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How to gain and sustain a competitive edge through transformation

Oct 15, 2023 | Public | 0 comments

The modern organization is facing a confluence of disruptions that have raised the bar for how companies manage change and transform themselves. The results of our newest McKinsey Global Survey on transformations continue to confirm just how much value is at stake, and how much can be lost, at every phase of such change efforts.

So what really works when it comes to today’s transformations? We know that successful transformations involve a wide range of actions that reflect the will, skill, rigor, and scope of the effort. But after surveying transformation participants across the globe, we identified seven actions in particular that are most likely to increase the odds of a transformation’s success—by both achieving and sustaining performance improvements and helping organizations establish a lasting competitive advantage (see sidebar “About the methodology”).

The seven actions we identified—including role modeling, moving quickly, and striving for holistic impact—point to a clear transformation approach for managing change successfully in an ever-changing world.

The value at stake and the foundations for success

Consistent with our previous research, we find that companies are losing potential value across all four phases of a transformation—most notably during the execution of transformation initiatives (Exhibit 1).

Respondents report that value is lost across all phases of a transformation, especially during execution.

To understand how companies can realize or reclaim this value, we asked participants about a range of actions that are used to support a successful transformation effort, including those that are associated with the “influence model,” McKinsey’s long-standing theory of behavior change within an organization. (See sidebar “The influence model, explained.”)

Respondents’ answers suggest that four broad elements underlie transformation success:

  • Will: an ambitious, shared aspiration to reach the organization’s full potential
  • Skill: the capabilities and tools of the organization as a whole (for example, gathering market intelligence and using that to inform product design), as well as those of the individuals who make up the organization (for example, focusing on the right priorities, communicating clearly, and running meetings effectively)
  • Rigor: the performance infrastructure of the transformation effort (for example, incentive structures) that enables the disciplined execution of individual initiatives and the sustainability of the effort’s overall impact
  • Scope: the range of outcomes that the transformation aims to improve, such as EBITDA, working capital and cash, customer experience, employee health and safety, or greenhouse-gas emissions

The survey results, and our experience, affirm that a comprehensive approach to transformation is best. Nearly all respondents (96 percent) from transformations that implemented all four elements say their efforts improved and sustained organizational performance, compared with 13 percent of respondents from transformations that implemented just one. Furthermore, despite the difficulty of outperforming peers in a continually evolving competitive landscape—and the inherent challenge of large-scale change efforts—respondents whose transformations implemented all four elements report a much higher rate of outperforming peers than those whose transformations implemented just one. They are more than twice as likely to say so: 39 percent, compared with 16 percent. Yet the results suggest that few organizations are taking this comprehensive approach, with only 6 percent of respondents reporting transformations that implemented all four elements.

In our research, we also identified seven actions that underlie the four broader elements of will, skill, rigor, and scope. Since respondents reporting many of these actions are nearly twice as likely as their peers to see successful outcomes (Exhibit 2), we took a closer look at each one—with a focus on how the seven actions can help companies create a sustained, competitive advantage.

When respondents say their transformations involved each of seven key actions, they also report a higher rate of success.

Will: The organization’s commitment to the aspiration

To influence the organization’s will to undertake the transformation, we identified two actions that are related to transformation success: fostering understanding and conviction, and role modeling.

Fostering understanding and conviction. The survey results indicate just how critical it is that employees understand why they’re being asked to change. Respondents who say their transformations fostered understanding and conviction are 3.2 times more likely than those without this action to report outperformance versus peers after the transformation began.

To start, companies should explain why the transformation is necessary in the first place. According to the survey, respondents whose transformations explained the rationale are 3.1 times more likely than others to report outperformance (Exhibit 3). Also critical is clarifying its implications for employees across the organization, identifying important stakeholders who can build conviction internally, and ensuring that leaders use a consistent change story to align the organization around the transformation’s goals.

Respondents whose transformations foster understanding and conviction are more likely to report outperforming peers.

Role modeling. Leaders need to walk the walk with respect to the desired mindset and behavior shifts they’re asking others to make during the transformation. Respondents reporting that leaders role modeled changes are 1.6 times more likely to report outperforming their peers.

To do this, leaders can start by communicating changing expectations and norms clearly and consistently and providing employees with opportunities to learn more from leaders about the transformation. They can also identify “influencers” (that is, influential people whom other employees look to for advice, input, or ideas) and involve them in the transformation as owners of important initiatives or milestones, since role modeling happens—and matters—across all levels of the organization.

For example, one industrial company in a dire financial situation took several steps to ensure that all employees were committed to the transformation’s aspiration. The CEO personally shared powerful and honest stories about why the transformation was necessary at all levels of the organization, so employees understood as well. He also role modeled new behaviors that employees were expected to demonstrate. For example, he showed he was taking the change effort seriously by running core meetings when the chief transformation officer couldn’t attend and by leading courageous conversations about the transformation in forums that were open to a wide audience. He also held himself personally accountable when his team made any missteps: apologizing to the organization, providing the rationale for what happened, and committing to doing better next time. This commitment cascaded throughout the organization, with nearly 50 percent of the workforce involved in individual initiatives in some form by the transformation’s second year. Through the transformation, the organization saw substantial shifts in mindsets and behaviors. The company also realized massive performance improvements, including to its share price, which increased by more than ten times during the transformation.

Skill: The capabilities the organization needs to succeed

To ensure that the organization has the capabilities needed to support the transformation, respondents’ answers point to two actions: building skills and applying skills.

Building skills. Once the organization has fostered commitment to the changes, it can initiate efforts to build the necessary skills for transformation success, including technical, execution, interpersonal, and leadership skills—which other McKinsey research suggests are foundational for the future of work. Respondents stating their transformations included efforts to build all of these key employee skills are 1.5 times more likely to report outperforming peers.

