Transforming Internal Governance: The Challenge for Multinationals

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The emerging competitive landscape poses a challenge to the internal-governance capacity of large, established firms. Internal governance refers to the wealth-creation processes inside diversified multinational corporations (DMNCs). Three main processes constitute internal governance: cultivating strong corporate–business-unit relationships, fostering inter-unit linkages, and pursuing growth and innovation. First, it is easier to create wealth when frictions in the relationships between the corporate center and the business units (and the geographical units) are reduced. Eased frictions allow business units to be market oriented rather than embroiled in internal debates.

Second, enhancing the quality of inter-unit linkages (for example, global account management) creates value. Internal corporate leverage of resources requires business units to collaborate to address new, emerging opportunities. Finally, growth and innovation are an integral part of a corporation’s vitality.

The rate of change in the competitive environment exceeds the speed with which established DMNCs have been able to transform their internal-governance processes.1 Consider Kodak, Matsushita, Toshiba, and other firms with great traditions, global scope, and established technological capabilities. As the dominant paradigms in their businesses shift, their ability to lead is severely compromised. Although leaders recognize the need for rapid transformation of their firms’ internal governance, the problem lies in determining how to accomplish that transformation.

DMNCs are not constrained by a lack of knowledge about new technology; they often create new technologies. Philips is a technological leader in the optical media that gave the world CD and now DVD. Long before smaller start-ups, Xerox and IBM had all the technology needed to develop the personal computer. Kodak had the knowledge base to lead the development of the digital-imaging market. Nor are these organizations financially constrained. Their R&D budgets and capital spending run into billions of dollars per year. The malaise cannot be attributed to resource constraints.

Old Remedies and New Problems

At the first signs of competitive difficulty, managers assumed that the time-tested remedy of cost cutting would save them. All large, established firms bought time through the rituals of portfolio adjustment, reengineering, and head-count reduction. From 1991 to 1996, many leading firms attempted to restructure their way out of problems (see Table 1).

As late as 1998, Kodak and Xerox were undertaking restructuring efforts: in January, Kodak announced a reduction of 16,800 employees; in April, Xerox announced a reduction of 9,000 employees. Through restructuring activities, managers reduced inefficiencies accrued over decades. Yet these cost-cutting efforts failed to transform the firm as many had hoped. The competitiveness problems persisted because managers were applying old remedies to new problems.

In this article, we first describe the competitive discontinuities that DMNC managers face. From that description, we derive the new managerial challenges. We then examine the impediments to change that established firms must overcome. Finally, we argue that transformation of the internal-governance process — a capacity for corporatewide unlearning as well as learning — is at the heart of sustained wealth creation.

Competitive Discontinuity

We define discontinuity as an abrupt change. An example is the Internet. Five years ago, no one could have anticipated its rapid proliferation and impact on consumers and firms. The rise of the Internet has forced a quantum jump in the rate of change in how firms do business. In an environment of rapid and discontinuous change, gradual evolution of the business model and, therefore, of internal governance is insufficient.

Discontinuity arises from many sources:

  • Prosumerism. During the past decade, multinational firms gained access to more than a billion new customers as formerly closed economies — in Eastern Europe, China, India, Brazil, and the Commonwealth of Independent States (former Soviet republics) —joined the free markets. As a result, the demographic composition of the global markets available to DMNCs has changed — for example, potential markets include an aging population in Europe and Japan, a young population in China, Mexico, and India, and an aging and young population in the United States. Furthermore, customers spend their time and money differently. Lifestyles and fashions are evolving. The spread of television in emerging markets and the Internet worldwide gives consumers access to vast amounts of information. In many industries, such as software, consumers are actively involved in product design and development.

The changing nature of customers’ expectations, age, income levels, regional spread, and knowledge base has profound implications. Consumers are in charge and have more choice than previously. The dramatic shift in the balance of power among manufacturers, distributors, and consumers is best described as the age of prosumerism. Businesses have to become “pro” consumers as they gain access to more information and start exercising their new options.

