Psychology, Pathology, and the CEO
In difficult times, organizational pathologies can cause a death spiral. Here’s how the CEO can win back the hearts and minds of staff, according to HBS professor Rosabeth Moss Kanter.
In recent years, I have been inside nearly two dozen turnaround situations, in various stages of progress, in which new leaders were bringing distressed organizations back from the brink of failure and setting them on a healthier course. In every case, I saw—and agreed with—the need for smart financial and strategic decision making. But along the way, I also noted another important aspect of this leadership task, a related line of effort that seemed to go largely unnoticed and unstudied by observers but that was just as vital to improving the company's fortunes and just as hard to do well. Each of these executives restored their people's confidence in themselves and in one another—a necessary antecedent to restoring investor or public confidence. They inspired and empowered their organizations to take new actions that could renew profitability. In short, each had to lead a psychological turnaround.
Consider the situations that confronted new CEOs in three companies:
Gillette: Its performance was strong through the mid-1990s, but by the beginning of 2001, this global consumer-products company had experienced several years of flat sales, declining operating margins, and loss of market share. Its Mach3 shaving system was a blockbuster product, but the company was suffering the effects of its own reliance on trade loading—the practice of offering discounts to retail customers at the end of a quarter in order to move products and achieve sales targets, thus sacrificing margins and jeopardizing the next quarter's sales. Meanwhile, because the executives in different product groups and locations rarely sat in the same meetings, initiatives in their various areas were not coordinated. SKUs (stockkeeping units, or product variations) proliferated as groups made decisions without informing other departments, leading to waste and duplication. Respect among peers declined.
Employees regularly went to the press to air grievances, reinforcing the BBC's culture of blame.
— Rosabeth Moss Kanter
BBC: In 1999, the British Broadcasting Corporation was a seriously demoralized organization. Its funding was secure through 2006 because of a government-collected licensing fee, but it had lost audience share, experienced declining ratings, and was being outpaced by commercial competitors. Skepticism and cynicism reigned in the company. Many people felt under attack, externally and internally. Program developers felt they were at the mercy of broadcast commissioners and that they were being treated unfairly, having to endure a long bureaucratic process that ended in their show proposals being rejected more than half the time. The radio division felt it didn't get the same respect as the TV unit. The sports division had to fight for airtime. Employees regularly went to the press to air grievances, reinforcing the BBC's culture of blame.
Invensys: A global conglomerate that was created largely through acquisitions, Invensys in 2001 had more than 50,000 people working in industrial and energy services—and was close to defaulting on its financial obligations. Some managers felt the company was also bankrupt in terms of ideas. There was insufficient communication across the company, including few common meetings of the top group, competition among divisions that were largely isolated from one another, and an inward focus among managers. Perpetual restructuring had created a culture of fear and had reduced employee initiative. When the new CEO asked executives individually to name the three people in the company for whom they had the greatest respect, most could barely name one.
Rather than continually reorganize, which is highly disruptive, ... turnaround leaders simply augment the organization chart with flexible, often temporary, groups that open relationships in multiple directions.
— Rosabeth Moss Kanter
It may be true, to paraphrase Tolstoy, that every unhappy organization is unhappy in its own way, but once we set aside the details, the fundamental dynamics of decline—and recovery from it—in these three companies turn out to be remarkably similar. Indeed, across a wide variety of situations, in banking, consumer products, retail, industrial products, software, education, and media in North America and Europe, I've found the same pattern. Organizational pathologies—secrecy, blame, isolation, avoidance, passivity, and feelings of helplessness—arise during a difficult time for the company and reinforce one another in such a way that the company enters a kind of death spiral. Reversing that downward trend requires deliberate efforts by the CEO to address each of the pathologies. ...
Turnaround leaders know that problem solving requires collaboration across departments and divisions—and not just because innovations often come from these joint projects. Changing the company's dynamics requires collective commitments to new courses of action lest local decisions, taken in isolation, undermine that change. New strategies are possible when new kinds of conversations are held about combining organizational assets in new ways. Thus, Greg Dyke's first major initiative, announced within two months of his arrival, was called "One BBC: Making It Happen," to highlight that he was seeking more collaboration throughout the organization. Executive committee meetings were increasingly devoted to themes that cut across divisions, and members discovered areas in which they could combine forces to tackle new business opportunities.
Gillette's complex organizational matrix meant that many operations issues arose at the intersection of groups—for instance, product managers required resources and support from the IT department or needed to coordinate their launches with help from sales representatives in the field. Jim Kilts encouraged the formation of operating committees in each business unit or regional group, and then further encouraged the creation of cross-matrix operating committees that included representatives from all the functions and areas on which the business unit depended. The view across the organization revealed business opportunities that would have been hard for any one unit to see by itself. For example, Gillette's Oral-B business unit, centered in the United States, produced a quality line of toothbrushes, and its Braun division, headquartered in Germany, had developed world-class portable-appliance technologies. But, unlike its competitors, Gillette did not make a battery-powered toothbrush—until new relationships were formed across the ocean.
Rather than continually reorganize, which is highly disruptive, especially for a troubled company, turnaround leaders simply augment the organization chart with flexible, often temporary, groups that open relationships in multiple directions. Invensys's Rick Haythornthwaite refers to this as structuring the organization to get the right discussions. "The only thing I really do is lead conversations," he says. "Any group is a network of conversations. I continuously thrust people into situations that force them to challenge the current conversation they're holding, to get beyond that discussion to one that's more productive."
[New CEO] Greg Dyke virtually eliminated consultants at the BBC to force managers to think for themselves.
— Rosabeth Moss Kanter
Invensys's leadership team acted on this theory by adding new groups and roles, slicing through the organization chart vertically, diagonally, and horizontally. In his first months at the company, Haythornthwaite formed nine strategy teams comprising people from across the divisions, with each team focused on one of nine customer segments. When the company launched this initiative, it involved the top 300 people in rank at the organization and 100 additional participants called "ambassadors for change," ensuring that people below the managerial ranks would be part of the strategy conversation. Haythornthwaite also recruited experts to lead in four areas cutting across the business-supply chain (procurement), customer development, service delivery, and project management. They had only small teams and no P&L responsibility. Their charter was to set standards within their areas and to work with others to bring about necessary improvements.
The Energy for Change
Despite the common psychological dynamics at work in all the turnaround situations I've witnessed, we should remember that leading a corporate turnaround isn't a one-size-fits-all process. It requires that CEOs pay attention to the specifics of a company's problems and that the leaders bring their own preferred approaches to the task. Rick Haythornthwaite engaged large teams to work on a new strategy for Invensys, while Jim Kilts devised Gillette's strategy for each line of business by himself, working with a small group of trusted executives. Greg Dyke virtually eliminated consultants at the BBC to force managers to think for themselves, while Kilts retained many consultants to bring an external perspective to a company that had become too insular.
Yet, despite differences in strategies and tactics, all turnaround leaders share the overarching task of restoring confidence through empowerment—replacing denial with dialogue, blame with respect, isolation with collaboration, and helplessness with opportunities for initiative. Each leader must manage the tricky task of creating a winner's attitude in people, even before the victories.
Excerpted with permission from "Leadership and the Psychology of Turnarounds," Harvard Business Review, Vol. 81, No. 6, June 2003.
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