Why corporate giants fail to change

May 8, 2013, 4:18 PM UTC

(TheMIX) — Last week, I taught a case study on the decline of Nokia to my MBA students. I asked them, “Why did Nokia fall from industry leadership to also-ran status in the space of less than five years?” Their answers were predictable:

  • “They lost touch with their customers.” True, but almost tautological — and interesting to note that this is the same Nokia that in the early 2000s was lauded for its customer-centric marketing and design capabilities.
  • “They failed to develop the necessary technologies.” Not really true — Nokia (NOK) had a prototype touchscreen before the iPhone was launched, and its smartphones were technologically superior to anything Apple (AAPL), Samsung, or Google (GOOG) had to offer during the late 1990s.
  • “They didn’t recognize that the basis of competition was shifting from the hardware to the ecosystem.” Again, not really true — the “ecosystem” battle began in the early 2000s, with Nokia joining forces with Ericsson (ERIC), Motorola, and Psion to create Symbian as a platform technology that would keep Microsoft (MSFT) at bay.

Through this period, the people at Nokia were aware of the changes going on around them, and they were never short of leading-edge technology or clever marketers. Where they struggled was in converting awareness into action. The company lacked the capacity to change in a decisive and committed way.

The failure of big companies to adapt to changing circumstances is one of the fundamental puzzles in the world of business. Occasionally, a genuinely “disruptive” technology, such as digital imaging, comes along and wipes out an entire industry. But usually the sources of failure are more prosaic and avoidable — a failure to implement technologies that have already been developed, an arrogant disregard for changing customer demands, a complacent attitude towards new competitors.

In such cases, the ultimate responsibility for failure rests with the CEO. But if such failures are to be avoided, it is clear that the CEO cannot do it on his or her own. People across the firm must keep their eyes open to changes in their business, and to take responsibility to push their new ideas and challenge existing ways of working.  Obviously, this isn’t easy to do, but if there is a better understanding of the problem then there is a chance for improvement.

So what are the enemies of agility you should be looking out for in your organization?  Here are my “big five”:

Ossified management processes.  Things get done in big firms through management processes — budgeting and planning, performance management, succession planning. These processes create simplicity and order, but they also become entrenched and self-reinforcing. One example: I was asked to put on a webinar for a big publishing company a couple of years ago, and they asked me to sign a 20-page contract for the right to talk about my research for an hour. The reason wasn’t hard to fathom — their antediluvian book-publishing process was running on autopilot, and doing its best to suck the life out of any new Web-based initiatives. What’s the solution here? First, identify and kill off the processes that no longer add any value. Second, pilot all new initiatives outside the existing processes.

Old and narrow metrics.  What gets measured gets done, but we don’t refresh our choices of measures frequently enough, and we end up with massive blind spots. Nokia didn’t think of Apple and Google as competitors until it was too late. A friend of mine took the reins at a major national newspaper in the U.K. in the early 2000s, and it took him more than a year to persuade his colleagues that Google should be added to the list of competitors they used to benchmark their performance. The solution here? Define your relevant market as widely as possible, so that your market share is as low as possible. And measure customer behavior very carefully — are they defecting? To whom?  And why?

A disenfranchised front line.  The first insights into changes in your business environment come from the people on the “front line” — salespeople, developers working with third parties, purchasing managers. But their voice — if it is raised at all — typically gets drowned out among all the others clamoring for executive attention. The solutions here are far from easy, but they include technology-based systems for sharing front-line information quickly with those at the top, as well as informal networks and cross-cutting task forces designed to address specific threats and opportunities.

Lack of diversity.  Nokia’s top executives were all Fins of similar age and background, and this surely hampered their ability to make sense of their changing business environment. Of course, we are all more comfortable working with people with similar worldviews and as a result we end up with inevitable blind spots. The solution? Hire people with different frames of reference from our own, or at least find a way to bring their point of view to the table. In the late 1990s, Infosys (INFY) had a program called “Voice of Youth” designed to bring the insights of the under-30 crowd to the attention of the 50-something executive team.

Intolerance of failure. The bigger and more successful a firm becomes, the more risk-averse it becomes. Executives say they want innovative new products and services, but they expect them all to succeed. And, needless to say, this attitude breeds caution and rigidity. The solution here is clear: you need to find ways to develop a culture that encourages trial and error. Google, Amazon (AMZN), and Netflix (NFLX) are all great examples — they have all had their share of dud products, but everyone accepts them as part of the package.

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Julian Birkinshaw is Professor of Strategic and International Management at London Business School. He is co-Founder and Research Director of the Management Lab (MLab).