The Innovation Show

When an organisation recalibrates to adopt a radically new strategy, most leaders focus on the changes in processes, practices and procedures. These are the mechanics of business, the easiest to measure and easier to implement. Successful change efforts engage both the mechanics and humanics of change. The humanics involves the community, collaboration and culture. In a world of constant change, organisations must adopt a “chameleonic” culture, one that is capable of rapid change in line with strategic change.

Psychologists tell us that by the time we reach age thirty-five, our behaviours, attitudes, beliefs, emotional reactions, habits, skills, associative memories, conditioned responses, and perceptions are subconsciously programmed within us. The subconscious stores our childhood memories and behaviours and patterns that feel comfortable. The same subconscious programming that happens to each person happens with organisational culture too. Subconscious programming is like a stubborn stain, engrained and deep; it is difficult to access, let alone reprogramme.

When you think of culture this way, you can understand why 75% of transformation efforts fail. You cannot change business models until you change mental models. You can’t change what people do until you change how people think. This week’s Thursday Thought highlights how changing culture is a decisive step towards successful transformation, but equally how it is not just about a new culture but an ever-adaptive culture. Just as a (once-great) culture can support a strategy in one business context, it can eventually undermine it in another. Culture and its associated strategy are situational. As firms become successful, they develop cultures that support that success, but in the face of change, the same culture that made them successful becomes a source of inertia and resistance to change. The pattern of behaviours and culture required for a start-up is not the same as that of a mature organisation.

In our series on the work of Charles O’Reilly and Michael Tushman, we explored the topic of culture. Tushman and O’Reilly call the harmony of humanics (culture and behaviours) and mechanics (strategy and execution) alignment. An example of such alignment is Netflix.

Netflix started life as a DVD mail business. With fulfilment centres and stock all over the USA, the company had a logistics system and organisational capacity to excel at such an offering. However, CEO Reed Hastings always had one eye on the forthcoming streaming revolution. He knew the future indicated faster, ubiquitous connectivity and increasing online entertainment consumption. While Netflix built original capabilities in the DVD business, it eventually transformed into a streaming and entertainment business. Netflix started streaming on-demand video in 2007 and, by 2009, became the company’s most popular offering by 2009. Netflix moved the DVD service to DVD.com in 2016. DVD.com still exists and delivered almost $300 million in 2019, according to a recent SEC filing. (Netflix just announced it would exit that business in September 2023.)

Here is an often overlooked point with such a dramatic transformation. DVD.com requires a very different “alignment” (of culture, behaviour and strategy) than that of Netflix. The former is run for efficiency and exploiting current advantage to maximise profit. It is always looking for ways to cut costs and optimise. Netflix is run with a starkly different alignment. Netflix is open to the exploration of new advantages and willing to take punts in original content creation, gaming, and even developing new video codecs.

However, the challenge comes when you need to do both in parallel. This is what O’Reilly and Tushman call “exploit and explore”. Netflix is not all beanbags and pool tables. It still exploits current advantages (optimisation of mobile platforms, data and personalisation, business models with ad-based models) while exploring the future (new forms of content creation and technology).

When new businesses and strategies require new alignments, the risk is that the old (and once successful) ways of doing things can undermine the new. This is particularly pronounced when the business comes under financial pressure. The norms that promote exploitation (e.g., incremental improvement, attention to detail) are substantively different from those needed for exploration (e.g., risk-taking, flexibility).

In their books, Tushman and O’Reilly consider the transformation of IBM led by Lou Gerstner. In the early 1990s, IBM was failing. IBM’s stock price had plummeted, and many Wall Street analysts called for the firm to be broken up and sold in pieces. By 1992, more than 60,000 jobs had been lost, and, despite the previous CEO’s efforts at transformation, the company seemed doomed. In 1993, Lou Gerstner became the first outsider in its history to be appointed as CEO. Over the next decade, under his leadership, the company was transformed from a failing maker of computers to a successful software and services business. In describing this transformation, Gerstner claimed that the main reason the prior management could not transform IBM was not a failure of strategy. Instead, it was a case of the values and culture being created for another time and a different strategy. He argued that “[u]ntil we got to the issues of culture, values and behaviour, we never would have changed IBM.” In 2012, as Gerstner was getting ready to step down as CEO, he reflected on what it took to transform a company: “If you’re really going to transform an enterprise, you’ve got to understand culture. . .. It took me to age 55 to figure that out. Culture is everything.”

As strategists, we must recognise that the business model that makes mature businesses successful in one context suppresses new-growth opportunities in another. However, we must also recognise that the culture enabling that business model must adapt. You cannot change business models without changing mental models. Strategic and cultural change are symbiotic, and the best way to navigate change is to adopt an agile culture or, to the point of this Thursday Thought, a “chameleonic culture”.

Thanks for Reading

The Winner of “Corporate Explorer” is David E., David I will drop you an email to organise delivery.

We will announce the winner of “Creative Acts for Curious People” by Sarah Stein Greenberg will be announced next week, 10th April 2023

Thanks for all the messages of support for our series on Tushman, O’Reilly and Binns, the 6-part series is now complete and available at the link below, and anywhere you get podcasts.