Leading Change Why Transformation Efforts Fail Leaders who successfully transform businesses do eight things right (and they do them in the right order). by John P. Kotter 96 Harvard Business Review | January 2007 | hbr.org 0 VER THE PAST DECADE, I have watched more than 100 companies try to remake themselves into significantly better competitors. They have included large organiza- tions (Ford) and small ones (Landmark Communications), companies based in the United States (General Motors) and else- where (British Airways), corporations that were on their knees (Eastern Airlines), and companies that were earning good money (Bristol-Myers Squibb). These efforts have gone under many ban- ners: total quality management, reengineering, rightsizing, re- structuring, cultural change, and turnaround. But, in almost every case, the basic goal has been the same: to make fundamen- tal changes in how business is conducted in order to help cope with a new, more challenging market environment. A few of these corporate change efforts have been very suc- cessful. A few have been utter failures. Most fall somewhere in be- tween, with a distinct tilt toward the lower end of the scale. The lessons that can be drawn are interesting and will probably be rel- evant to even more organizations in the increasingly competitive ? * ? business environment of the coming ent expires, the five-year trend in declin- decade. The most general lesson to be learned from the more successful cases is that the change process goes through a series of phases that, in total, usually require a considerable length of time. Skipping steps creates only the illusion of speed and never produces a satisfy- ing result. A second very general lesson is that critical mistakes in any of the phases can have a devastating impact, slowing momentum and negating hard won gains. Perhaps because we have relatively little experience in renewing organizations, even very capable people often make at least one big error. Error 1: Not Establishing a Great Enough Sense of Urgency Most successful change efforts begin when some individuals or some groups start to look hard at a company's com- petitive situation, market position, tech- nological trends, and financial perfor- mance. They focus on the potential revenue drop when an important pat- ing margins in a core business, or an emerging market that everyone seems to be ignoring. They then find ways to communicate this information broadly and dramatically, especially with re- spect to crises, potential crises, or great opportunities that are very timely. This first step is essential because just get- ting a transformation program started requires the aggressive cooperation of many individuals. Without motivation, people won't help, and the effort goes nowhere. Compared with other steps in the change process, phase one can sound easy. It is not. Well over 50% of the com- panies I have watched fail in this first phase. What are the reasons for that failure? Sometimes executives under- estimate how hard it can be to drive people out of their comfort zones. Sometimes they grossly overestimate how successful they have already been in increasing urgency. Sometimes they lack patience: "Enough with the prelim- inaries; let's get on with it." In many cases, executives become paralyzed by the downside possibilities. They worry that employees with seniority will be- come defensive, that morale will drop, that events will spin out of control, that short-term business results will be jeop- ardized, that the stock will sink, and that they will be blamed for creating a crisis. A paralyzed senior management often comes from having too many managers and not enough leaders. Management's mandate is to mini- mize risk and to keep the current sys- tem operating. Change, by definition, requires creating a new system, which in turn always demands leadership. Phase one in a renewal process typi- cally goes nowhere until enough real leaders are promoted or hired into senior-level jobs. Transformations often begin, and begin well, when an organization has a new head who is a good leader and who sees the need for a major change. If the renewal target is the entire company, the CEO is key. If change is needed in a division, the division general manager is key. When these individuals are not hbr.org January 2007 | Harvard Business Review 97 Lawrence Zeegen new leaders, great leaders, or change champions, phase one can be a huge challenge. Bad business results are both a bless ing and a curse in the first phase. On the positive side, losing money does catch people's attention. But it also gives less maneuvering room. With good business results, the opposite is true: Convincing people of the need for change is much harder, but you have more resources to help make changes. But whether the starting point is good performance or bad, in the more successful cases I have witnessed, an individual or a group always facilitates a frank discussion of potentially un- pleasant facts about new competition, shrinking margins, decreasing market share, flat earnings, a lack of revenue growth, or other relevant indices of a declining competitive position. Because there seems