Corporate transformation without a crisis

NOAH WOODS
(116-127)Transforma 9/25/00 12:58 PM Page 116

Jonathan Day is a principal in McKinsey’s London office, and Michael Jung is a director in the Vienna
office. Copyright © 2000 McKinsey & Company. All rights reserved.
ike individuals, organizations change continuously, reacting to develop-
ments in their markets and to the arrival and departure of key people.
In a large company, these changes go on more or less unnoticed. But some-
times a company must change more quickly than this gradual evolution
allows; it needs a break with the past, an accelerated pace of change—a
transformation.
Successful corporate transformations and their leaders—Lou Gerstner at
IBM, Ferdinand Piëch at Audi, John Reed at Citibank—become the stuff of
business legend. Transformed companies have achieved unprecedented com-
petitive power, a pride in everything they undertake, and outsized returns to
shareholders. What chief executive officer wouldn’t want all of these things?
Rather oddly, it is the leaders of companies in crisis who may be best placed
to achieve a true transformation. David Simon and John Browne could
Jonathan D. Day and Michael Jung
The art of leading deep corporate change can be learned. The trick
is to help each member of the company discover a new reality.
L
transformation
without a crisis
Corporate
L E A D E R S H I P 117

transform British Petroleum from one of Britain’s weakest industrials into
one of its strongest because the company faced imminent ruin. Steve Jobs
rescued Apple Computer from collapse. By contrast, most transformations
undertaken in noncrisis conditions
end up failing: employees’ attitudes
and behavior remain unchanged,
ambitious targets slip downward,
and the program is finally aban-
doned, leaving the company worse
off than it was before. Especially
when things are going well, execu-
tives are justifiably reluctant to undertake transformation programs. They
know that failure to act may condemn the company to slow decline and
eventual collapse, but they also justifiably fear the uncertain outcome of a
transformation process.
The leader of such a program faces a daunting challenge: nothing less than
creating a new corporate reality that changes the way employees, customers,
and investors perceive and experience the company. This future reality must
be so clear and impressive that it seems not only better than today’s reality
but also necessary, even inevitable.
Principles of transformation
Can a company be transformed without first experiencing a crisis? We believe
that the answer is yes if the leaders understand what makes individuals and
groups transform their view of reality. The successful transformations we
have encountered all met the four conditions described below; in every fail-
ure we have analyzed, at least one has been missing.
1. Everyone is both actor and observer
Transformations call for more than superficial levels of change: well-grooved
habits must be questioned and discarded and new ones learned. But it is hard
for people to achieve the objectivity needed to question and change their daily
routine while they are still actively immersed in it.
Ronald A. Heifetz, an expert on leadership at Harvard’s Kennedy School of
Government, rightly observes that the leaders and participants in a transfor-
mation must combine frenetic activity on the “dance floor” with composed
observation and reflection from the “balcony above.”1
In our experience,
118 THE McKINSEY QUARTERLY 2000 NUMBER 4
Most transformations in noncrisis
conditions fail: both attitudes and
behavior remain unchanged and
ambitious targets slip downward
1
See Ronald A. Heifetz, Leadership Without Easy Answers, Cambridge, Massachusetts: Belknap Press,
1994.

however, corporate leaders in a transformation tend to stay on the floor
and dance ever faster. Yet the full cognitive and emotional complexity of the
transformation process can be managed only when its leaders have sufficient
opportunities for reflective observation. In the long run, everyone with sig-
nificant involvement in the company’s transformation has to make a trip to
the balcony.
The most energetic proponents of change are often naturally drawn to the
balcony: nonexecutive directors who share financial analysts’ point of view
or new leaders recruited from outside the company largely because of their
detachment. But in the absence of a crisis, this perspective is difficult for
most senior managers to achieve—the pressure of day-to-day events renders
detached observation a rare luxury—and if it is difficult for senior man-
agers, it is much harder for rank-and-file employees. Yet without the balcony
perspective, these employees will experience a transformation program as
something imposed from above, and the program will fail.
2. Each individual crosses a threshold of conviction . . .
The transformation of a large company requires thousands of employees
to adopt a new view of its future, a future they must regard as essential.
Before employees can arrive at this deep conviction, three things must be
absolutely clear to them.
First, the “why” of the transformation program, as well as the “why now,”
must persuade them; the benefits of success and the penalties for failing to
act must be equally obvious. Second, the company’s new future—the “where
to”—must be clear and exciting to everyone. Third, each employee must
understand the personal benefits of the program: the leadership must have
credible answers to that natural question, “What’s in it for me?” To inspire
genuine conviction, the program’s rationale and goal must withstand the
toughest scrutiny from the most cynical observer right from the start.
3. . . . and of experience
We may have given the impression that leaders can create a compelling new
reality simply by mustering the arguments in its favor—with the odd trip to
the balcony to check on progress. But our experience of personal learning
and transformation actually suggests that this picture is incomplete. Human
beings master complex new activities (heart surgery, golf, cookery) not by
reading or thinking about them but through experience. A corporate trans-
formation too requires the rank and file to have direct, nonabstract experi-
ence, for leaders can’t transfer their own through speeches, documents, and
119C O R P O R AT E T R A N S F O R M AT I O N W I T H O U T A C R I S I S

