Chapter 7: The People Side of Strategic Shifts

Overview

Once Commander Jean-Luc Picard decided on a course of action, he simply told his starship crew, “Make it so,” and they did. If only implementation in business were that easy. Clearly it is not, as evidenced by the dismal history of corporate change efforts in both strategy and culture over the last several decades. Michael Beer and Nitin Nohria of Harvard Business School estimated that almost 60 percent of change initiatives fail.^[1] Among mergers and acquisitions the results are equally disappointing.

What is the cause of these failures? Is it poor strategizing on the part of executives? Is it failure to build a suitable financial foundation for change? Do disturbances in the marketplace undermine these corporate efforts from the outside? Are countermoves by competitors the cause? Some strategies are jeopardized by these problems, but more often the source of failure is on the people side of the business. The strategy may have shifted, but most of the management practices are still aligned with the old model, effectively working against leadership’s intent.

Managers complain that employees are unable or unwilling to play along when in fact the employees are responding rationally to practices that are in conflict with the new strategy. It is tempting to characterize employee behavior as resistance to change, but a closer look will show that most organizations have institutionalized practices and incentives that discourage people from moving in the latest strategic direction. These “baked-in” practices and incentives are a valuable asset when they fit the strategy, but they become high hurdles when they are at odds with needed changes.

The frequency of failure in strategic change initiatives has led the Stanford business professor Jeffrey Pfeffer to observe that strategy is less important than the ability to execute. At a time when most consultants and academics were obsessed with creating winning strategies, he wrote, “It is more important to manage your business right than to be in the right business.”^[2] This may sound heretical to a generation of executives raised on the strategy doctrines of Michael Porter and other business gurus, but as Pfeffer put it, “Success comes from successfully implementing strategy, not just from having one. This implementation capability derives in large measure from the organization’s people, how they are treated, their skills and competencies, and their efforts on behalf of the organization.”^[3] Simply put, success in strategic change is accomplished primarily through human capital management. This means that a shift in business strategy must be mirrored by an appropriate shift in a firm’s human capital strategy.

The people part of strategy is not reflected adequately in the literature of corporate strategy. Strategists are concerned primarily with customer segmentation, barriers to entry, cost advantages and disadvantages, product differentiation, government regulations, economies of scope and scale, capital spending, and that old will-o’-the-wisp synergy. Except for an occasional reference to “skill transfers,” people factors largely are ignored. Indeed, human capital has no place in traditional strategy formulation; it is merely an “input” that comes later, in the implementation phase. Traditional economists weaned on “production functions” tended to consider labor a homogeneous input to production, treating an hour of labor as having as much uniqueness as a cubic meter of cement.

Scholars who deal with organizational change, in contrast, recognize the centrality of people. They universally hold that change is bound to fail if people factors are not given their due. John Kotter, for example, emphasizes the importance of creating a sense of urgency among employees, organizing a guiding coalition of key individuals, empowering people and providing them with a vision and strategy, and encouraging organizational learning.^[4] However, although people are at the core of change literature, the importance of having the “right” people and management practices in a change initiative largely are ignored.

Experience indicates that strategic shifts are most likely to succeed when management complements its strategy with people practices that can make the strategy work. Few cases make the point more clearly than the battle for market share in California air travel in 1994.

^[1]Michael Beer and Nitin Nohria, “Cracking the Code of Change,” Harvard Business Review, May–June 2000, 133–141.

^[2]Jeffrey Pfeffer, The Human Equation. Boston: Harvard Business School Press, 1998, xvi.

^[3]Ibid., 17.

^[4]See John Kotter, Leading Change. Boston: Harvard Business School Press, 1996.