The process of transformation: In search of Nirvana

European Managemen~]ournat Vol. 14, No. 6, pp. 529-539, I996

~ Pergamon

80263-2373(96)00050-3

Copyright © 1996 Elsevier Science Ltd Printed in Great Britain. All rights reserved 0263-2373/96 $I7.00 + 0.00

The Process of Transformation: In Search of Nirvana

!

BALA CHAKRAVARTHY, Edson W. Spencer Professor of Technological Leadership, University

of Minnesota

Models of corporate transformation typically distinguish a sequence of three stages: Restructuring, Revitalization, and Renewal. The last one comes closest to corporate Nirvana. However, there are very few examples of firms that have progressed successfully through all three stages. What is important is that the path to corporate Nirvana includes from the start the nurturing of all the organizational behaviors essential to a firm's renewal and revitalization even during the restructuring stage of its transformation. Bala Chakravarthy illustrates from an example of the decade-long transformation of the large European telecommunications equipment manufacturer, Alcatel Standard Electrica SA (ASESA) under the leadership of its new CEO - Miguel Canalejo. Canalejo's approach to managing transformation was different and distinct in three ways: he moderated discipline with fairness, he empathized 'sweet-and-sour' (pleasure and pain) together rather than sequentially, and he involved all the firm's key stakeholders in the transformation process. The ASESA story offers several useful lessons on how corporate transformations can be managed more successfully, including a focus on process, the importance of early vision, modified budgetary control systems, and a balanced approach to leadership. Copyright © 1996 Elsevier Science Ltd

Introduction Intense global competition, fueled by falling trade barriers and accelerating technological innovations, has made it very difficult for firms to maintain their competitive edge. Many of the leading firms, across all three triadic regions of North America, Europe and Japan, are engaged in the painful task of transforming European Management Journal Vo114 No 6 December 1996

themselves. The experiences of firms like GE, IBM, General Motors, ABB, Siemens, NEC, Honda and others, are routinely described in the business press, and form the bases for the many models of corporate transformation that are offered by consultants and academics alike. Transformation is typically viewed in these models as a multistage process (see Figure 1), following a sequence of Restructuring, Revitalization, and Renewal. 1 The first stage of Restructuring, also called the 'awakening'z or 'simplification'3 stage, is especially relevant to under performing firms. The transformation process in these firms often starts with a major downsizing of the organization, pruning of its business portfolio and an overhaul of its structure and management processes. At the end of this stage, the firm reaches a minimum threshold of profitability in-keeping with its peer group. However, this in itself is not enough to restore the firm's competitiveness. In addition, the transformation process must also help redefine the firm's vision, redesign its strategic and competence architectures, rejuvenate the firm's strategies and renew its core competencies.4 The focus in this second stage, Revitalization, is on improving the firm's growth and profitability. The effort may include both in-house attempts at identifying new business opportunities and developing new competencies, as well as acquisitions and strategic alliances that enable the firm to access these opportunities and competencies with the help of others. Current wisdom would suggest that the pain of restructuring is an inevitable precursor to the pleasure of revitalization. This is the 'sour-first-sweet-later' approach to corporate transformation. The third and final stage of the transformation process is Renewal, a stage that comes closest to corporate Nirvana. In this stage, the firm seeks to be continuously engaged in identifying and eliminating waste, building and sharing new capabilities, and rejuvenating its strategies - thus embodying aspects of both restructuring and revitalization at the same time. .52 9

