the time Glucksman took over. If you want further proof, take a look at Blackstone’s record. It’s clear who should have been running Lehman Brothers during a period of transformation.

Lesson learned: the team that creates the transformation plan isn’t necessarily the team that should implement it.

3. Transformations Can Be Based On False Positives (when the market changes its mind)

GE didn’t change quickly enough and Lehman changed too fast. But there is a third way to make a transformational mistake: not thinking about the false signals in the data.

The most well-researched transformation in history was New Coke, launched in 1985 by a company known for brand strategy. It flopped so badly that if market researchers had a reality TV show, New Coke would be the prop on Kocktails with Khloe, where there is no way to fix a bad idea.

Coca Cola needed a better tasting product to compete with Pepsi. After $4 million spent on research and over 200,000 taste tests, 53% of the sample preferred New Coke. So what could go wrong?

In less than three months, over 400,000 angry customers called the company to complain about the new product. Old Coke was reborn as “Coke Classic,” and New Coke had $30 million in unwanted inventory. It was renamed Coke II in 1992 and then killed off in 2002.

New Coke tasted better, and the test data proved it. But market research is more than a numbers game. Just because consumers liked the taste of New Coke didn’t mean they were willing to give up the old familiar brand. The testing was right; the transformation strategy was wrong. Coca Cola’s mistake was in failing to recognize that taste tests are science, but the Coke brand was a story. To consumers, stories matter.

Lesson Learned: In testing a strategy for the future, be sure to nail down the science but also the story.

Written by

Producer of Extraordinary Lives 2019 @TellyAwards for documentaries @ IconicVoices.tv; Author of Be Somebody @ jeffcunningham.com; ex-publisher @Forbes

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