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Long-term success can hamstring a company’s ability to adapt to change and ultimately survive

by Takashi Kitazume

Adaptability is the key to survival of even big, successful companies over time, said professor Charles O’Reilly, a professor at Stanford University Graduate School of Business.

“Selection. The market says, this is a good idea, and if the market says it’s not a good idea, stop it, and they try other ideas, and then retention. It’s evolutionary biology in organizations,” O’Reilly told the June 6 symposium.

O’Reilly noted how in almost any industry, major companies that dominate the market typically do not remain successful over a long period. He cited research he conducted with computer giant IBM to explore how some firms fail and others continue to succeed.

“In 2000, IBM did an internal study — it looked at 29 separate technologies and markets that it had the capability to enter, and the technology, but failed to enter the market. And this led the CEO to question how IBM strategizes and how it implements strategy,” he said.

“What it decided is that it makes no sense to strategize at the corporate level, that is, every business unit manager has to be able to have strategic insight and the ability to execute,” the professor said.

And once each of the managers decides on a strategy, he will have to think about how they need to organize to execute that strategy, he said. The managers ask themselves whether they have the right people, are their teams organized the right way, or is the culture of their unit aligned with their strategy, he added.

One problem with successful companies, O’Reilly said, is that a very successful culture could hamper their ability to adapt to changes.

“When we are successful, we get older as a business, and when we get older, we develop cultures — tacit ways of operating that help us succeed. But that also creates inertia, rigidity within our systems and processes, within our culture, within our leaders and their mind-set,” he said. “The very things that make us successful put us at risk.”

“In most businesses, perhaps not all, if you pursue the same strategy, the same technology over time, you will eventually lose. You will be successful only so long as your existing strategy and alignment are appropriate. But if the world is changing, then as leaders we need different alignments,” O’Reilly told the audience.

In 2000, IBM put a new manager in charge of its health-care division, where the company had small sales but saw huge market potential to sell hardware, software and consulting, O’Reilly said.

The manager was told to run the business “with a completely different alignment” — to hire different people than IBM usually did, to have different compensation systems and to have a different culture, he noted. The structure at the division is entirely different from, for example, IBM’s mainframe computer division, O’Reilly said.

What was needed here, he said, was an ambidextrous leadership that tolerates different alignments among divisions within the company. “Unless companies like IBM are prepared to explicitly manage this, they will mistakenly attempt to use some of the things that had made them successful in ways that will be inappropriate,” he added.