to be an almost universal human tendency to shoot the bearer of bad news, especially if the head of the organization is not a change champion, executives in these companies often rely on outsiders to bring unwanted in formation. Wall Street analysts, custom ers, and consultants can all be helpful in this regard. The purpose of all this ac- tivity, in the words of one former CEO of a large European company, is "to make the status quo seem more danger ous than launching into the unknown." In a few of the most successful cases, a group has manufactured a crisis. One CEO deliberately engineered the largest accounting loss in the company's his tory, creating huge pressures from Wall Street in the process. One division pres- ident commissioned first-ever customer satisfaction surveys, knowing full well that the results would be terrible. He then made these findings public. On the surface, such moves can look unduly risky. But there is also risk in playing it too safe: When the urgency rate is not pumped up enough, the transformation process cannot succeed, and the long Now retired, John P. Kotter was the Kono- term future of the organization is put in outside of the normal hierarchy by def- jeopardy. When is the urgency rate high enough? From what I have seen, the answer is when about 75% of a com- pany's management is honestly con- vinced that business as usual is totally unacceptable. Anything less can pro- duce very serious problems later on in the process. Error 2: Not Creating a Powerful Enough Guiding Coalition Major renewal programs often start with just one or two people. In cases of suc- cessful transformation efforts, the lead- ership coalition grows and grows over time. But whenever some minimum mass is not achieved early in the effort, nothing much worthwhile happens. It is often said that major change is impossible unless the head of the orga- nization is an active supporter. What I am talking about goes far beyond that. In successful transformations, the chair man or president or division general manager, plus another five or 15 or 50 people, come together and develop a shared commitment to excellent perfor mance through renewal. In my experi- ence, this group never includes all of the company's most senior executives be cause some people just won't buy in, at least not at first. But in the most success- ful cases, the coalition is always pretty powerful-in terms of titles, informa- tion and expertise, reputations, and relationships. In both small and large organiza- tions, a successful guiding team may consist of only three to five people dur- ing the first year of a renewal effort. But in big companies, the coalition needs to grow to the 20 to 50 range before much progress can be made in phase three and beyond. Senior managers always form the core of the group. But some times you find board members, a repre- sentative from a key customer, or even a powerful union leader. Because the guiding coalition in- suke Matsushita Professor of Leadership at cludes members who are not part of se- Harvard Business School in Boston. nior management, it tends to operate 98 Harvard Business Review | January 2007 | hbr.org inition. This can be awkward, but it is clearly necessary. If the existing hierar- chy were working well, there would be no need for a major transformation. But since the current system is not working, reform generally demands activity out- side of formal boundaries, expectations, and protocol. A high sense of urgency within the managerial ranks helps enormously in putting a guiding coalition together. But more is usually required. Someone needs to get these people together, help them develop a shared assessment of their company's problems and opportu- nities, and create a minimum level of trust and communication. Off-site re- treats, for two or three days, are one popular vehicle for accomplishing this task. I have seen many groups of five to 35 executives attend a series of these re- treats over a period of months. Companies that fail in phase two usu- ally underestimate the difficulties of producing change and thus the impor- tance of a powerful guiding coalition. Sometimes they have no history of teamwork at the top and therefore un- dervalue the importance of this type of coalition. Sometimes they expect the team to be led by a staff executive from human resources, quality, or strategic planning instead of a key line manager. No matter how capable or dedicated the staff head, groups without strong line leadership never achieve the power that is required. Efforts that don't have a powerful enough guiding coalition can make ap- parent progress for a while. But, sooner or later, the opposition gathers itself to- gether and stops the change. Error 3: Lacking a Vision In every successful transformation ef- fort that I have seen, the guiding coali- tion develops a picture of the future that is relatively easy to communicate and appeals to customers, stockhold- ers, and employees. A vision always goes beyond the numbers that are typically found in five-year plans. A vi- sion says something that helps clarify the direction in which an organization needs to move. Sometimes the first draft comes mostly