videotapes; each individual must re-create it personally. Leaders can, how-
ever, create a “disposition to experience,” and later in this article we suggest
several ways of doing so.
4. The process balances redundancy and control
Mistakes and surprises are inevitable in a transformation process. Industries
don’t stand still waiting for companies to transform themselves. Champions
of the process become disenchanted and leave. Often the program reveals
weaknesses that the company had not anticipated. Unless a transformation
program is conﬁgured to accommodate these unwelcome surprises, it can
all too easily come undone in midcourse. Such a failure can be disastrous,
since a company whose transforma-
tion fails before it is complete rarely
tries again.
Anticipating the unexpected when
developing the program’s design
and resources can make failures less
likely. Objective formal reviews of
progress (reports from the balcony, so to speak) can help leaders spot prob-
lems before they become acute. Bringing more leaders into the program
than are needed at each stage can improve the transformation’s resilience to
departures. Linking the compensation of managers to the program’s success
makes them less likely to leave when complications arise. Launching parallel
initiatives in different parts of the company increases the chance that key
ideas will survive. Finally, arranging meetings where people from different
business units, divisions, or regions compare progress and perspectives
makes it easier to identify and correct problems.
Stories of transformations
If these are the conditions of a successful transformation, what should leaders
do to create them? To help individuals cross their threshold of conviction,
the leaders must provide a “screenplay” for the drama to come—a story
showing why the company must transform itself, where it is heading, and
how it will get there. The story must be so convincing and vivid that its
readers will want to help it come true. Effectively framed, such a story can
help people strengthen their conviction and start experiencing “the new
world” even before it arrives.
A transformation born of crisis writes its own story. Before a crisis hits, it is
much harder to create an authentic story explaining why a company should
Failure can be disastrous, for
a company whose transformation
fails before it is complete will rarely
attempt to transform itself again

transform itself. Nonetheless, even if a transformation isn’t driven by a crisis,
it is important to clarify and write down the story. Giving it this formal
embodiment forces the top leadership of a company to think it through and
ensures that its central elements will remain similar no matter who is actu-
ally telling it.
A transformation story is neither a writer’s gimmick, such as a “retrospec-
tive from the future,” nor an anthology of reflections from management
sages. It is nothing like the mountains of documents and presentations that
so often accompany change programs. The great transformation stories are
often short, and some are surprisingly unpolished. We encourage top man-
agers to write their transformation stories themselves rather than delegate
the work to a communications unit or an advertising agency. Authenticity
and directness are far more important to a story than are fine prose or
clever visuals.
Although each story’s specific form will vary, we envision a transformation
story in three chapters, corresponding to the why, where, and how of the
transformation.
Chapter 1: Why does the company need this?
Almost always, the story of a transformation acknowledges the events that
triggered it: the company must take drastic action because its financial posi-
tion is weak, say, or because the competition has gained in power, or because
technology has revolutionized the industry. But these are often
only symptoms of deeper problems. If the transformation
process is to address those problems, they too must be
included in the story, which must explain why and how
the financial situation became weak, the competition gained
strength, or the new technology blindsided the company.
Such brutal honesty is difficult and therefore rare, for it leads
to awkward questions about the company’s previous deci-
sions and current leaders. But a shared understanding of
the actual cause of the current state of affairs is essential to a transforma-
tion. Putting hard truths on the table makes some people uncomfortable,
but avoiding those truths puts success at risk.
Chapter 2: Where is the company heading?
The second chapter, which calls for true creativity, outlines the company’s
future and makes it so convincing that it seems destined to happen. Many

