Can Companies Change from the Inside?
In the world that counts, that is to say in the struggle within organizations between constancy and wholesale change, the question that counts, even more than the experiences of people trying to change corporations through protest and appeal to justice, is this: can corporations that face major challenges change on their own?
What has been the fate of companies faced with, for example, technological or market advances that required fundamental changes in the ways they had heretofore operated? What are their chances of surviving and changing to meet new circumstances?
I ask this question because although the world faces some drastic changes in climate, water availability, species extinction, soil erosion, etc. over the next few decades, our survival as humans depends on the ability of our organizations to transform their purposes, their finances, their practices of extraction, production and marketing, and their legal obligations to maximize profits for shareholders above all else. Oh, and did I mention the demands of Wall Street for quarterly results? Corporations in the United States, at least, must set and meet quarterly goals, or else. Or else what? Or else investors lose faith in them, their stocks diminish in value, and their abilities to borrow and finance further activities is limited.
So our survival as a species could hinge on how flexible corporations (and government agencies and non-profits as well) can be in the face of requirements that they change. Naomi Klein summed up our dilemma, expressing the problem posed by global warming, in her book title, This Changes Everything: Capitalism vs the Climate.
An Organization Challenged to Change: Kodak and the Digital Camera
So let’s explore an example of a major corporation that sailed onto the shoals of technological change in its field. One educational example is Kodak, the American company that for much of the 20th century dominated the market for popular cameras and, more important for its business model, for film. Their business model was basically the same as the safety razor: offer the tool cheaply and then provide the replacement feature, which must be bought over and over in order to continue operating the tool, at high margins.
So Kodak, the great provider of cameras, was actually at its core a chemical company that survived by applying sensitive coatings to film and marketing its product around the world. What happened when it drifted into the next generation of photography, digital pictures? Short answer: it ran aground.
Longer answer: Kodak was, in fact, the company where digital photography was invented. In 1975 a Kodak engineer named Steve Sasson invented a radically new kind of camera. About the size of a toaster, it recorded images digitally on an internal screen instead of on film. Although it achieved a resolution that would be laughable now, some 10 bytes (0.001 Mb), it was the beginning of the revolution. Kodak manufactured and sold a few of them at something like $4,000 each.
But its whole company structure was built around making and marketing film. No crude electronic gadget-camera would threaten their commitment to manufacturing and selling film.
The company had pioneered roll film and, by providing the Brownie at $1.00 to make the film easy to use, had made family photographs a vital record of nearly everyone’s life, at least in North America and Europe. But as a company it could not think about or conceive of – did not have a process or structure for thinking that far from their baseline – popularizing film-less photography. (That’s what the hapless Sasson had called it in his original presentation to company decision-makers.) After all, in 1976, a few months after Sasson’s invention, Kodak sold 90% of the photographic film in the United States and 85% of the cameras.
Although perceptive individual employees championed the new approach, they could not move the management to embrace it. The company, with its huge investment in equipment, training, and marketing as well as its tradition of perceiving events in a framework based on that investment and nearly 100 years of developing routines and adding new ones onto the old ones, literally had no ability – to be technical in system terms, it had no receptors in its system boundaries – to perceive as a company the potential in digital photography.
Although individuals could perceive the potential and threat, the company as institution had no receptors capable of translating the incoming signals into useful information.
Gradually they began developing one after other companies had entered the market. But they then received a second blow, one that was even more unexpected. They were completely blindsided by this stronger but less predictable change in their environment.
The iPhone: A Second Whammy
Just when the company executives did develop the necessary frame for perceiving digital photography, they were hit by this second shift: the iPhone was released. Kodak executives could perceive that second digital change regime even less than the digital revolution, although it would engulf them. That second wave was brought about by smart phones because they enabled an unpredictable switch in popular behavior from sharing photographs printed on paper to sharing them electronically: posting a photo by the click of a phone on Twitter, Instagram or Facebook. No more prints, snapshots, or photo albums. Just snap, click, and post. Who knew?
Nor still later could they imagine, despite selling $5.7 billion worth of digital cameras in 2005, how to change their considerable investment in film and paper production facilities around the world into alternative, profitable activities or how to treat their tens of thousands of employees around the world who had become so proficient at making and coating roll film. They went on trying to sell printers that would produce pictures on paper.
Kodak, wrote a team from the Wharton School at the University of Pennsylvania,
…saw the future and simply couldn’t figure out what to do. Kodak’s Chapter 11 bankruptcy filing… culminates the company’s 30-year slide from innovation giant to aging behemoth crippled by its own legacy.
Adapting to technological change can be especially challenging for established companies like Kodak, Wharton experts say, because entrenched leadership often finds it difficult to break old patterns that once spelled success.[Note]“What’s Wrong with this Picture? Kodak’s 30-year Slide into Bankruptcy,” Knowledge at Wharton, February 1, 2012, downloaded 7/17/17 from <http://knowledge.wharton.upenn.edu/article/whats-wrong-with-this-picture-kodaks-30-year-slide-into-bankruptcy/>[/note]
Even though film’s market share was declining, the profit margins were still high and digital seemed an expensive, risky bet. “It would have been difficult to just give [film technology] up,” says [Robert] Shanebrook, who worked at Kodak from 1969 to 2003 and has documented the process in his book, Making Kodak Film.
“It meant abandonment of the entire capital structure.” Kodak’s core competency was being a vertically integrated chemical manufacturer, he adds, whereas, “’The core competency of being a digital camera manufacturer is electronic…. Trying to convert from being a chemical company to making digital cameras — which are like computers more than anything else — you wouldn’t expect [Kodak’s expertise] to be there.’