from a single in- dividual. It is usually a bit blurry, at least initially. But after the coalition works at it for three or five or even 12 months, something much better emerges through their tough analytical thinking and a little dreaming. Eventu- ally, a strategy for achieving that vision is also developed. EIGHT STEPS TO TRANSFORMING YOUR ORGANIZATION Establishing a Sense of Urgency Examining market and competitive realities Identifying and discussing crises, potential crises, or major opportunities Coalition 2 Forming a Powerful Guiding galitiwer to lead the change effort Encouraging the group to work together as a team Creating a Vision Creating a vision to help direct the change effort Developing strategies for achieving that vision 4 Communicating the Vision 5 Using every vehicle possible to communicate the new vision and strategies Teaching new behaviors by the example of the guiding coalition Empowering Others to Act on the Vision Getting rid of obstacles to change Changing systems or structures that seriously undermine the vision Encouraging risk taking and nontraditional ideas, activities, and actions Planning for and Creating Short-Term Wins Planning for visible performance improvements Creating those improvements Recognizing and rewarding employees involved in the improvements Consolidating Improvements and Producing Still More Change don't fit the vision structures, policies that Hiring, promoting, and developing employees who can implement the vision Reinvigorating the process with new projects, themes, and change agents Institutionalizing New Approaches 8. Articulating ing of Apps between the new behaviors and corporate success Developing the means to ensure leadership development and succession In one midsize European company, the first pass at a vision contained two- thirds of the basic ideas that were in the final product. The concept of global reach was in the initial version from the beginning. So was the idea of be- coming preeminent in certain busi- nesses. But one central idea in the final version-getting out of low value-added activities - came only after a series of discussions over a period of several months. Without a sensible vision, a transfor- mation effort can easily dissolve into a list of confusing and incompatible projects that can take the organization in the wrong direction or nowhere at all. Without a sound vision, the reengi- neering project in the accounting department, the new 360-degree per- formance appraisal from the human re- sources department, the plant's quality program, the cultural change project in the sales force will not add up in a meaningful way. In failed transformations, you often find plenty of plans, directives, and pro- grams but no vision. In one case, a com- pany gave out four-inch-thick note- books describing its change effort. In mind-numbing detail, the books spelled out procedures, goals, methods, and deadlines. But nowhere was there a clear and compelling statement of where all this was leading. Not surpris- ingly, most of the employees with whom I talked were either confused or alien- ated. The big, thick books did not rally them together or inspire change. In fact, they probably had just the oppo- site effect. In a few of the less successful cases that I have seen, management had a sense of direction, but it was too complicated or blurry to be useful. Re- cently, I asked an executive in a midsize company to describe his vision and re- ceived in return a barely comprehensi- ble 30-minute lecture. Buried in his an- swer were the basic elements of a sound vision. But they were buried - deeply. A useful rule of thumb: If you can't communicate the vision to someone in five minutes or less and get a reaction that signifies both understanding and interest, you are not yet done with this phase of the transformation process. Error 4: Undercommunicating the Vision by a Factor of Ten I've seen three patterns with respect to communication, all very common. In the first, a group actually does develop a pretty good transformation vision and then proceeds to communicate it by holding a single meeting or sending out a single communication. Having used about 0.0001% of the yearly intracom- pany communication, the group is star- tled when few people seem to under- stand the new approach. In the second pattern, the head of the organization spends a considerable amount of time making speeches to employee groups, but most people still don't get it (not surprising, since vision captures only 0.0005% of the total yearly communi- cation). In the third pattern, much more effort goes into newsletters and speeches, but some very visible senior executives still behave in ways that are antithetical to the vision. The net result is that cynicism among the troops goes up, while belief in the communication goes down. Transformation is impossible unless hundreds or thousands of people are willing to help, often to the point of making short-term sacrifices. Employ ees will not make sacrifices, even if they are unhappy with the status quo, unless they believe that useful change is possi- ble. Without credible communication, and a lot of it, the hearts and minds of the troops