  • Disintermediation. Traditional channel structures are being challenged. Manufacturers are more likely to be in direct contact with end users by eliminating intermediaries — wholesalers, dealers, and distributors. The Internet provides a new approach to customer access and distribution. Managers are gaining increasingly sophisticated knowledge of consumers and will be able to serve them better. While the quality of relationships between manufacturers and customers can improve through disintermediation, selling and administrative costs as a percentage of sales in most firms are likely to decline significantly. The mix of marketing investments will change as well.
  • Deregulation, Privatization, and Globalization. Although the pace and timing vary in different parts of the world, deregulation and privatization are changing the character of globalization. A wide variety of industries are being deregulated and privatized — for example, financial services, power, telecommunications, water, airports, broadcasting, and postal services. Deregulation destroys local monopolies, allowing entrepreneurial firms to exploit global opportunities in industries that were, for most of the century, primarily local. The globalization of Enron (in power, gas, and water), Sprint (in telecommunications), and Schiphol Airport Authority are but a few examples of the dramatic shift in industry dynamics resulting from deregulation and privatization. Significant regional differences, however, persist, as beneath the veneer of global uniformity, differences lurk. For example, MTV can be seen as a uniform, global force. Yet as a manager in India told one of the authors, “If you only see the video, MTV in India is like it is anywhere else in the world. If you listen to the audio as well, you know it is India. The freedom of movement may be global but the soul is local.”
  • Digital Convergence. Many traditional industries are learning to harmonize traditional technologies with new ones. For example, traditional consumer electronics firms such as Philips and Sony will have to learn to harmonize what used to be the domains of telecommunications, computing, and software. The new high-volume electronics (HVE) industry is attempting to combine these capabilities seamlessly. Products like cellular phones, palm tops, and Web TV are the results of such integration. Similarly, electronic commerce may be forcing a convergence of traditional banking, retailing, database management, and communications industries. Plant and animal genetics is becoming an integral part of food processing. The pressures to converge are reshaping every industry —from auto dealerships to bookselling, education, government, and health care. Convergence results in industry structures that are fundamentally different from those that survived for a century. For example, in the financial services industry, there are mega-mergers (for example, Citigroup) and the emergence of nontraditional competitors such as Tesco, Sainsbury, and Virgin.
  • Indeterminate Competitive Landscape. With convergence and deregulation, traditional industry boundaries among telecommunications, computing, and consumer electronics are disappearing. The personal computer serves as a bridge between those three traditional industries. The same transformation is taking place among the investment, insurance, and banking industries. These changes suggest that the business models developed to compete in a traditional industry structure are becoming irrelevant in the new, evolving industries.
  • Evolution to Open Standards. Standards are important if new industries are to evolve. However, standards are emerging as much from market dynamics as from government imposition. Furthermore, most of the standards developing in new industries are open: no single vendor or government controls them, and they are available to anyone willing to license. As a result, technology investments may not be as critical for effective participation in an industry as they were thirty years ago. IBM benefited from a proprietary standard. Compaq, on the other hand, benefits from an open, de facto industry standard. The sources of competitive advantage are shifting from patents and technology to cost, quality, speed, and access to suppliers and distribution channels.
  • Zero Cycles. The life cycles of products and services are becoming dramatically shortened, approaching months and weeks. Discontinuity is creating an era of close “zero cycles.” Managers must expect competing products to appear almost immediately, which means that a firm has to gain volumes rapidly to amortize investments. Scaling up the logistics chain — supply, manufacturing, distribution, and marketing — is a critical capability. Because the market for a product can decline just as rapidly, the ability to scale down is equally important. This volatility imposes new demands on organizations. Access to a responsive supplier base, global logistics, and flexible manufacturing systems are becoming new sources of competitive advantage.
  • Ecological and Social Sensitivity. Businesses are moving swiftly from a position of compliance to active involvement with environmental issues, a development that has a significant impact on packaging, product design, and technology choices (for example, nuclear energy versus coal). Social issues —child labor, family orientation, workers’ rights, and consumers’ rights — are becoming major topics of social and political debate. The attention that Shell got in offshore drilling and Nike in making shoes in factories with (by our standards) inappropriate labor standards are examples.