To do this, companies can formally evaluate employees’ skills to identify gaps and initiate efforts to develop capabilities that are directly linked to value creation. Our past research on transformations confirms the importance of linking business and talent priorities—namely, by identifying high performers and giving them ownership of high-value initiatives.

Applying skills. Throughout the transformation, employees need regular opportunities to apply the skills they are learning. When they do, respondents are four times more likely to report that the organization outperformed peers.

Companies can create these opportunities by providing resources to support employees’ behavior changes during the transformation. In the survey, respondents who say their organizations provided resources for applying new skills through tools, such as dashboards and project plans, are 3.8 times more likely to report outperforming peers (Exhibit 4). Companies can also establish a weekly meeting cadence for employees at all levels to share their progress on applying new behaviors and monitor the implementation of transformation initiatives, to ensure that people have enough opportunities to demonstrate the skills they are building.

Respondents whose transformations provided tools and opportunities for employees to apply new skills are more likely to report outperforming peers.

A global equipment manufacturer and services provider was particularly effective at ensuring that the organization had the full complement of skills for the transformation to succeed. To create sustained behavior changes, the organization engaged more than 50,000 employees in more than 100 countries and in nearly a dozen languages in formal capability-building programs. These programs covered a range of foundational skills, from providing tactical project management support to project owners to advising senior leaders on how to motivate their teams through a mix of in-person, virtual, and digital delivery formats. The organization also developed programs to enhance employees’ core business skills and expertise in topics across operations, sales, strategy, and finance. By shifting behaviors through skill building, it improved execution skills across levels, from senior leadership to the front line, with more than 95 percent of participants recommending a broader deployment of these programs. According to executives, the organization now has a shared language and set of common tools, which are accessible by all employees, for sustaining the behavior changes made in the transformation. “Common language, common behaviors, uncommon impact” was a familiar refrain about its capability-building programs.

McKinsey Global Surveys

Rigor: The organization’s discipline in executing rapid change

The survey results suggest that the successful execution of the transformation involves two actions: moving quickly to realize impact and embedding reinforcement mechanisms.

Moving quickly to realize impact. Time is of the essence when organizations are making improvements on the outcomes the transformation aims to address. As we’ve seen in earlier research, much of the value a transformation ultimately creates is typically achieved in its first few months. Respondents reporting that the transformation realized impact in less than six months are 1.2 times more likely to say their organizations outperformed peers. What’s more, we also observed that 57 percent of respondents whose transformations realized impact in less than six months reported improving and sustaining organizational performance (Exhibit 5).

Respondents who saw meaningful improvements quickly are more likely to report improved and sustained organizational performance.

To speed things up, leaders will want to identify and execute quick wins (for example, on pricing and improved spending management) within the first six months and create a road map of iterative sprints for more complex transformation initiatives.

Embedding reinforcement mechanisms. Also critical to rigor is the implementation of new policies and procedures that reflect and reinforce the transformation’s formal changes. Respondents who report the use of reinforcement mechanisms are 1.6 times more likely to say their companies outperformed peers.

To do this, companies can start by including transformation-related objectives in annual performance reviews, holding project leaders accountable, and tying employees’ financial incentives directly to transformation outcomes. Survey respondents reporting that their organizations aligned employee incentives with the transformation’s goals are 2.6 times more likely to report outperforming peers (Exhibit 6).

Respondents whose transformations reinforce the changes being made through a range of formal mechanisms are more likely to report outperforming peers.

A power company executed change rigorously by incorporating transformation targets in its planning processes, including budgeting, and in the metrics used to evaluate executive performance. The organization also moved fast, implementing more than 700 initiatives to realize over $150 million within the first few months of implementation. By the transformation’s third year, the organization was incorporating transformation targets into annual reviews, holding employees accountable, for instance, by linking individuals’ goals to their contributions to transformation targets. Through the transformation, the organization saw a 60 percent increase in its stock price over a three-year period. More than five years into the effort, the company has sustained the changes that it made.

Scope: The breadth of the aspiration

Finally, our results suggest that transformations with a broader scope tend to outperform peers. More specifically, these transformations aim to improve the organization’s performance in more than one of the following dimensions that we tested in the survey—financial, operational, or both; customer; employee; social, environmental, or both; and capability building—which we define as striving for holistic impact. Respondents reporting that the transformation had a holistic aspiration are 1.9 times more likely to say their companies outperformed peers.

To do this, companies should set bold aspirations that aim to improve performance across a wide range of outcomes. Earlier research has found that much of a transformation’s value is generated by these types of growth initiatives, which shows that addressing both the bottom and top lines helps the organization reach its full potential through transformation.

An energy company is pursuing an enterprise-wide transformation that’s broad in scope by equally prioritizing change in three dimensions of the organization: its health (or organizational effectiveness), operational performance, and financial performance. The company is emphasizing each of these goals equally, based on an organization-wide mindset that is focused on sustaining long-term performance, rather than short-term gains alone. The bold aspiration also provides employees a shared, meaningful goal to compel them to modify their behaviors in pursuit of sustained gains, rather than focusing exclusively on short-term cost reductions.

To meet and exceed the ever-rising bar for organizational change, companies should consider how transformations can set them up for a true competitive advantage—in addition to achieving successful outcomes for the change effort itself. The results of our survey suggest that the seven actions noted above, rooted in the science of behavior change, can help accomplish both objectives. Through these actions, leaders can ensure that their organizations have in place four essential elements for transformation success—will, skill, rigor, and scope—that could give them a better chance at outpacing the competition in a time of constant disruption and change.

The post "How to gain and sustain a competitive edge through transformation" appeared first on McKinsey Insights


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