Transforming a company’s performance is a daunting challenge faced by many CEOs, though the nature of the challenge differs from case to case. That seems obvious, but it is overlooked by much management literature. The change approach touted as a wild success for one company may prove a dismal failure in the next, and even the most enthusiastic leaders see their efforts run out of steam. So what is the right strategy for your particular industry, your company, or even your personal leadership style?

We studied 25 companies to try and understand their method of transformation and what determined the choices their chief executives made. Each transformation was a unique response to a specific set of problems and opportunities. Some companies were facing up to future threats; others were on the brink of collapse. Some had to endure wave after wave of change; others were transformed within 18 months. Yet despite these variations, similarities emerged that suggest it is possible to ascertain which strategy will best create and sustain the momentum needed for transformation, depending on an organization’s goals and the raw ingredients at its disposal.

Creating a strategy

The main lesson emerging from the experiences of the companies studied was that senior managers need to develop a strategy to create and sustain momentum—one that recognises what change is needed and where the energy to drive change will come from—before launching any initiatives. Transformations that focus on programs such as reengineering or TQM can and do fail because they are ill suited to a company’s particular needs and resources.

Leaders found a pattern of change that improved corporate performance at the same time as it liberated energy

No matter which strategy appeared to be at work, each case shared a common feature: the leader appeared to have "cracked a code" embedded within the organization. In doing so, these leaders found a pattern of change that improved corporate performance at the same time as it liberated energy. They created a virtuous cycle whereby energy was released and channeled to improve performance, which unleashed more energy, which improved performance still further. The cycle delivered a successful "episode" of change that lasted anywhere between one and three years, after which leaders often found a different strategy was required to move the transformation along. It sometimes took several such episodes to complete the transformation.

The strategies followed by the companies studied fell into six broad categories (Exhibit 1):

Evolutionary/institution building. This route tended to be chosen by those looking for long-term improvement rather than short-term results. Since their companies were not in deep trouble, leaders did not have to risk rapid change or bold actions. Instead, they gradually reshaped their company’s values, top-level structures, and performance measures so that line managers could drive the change.

Jolt and refocus. In sharp contrast, this strategy aimed to force a company to respond to a future threat. In one fell swoop, leaders delayered top management, defined new business units, and redesigned management processes. Such an approach is often used to shake up a gridlocked power structure. It realigns power, creates urgency, shapes fears and aspirations, and affects beliefs. The jolt can be a potent means of improving performance, but it also causes confusion that can delay results.

Follow the leader. Some confident and experienced leaders who wanted immediate results initiated major changes from the top, personally grabbing the levers that would improve financial performance (such as selling off weak businesses), while removing only the most critical organizational bottlenecks. With this strategy, performance improves rapidly, but more broadly based change is needed later if the transformation is to be sustained.

Multifront direct. Here, the focus is again on immediate, direct financial improvements. But unlike "Jolt and refocus" or "Follow the leader," change is driven by task teams whose targets are more wide-ranging. They might seek performance gains through cost reduction, asset sales, or sales stimulation. Such programs temporarily overwhelm the old organization, which is later realigned to sustain the improvements.

Systematic redesign. As in "Multifront direct," task teams drive change across a broad set of economic levers to boost performance. Here, however, core process redesign and other organizational changes tend to be planned in parallel with the economic improvements to produce the necessary results.

Unit-level mobilizing. This was the choice of top managers when major gains in performance could be achieved by improving unit-level operations without the need to redefine strategy or organizational processes. Change leaders empower task teams to tap into the pent-up ideas of middle managers and frontline employees, creating a temporary power structure that ensures implementation.

The strategies chosen tended to reflect three underlying factors: how performance needed to improve; the leader’s aspirations and preferences; and the human energy available to power the transformation. Considering these three variables can help senior managers design an approach that will work for their company (Exhibit 2).

The performance task

To design a successful strategy, leaders must start from an understanding of why and how performance needs to improve

To design a successful strategy for change, leaders must start from an understanding of why and how performance needs to improve—in other words, the performance imperative. Does the company face an immediate threat to its viability, or simply an opportunity to make improvements? Is there a challenge on the horizon, perhaps from technological innovation, for which the company should be preparing?