All established firms face these competitive discontinuities, but managers often misinterpret their effects. They regard loss of market share, unattractive products, profit declines, and new competitors as the result of inefficiencies rather than as the result of the rapidly changing competitive landscape. Thus their first reaction to discontinuities is to “work harder” when what they really need is to “work differently.” Competitive challenges demand an “out of the box” strategy, an attempt to operate in the zone of opportunity. Yet organizations make “in the box” operational improvements, attempts to stay in the zone of comfort. Once managers learn the futility of old solutions, they begin to recognize the new internal-governance issues that competitive discontinuities generate. This recognition is the first step toward transformation of the established firm.

New Internal-Governance Challenges

Traditional wisdom dictated that managers think globally and act locally. The former chairman of Sony called it becoming “glocal” — global and local.2 In our view, that rule is no longer valid, if it ever was. Managers must think and act globally (for example, deciding where to locate the next $1 billion semiconductor facility). Managers must think and act regionally (for example, determining how to exploit opportunities in the Latin American market). Regions of the world, such as greater China, the Indian subcontinent, and the North American market each have their own dynamics. For example, a European firm cannot manage, from Europe, the opportunities available in these diverse, fast-growing markets. Finally, managers must think and act locally. Each market has its own peculiarities, including regulation, local politics, local competitors, distribution channels, pricing pressures, quality of talent available, and company history in that market.

We believe that thinking and acting globally, regionally, and locally is a new capability for most established DMNCs. As we approach the new century, managers must become sensitive to what is outside their normal purview. Trends in Shanghai may be as important as trends in New York. In the video CD (a two-in-one product that combines audio and video players using CD technology) business, for example, the Chinese market is more important than the European and U.S. markets. Emerging markets do not suffer from the problems of an installed base.

Innovations can emanate from both the corporate center and the subsidiaries. Furthermore, local innovations can be exploited globally. In telecommunications, China and India are just starting to build their infrastructures and are not saddled with the traditional “copper wire” infrastructure. As a result, they can adopt new technologies more readily and may also become sources of innovation in how new products are used. For example, the Chinese, without universal access to telephones, use pagers to send one-way messages. This usage requires more display space, thus adding a new feature to the traditional pager. All markets with characteristics similar to China’s are candidates for pagers used as one-way communication devices. The locus of innovation and the locus of exploitation of innovations can be global, regional, and local. The corporate environment must resemble a network of distributed intelligence. Multiple languages, perspectives, customs, and business environments must be incorporated into the firm’s thinking and actions.

A different pace and rhythm will permeate all aspects of a firm’s activities. As we have noted, for example, cycle times for product development in most industries are becoming shorter; to amortize R&D investments, firms must build volumes quickly. Exploiting global markets is one way to build volume. As product life cycles decrease, so do the life cycles of business models and management processes. As competitive conditions change, management processes must be constantly evaluated for their relevance. The global launch of products is a consequence of these pressures.

The convergence of technologies requires that managers rapidly absorb and integrate new knowledge with old as well as reconfigure that knowledge into new business opportunities. As the established firm acquires new knowledge, it confronts an intellectual heritage germane to that knowledge — which often means confronting a generation of managers with skills different from those of incumbents. Almost all firms must learn to accept and harmonize technologies that are new to them. While the convergence of chemical with electronic technologies (e.g., Kodak), pharmaceuticals with fashion (e.g., Revlon), plant genetics with commodity processing (e.g., Cargill), and hardware with software (e.g., Philips) are obvious, the process by which multiple intellectual disciplines are commingled to create new knowledge is not. We often lack adequate labels to describe hybrid knowledge and use clumsy labels such as “cosme-ceuticals” to describe the harmonization of pharmaceutical and cosmetics knowledge. In today’s MNCs, geographic distance may be less worrisome than cognitive distance. Harmonizing different intellectual traditions (for example, between software engineers and chemical engineers) is often more demanding culturally than coping with cultural differences among nations and races.