are never captured. This fourth phase is particularly challenging if the short-term sacrifices include job losses. Gaining understand ing and support is tough when downsiz- ing is a part of the vision. For this rea- son, successful visions usually include new growth possibilities and the com- mitment to treat fairly anyone who is laid off. Executives who communicate well incorporate messages into their hour- by-hour activities. In a routine discus- * * sion about a business problem, they talk about how proposed solutions fit (or don't fit) into the bigger picture. In a regular performance appraisal, they talk about how the employee's behavior helps or undermines the vi- sion. In a review of a division's quarterly performance, they talk not only about the numbers but also about how the division's executives are contributing to the transformation. In a routine Q&A with employees at a company facility, they tie their answers back to renewal goals. In more successful transformation efforts, executives use all existing com- munication channels to broadcast the vision. They turn boring, unread com- pany newsletters into lively articles about the vision. They take ritualistic, tedious quarterly management meet ings and turn them into exciting dis- cussions of the transformation. They throw out much of the company's generic management education and replace it with courses that focus on business problems and the new vision. The guiding principle is simple: Use every possible channel, especially those 100 Harvard Business Review | January 2007 hbr.org * * that are being wasted on nonessential information. Perhaps even more important, most of the executives I have known in suc- cessful cases of major change learn to "walk the talk." They consciously at- tempt to become a living symbol of the new corporate culture. This is often not easy. A 60-year-old plant manager who has spent precious little time over 40 years thinking about customers will not suddenly behave in a customer-oriented way. But I have witnessed just such a person change, and change a great deal. In that case, a high level of urgency helped. The fact that the man was a part of the guiding coalition and the vision- creation team also helped. So did all the communication, which kept reminding him of the desired behavior, and all the feedback from his peers and subordi- nates, which helped him see when he was not engaging in that behavior. Communication comes in both words and deeds, and the latter are often the most powerful form. Nothing under- mines change more than behavior by important individuals that is inconsis- tent with their words. Error 5: Not Removing Obstacles to the New Vision Successful transformations begin to in- volve large numbers of people as the process progresses. Employees are em- boldened to try new approaches, to de- velop new ideas, and to provide leader ship. The only constraint is that the Sometimes the obstacle is the orga- nizational structure: Narrow job cate gories can seriously undermine efforts to increase productivity or make it very difficult even to think about cus- tomers. Sometimes compensation or performance-appraisal systems make the new initiatives. He paid lip service to the process but did not change his behavior or encourage his managers to change. He did not reward the uncon- ventional ideas called for in the vision. He allowed human resource systems to remain intact even when they were actions fit within the broad parameters If you can't communicate the vision to someone in five of the overall vision. The more people involved, the better the outcome. To some degree, a guiding coalition minutes or less and get a reaction that signifies both empowers others to take action simply understanding and interest, you are not done. by successfully communicating the new direction. But communication is never sufficient by itself. Renewal also requires the removal of obstacles. Too often, an employee understands the new vision and wants to help make it happen, but an elephant appears to be blocking the path. In some cases, the elephant is in the person's head, and the challenge is to convince the indi- vidual that no external obstacle exists. But in most cases, the blockers are very real. people choose between the new vision and their own self-interest. Perhaps worst of all are bosses who refuse to change and who make demands that are inconsistent with the overall effort. One company began its transforma tion process with much publicity and actually made good progress through the fourth phase. Then the change ef- fort ground to a halt because the officer in charge of the company's largest divi- sion was allowed to undermine most of clearly inconsistent with the new ideals. I think the officer's motives were com- plex. To some degree, he did not believe the company needed major change. To some degree, he felt personally threat- ened by all the change. To some degree, he was afraid that he could not produce both change and the expected operat- ing profit. But despite the fact that they backed the renewal effort, the other of- ficers did virtually nothing to stop the one blocker. Again, the reasons were Open-Enrollment 1 Programs