For Companies to Survive, CIOs Must Transform Them

Back in the last century, when business and society changed more slowly, companies could afford to take their time fine-tuning their operations. Today, the marketplace rewards those companies that change most quickly.

Just ask Dennis Donovan. Donovan, who spent most of his career at GE and then spent several years as an executive at  Home Depot, notes that through the 1990s, Jack Welch focused on changing one area of business at a time: There was the structural revolution of the early 1980s, followed by a cultural revolution, such as the Work-Out (Welch’s method for empowering workers to tell managers about business problems). Next, he tackled business processes by implementing Six Sigma, followed by the digitization revolution of the 1990s. “Today,” Donovan observes, “we don’t have that luxury. If you have an eight-cylinder engine, you have to run on all cylinders; you have to have an [integrated] model that would focus on all aspects of business in parallel and quickly.”

With shorter cycles of innovation and increasingly frequent technology breakthroughs, the serial model of corporate change is no longer effective. The interplay between the information revolution, the rapid pace of globalization and fierce competition have required a new model that enables companies to change quickly.

I have researched more than 500 companies to identify the key principles and practices of transformation that are effective today. I found that successful transformation efforts tend to be 1) all-encompassing, 2) integrative, 3) fast and 4) have full, passionate commitment and buy-in, especially at the top levels of the organization. During the past 13 years, companies that have taken this holistic approach performed better than those that followed the serial reengineering model. The results were similar regardless of their industry and varied little according to the business cycle.

A New Model for Change

First and foremost, companies that have successfully transformed themselves began by analyzing all aspects of their operations, leaving no stone unturned. Once they identified areas for improvement, they moved quickly, reducing down time and hand-off periods. They ran transformation initiatives in parallel, not only for speed and efficiency, but also to promote better integration—to take advantage of synergies between different parts of the business. Last, successful companies all had fully committed leadership. Lack of buy-in at the top level, as many others have observed, negatively impacts the transformation effort by stalling the effort and creating, rather than removing, obstacles.

Consider the cases of General Motors and Nissan. Both large automobile manufacturers faced dire circumstances at the turn of the millennium. However, the transformation efforts undertaken by the two companies were drastically different and have had drastically different results.

GM approached change in the old way: a piece at a time, over several years. GM’s approach was consistent with its culture, says Jay Conger, a visiting professor of organizational behavior at the London School of Economics.

“GM has always been a very siloed corporation with all of its different divisions really operating like separate companies,” Conger observes. There have been numerous reorganization efforts at GM, and most have not fared well, because of the turf battles and independent nature of GM’s divisions.”

This lack of integration across the company is reflected in the fact that its transformation initiatives themselves have not been integrated, with the company addressing only a few key issues at a time. At different times, GM has made changes to human resources, information technology and manufacturing lead time, among other functions, without exploring fully how these aspects of the business relate to each other.

Furthermore, cost cutting (a poor long-term strategy) has been a major component of GM’s transformation effort. Nearly two years ago, GM announced plans to eliminate 25,000 jobs in the United States—about 17 percent of its U.S. workforce—by closing several plants in the coming years. Aside from the drawn-out time frame for this initiative, GM has encountered tremendous difficulty getting buy-in for the change effort from middle management. The result? GM’s income went from a net profit of $420 million six months after Rick Wagoner took the helm of GM in 2000 to a loss of over $10 billion in 2005.

On the other hand, look at Nissan, where CEO Carlos Ghosn joined as COO in 1999. In the eight years prior to Ghosn’s arrival, Nissan had lost nearly 30 percent of its global market share. Management became complacent, product development had come to a standstill, and the company was $22 billion in debt.

A few months after Ghosn came on board, a big portion of the company was engaged in developing an integrated plan to address many of Nissan’s pain points. The Nissan Revival Plan incorporated not only cost-cutting efforts to reduce debt but also strategies for long-term growth. Through this integrated, all-encompassing and speedy transformation effort, Nissan reached its stated goals (such as launching 20 new models, reducing debt by half and becoming profitable) within two years, an entire year ahead of schedule. Nissan’s success prompted Ghosn to seek an alliance with GM last year, although the talks have since broken down.

What Rapid Change Means for CIOs

CIOs are critical to companies’ success with rapid change—but only if they take an integrated view of both the business and its transformation. Unfortunately, within many of the companies I studied, IT departments remained stuck with old models for implementing change. In fact, reengineering as propounded by management consultants throughout the 1990s failed because of its deliberateness. The methodology often takes three to five years to execute and entails addressing one narrow section of an organization—such as finance products or supply chain processes—at a time.

Among the companies that succeeded at business transformation, CIOs were essential leaders of integrated, fast, top-down change efforts. They often helped create the holistic methodology for change that was then adopted by the top executive team. Furthermore, the successful CIOs often led the implementation of individual change initiatives by involving the cross-functional senior executives in a synchronized and well-planned process.

The bottom line: Change is inevitable. It’s how you make it that determines whether your company will thrive.

Behnam Tabrizi is a professor at Stanford University. He is an expert on business transformation and consults to Fortune 500 companies. He can be reached at behnam@stanford.edu.