Understanding What’s Behind Change Firms

Jan 24, 2019

Organizations are born, they grow, and then they struggle to survive. In his book, Serial Innovators: Firms That Change the World, Claudio Feser, director of McKinsey & Company, where he leads the McKinsey CEO Network, examines this aging process of a company. In the book, Feser identifies and explains the factors that slow down the ability of a business to adapt to an ever-evolving marketplace.

Feser was recently interviewed by the editor of Leader’s Edge, during which he described the results of a study he did that showed how growing firms develop rigidities that prevent change and how to resist them. Here, we share some results from our interview with Feser.

1. What do you mean by serial innovators? The average life expectancy of firms at listing is about 15 years, and only 1 in 20 lives longer than 50 years. Set up on the back of an innovative idea, firms grow, and sometimes they blossom into admired world-class firms; but then their development slows, they lose their momentum, they become bureaucratic, and their profitability decreases. Eventually, they die. History is full of firms that were once admired global leaders but that no longer exist: General Foods, Pan Am, Enron, or Lehman Brothers, just to name a few.

Sometimes, but only sometimes, firms innovate continuously; they reinvent themselves again and again, and they thrive in dynamic markets. I call them serial innovators.

2. What was the nature of your research? Most business books on company adaptation sample great companies at a given point in time and search for commonalities in their approaches. Too often the companies no longer exist. The research is therefore often flawed by a “survivor bias.” As a consequence, when you sort these books by decade, the names of great companies, and approaches to become one, change from decade to decade.

Serial innovators go a different route. They review the latest advances in many academic fields that are relevant to individual and organizational adaptation—behavioral, economic, psychological, neuroscientific, among others —and then they combine these reviews with hands-on, practical experience of the author working with CEOs at major companies throughout the world. It also illustrates the insights with the fictional story of a young CEO who moves his company from the brink of disaster to long-term health. As a consequence, Serial Innovators is an academic as well as practical, and entertaining book to read.

3. What kind of rigidities did you discover? While markets are dynamic, large organizations typically aren’t. Over time they develop rigidities of two types. First, firms that have successfully survived the early years and blossomed into large and admired companies are often locked into mental models that prevent change. For example, they dismiss new ideas that challenge their existing thinking and business models. Second, they codify their success through rigid organizational constructs such as hierarchy, processes, rules of conduct, and standard operating procedures.

4. Can you share with us an individual rigidity? One form of individual rigidities is mental biases. As recent research of behavioral economists has shown, the human brain works with shortcuts or rules of thumb to solve problems it faces regularly. The human brain embodies rules of thumb, and over time these become mental biases (or simply experience); they become the way to think about a problem or an issue. These biases are highly efficient. They allow quick decision making and action, especially when confronted with familiar challenges. They can represent a major risk, however, when the context in which they were developed, or the marketplace, changes significantly. The following statement, made in 1977 by Ken Olson, the founder of Digital Equipment Corporation, is an example of how mental biases work: “There is no reason why anyone would want a computer in their home.”

5. What is the nature of organizational rigidities? Structures, performance management and reward systems, supporting cultures, capabilities (or simply collective experience) are constructs that allow firms—groups of individuals—to fulfill their common mission and to implement strategies at scale effectively and efficiently. Without them, performing large tasks, or implementing complex strategies requiring the effective and efficient collaboration of hundreds or thousands of individuals would not be possible. However, these constructs can become rigidities that may prevent organizations from adapting rapidly when markets change.

Furthermore, organizational rigidities tend to grow over time. To deal with the increasing complexity and demands of dynamic markets, firms tend to add additional functions, councils, processes, values, and norms onto existing organizations. Only seldom do firms eliminate older organizational constructs that have become obsolete—older processes, older functions, or older committees. As a consequence, layers of new constructs are added onto older ones, making firms bureaucratic, inward-oriented, and slow in adapting to changes in the market.

6. How does culture hinder change? Organizational culture can be a key stumbling block when it comes to achieving change. When it is established and strong, it can suppress alternative perspectives that are needed for adjusting to market conditions.

7. Describe some poorly designed incentive schemes Monetary incentives are the bedrock of today’s employee motivation programs. Generally, money tends to be most effective when there is a clear and immediate causal link between an individual action and a desired outcome, and when the desired outcome is easily measurable. For example, money is effective in incentivizing insurance agents to sell insurance products, or in investment banks. While effective, money tends to draw attention to activities that are remunerated, while other activities, important they may be for an organization to adapt, may not receive much focus. For example, when monetary incentives promote the achievement of the year’s budget, many firms observe short-term-oriented behavior at the expense of experimentation. Monetary incentives should therefore ideally be complemented with nonmonetary ones, including social recognition, working on interesting tasks, and performance feedback. For instance, 3M and Google provide free time to their employees so that they can spend work hours on special pet projects they are passionate about pursuing.

8. Why do existing capabilities for wealth creation also limit growth and adaptation? A firm is restricted in the market and value creation opportunities it can capture. Its existing assets and resources determine those opportunities. A car manufacturer, for example, is unlikely to have the capabilities and resources to create a contact lens business. However, as companies implement their strategies, they may develop new resources and capabilities that can open up new areas of opportunity. Purposeful diversification and continuous experimentation are essential for that.

9. What are the secrets of serial innovators? Serial innovators engage their organizational members with their mission, making an impact and a difference to their customers and in society. They are led by a diverse set of people who complement each other with differing mental frameworks, and they are organized into small, nimble units. Serial innovators also experiment a lot. Therefore, when circumstances change, they’re much faster than other organizations to build new capabilities and skills. And finally, serial innovators continuously challenge themselves, always asking could we do this better or differently.

10. Can you share some examples of companies and experiences? One approach to address mental biases is to dramatically increase transparency and to bring outside views and data into the organization. Firms use different approaches to accomplish this goal. Some use second opinions or critical challenges of plans and strategies by external industry experts. A large Swiss group is a good example of this approach. Every year, it invites four or five external challengers—external experts—to a two-day management workshop and asks them to shoot holes in the group’s strategy. Not pleasant for the managers, but highly effective in bringing new insights and angles on a problem to the forefront. Another example is the way some private equity firms address the optimism bias by always taking a fresh look: After a partner has supervised a company for a few years, a different partner evaluates it anew.