Financial Times, 2006 CHANGE WILL HAPPEN. WHY NOT SCHEDULE IT IN ADVANCE? JUNE 3-29, 2007 ADVANCED MANAGEMENT The Executive Program Darden Executive Education For almost fifty years, executives from around the world have integrated The Executive Program (TEP) at Darden into their careers. Through TEP, executives see their businesses from a whole new perspective and use their new knowledge to lead their organizations to places they might never have envisioned. The transformational learning environment is customary; the results gained will be extraordinary! UNIVERSITY VIRGINIA DARDEN SCHOOL OF BUSINESS EXECUTIVE EDUCATION CHANGE THE WAY YOU THINK. IMPROVE THE WAY YOU DO BUSINESS. complex. The company had no history of confronting problems like this. Some people were afraid of the officer. The CEO was concerned that he might lose a talented executive. The net result was disastrous. Lower-level managers con- cluded that senior management had lied to them about their commitment The result is not just a judgment call that can be discounted by those oppos ing change. Creating short-term wins is different from hoping for short-term wins. The latter is passive, the former active. In a successful transformation, managers ac- tively look for ways to obtain clear per- fine, declaring the war won can be cat- astrophic. Until changes sink deeply into a company's culture, a process that can take five to ten years, new ap- proaches are fragile and subject to regression. In the recent past, I have watched a dozen change efforts operate under the After a few years of hard work, managers may be tempted to declare victory with the first clear performance improvement. While celebrating a win is fine, declaring the war won can be catastrophic. to renewal, cynicism grew, and the formance improvements, establish goals whole effort collapsed. In the first half of a transformation, no organization has the momentum, power, or time to get rid of all obstacles. But the big ones must be confronted and removed. If the blocker is a person, it is important that he or she be treated fairly and in a way that is consistent with the new vision. Action is essential, both to empower others and to main- tain the credibility of the change effort as a whole. Error 6: Not Systematically Planning for, and Creating, Short-Term Wins Real transformation takes time, and a renewal effort risks losing momentum if there are no short-term goals to meet and celebrate. Most people won't go on the long march unless they see com- pelling evidence in 12 to 24 months that the journey is producing expected re- sults. Without short-term wins, too many people give up or actively join the ranks of those people who have been resisting change. One to two years into a successful transformation effort, you find quality beginning to go up on certain indices or the decline in net income stopping. You find some successful new product intro- ductions or an upward shift in market share. You find an impressive productiv- ity improvement or a statistically higher customer satisfaction rating. But what ever the case, the win is unambiguous. in the yearly planning system, achieve the objectives, and reward the people involved with recognition, promotions, and even money. For example, the guid ing coalition at a U.S. manufacturing company produced a highly visible and successful new product introduction about 20 months after the start of its re- newal effort. The new product was se- lected about six months into the effort because it met multiple criteria: It could be designed and launched in a relatively short period, it could be han dled by a small team of people who were devoted to the new vision, it had upside potential, and the new product- development team could operate out side the established departmental struc ture without practical problems. Little was left to chance, and the win boosted the credibility of the renewal process. Managers often complain about being forced to produce short-term wins, but I've found that pressure can be a useful element in a change effort. When it becomes clear to people that major change will take a long time, urgency lev- els can drop. Commitments to produce short-term wins help keep the urgency level up and force detailed analytical thinking that can clarify or revise visions. Error 7: Declaring Victory Too Soon After a few years of hard work, manag- ers may be tempted to declare victory with the first clear performance im- provement. While celebrating a win is 102 Harvard Business Review | January 2007 | hbr.org reengineering theme. In all but two cases, victory was declared and the ex- pensive consultants were paid and thanked when the first major project was completed after two to three years. Within two more years, the useful changes that had been introduced slowly disappeared. In two of the ten cases, it's hard to find any trace of the reengineering work today. Over the past 20 years, I've seen the same sort of thing happen to huge quality projects, organizational devel- opment efforts, and more. Typically, the problems start early in the process: The urgency level is not intense enough, the guiding coalition is not powerful enough, and