THE PROCESS OF TRANSFORMATION

Threshold

Profitability

~ ] 3. Renewal I

S

Rejuvenating Strategies

Seek~Assemble Opportunities Growth

11. Restructuring I ~l 2. Revitalization

J

b RenewingCore Competencles

Threshold

Grow~Assemble Distinctive Competencies Figure I

A Multistage Model of Corporate Transformation

Popular as this stage model of corporate transformation is, we do not have many shining examples of firms that have progressed successfully through all three stages. Renewal, in particular, is an elusive stage that no company seems to have achieved. In fact, even revitalization has been difficult for many firms. In Kodak, for example, three successive chairmen prior to the current chairman, George Fisher, had all tried in vain to revitalize the company. In the early 1980s, Walter Fallon tried to make this 'elephant' dance, primarily through product and geographic diversification, but to not much avail. When his successor Colby Chandler took over in 1983, Kodak was headed for serious trouble. Its core photographic business was under attack from Fuji and it had to retreat from the instant photography business after losing a patent battle to Polaroid. Chandler trimmed the company's employee strength by nearly 25 per cent and tried unsuccessfully to jump start the company's growth by pursuing broader horizons beyond photography like batteries, electronic publishing, blood analysis tests and optical-disk data-storage. When Chandler stepped down in 1990, Kodak was still seen as a mature, clunky and overweight company. Its next chairman, Kay Whitmore, lopped another 4,500 workers from the company's payroll and sold several businesses. He implemented no fewer than three reorganizations and yet when he handed over the reins of the company to Fisher in 1993, Kodak earned less that year than it had in 1982. While Fisher seems to be off to a good start at Kodak, only time will tell whether Kodak is finally on to revitalization after a decade long struggle with restructuring. The experiences of Kodak are not unique. Witness, for example, the difficulties that IBM, American Express or DEC are experiencing with revitalization after a relatively successful effort at restructuring. 530

Going Beyond Restructuring Why is revitalization so difficult? Perhaps it is because of the inability of CEOs to provide an inspiring vision. This has certainly been one of the reasons advanced for Kodak's past failures. Or maybe because the firm's strategic and competence architectures are either incomplete or flawed. Some have suggested that this is indeed the case at DEC. It is also possible that the firm's 'genetic variety' itself may be severely limiting. The firm may not have the right blend of skills and experiences in its workforce and must seek these from the outside. The acquisition and strategic alliances initiated by IBM and American Express have been viewed in this light. But then even in the exemplar case of GE, where arguably none of these excuses hold, revitalization was stalled for nearly eight years after the impressive early successes with restructuring. GE's front line managers did not feel empowered to engage in the innovations that its charismatic chairman, Jack Welch, demanded of them. Cooperation among its multifarious businesses remained poor. The company had to introduce a series of new initiatives starting with the 'Work Out' program in 1989 and the 'Boundaryless Organization' in 1991 to deal with these issues. One of the primary difficulties with revitalization is that the organizational behaviors that are appropriate to this stage get inadvertently excluded during the restructuring stage. For example, a recent survey suggests that trust is a major victim of corporate restructuring.5 Without trust, empowerment becomes an empty slogan. And yet, in the revitalization stage the firm is expected to rely more on bottom-up entrepreneurship for its European Management JournaIVo114 No 6 December 1996

THE PROCESS OF TRANSFORMATION

business success. Front line managers must feel empowered to initiate strategic decisions, and to take the associated risks. The necessary trust, if lost during restructuring, takes time to reestablish. Tichy and Sherman6 narrate an incident at GE in late 1985. Ten newly hired junior managers were sitting in a Crotonville conference room debating two propositions: 'Jack Welch is the greatest CEO GE ever had' and 'Jack Welch is an asshole'. One wonders what the motivation was for the second proposition? Clearly, the new recruits had no first hand exposure to Jack Welch and yet they seemed more than willing to pass judgment on their CEO. Was this irreverence perhaps an expression of low trust in the organization? If top management uses a heavy hand during the restructuring stage, it does not prepare the organization for subsequent delegation during the revitalization stage. As is true for nation states, 'dictatorship' tends to destroy the seeds that are so essential for transitioning to a 'democracy'. As the firm heads towards renewal, the role of top and middle management becomes increasingly one of providing the organizational context that can encourage entrepreneurship, mutual cooperation and collective learning. 7 Learning is vital to renewing the firm's competencies on a continuous basis. Entrepreneurship helps leverage these competencies profitably and also points to new competencies that have to be grown or acquired. Cooperation is necessary since businesses are unlikely to have all of the competencies required to support their strategies.8 They will have to borrow the rest from both within and outside the firm. Prescriptions abound on what these and other desired behaviors should be for a self-renewing firm, but we have very few pointers on how to nurture them. While management systems, if properly designed,9 can partially help in this regard, the process of transformation itself plays a major role in shaping the behaviors that are so essential to the renewal stage. The sequential 'sour-firstsweet-later' approach to transformation is likely to get stalled after the 'sour' stage because of the inadvertent destruction of behaviors that are required in the later stages. The path to corporate Nirvana begins by nurturing all of the behaviors essential to a firm's renewal and revitalization even during the restructuring stage of its transformation.