Transformations designed to counter immediate threats usually entail gut-wrenching measures—such as selling businesses and slashing costs—that produce rapid results. Here, the performance imperative might suggest a "Follow the leader" strategy. At the opposite extreme are the changes needed to respond to a future threat or opportunity. In such cases, the performance imperative creates the need for a less direct approach that may begin by convincing management of the need to change, perhaps by introducing new thinkers into the top management team or modifying business unit structures. An "Evolutionary/institution building" strategy might fit the bill.

Once the performance imperative has been defined, the issue becomes what needs to change if it is to be achieved. The transformations studied used a combination of three levers, each of which had a different impact on performance. In part the mix was determined by availability, and not all levers are equally easy to pull (Exhibit 3):

Direct levers bear on the revenues, costs, assets, and financial structure of a business, and hence on its financial performance. Overhead reductions and asset disposals are commonplace, though some direct levers are industry specific. A manufacturing company might rationalize its production capacity, banks might offer new products and services, and an electric utility might seek low-cost feedstock. To produce business results, change must ultimately occur to the direct levers. Altering attitudes or reorganizing a business may help bring change about, but it will not have the necessary financial impact.

Knowing which direct levers to pull calls for an intricate understanding of what drives a company’s economic performance: the same lever is likely to yield different prizes for different companies. However, a common thread among the companies studied was that while most transformations entailed cutbacks and asset disposals, these were soon followed by growth in order to attract shareholders and top-notch employees. One steel company cut its workforce by over 30 percent and closed its older ingot-based steelmaking operations to concentrate on continuous casting. It then invested in new minimill capacity and explored ways of entering Asian markets.

The use of indirect levers such as organizational structure, performance measures, and business unit strategy influences performance by focusing a company on what is important. Decentralizing and forming smaller business units, for example, can bring financial performance into sharper relief. Some companies and business units redefined their strategies, carefully considering what they wanted to become and how they would achieve this destiny. They established targets for performance and, more important, set out to build institutional competencies to sustain and intensify their improvement efforts.

Indirect levers can have an enormous impact on the success of a program, though the payoff may be slow to materialize

Indirect levers can have an enormous impact on the success of a program, though the payoff may be slow to materialize. One company was able to achieve major gains within a year by slashing plant personnel. Management then shifted its attention to building outstanding operating competencies to optimize performance. This indirect program took a year to produce the first results, and three years to have an impact on all facilities—but it did deliver a more enduring improvement in manufacturing performance.

Attempting to pull direct levers when the indirect ones are firmly aligned against change can stall progress. In one steel company, patchy performance measures and poor cost management skills jeopardized the effect of a cost reduction program. To capture large-scale improvements from the program, the company had to make immediate changes to these indirect levers.

Contextual levers such as vision, values, and leadership style challenge an organization and the individuals within it to create an environment that inspires high performance. In successful companies, high performance is often a seamless part of the culture. Top management is demanding and uncompromising, and management processes ensure that a performance ethic runs down through the business and operating units.¹

Contextual levers have a broad influence and can act as a forceful catalyst of change. One US paper manufacturer began its transformation by oiling controls that had become rusty. After a round of visits to high-performing companies, the CEO and COO set corporate goals for productivity, growth, and customer satisfaction. They disbanded the various committees and staff groups involved in planning and budgeting, and put themselves at the helm. They became demanding partners, insisting on explicit goals in one-on-one meetings. This environment prompted action on direct levers as business unit leaders sought to achieve the results they had promised.

The problem with contextual levers is that changing them can consume enormous amounts of energy and create the illusion of progress with little real performance improvement if it is not complemented by changes to other, more direct levers. Fearing this, inexperienced leaders sometimes shy away from using them.

Each of the six strategies works on a different sequence of levers. "Jolt and refocus" uses indirect and contextual levers to kick-start change through reorganization at the corporate and business unit levels. These changes do not in themselves produce immediate performance gains—in fact, they destabilize the organization, making it difficult to focus on the day-to-day running of the business for some time. They do, however, release a great deal of energy, liberating capacity that can then be focused on the direct levers that ultimately produce performance improvements.