companies derive their “destiny” from the triumphs of other companies and
from known facts: surveys, benchmarks, best practices. Such companies
assemble their future piece by piece. But in our experience, a future that
merely imitates what others have achieved, no matter how great their results,
rarely inspires employees.
Instead, the company needs a genuinely new and superior idea for a product,
a quality standard, a technology, or a managerial model. Such ideas vary
from company to company, but in all cases they must be capable of giving it
a decisive competitive superiority. Of course, companies can learn from their
competitors. Nonetheless, the ideas that drive a transformation always move
beyond what others know.
Chapter 3: How can the company reach its goal?
Returning to the realm of the practical, how can the company use the diag-
nosis of the ﬁrst chapter and the new idea of the second to transform itself?
There are many technical details to spell out concerning tasks, phases,
timing, and responsibility. But while detail is important, it is not sufficient
to answer the question of how the company will achieve its goals. Transfor-
mational learning comes, ultimately, from personal experience. The leaders’
experience, which should be embedded in the story, must be internalized
within every participant in the process. Each participant must undergo an
“identity transition.”
Although orchestrating thousands of these individual identity transitions
is an enormous challenge, doing so will make the process of change self-
sustaining. Once individuals begin to experience the early realities created
by the transformation story, they will often try to do what it takes to com-
plete it on their own.
Making it real
Getting thousands of people to move across that threshold of initial experi-
ence is undoubtedly the hardest task facing a management team that leads a
corporate transformation. We have observed many situations in which a top-
management group has discovered the causes of the present problems of a
company and developed a convincing vision of its future. These leaders have
captured that experience in a powerful transformation story and struggled
to help many thousands of employees, business partners, and customers dis-
cover the logic of the transformation for themselves. After all, the company’s
leaders, as we have already noted, cannot know or experience anything on
anyone else’s behalf.

The challenge
Here the leaders face a contradiction. On the one hand, identity transitions
must be highly personal, arising from real-life experience. On the other, the
transformation won’t succeed unless the transition is carefully choreographed
from the center. Indeed, central leadership is essential to any transformation.
Only a few people in most organizations have the stamina, ambition, and
ideas to develop and communicate an effective transformation story. Only a
powerful central group can guide the process through the risks and setbacks
encountered during every transformation. Only central controls can prevent
chaos. Ultimately, however, the transformation must proceed without central
leadership. To acknowledge the need for a not-yet-existing reality is to make
a conscious, free decision. Individ-
uals must make this decision for
themselves.
The most common approach to a
large-scale transformation process
involves central deﬁnition and man-
agement. That approach sometimes
works in a crisis. To prevent the threatened closure of a factory, its workers
may well accept draconian staffing cuts. To save a company from a hostile
takeover, managers may allow core businesses to be sold. But without a
crisis, these prescriptive methods run into trouble, for the shared conviction
that permits a company to endure setbacks and complications can’t be cen-
trally imposed.
Hence the rise in recent years of attempts to use a “cascade” process—in
which each round of discussions engages new people in a dialogue about the
transformation—to persuade every organizational level of the need for radi-
cal change. Although this approach usually persuades more employees of the
story’s necessity than do prescriptive methods, it has practical drawbacks,
especially in large organizations. It isn’t easy to arrange conversations with
50,000 employees. As the cascade works its way down through the organiza-
tion, the dialogue it creates loses spontaneity. Overstretched lower-level man-
agers may have too little feeling for the transformation process to touch their
audience. The leadership group may try to bypass them by using a video pre-
sentation, but the dialogue then turns into prescription.
Are there other ways to resolve the problem? The leadership group can’t
transform individuals, but it can do much to foster their readiness to accept
a transformation. The leaders can remind people of past events to spur them
to re-create former glories or, for that matter, to avoid former mistakes. They
Only a powerful management
group at the center can guide a
transformation through the risks
and frustrations of the process

can encourage employees to visit other organizations to see and feel the new
ways of working. And by painting a vivid picture of the future, they can give
employees a feeling for a world that does not yet exist.
New approaches
Such actions create a disposition to embrace change. But do the leaders have
to be personally involved in creating this disposition? Are there other ways
to encourage the focused and disciplined patterns of dialogue,
thought, and action that transformation entails? Some
striking cases of success suggest that there are.
St. Luke’s. Consider the case of an extraordinarily
successful UK advertising agency, St. Luke’s. Each of its
clients has a specific room in the agency’s building.2
Jointly
designed by the client and the St. Luke’s team, the room
is filled with the collective knowledge of the client’s
situation, advertising campaigns, products, and so
forth. Each client room in St. Luke’s is different. The
essence of the agency’s knowledge is presented, sometimes on wall displays,
sometimes in electronic form, and sometimes in the furniture and colors.
In each case, the room captures the work of the joint agency-client team in
a way that others can see and personally experience.
St. Luke’s guarantees its clients 24-hour-a-day, seven-day-a-week access to
its building if they agree to enter only their own client room, which thus
becomes a place where executives and line managers at many levels can
experience a new corporate identity. Each of these rooms, providing con-
stantly changing yet concrete access to the joint view of reality envisioned
by St. Luke’s and the client, is far more tangible and immediate than the
usual paper or slide campaign presentation.
Ford Motor. In the course of a sweeping global transformation program, Ford
has developed a novel approach that fosters identity transitions. Drawing
on the story drafted by the company’s leaders, all managers, following a
centrally defined process, develop individual interpretations of the task of
change at Ford. This individual perspective, which Ford calls a “teachable
point of view,” provides the content of a workshop at which the next group
of employees is encouraged to create its own teachable point of view.3
In
2
See Andy Law, Open Minds, London: Orion Books, 1998, published in the United States as Creative
Company, New York: John Wiley & Sons, 1999.
3
See Suzy Wetlaufer, “Driving change: An interview with Ford Motor Company’s Jacques Nasser,” Harvard
Business Review, March–April 1999, pp. 76–90.