A European Classroom This article is based on a study of the decade long transformation of a large European telecommunications equipment manufacturer, Alcatel Standard Electrica SA or (ASESA), under the leadership of its new CEO Miguel Canalejo. The choice of a European firm for this study was deliberate. Its socio-political context sets it apart from a typical US firm. One of the most influential early writers on executive leadership, Chester Bamard, 1° observed that the modem firm is a cooperative system. It requires the sustained contributions of several stakeholders. Their contributions are motivated both European Management JournalVo114 No 6 December 1996

by the tangible and intangible inducements that a firm provides them with for participating in its activities. When a firm is in trouble, it is because it has failed to identify a strategy that can pay the inducements that its stakeholders seek, by leveraging the contributions that they can provide. One obvious way of correcting this imbalance is to reduce the inducements that have to be paid. For the employees of the firm this means downsizing. Despite the social upheaval that this approach can cause, it seems to have been used rather widely in the US but far more sparingly in Europe. Some have argued that this is because European managers are more people oriented and prefer negotiated settlements over their more profit oriented American counterparts. 11 The style differences notwithstanding, it is also clear that powerful labor unions and sympathetic national governments have made it difficult for European firms to engage in efficiency enhancing measures at the cost of their employees and host communities. European managers, like Canalejo, have had to invent an evolutionary approach to corporate transformation that balances more delicately the demands of their firms' multiple stakeholders, albeit at the cost of business performance in the early years. An important consequence of this evolutionary approach is the opportunity that it provides top management to preserve behaviors at each stage of the transformation process as may be needed later.

The Transformation at ASESA ASESA is the Spanish subsidiary of the second largest telecommunications company in the world, Alcatel NV. The firm is the largest supplier of telecommunications switching, transmission and cable products for both public and private networks in Spain. Its turnover in 1994 was over US$I billion. When Canalejo joined ASESA in 1984, the company had lost its undisputed leadership of over five decades in the Spanish market. The decades of the sixties and seventies were the growth years for the company. The whole management thrust was to add employees to ASESA's payroll, and there was even a big celebration in the boardroom with champagne and petit fours when the company hired its employee number 20,000. This reflected a mind-set where being successful meant hiring more people. The company flourished under government protection. By the early eighties, however, ASESA began to face tough competition, especially from Ericsson of Sweden and the Italian company Telettra. ASESA was then the exclusive supplier to the national telephone company, Telef6nica. As of 1984, 73 per cent of ASESA's revenues came from this one single customer. With Spain set to join the European Community, the telecommunications market in Spain was expected to become progressively open to other European and eventually to global competitors. ASESA was at risk by being so heavily reliant on one customer. 531