A "Multifront direct" strategy employs direct levers for maximum near-term financial impact. Indirect and contextual barriers are tolerated for a time and a project structure is used to arch over them. An "Evolutionary/ institution building" strategy has a similar focus of effort to "Jolt and refocus," though reform is conducted at a much slower pace. "Follow the leader" and "Unit-level mobilizing" pull a more select set of levers, but are polar opposites in style.

The leader’s aspirations and preferences

The aspirations and preferences of the person leading the change determine the way in which transformations evolve. In the companies studied, the leader’s aspirations were often the source of energy that sparked change.² One paper company embarked on its transformation when a long-time employee became CEO. Fed up with working for a middling company, he aspired to turn it into one of the best. Another CEO, facing retirement in two years, initiated a far-reaching transformation in anticipation of a major change in the industry. While it would have been easy for him to coast through his final years with the company continuing to produce strong financial results, he viewed the transformation as his legacy.

A leader’s preferences are also likely to be reflected in the style of the transformation. If a CEO believes in the power of reorganizing, for example, he or she is more likely to decentralize early in the program. One leader reorganized three times in four years, fascinated by the indirect and contextual levers and happy to leave others to deal with the direct ones.

Another leader felt comfortable placing trusted people in key positions and holding them accountable. In the program’s first year, he replaced many executives with people he had worked with previously. He set individual targets with these individuals and followed them up relentlessly. He was not inclined toward major process change or frontline involvement, and in these areas his achievements were less remarkable.

At the other extreme was a leader who had spent his career in research. Believing in the power of analysis, he initiated change by sending a set of crossfunctional teams in search of financial improvement opportunities. His intellectual strength was invaluable in driving the teams toward the most promising opportunities. But though he was demanding about analysis, he was lenient with people. Only after some of his efforts failed repeatedly was he willing to address leadership issues.

Most of the change leaders were imperfect, and none was impartial

Most of the change leaders studied were imperfect, and none was impartial. All aspired to improve their companies while meeting certain personal objectives. All were blessed with some degree of management and leadership skill; a few were outstanding at both. More interesting than their weaknesses, though, was the formative role their aspirations and preferences played in shaping the change program. A strategy that amplifies, rather than resists, a leader’s qualities could prove to be the key to combustion. But sustaining the fire may require different fuel.

In a few cases, the leader’s aspirations were so high and preferences and beliefs so strong that they dominated the entire program. Often, however, leaders found themselves constrained by their reluctance to move beyond their preferred style. The successful ones found ways to complement their strengths and extend their range by using a small team at the top and bringing in outside resources.

The energy for transformation

To succeed, leaders must release and orchestrate the energy within the organization

Whatever a company’s potential, transformation is doomed to fail unless change leaders can release and orchestrate the energy within the organization. Transformation is a dynamic process. Understanding how to energize transformation is a neglected area in the change literature, but one that lies at the heart of successful change.

Energetic and powerful though many of the change leaders were, they knew they could not change their company by themselves, and recognized they would have to muster huge amounts of effort from others. This meant they had to view the changes from other people’s perspectives. Then, since collective effort is needed to propel change through a number of episodes, they had to align the various sources of energy. By forming coalitions, they were able to build a critical mass of capability and capacity in order to transform potential energy into the kinetic energy that would power change.

People power

Often, spelling out the case for making changes to respond to a new competitive situation falls on deaf ears. But by understanding what motivates people, leaders can identify which key individuals might be enlisted to help drive change. Four forces influence the energy available:

If a business’s survival is in doubt, fear about job losses will prompt employees to improve their performance

Fear is the most obvious. If a business’s survival is in doubt, fear about job losses will prompt employees to improve their performance. In a couple of resource companies threatened by bankruptcy, fear motivated the managers, who did not want to drop a few rungs in the hierarchy under new ownership. The rank and file in remote locations, however, remained unconcerned. They had seen owners come and go, and were convinced their plant was a valuable asset that would continue to operate no matter what.