In a rapidly evolving competitive environment, it is natural for managers to disagree on direction, priorities, and timing of actions such as market entry. For example, a manager at Kodak USA or Japan might believe that the development of digital photography products is urgent. A manager at Kodak Germany or China may feel less pressure. These managers may not even have access to the same data on the importance of digital photography. If dissent is legitimate, consensus building becomes a critical element of internal governance. Consensus building across cultures and distances in a DMNC is a tall order. IBM and Hewlett-Packard are developing information technology systems that supply all managers involved in making complex trade-offs with the same information and knowledge base. Their debate focuses on interpreting data rather than disagreement over data. Candor, openness, and intellectual challenge must characterize the debate within the organization, with top management setting the tone. Information cannot be merchandised and used as a source of private power, but must be seen as a corporate resource.

Firms need to form a wide variety of alliances — for setting standards, for market entry, and for gaining access to technology. Managers will have to prepare their organizations to learn from these alliances. Simultaneously, they have to protect their organization from unanticipated leakage of intellectual property. Becoming selectively open and opaque is a new skill for most firms.

Managers must allocate financial and human resources in an increasingly ambiguous world. No one can fully predict the implications of discontinuities. Different firms may pursue varying approaches to the future. For example, Disney, Microsoft, IBM, Sony, and Compaq may each develop different strategies for exploiting the opportunities presented by digital convergence. Each firm starts from its base of experience and moves forward. Multiple migration paths in an evolving industry such as multimedia are equally legitimate. Strategy in this evolving environment involves convincing customers of what the future could be and then shaping that future. Its goal is to create a new competitive space.

At the same time, managers cannot ignore the current businesses. With all the discussion surrounding PC-TV, for example, companies still have to sell televisions and personal computers. Discontinuities do not happen overnight. Black-and-white TVs still account for more than 5 percent of the world market for televisions. The market for traditional color TVs is growing. The question is not whether color television will disappear in the next three to five years, but how fast the business’s center of gravity will shift. How can managers migrate from one profit engine to the other?

In view of these pressures, why do incumbent managers in established firms hesitate to act? The impact of discontinuities on the established firm may not always be obvious, and the internal-governance implications of discontinuous change is even less so. Top managers may disagree on the time frames within which the changes will affect their firm. We have found, in most established firms, a sufficient sense of discomfort with the status quo. Managers agree that the changes in the competitive environment during the past decade are qualitatively different from those in the previous environment and see the pace of change as accelerating. What, then, prevents managers in established firms from being more proactive?

Zone of Comfort versus Zone of Opportunity

We believe there is a big gap between knowing the problem and knowing the solution. Faced with discontinuous change, most managers do not know where to start. Over many years, firms such as General Motors, Hitachi, or Siemens have developed a set of managerial routines. The more successful the firm, the more entrenched the managerial routines. Furthermore, the senior ranks of these firms are populated with managers promoted from within. All senior managers have been socialized in the same “village.” They may not even have an intellectual understanding of (much less experience with) an alternate model of managing. As a result, there are several impediments that prevent rapid response to the discontinuous changes in the competitive environment.

In most established firms, managers do not distinguish between “social” and “task” performance. Having “grown up” together, managers have strong social ties. Discontinuities challenge the established social order within the company. Task performance — protecting the interests of the company and transforming it to meet the new reality — challenges social harmony. Senior managers, against all good advice and their better judgment, entrust the new tasks to old friends who may not be prepared for it. It is an age-old problem, illustrated delightfully in Tuchman’s history, The March of Folly.3

Discontinuous change demands new knowledge. Hierarchical positions represent old knowledge. The people with power and authority to make things happen lack specific new knowledge. Senior managers must often manage business opportunities that they do not fully understand and are simultaneously burdened with the responsibility to make current businesses profitable. The resulting tensions are both administrative and personal. How much attention is the new business likely to get when folded administratively into the current business? What underlying business model will managers likely use to evaluate the new business opportunities? How will they allocate resources? These systemic problems are exacerbated by personal inadequacies of senior managers, their knowledge gaps, and an accompanying sense of personal vulnerability. The risks of the new opportunity are thus magnified.