THE PROCESS OF TRANSFORMATION

After decades of profitable operation, ASESA posted its first loss in I980. Losses persisted year after year until 1984. In addition to this growing competitive threat, technology was another major change force that affected ASESA. The advent of digital technology had revolutionized the telecommunications equipment manufacturing sector. Digital switching rendered nearly 5000 employees (35 per cent of its workforce) redundant at ASESA. Whereas six employees per 1000 access lines were needed to produce the old electro-mechanical switches at ASESA, the manufacture of the new digital switches was estimated to be eight times more productive. The government of Spain encouraged ASESA to begin discussions with its major stakeholders - its then parent ITT, the unions, Telef6nica, and the government, and to draw up a suitable transformation plan. The 'reconversion plan', as it was called, was finally announced through Royal Decree in June 1984. While a government sponsored pact for transforming a company is very European in nature, similar multi party agreements, albeit more limited in scope, are not unusual in the US context. The Chrysler 'bail out' is a good illustration of such a multi party agreement. In the case of ASESA the governmental involvement was limited to: (i) providing an R&D subsidy of 5.4 billion pesetas over a six year period from 1984-89, (ii) providing tax breaks to one of ASESA's subsidiaries, Marconi Espanola - a defense contractor that was eventually divested in I987, and (iii) waiving social security taxes for workers in the temporary layoff program. In exchange the company had to agree that there would be no forced layoffs. The downsizing of the company had to be achieved only through early retirements and voluntary departures. Canalejo was hired in July 1984 to help implement the 're-conversion plan'. He saw the governmental support as a mixed blessing. While the limited tax breaks and R&D subsidy were welcome, the company was severely constrained not only in its restructuring efforts, but also in reframing its business agenda. For example, ASESA could not divest the loss-making Marconi Espanola without prior government approval. On the other hand, he did not see the 're-conversion plan' as a legal contract per se, but rather as a mechanism to revitalize the participation of the firm's stakeholders. When Alcatel NV became ASESA's new owner in 1987, Canalejo renegotiated the 're-conversion plan' with all the relevant stakeholders and extended it through 1991. Under Canalejo's leadership, ASESA's workforce was drastically reduced from a complement of 15,633 employees in 1984 to 7,178 in 1992. More importantly, the workforce was better skilled (31 per cent had high school diplomas in 1992 compared to 11 per cent in 1984). Concurrent with this 'right sizing', the company's sales actually expanded from 53 billion pesetas in 1984 to 143 billion pesetas in 1992. Net income before reconversion costs had grown in the same period from 532

minus 650 million pesetas to plus 13.3 billion pesetas. Employee productivity, as measured by sales per active employee, rose from 3.3 million pesetas in 1984 to 17.3 million pesetas in 1992, finally matching that of other international competitors. The company had also diversified its revenue base. Telef6nica's share of ASESA's revenues dropped to less than half by I994, from a high of 73 per cent in 1984. Intemational revenues represented nearly 40 per cent of the total in I994, growing rapidly from 16 per cent in 1984 . Impressive as these achievements were, other corporate transformations have produced even better financial results. However, what made Canalejo particularly proud of ASESA's restructuring was that it had been achieved without losing the trust or cooperation of any of the firm's key stakeholders. Also, the process had not merely focused on cost reductions, but had actively supported learning and innovation. The company had launched several new businesses during its restructuring. One such, industrial electronics, had developed rapidly to become a competence center for Alcatel world-wide. By nurturing trust, cooperation, learning and innovation through the difficult restructuring stage of the transformation process, Canalejo had increased the odds of a successful revitalization and perhaps even renewal at ASESA.

A Different Approach to Transformation Canalejo's approach to managing transformation (see Figure 2) was distinct in three respects: (I) his moderation of strict discipline with fairness, (2) his emphasis on both the sour and sweet aspects of transformation simultaneously (as opposed to sequentially), and (3) his encouragement to the firm's key stakeholders for their active participation all through the transformation process.

Moderating Discipline with Fairness A useful first step in any transformation process is to instil discipline back in the organization. Discipline is that attribute of an organization's context that induces its members to strive to meet all expectations generated by their explicit or implicit commitments.12 Discipline is enhanced if there are clear standards of performance, there is objective and timely feed back against these, and the rewards and sanctions in an organization are tied closely to over- and under-achievements against standards. As an ITT subsidiary, ASESA had inherited its parent's legendary budgeting system. But the monitoring of budgets was sloppy. As one manager recalled: Any time a manager did not make his numbers, he renegotiated his budget or questioned the assumptions behind it, as opposed to going back and checking how his EuropeanManagementJournalVo114No 6 December 1996

THE PROCESS OF TRANSFORMATION

VISION

!I. • Cooperation

FAIRNESS

VOICE •

Execution

• Learning

DISCIPLINE

Figure 2

Managing the Transformation Process

costs could be reduced. The old culture was not focused on results but on excuses.