Fear is unlikely to propel an organization through several episodes of change, however. Aspiration is needed, especially when a company’s existence is not at risk. Often, the promise of becoming number one—"the best oil producer," "the finest paper company," "the top-performing bank"—instills a sense of pride and belonging that creates the energy to change. In the early stages of a transformation, employees tended to cling to the hope that their company would not merely survive, but attain new heights.

As change progressed, this aspiration gained definition. For one US oil and gas producer, the transformation, once initiated by top management, was sustained by the desire of frontline employees to solve problems and improve performance. Management provided the proper tools and planning support, but the front line’s aspirations provided the energy.

People’s beliefs also affect their willingness to participate in change, coloring their judgments and decisions. The transformation of one US paper manufacturer stemmed from its CEO’s firm belief that his company, despite years of mediocrity, had the people and assets to become industry leader. His unwavering confidence empowered the organization, prompting initiatives and healthy risk-taking.

A more difficult challenge is to overcome the limiting beliefs that make people deny or resist the need for change, however powerful its logic. One executive with a top-down style denied the need to cut costs. He could not believe that the necessary cost reductions could be achieved, and mobilizing the front line to capture savings was outside his experience.

Inevitably, there will be instances where people have to be replaced if they are unable to overcome their limiting beliefs. Too often, however, zealous champions of change perceive resisters as not very smart, over political, and too old to learn new tricks. In many cases, resisters’ beliefs are genuine, and changing them calls for exposure to new experiences and an empowering sense of new possibilities.

Even when people are motivated to act, they may not have the capability and capacity to do so

Even when people are motivated to act, they may not have the capability and capacity to do so. Establishing devolved profit centers, for example, will not work unless enough managers understand the basis of commercial management. And when it comes to large-scale transformations, leadership can be a scarce resource. At some point, executives are likely to exhaust their own capacity to energize all the areas requiring change, and the program will run out of steam unless it can draw on or build broader leadership capability.

Building coalitions

Though individual fears, aspirations, beliefs, and capabilities may be sources of energy, it is collective effort that transforms a corporation. Leaders must find the means to form coalitions between potential sources of energy, while neutralizing or overcoming sources of resistance. This may entail tapping into energy at a particular level to form a group that will drive the change. Or it could mean shaking up a Balkanized power structure that is thwarting individual efforts.

Understanding how energy is distributed suggests ways of assembling a critical mass of effort. The CEO of a North American basic materials company built coalitions that cut across several levels. Close to retirement, he was seeking dramatically better results during his final two years. He had an empowering belief in his and others’ ability to transform the company, but was indecisive and unfamiliar with the core business, and lacked the capability and power base to drive home the change.

His team at the top believed that the company was at the limit of its performance, and was waiting for an upswing in the business cycle to re-establish profitability. Keen to preserve their fiefdoms, the top managers used their power to prevent change initiatives from taking root. Leaders down the line, however, were ready to go, seeking recognition from the board and CEO. They believed the company could be the industry leader, and wanted to use their training to help it achieve this potential, but they too lacked power. The front line sought to preserve pay and jobs, but lacked a strong union and the means to resist change.

The CEO and the leaders down the line represented sources of energy that were unable to fuel a change program because of top management blockers and a lack of clear urgency. Once these energy sources were connected, however, the transformation began. A new program increased the CEO’s confidence and courage to act. He broke through the regional power structure, fired two of the four SVPs, and led a change program that linked him directly to down-the-line leaders. These newly empowered employees improved performance in the units.

Exhibit 4 summarizes the situational factors—performance imperatives, leader’s performances and aspirations, and available energy—that determine the choice and effectiveness of the six different change strategies.

Breathing life into a change strategy

Once change leaders have created their strategies, how do they execute them? How do they hook into the forces that will give a change program the momentum it needs? How do they make it come alive? Successful change leaders design initiatives explicitly to pull a particular performance lever and energize those charged with carrying out the change. Such initiatives fall into four basic groups.