Discontinuities create competitive problems; they are the “bad news” that top managers get tired of listening to. In a profit crisis, top managers are willing to listen to advice. But as soon as the firm’s profitability starts to improve and reaches a minimum acceptable threshold, the appetite for continuing to make tough choices — pruning the portfolio, raising performance standards, or making personnel changes — is lost. Top managers’ attitude is: “We have gone through a rough period. I do not want to hear more of the same. We’ll be fine.” This weariness expresses a lack of the intellectual and physical stamina that top managers need to be able to lead the transformation of a DMNC. The people who report to the top managers stop bringing up difficult issues or try to minimize the importance of persistent problems. Often the investment analysts and consultants become the firm’s conscience. Over time, the momentum of the change process is lost. Performance deteriorates, and more restructuring becomes inevitable. Few CEOs are able to keep the pressure for higher performance at the top of the agenda. Jack Welch at General Electric may be the rare exception.

Traditionally, senior managers seek administrative clarity. Pressures to improve performance in current businesses reinforce the emphasis on accountability. For most managers, accountability equals administrative clarity. The popularity of the trend to break up DMNCs into defined strategic business units (SBUs) with clear charters and performance measurements reflects the desire for clarity. As DMNCs march toward the goal of administrative clarity and accountability, competitive discontinuities are creating a need to articulate strategic direction for the entire corporation. Strategic questions — for example, the Internet’s impact on marketing and logistics — transcend the domains of individual business units.

To exploit emerging opportunities, managers have to devise strategies that do not respect current business-unit charters. In an age of discontinuities, strategic clarity — the ability to create new businesses and business models — confronts administrative clarity — the ability to foster accountability for current business performance. Senior managers tend to postpone strategic questions because they impinge on administrative clarity. Paradoxically, the longer managers cling to administrative clarity to deal with the demands of current performance and avoid important strategic questions, the more performance will suffer. In a rapidly changing competitive environment, profitability demands a new strategy and a new approach to internal governance.

The intellectual demands of the new economy are at odds with those of the traditional businesses. For example, new customer demands are forcing managers to shift from selling “boxes” — discrete, stand-alone devices — to selling “solutions.” The shift applies to diverse businesses, from financial services (e.g., selling “financial freedom” in contrast to selling mortgages, insurance policies, credit cards, or checking accounts) to cleaning services (e.g., selling “health and sanitation” in contrast to selling detergents, mops, and disinfectants). “Things” and “knowledge” have to be creatively bundled and sold as a package. Managers accustomed to pricing “boxes” and “things” find the costing and pricing of knowhow and solutions difficult. Know-how is usually given away free as a basis for selling “boxes.”

Until recently, in a wide variety of industries (e.g., utilities, telecommunications) and in many countries (e.g., China, Russia, India), customers did not have choices. Managers in these environments developed skills appropriate to markets characterized by no choice and/or shortages. In the new economy, customers have not only choices but information to facilitate those choices, for example, via the Internet. Price differences across markets for the same product are less likely to be defensible. The new reality is that customers benefit, and managers face unprecedented margin pressures.

Relevant managerial knowledge may be related to age. In most established firms, the managerial ranks break down into clusters: age fifty-five years and older, forty-five to fifty-four, thirty-five to forty-four, and twenty-five to thirty-four. As a rule, the older managers are disconnected from the new reality of technologies and customers. The lower-middle and middle managers may be more in tune with marketplace realities. The resulting gap between authority and ability creates an obstacle to active debate on strategy formulation and implementation. The phenomenon has led to suggestions such as “middle-out” initiatives4 and using lower-level executives in strategy formulation.5

The need to invent a new strategic direction for the DMNC, coupled with the need to manage current businesses, can lead to paralysis. The zone of comfort — the familiar — often wins over the zone of opportunity — the unfamiliar. For example, at Matsushita, moving away from the company’s famous system of decentralized management has not been easy. Everyone in Matsushita grew up in the system; it is all they have experienced. At Philips, enforcing disciplines and accountability went against what senior managers recognize as the “mentality of the village and the social fabric.” Poor performance was tolerated until a new management group, consisting primarily of outsiders, took over. The new CEO of Philips came from a performance-driven U.S. DMNC. We can attribute the dramatic improvement in the company’s profitability during the past two years largely to his managerial style.