One of Canatejo's early initiatives was to reorganize the company into four autonomous operating groups and to create a total of twelve businesses within them. Each business was assigned a clear responsibility for performance. Performance against budgets was monitored monthly and managers were encouraged to highlight problems early. A new management-by-objectives system, the Sistema de Gestibn Professional or SGP, was introduced to assign personal responsibility to individual managers for aspects of business performance. All compensation, either as pay incentives or promotion, were made competitive and tied to results against these objectives. An important consequence of this was that managers at all levels within the company began identifying and surrendering slack resources. Canalejo noted: When you have a huge excess of employees, as we did, the control system breaks down. No matter what the manager does, the business cannot be profitable. We invited our business managers to submit a stretch budget that would show a profit. They very quickly identified large numbers of redundant employees in their businesses - more than what was projected in the 're-conversion plan'. For purposes of internal profit measurement, we did not charge these employees to the business budget. This created a new profit consciousness in the company. The redundancies that were identified also helped convince the unions that we had been inefficient.

The redundant employees were physically relocated to an unused company canteen. The canteen became a European ManagementJournal Vol 14 No 6 December 1996

powerful visual symbol of the problems facing the company. With the company's approval, some of the redundant workers chose to stay at home. Others found creative ways to while away their time. The unions could not complain since the employees were on full wages. However, they did point out that the arrangement was unfair to those employees stuck in the canteen who had further career aspirations. Management agreed to have a planned rotation of employees between the redundant pool in the canteen and the factories. The plan ensured that no employee would be in the redundant pool for more than eighteen months. This sense of fair play was not an isolated incident. ASESA had signed in 1987 a three year wage contract with the unions. The rising prosperity of the Spanish economy in the following two years, bumped up Spanish wages at a considerably higher rate than what the ASESA unions had contractually agreed to. Even though the union leaders had used the best available information at the time of negotiating the contract, they were in a difficult position when subsequent events suggested that they may have been poor bargainers. On a matter of principle, ASESA management refused to renegotiate the wage contract. But instead they invited the unions to support an employee bonus scheme tied to the company's sales exceeding I00 billion pesetas. The company cleared that mark in 1988 and its employees did receive the special bonus. Not only did this gesture enhance the union's trust in management, it also was a first lesson to employees on how company performance would increasingly influence their compensation in the future. It is important to note here that top management was not being particularly generous or kind in its ,533

THE PROCESS OF TRANSFORMATION

gesture. It merely chose not to take full, short-run advantage of an opportunity to gain at the expense of the firm's employees. Trust in an organization is defined as a common belief among its stakeholders that each will behave in accordance with its implicit and explicit commitments, and will not take excessive advantage of the other even when the opportunity presents itself. To build trust, an organization needs discipline. This ensures that the commitments of each stakeholder will be monitored closely. However, it is just as important for trust building if selective modifications are allowed to these commitments. The 'reconversion plan' of 1987 provides a good example of this trust building process at ASESA. Even though the 1987 plan was far more realistic in its goals than the earlier plan of 1984, implementing the plan was nevertheless challenging. The first major challenge was presented by Telef6nica. The company had severely underestimated its requirements from ASESA. There was a huge positive variance in ASESA's sales to Telef6nica compared to what was planned. This created some tensions with the unions. In computing, the likely redundancies in its workforce, ASESA management and its unions had used the more conservative forecast provided by Telef6nica. When orders from Telef6nica started to grow, the unions wanted to renegotiate the planned redundancies. Canalejo did not want the hard task of downsizing to get side tracked by this temporary spurt in orders from Telef6nica. He chose not to renegotiate the number of planned redundancies with the unions. Instead he proposed raising the minimum severance indemnity for voluntary redundancies from 3 million pesetas to 12 million pesetas. This was seen as a fair compromise by the unions. Reflecting on this episode, Canalejo remarked: Every stakeholder is important to the company. Running a company is like balancing a four legged table. The customer, the employees, stockholders and the government are the four legs. You can make the four legs thinner or thicker but never shorter or else the table will lose its stability. We felt that the unions had a right to ask that the planned redundancies be reviewed in light of our new found prosperity. We, on the other hand, wanted to maintain a strict line on employee head counts. Voluntarily raising the minimum severance compensation was a way of communicating to the unions our sensitivity to their issues. We were willing to share some of our gains with them - but without compromising our goal for workforce reduction.

