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Why Transformation Needs a Second Chapter

Lean, but Not Yet Mean
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In This Article
  • In an era of increased market turbulence, companies are under growing pressure to transform their businesses.
  • Some 75 percent of corporate transformations fail to deliver enhanced competitiveness and growth over the long term.
  • Successful transformation efforts share a number of key attributes.
  • Corporate transformations that fail over the long term fall into common traps, including an inability to respond effectively to market changes.
 

It’s a well-known mantra in business: “You can’t cut your way to greatness.” Nonetheless, painful cost cutting and other defensive measures are a familiar strategy for staying afloat. They are quick and obvious and deliver tangible results, but they are not in themselves a recipe for success. What does a CEO driving a turnaround do after these “easy” measures have been exhausted?

In an era in which markets are more turbulent and leadership is less durable, companies must continually renew their competitive advantage. (See “Adaptability: The New Competitive Advantage,” BCG article, August 2011.) It is not surprising that an increasing number of companies find themselves out of step with market realities and in need of transformation. As Xerox CEO Ursula Burns said in May 2012, “If you don’t transform your company, you’re stuck.” But transformation in its true sense—the restoration of vitality, growth, and competitiveness—is easier said than done. In fact, 75 percent of transformations ultimately fail. (See Exhibit 1.) In practice, the visionary titles given to transformation programs—names like “Inspire” or “Phoenix”—are often mere euphemisms for cost reduction.

exhibit

We looked closely at the long-term performance of transformation programs by using the method of paired historical comparisons, an approach that eliminates interesting but irrelevant details and zeroes in on the key factors that separate success from failure. We studied a dozen pairs of companies, each in the same industry and facing similar challenges at similar times. Our study revealed two common trajectories: short-term recovery with long-term slow decline and, less commonly, short-term recovery with long-term restoration of growth and performance. (See Exhibit 2.) So what’s the formula for the second path?

exhibit
“‘If You Don’t Transform, You’re Stuck,’” narrated by Renee Montagne, Morning Edition, NPR, May 23, 2012.

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