Executive "debottlenecking" decisions used to make changes that will liberate substantial amounts of energy within an organization or provide a major one-time benefit. Levers suited to this approach include top-level direct levers such as portfolio restructuring, plant rationalization, and strategic pricing, and indirect and contextual levers such as removing key executives and changing the top management structure. Easily overlooked in an era of empowerment, this approach tends to be used when the CEO or another top executive is the prime source of energy.

Direction-setting or redesign task teams, appropriate when complex systems of cause and effect need to be understood, or when a diagnostic is required to set the direction. They usually require crossfunctional participation and are used to initiate change in complicated systems or to institutionalize new behaviors such as in-plant skill building. This approach tends to be driven by down-the-line champions, and relies on both the CEO and management team members for support.

Mobilizing—structured efforts that can involve hundreds of people in problem solving, and are often used on frontline direct levers such as cost reduction and quality improvement. It is here that specialized techniques proliferate: breakthrough strategy, frontline problem-solving teams, TQM, and so on. For enervating tasks such as reducing staff levels, highly structured, forced-pace approaches are required to unleash energy. Other tasks, such as quality improvement, tend to take on a life of their own, readily drawing many people into action. These mobilizing initiatives link down-the-line champions with a team at the top.

Communicating and coaching, important complements to more performance-focused initiatives, though they can stand alone. Coaching and training have a strong impact on contextual levers such as vision and values, and are also effective in reshaping performance expectations and vertical processes.

It is important to avoid falling into the trap of thinking that only one technique is available to pull a particular lever

It is important to avoid falling into the trap of thinking that only one technique is available to pull a particular lever. Consider core process redesign, an approach that involves forming task teams that tear processes apart and then put them back together. Certainly, this can be a powerful solution if a company can wait a year or two for a quantum gain—and if it has the leadership, performance ethic, vertical processes, and confidence to take on such a major enterprise.

Yet experience suggests that particular levers and initiatives are best left uncoupled until you have figured out the best way of meeting your needs. Then they can be married accordingly. You do not, for example, necessarily need to redesign a core process. One relatively low-skilled company used local problem-solving teams to realize short-term benefits in the customer satisfaction core process, rather than redesigning it entirely.

Addressing the right levers and energy sources with appropriate initiatives lays the foundation for the sound execution of change

Addressing the right levers and energy sources with appropriate initiatives lays the foundation for the sound execution of a change episode. But exploiting the dynamic effects of the various initiatives that make up an episode will make the change strategy come alive. Initiatives should be carefully coordinated and sequenced for the greatest impact:

Act first on the barriers to improvement. One "Jolt and refocus" strategy entailed removing several key executives who did not share the new vision, then staffing a new business unit structure with more change-ready executives. The changes released the energy to develop new strategies for each of the units.

Focus a critical mass of initiatives on one part of the business system to ensure sufficient force to produce results. Rather than diffuse efforts across the entire manufacturing process, for example, break the back of a performance problem by improving production processes, material management, and maintenance.

Bundle high-impact initiatives requiring a large investment of energy with others that need less energy. In a "Multifront direct" strategy, for instance, combine a major unit-level cost reduction effort with an equally hard-hitting but less intensive portfolio restructuring. Sequence, rather than pursue in parallel, demanding initiatives that are likely to overwhelm the organization.

Sustaining momentum

Bundling initiatives correctly will help achieve the necessary velocity for a transformation. Yet the dynamics of change have wider implications. What works for the first year or two might not work for the next phase, as changes initiated within the company filter through the organization and influence energy and performance levels. And changes outside the company can move the goalposts: one resource company managed to reduce costs below the target level, only to find that prices then dropped a further 20 percent.

Successful transformations often go through several distinct episodes as the strategy is adjusted, consciously or unconsciously, to reflect changes in performance targets, energy resources, and leadership preferences. One European bank discarded its initial "Evolutionary/institution building" strategy as heightened competition and deregulation raised the performance imperative. A new leadership team was determined that the bank would be one of the survivors of an industry rationalization over the next three to five years, and so moved to a "Jolt and refocus" strategy, changing the organization’s structure and developing a new vision to muster the energy required to drive the change. "Systematic redesign" followed later, giving the team a long-term road map to offset its inexperience (Exhibit 5).