Lessons in Managerial Transformation

Experience with organizational transformation during the past fifteen years has taught us several lessons. First, transformation is not just about reducing costs, improving profitability, or reengineering. Transformation is the invention of strategies and management processes. It must be driven by new ideas, a new concept of opportunity. Second, transformation must involve the whole organization. Top managers leading the transformation effort must dramatically change the world-view of the entire organization — the perception of the firm’s opportunities. Only a new and shared perception of opportunity can lead to new ways to compete. Third, transformation must deal with deeply embedded and often tacit values and beliefs. They have a significant influence on how managers act. Fourth, transformation requires building a new portfolio of skills within the DMNC. New markets and businesses and new approaches to creating and sustaining competitive advantage inevitably demand changes in the skill sets at all levels. Finally, transformation must be cemented with new management processes; performance evaluations, rewards, career management, product development, and logistics must change.

The demands of transformation are complex, involving interrelated systemwide changes. Most top managers are unprepared, intellectually and emotionally, to cope with the task. Their managerial models and cognitive maps are conditioned by their experience.6 The “bandwidth” of responses is limited. Managers must start with a blueprint to prevent transformation efforts from stalling or failing. A detailed road map is impossible because much learning takes place as the effort unfolds and the competitive situation evolves. However, managers must be clear about the elements of the transformation effort; if they cannot imagine the future, they cannot create it.

How to Change an Established DMNC?

Needless to say, without restoring the firm to an acceptable level of profitability, no management group will have a chance to attempt a long-term transformation. Restoring profitability creates confidence among employees inside the firm. It soothes the anxieties of suppliers, customers, and investors. Without their support, no long-term transformation effort is likely to succeed. However, top managers must recognize that restoring profitability is but a necessary condition. Too often, regaining profitability in existing businesses is equated with transformation.

Based on our experience, we suggest the following process for managing the transformation of an established DMNC.

Creating an Agenda for Transformation

Transformation cannot be initiated without an explicit recognition among top managers that the environment of discontinuous change presents risks and opportunities. Transformation is a voyage beyond the known. Discomfort and anxiety are, therefore, normal reactions in embarking on transformation. Managers can create the future only if they have a point of view. Therefore, the first step should be to create on paper a transformation agenda consisting of two components: the firm’s strategic architecture and its social architecture. The purpose of developing a strategic architecture is to assess the trends, drivers, and discontinuities that are likely to influence the evolution of the various businesses and the new opportunities that the firm can expect to create over the next decade. It provides a framework for how the businesses, competencies, and the business model(s) within the firm can be transformed.7 Based on the strategic architecture, managers must then develop a social architecture, or blueprint, of how the organization’s social fabric — its beliefs, values, management processes, skill sets, work force, and geographical distribution — will change. The purpose of the transformation agenda is to create a framework — a set of new ideas — that can mobilize the entire organization.

Once the framework for transformation is ready, top managers must fight organizational inertia. They must initiate actions that get attention and jolt the entire organization. Major divestments (e.g., of the very profitable chemicals business at Unilever), significant alliances and mergers (e.g., Citicorp and Travelers), or major shifts in key people tend to send the signal that “business as usual” is over. These signals followed by a significant and coordinated educational experience, such as the Centurion process at Philips, can create a sense of urgency and reinforce the need for deep change.

The organization is then ready for deployment of the new strategy. The goal is now to align the entire organization with the new direction. Each employee should be able to see where the firm is headed and why and be able to translate that vision into action. Deployment involves sharing the same big picture of the emerging competitive landscape with everyone, persuading people, and providing them with the new tools they need to contribute to the new strategic direction. Each employee can and must make a contribution. For transformation to take hold, work has to become meaningful at a personal level.

