Companies should transform early, before financial performance has started to decline.
Due to the accelerating evolution of technology and rising risk of disruption, companies frequently need to transform in order to realign themselves to their environment. While early intervention may seem desirable, leaders may also be understandably biased against changing a successful recipe.
What does the evidence say about the value of preemptive transformation? Among companies in need of change, our analysis shows that preemptive transformations drive 3% higher annual Total Shareholder Return (TSR) than those launched in reaction to declining performance, and the ROI of investments in preemptive transformation programs is 50% higher. Moreover, preemption appears to be the strongest measurable factor in predicting success.
Faced with a need to adapt to changes in their business, technology or competitive environment, companies should transform early, before financial performance has started to decline. How can leaders turn around the successful company in practice?
1. Constantly explore
To be able to transform preemptively, leaders need to anticipate change by continuously exploring new options. The observation of biological systems teaches us that it is optimal for companies to begin searching well before they exhaust their current sources of profit, and that firms should use a mix of “big steps” to move to uncharted terrain and “small steps” to uncover adjacent options at low cost. This requires balancing short-term tactical moves with laying out a long-term aspiration, and investing enough in the future, especially in digital technology and R&D.
When a company is doing well, danger lies in self-satisfaction. Leaders shouldn’t wait for an actual crisis to mobilize. Creating a sense of urgency is the best way for leaders to preempt the risk of complacency. Using scenarios, studying maverick challengers, surveying dissatisfied customers or non-customers and other exercises can help management envision new risks and opportunities, and test the resilience and adaptability of the current business model in a changing environment.
3. Watch out for early warning signals
Most financial metrics, such as revenues, profits or cash flow, are backward-looking. Detecting the need for change requires a variety of early warning signals for phenomena that have not yet impacted the bottom line. Forward-looking metrics such as revenue freshness (the share of revenues coming from new offerings) or vitality can help assess the future-readiness of a company.
Moving quickly against risks and opportunities is essential. This requires building permanent transformation capabilities and strengthening the adaptability of the organization. In particular, leadership teams should balance the right mix of fresh ideas and experience to foster innovation and ensure that new ideas are constantly explored and entertained.
5. Control the narrative
Preemptive change may generate frictions with stakeholders who believe that prudence and continuity are the best policies. Leaders should take control of the investor narrative and actively manage investor expectations in order to make preemptive transformation feasible. Defining and conveying the purpose of the company, and relating change efforts to that purpose, can also help energize and recruit employees and middle management for change efforts, which may otherwise be perceived as threatening. Indeed, a common reliance on reactive approaches has caused transformation to become associated with painful, defensive and remedial change efforts, whereas preemptive transformation is more likely to be focused on innovation and growth from the outset.
6. Choose the right approaches to change
Companies tend to drive change with a monolithic, linear project management mindset. But there is no such singular thing as change management. In reality, a complex business transformation comprises multiple types of change. Each form requires a different mindset and different change management mechanisms. While the transformation may be run as a comprehensive program under a consolidated agenda, leaders should de-average and sequence the different forms of change within. In particular, preemptive change is more likely to rely on adaptive or visionary models of change, rather than heavy-handed, top-down approaches.
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