Today’s business environment is characterized by rapid, extensive change and unpredictability. The combined effects of digitization, connectivity, globalization, demographic shifts, and social feedback are shaking the foundations of almost all businesses, making sustained growth more valuable and elusive than ever before. In addition, we see that companies—at a time when adaptiveness is so crucial—are often hampered by internal complexity that makes change difficult.
To compound matters, the diversity of the business environments—in terms of growth, rate of change, and harshness—that global companies face is expanding in a multispeed world. So it is not surprising that many companies find their strategies and business models increasingly out of step with their environments.
Many companies get caught in a “boiling-frog trap,” where they fail to recognize the problem and delay efforts to remedy it, thus necessitating a painful and risky step-change transformation. Our analysis suggests that, prior to embarking on such change efforts, fewer than a quarter of companies have outperformed the market and nearly half are systemic underperformers. (See Exhibit 1.)
And while transformations are increasingly common, we know that about 75 percent of such efforts fail to restore long-term growth and competitiveness. Logically, that’s hardly surprising: jumping is inevitably riskier than walking, especially when the bar is high. And often the company’s focus is on healthy quarterly earnings rather than sustained competitiveness, encouraging management to adopt a stance of “if it ain’t broke, don’t fix it.” Waiting until performance is already declining, however, not only increases the magnitude of the required adjustment and the organizational difficulty of realizing it but also puts companies in a reactive position, causing them to miss opportunities for preemption, experience building, leadership, and, ultimately, competitive advantage.
There are understandable reasons why companies fail to preemptively transform themselves in the face of change. A company might, for example, do the following:
- Foster a culture that marginalizes new, dissonant perspectives, causing the company to miss or minimize important change signals
- Lapse into a false sense of security because of solid short-term financial performance: one needs to change shoes while they are still comfortable but before they wear out
- Believe that past performance is indicative of future results
- Have incentives that discourage deviation from the current path
- Focus so closely on short-term performance that the company neglects long-term competitiveness
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