principle, this process follows the cascade model, but prescribed elements
(including detailed instructions for developing teachable points of view) can
be used to form dialogues that are genuinely individual.
Johnson & Johnson. Despite years of success, the global heath care company
Johnson & Johnson was concerned about avoiding IBM’s experience during
the 1980s, when it fell from a seemingly unassailable position to near col-
lapse. IBM apparently had the right strategy “in the drawer” all along, but
nobody asked the questions that
would have prompted the adoption
of the strategy.
So J&J’s leaders designed a process
called FrameworkS to ensure that
the right questions were asked.4
The uppercase S in the name empha-
sizes the importance of bringing many diverse perspectives to the leaders’
discussions—the views not just of managers but also of customers, artists,
politicians, and so on, in a process that is simultaneously open and directed.
In a typical FrameworkS exercise, 10 to 12 people are invited to become
temporary members of J&J’s executive committee, which has 9 permanent
members. The expanded group meets in a remote location for a full week
to address a speciﬁc problem. The temporary members of the executive com-
mittee, often from the middle ranks of the corporation, are chosen for their
ability to bring diversity to its discussions. No one at these meetings pulls
rank, and no single opinion carries more weight than any other.
J&J then creates subcommittees and task forces, each directed to study and
investigate a particular topic. Ultimately, hundreds of employees will join
Ralph Larsen, the company’s CEO, involving themselves in the transforma-
tion process and immeasurably widening the executive committee’s perspec-
tive on what must be done.
Catalytic objects
In all three cases just described—and in virtually every successful transfor-
mation exercise we have seen in large companies—individual employees
did not form a transformational outlook primarily as a result of personal
interaction with the CEO. The crucial element is rather a personal experi-
ence of what we have come to call “catalytic objects,” such as the St. Luke’s
4
See Donald L. Laurie, The Real Work of Leaders, Cambridge, Massachusetts: Perseus Books, 2000.
An individual employee forms
a transformational outlook primarily
as a result of personal experience,
not direct contact with the CEO

client room, Ford’s structured but freely teachable points of view, and J&J’s
FrameworkS conversations.
Catalytic objects are “objects” only in the sense that they can be described,
deployed, and observed. They are nothing like the inspirational wall plaques
or coffee mugs beloved of satirists. Catalytic objects in different transforma-
tion programs have almost no formal similarity, but they are similar in func-
tion: they help each participant in
a transformation process develop a
personal version of the story.
Because a catalytic object can be
observed and discussed, it fosters
the detached perspective that is
crucial for deep adaptive change.
Actors become observers. They can stand back from the company’s past
and prospects even as they shape those prospects. Catalytic objects serve to
transfer knowledge and simultaneously make it possible to re-create experi-
ence. The sequential approach of “tell them the facts, then fire them up”
gives way to a faster, more effective parallel process of discovery.
Finally, catalytic objects can be centrally shaped and their development in the
organization centrally monitored. They provide the degree of control needed
to keep a transformation process on track as well as the redundant message
needed to overcome the inevitable noise and transmission failures from the
executive suite to the front line.
Catalytic objects thus provide a bridge between a centrally developed trans-
formation story and each individual’s personal experience. They solve the
problem of faithfully transmitting a critical central message through the
vagaries of a cascading dialogue. They allow the transformation process to
ring with freedom yet simultaneously to move within boundaries set by the
leadership group.
We are only beginning to learn about the best ways to construct and deploy
catalytic objects, but our confidence grows daily that they are the key to the
“leadership without leadership” that is essential to a successful transforma-
tion program.
In seeking to increase the success rate of corporate transformations, we are
less concerned with the names of things (“transformation stories,” “catalytic
The fine art of leading a corporate
transformation may be the most
important core competence in a
turbulent competitive environment

objects,” and so forth) than with their functions. Many skilled transforma-
tion leaders use these approaches intuitively and implicitly, without a formal
nomenclature.
The drama of each corporate transformation unfolds in a different way,
and we would be the last people to prescribe a uniform script that must be
followed in all cases. We are convinced, however, that success in corporate
transformations is more than a matter of luck and that the art of leading
them can be learned. In a turbulent competitive environment, this art may
be the most important “core competence” of all.

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