Some transformations were much easier. One flexible, focused computer company engineered a remarkable turnaround in performance in just 18 months by redesigning its product line, entering new distribution channels, and cutting overheads. It was an intense experience, and a number of top and middle managers left because they could not stand the pace.

Often, it is evident that transformation will be a lengthy task involving more than one episode. A winning formula may prove elusive, or the transformation may demand changes at every conceivable level. Certainly, the more people involved, the more energy required, and the more difficult the challenge. There may sometimes be little room for maneuver, as was the case at one paper manufacturing company that had to spend hundreds of millions of dollars to upgrade largely unsaleable assets to achieve a competitive cost structure. It had to wait five years for markets to improve before it could make the necessary divestiture and investments.

Unless leaders can successfully steer their transformation from one episode to the next, it is likely to run aground

Unless leaders can successfully navigate a company’s transformation from one episode to the next, the transformation is likely to run aground. Navigation demands sensitivity on the part of change leaders, who need to detect the reverberations of change in order to adjust their strategy as the transformation takes shape. Successful leaders recognize that the exact course and duration of a transformation cannot be mapped in advance; complicated plans detailing changes from beginning to end will be wasted. But processes to monitor and manage the transformation are vital if leaders are to sense inflection points and move from one episode to the next without faltering.

Formal, disciplined management processes ensure that a strategy has clear mandates, is properly staffed, and makes good progress. These processes were most formal in the more programmatic change strategies. "Multifront direct" and "Systematic redesign" strategies were often led by a management coordinator to whom other initiative leaders reported. In some cases, task teams reviewed progress at regular intervals, with a steering group adjusting resources and objectives as necessary. In "Follow the leader" and "Evolutionary/institution building" cases, management processes were more likely to be integrated with a company’s key operating processes: budgeting, monthly performance reviews, executive bonus objectives, and so on.

The most valuable monitoring devices seem to be the networks that feed leaders with information that allows them to gauge energy levels and identify opportunities for improvement. From such a network, one bank’s CEO sensed when his "Follow the leader" strategy was losing momentum, and revised his tactics accordingly.

Many types of network existed in the cases studied. One linked key managers across an organization; another was driven by the CEO, who worked directly with a broad group of people. These networks measure more than just changes in performance; they also measure changes in the behavior of pivotal jobholders, in attitudes and beliefs, and in available capacity. Information flows are fluid in networks, in contrast to the carefully filtered missives sent up through formal power structures. But because they are founded on trust and respect, they take time to build, and can self-destruct if trust is violated or if their power threatens official structures. Since their benefits are so great, they should be zealously nurtured and protected.

Transforming a company is not a science: there are no formulae for success. The companies studied were not following some masterplan; indeed, much of what the CEOs did was intuitive, almost an art form. Examining their experience yields valuable insights into creating a strategy that will realize the promise of transformation.

By viewing a company from three perspectives—how performance needs to change and how fast; a leader’s aspirations and preferences; the sources of energy available to drive the change—we can gain insight into what strategy will work.

We identified six strategies that serve as a useful starting point for leaders wanting to transform their companies. These strategies may not work in all situations, but they do provide clues to understanding why strategies used in previous situations were successful, and how those situations differ from the ones now faced.

A successful strategy demands effective execution. Choose initiatives that link the sources of energy to the right performance levers. Grouping initiatives into four basic types—executive debottlenecking decisions, direction-setting or redesign task teams, mobilizing, and communicating and coaching—helps simplify the choice. Then, be sure to exploit the interdependent dynamics of the initiatives to keep the change moving ahead.

Do not waste energy formulating intricate plans that pretend to know just how the transformation will evolve

Do not waste energy by formulating intricate plans that pretend to know just how the transformation will evolve. More valuable will be the navigational processes and networks that allow leaders to gauge the unpredictable results of change and reformulate their strategy, particularly if the transformation has to endure several episodes.