A Few Principles of Inertia
In a fascinating article in the Harvard Business Review, Donald Sull developed a more general model that synthesizes the experience of many companies that have failed to respond to changing demands, changed conditions, in their environments.
There is a myth that they are often paralyzed by a disruption in their business conditions, he asserts, like a deer in the headlights. The problem normally is that although the best ones are keenly aware of the changes around them and launch searches for effective responses, they base their searches for alternatives on the routines and perceptual frameworks that have enabled them to be successful, and they use their own internal routines to judge what innovations in thinking and production, as expressed in organizational structure and investment choices, will work.
“The problem is not an inability to take action but an inability to take appropriate action,” Sull writes.
There can be many reasons for the problem—ranging from managerial stubbornness to sheer incompetence—but one of the most common is a condition that I call active inertia. Inertia is usually associated with inaction—picture a billiard ball at rest on a table—but physicists also use the term to describe a moving object’s tendency to persist in its current trajectory. Active inertia is an organization’s tendency to follow established patterns of behavior—even in response to dramatic environmental shifts. Stuck in the modes of thinking and working that brought success in the past, market leaders simply accelerate all their tried-and-true activities. In trying to dig themselves out of a hole, they just deepen it.
Active Inertia – Driving Straight Even When the Road Curves
Sull describes four hallmarks of active inertia, reasons a company may persist in reproducing the routines that have made it successful – and may be unable either to devise new routines or to pick effective ones from other sources. These four hallmarks include:
- Strategic frames are the mental models—the mind-sets—that shape how managers see the world.
- Processes harden into routines. “Fixing on a single process frees people’s time and energy for other tasks,” he writes. “It leads to increased productivity, as employees gain experience performing the process. And it also provides the operational predictability necessary to coordinate the activities of a complex organization.”
- Relationships become shackles. “…limiting their flexibility and leading them into active inertia.” with customers, employees, and distributors. [Not to mention, I add, with shareholders.]
- Values harden into dogmas. “A company’s values are the set of deeply held beliefs that unify and inspire its people. Values define how employees see both themselves and their employers.”
Have there been successful transitions? Yes, but many fewer, and they have been exceptions to the rule.
Sull describes some companies that have avoided active inertia. Each one has succeeded, he concludes, by launching a careful inquiry, not into what’s wrong or what can we do, but rather – without tearing apart the fabric of the company’s ongoing operation – into the question “What hinders us?”
Using this approach, BF Goodyear, for example, survived and changed when radial tires revolutionized the tire industry – whereas Firestone failed. As another example, IBM survived the transition to networks from mainframes by carefully selecting the elements in their mix that would change – and conserving other core company values.
For our purpose in this series, what is important is not that some companies actually have adjusted successfully to new circumstances and requirements but that the challenge to established routines is so great that we point out the survivors as curiosities and rare examples to learn from. Let me point out how rare.
The Exceptions Have Been Few
Jim Collins, in an article that summarized his book Great by Choice (with Morten T. Hansen), asked:
Why do some companies thrive in uncertainty, even chaos, and others do not? When buffeted by tumultuous events, when hit by big, fast-moving forces that we can neither predict nor control, what distinguishes those who perform exceptionally well from those who underperform or worse?
Collins and Hansen initially surveyed a list of 20,400 companies and from them they could identify only seven that met all their tests. You can read the details of their findings in the book Great by Choice or follow up on their web site at jimcollins.com.
What interests me here is the extremely small number of successful companies from the extremely large number of businesses in their sample. Seven out of 20,000? That’s 0.035% of the companies they surveyed.
I know, I know. He did not include many companies, perhaps measured in the low 100’s, that have survived and succeed over many decades through sequences of challenges of less dramatic impact than digital photography.
We can list companies in the United States like General Electric, General Motors, Ford, Aetna Insurance, Phillip Morris, and IBM, in Japan the descendants of the original zaibatsu-keiretsu with names like Mitsubishi, Mitsui, and Sumitomo, and similar long-lived corporations in Europe and India; many have survived much longer than average through changes in technologies, laws, governments, leadership, and markets.
They nevertheless, I would argue, constitute a minority of bureaucratic corporate entities, and to a great extent have shielded themselves against change by their size and their ability to control their environments through a variety of means rather than through their ability to change core perceptions and adopt new internal routines under changing circumstances.
The great majority of corporations and government agencies have been unable to change on their own the fundamental routines and processes by which they operate, even when threatened by massive changes in their environments. Their success at doing business in ways that have become entrenched over decades have nearly always determined the frameworks through which they have perceived changes in their environments and the resulting changing demands on their resources.
This conclusion matches my conclusions about the difficulty of inspiring change in large organizations from the outside. With only limited exceptions, neither public outcry nor technological leaps forward can lead mighty corporations and governments to drink at the trough of thorough reform.
So – is it any wonder that we need to ask why? The answer could determine the fate of humanity. And you don’t have to believe in global warming to believe that seems self-evident, but if you do believe in global warming, as I do, you will be scared, as Time Magazine once suggested, very scared.
In my next few entries, I will return to this exploration of why organizations don’t change, for the explanation touched on here, the active inertia, will lead us into exploring routines, the information they contain, and the limits imposed by structures of information. There the subject gets both interesting and, I hope, surprising.
First, though I’ll take a short detour through the myth that individuals can change them. Remember The Man in the Grey Flannel Suit?