Individuals, groups, and the organization as a whole have to learn to operate differently. Deployment of strategy requires breaking the broad conception of the future into specific, bite-size projects that provide the basis for experimenting and learning. These projects not only provide learning opportunities but also generate small wins along the way.

In initiating projects, organizations must recognize the need for evaluation. Most organizations do not become efficient at transformation because they do not create processes for analyzing failures. They often blame individuals or business units. Yet most failures result from systemic problems. As the organization starts to invest in projects to support the new strategy, vestiges of the old organizational processes are still in place; failures and difficulties in the early stages are a natural outcome. Rather than abandon initiatives or change managers, top managers must create forums for examining the systemic reasons for failure. Analysis of successes is also critical.

Managers must analyze failure and success with the future in mind. They must base their inquiry on an assessment of future internal-governance needs. But for managers to assess why they failed or succeeded, they need to go back to the past. Looking back to move forward is the goal. We call this process forward-reverse thinking. For example, as Citicorp moves forward toward creating a billion consumer market for its services, it must look back on its history of how it created the consumer business using the credit card as the vehicle. What lessons can be carried forward? A culture of learning from failures and successes is a prerequisite for transformation. The analysis must move beyond easy explanations toward an understanding of the dynamics of success and failure. Failure analysis is more difficult in most organizations and requires candor and trust.

As organizations undertake new activities, their current skill base may be inadequate for executing the strategic architecture. Top managers often hire talent from outside at senior levels, assuming that they will be able to provide new knowledge. Unfortunately, in most established firms, managers at senior and middle levels are adept at neutralizing the one or two top managers from outside. As one top-level DMNC manager from outside said, “The natives have the map and are not willing to share it with the new kid on the block.” The newcomers are naturally frustrated. Reskilling is a multilevel task. Top managers must create a critical mass of new skills on multiple levels to accomplish the transformation task.

Almost all top managers, reflecting on their own experiences of transforming their organizations, believe that they could have moved more quickly. A fast pace always seems risky at first. The CEO’s hesitancy may reflect, in part, personal anxieties. Furthermore, CEOs have to balance current performance and transformation. It is natural to believe that if they stepped up the pace of transformation, the profit performance in the short term might deteriorate. In retrospect, however, CEOs believe that was not a valid concern.


Increasingly, the managerial task embraces innovations in how firms manage. These must precede innovations in how firms compete and create wealth. Managers must step out of their zone of comfort and move into the zone of opportunity. They must focus on the new internal-governance requirements —changing the relationships between the corporate center and business units, finding opportunities for creating new businesses outside traditional business-unit boundaries, and pursuing growth and innovation. As we look at the transformation process, we see strategy at its heart — identifying discontinuities, determining their impact on markets of today and tomorrow, and developing new business models. A successful transformation rests on both strategic thinking and flawless execution.



1. For examples that demonstrate some of the problems established firms face, see:

C. Christensen, The Innovator’s Dilemma: When Technologies Cause Great Firms to Fail (Boston: Harvard Business School Press, 1997); and

D. Leonard-Barton, “Core Capabilities and Core Rigidities: A Paradox in Managing New Product Development,” Strategic Management Journal, volume 13, Summer 1992, pp. 111–125.

2. S. Morita, “Global Localization,” in Genryn (Tokyo: Sony, 1996), chapter 8.

3. B. Tuchman, The March of Folly: From Troy to Vietnam (London: Michael Joseph Ltd., 1984).

4. I. Nonaka and H. Takeuchi, The Knowledge-Creating Company (New York: Oxford University Press, 1995).

5. G. Hamel, “Strategy as Revolution,” Harvard Business Review, volume 74, July–August 1996, pp. 69–82.

6. C.K. Prahalad and R. Bettis, “Dominant Logic: A New Linkage between Diversity and Performance,” Strategic Management Journal, volume 7, November–December, 1986 pp. 485–501.

7. G. Hamel and C.K. Prahalad, Competing for the Future (Boston: Harvard Business School Press, 1994).

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