the vision is not clear enough. But it is the premature victory celebration that kills momentum. And then the powerful forces associated with tradition take over. Ironically, it is often a combination of change initiators and change resis- tors that creates the premature victory celebration. In their enthusiasm over a clear sign of progress, the initiators go overboard. They are then joined by resistors, who are quick to spot any opportunity to stop change. After the celebration is over, the resistors point to the victory as a sign that the war has been won and the troops should be sent home. Weary troops allow themselves to be convinced that they won. Once home, the foot soldiers are reluctant to climb back on the ships. Soon there- after, change comes to a halt, and tradi- tion creeps back in. Instead of declaring victory, leaders of successful efforts use the credibility afforded by short-term wins to tackle even bigger problems. They go after sys- tems and structures that are not consis- tent with the transformation vision and have not been confronted before. They pay great attention to who is promoted, who is hired, and how people are devel- oped. They include new reengineering projects that are even bigger in scope than the initial ones. They understand that renewal efforts take not months but years. In fact, in one of the most successful transformations that I have ever seen, we quantified the amount of change that occurred each year over a seven-year period. On a scale of one (low) to ten (high), year one received a two, year two a four, year three a three, year four a seven, year five an eight, year six a four, and year seven a two. The peak came in year five, fully 36 months after the first set of visible wins. Error 8: Not Anchoring Changes in the Corporation's Culture In the final analysis, change sticks when it becomes "the way we do things around here," when it seeps into the bloodstream of the corporate body. Until new behaviors are rooted in social norms and shared values, they are sub- ject to degradation as soon as the pres- sure for change is removed. Two factors are particularly impor- tant in institutionalizing change in cor- porate culture. The first is a conscious attempt to show people how the new approaches, behaviors, and attitudes have helped improve performance. When people are left on their own to make the connections, they sometimes create very inaccurate links. For exam- ple, because results improved while charismatic Harry was boss, the troops link his mostly idiosyncratic style with those results instead of seeing how their own improved customer service and productivity were instrumental. Help- ing people see the right connections re- quires communication. Indeed, one company was relentless, and it paid off enormously. Time was spent at every major management meeting to discuss why performance was increasing. The company newspaper ran article after ar- ticle showing how changes had boosted earnings. The second factor is taking suffi- cient time to make sure that the next generation of top management really does personify the new approach. If the requirements for promotion don't change, renewal rarely lasts. One bad succession decision at the top of an or- ganization can undermine a decade of hard work. Poor succession decisions are possible when boards of directors are not an integral part of the renewal effort. In at least three instances I have seen, the champion for change was the retiring executive, and although his successor was not a resistor, he was not a change champion. Because the boards did not understand the trans- formations in any detail, they could not see that their choices were not good fits. The retiring executive in one case tried unsuccessfully to talk his board into a less seasoned candidate who bet- ter personified the transformation. In the other two cases, the CEOs did not resist the boards' choices, because they felt the transformation could not be undone by their successors. They were wrong. Within two years, signs of re- newal began to disappear at both companies. ... There are still more mistakes that peo- ple make, but these eight are the big ones. I realize that in a short article everything is made to sound a bit too simplistic. In reality, even successful change efforts are messy and full of surprises. But just as a relatively sim- ple vision is needed to guide people through a major change, so a vision of the change process can reduce the error rate. And fewer errors can spell the difference between success and failure. Reprint R0701J; HBR OnPoint 1710 To order, see page 127. Open up to great ideas FIRING BACK Jeffrey Sonnenfeld Andrew Ward "Firing Back should be read by anyone who has success on their agenda." Donald Trump HENRY CHESBROUGH OPEN Business Models How to Thrive in the New Innovation Landscape "I strongly recommend it." Clayton M. Christensen, author, The Innovator's Dilemma and The Innovator's Solution Payback JAMES P. ANDREW HAROLD L. SIRKIN "Filled with ideas and methods that can help any company." Jong-Yong Yun, Vice Chairman and CEO, Samsung Electronics Available wherever books are sold. HARVARD BUSINESS SCHOOL www.HBSPress.org