The positive impact of this trust building exercise was evidenced in a number of ways. The labor negotiations with the unions had grown to be amicable. The 1992-93 wage negotiations lasted a mere five minutes. In 1993, Canalejo launched a new program called Cenit (zenith in Spanish) for revitalizing the company. It sought to empower employees at all levels. In order to facilitate this, he sought from the unions the right to offer differential wages to employees based on their contributions to the Cenit program. The unions agreed, 534

an achievement that would have been unthinkable in the 1980s. Employee satisfaction had also climbed despite the downsizing. In a yearly survey conducted by an external consultant, the average index of employee satisfaction had climbed steadily from 5.06 in 1989 to 5.4 in 1994 on a 7 point scale. The increase was statistically significant, though small in absolute terms. But it is useful to remember that the increase was achieved during a period when the employee strength had dropped from I0,216 to under 7,000.

Sour and Sweet Hamel and Prahalad describe the power of vision, or strategic intent as they call it, to drive innovation in the firm by creating a substantial stretch between the aspirations implied by this vision and the firm's own resource base and past momentum. They go on to prescribe three attributes of an ideal vision. It must convey: (i) a sense of direction, (ii) a sense of discovery, and (iii) a sense of destiny. Soon after taking charge of ASESA, Canalejo attempted to provide such a vision for ASESA. It was simple and in many ways obvious. The key elements of the vision were to dominate the Spanish market, to expand international revenues, and to reduce the dependence on Telef6nica through diversification into other businesses, all to be accomplished within five years. In order to fulfil this vision, ASESA would have to improve its productivity to the levels of its global competitors, to install a commercial orientation in its businesses and to build capabilities in new product development. Each of these goals represented a major 'stretch' target for ASESA managers. The company's productivity, at 3.3 million pesetas per employee, was one of the lowest in the industry. Its preoccupation with a single large captive customer gave it no opportunity to develop any commercial skills. The company had very limited presence abroad and no skills in doing international business. Finally, it was a laggard in technology and had not kept up with the new product developments in its industry. The emphasis at ASESA on a corporate vision early in the transformation process is noteworthy. ASESA's poor financial performance and fiat sales qualified it for a major restructuring. The more typical emphasis at this stage is on financial performance. Cost cutting and portfolio trimming are the dominant emphases of top management. In contrast, Canalejo also chose to focus on growth and productivity improvement - performance targets that are typically pursued in the revitalization stage. He reasoned that a single-minded focus on the denominator, i.e. employee strength, to the exclusion of the numerator, i.e. the revenues that could be additionally generated on any given employee strength, was a perverse way of addressing the productivity problem. Moreover, he felt that it was very important to the morale of the workforce that it saw signs of revitalization concurrent with the restructuring of the company. Restructuring would then be seen not as an end in itself, but rather as the flip side of revitalization. EuropeanManagementJournalVo114 No 6 December 1996

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With this in mind, Canalejo created the IPS Operating Group in 1984. As he noted:

manufacturing and delivery of precision electromechanical components.

We created Industrial Products and Services (IPS) because of the need to diversify and because it is essential for ASESA to grow outside telecommunications and electromechanics. Perhaps at a different time and place, this new group would have made no strategic sense at all. But in the mid I980s in Spain it was very important for ASESA to impress the government and the unions that we were not merely downsizing the company but were also very serious about creating new jobs.

Building from this platform, one of the new businesses that lED identified very early on was power electronics. The decision to enter power systems proved to be an excellent one in hindsight. As digital technology began to shrink the size and cost of telecommunications equipment, power systems became an increasingly important cost item - representing roughly five per cent of the equipment costs by I993. lED also invested a billion pesetas in 1992-1993, leveraging all of the knowledge that it had gained through the Teves project, into a new business opportunity for vehicle identification. In April 1993 lED won the award for the most admired company in the electronics industry in Spain. 13 The crowning achievement came when the power electronics business group was designated in 1993 a corporate-wide competence center within Alcatel.

IPS initially went after every sales opportunity, at various times considering such diverse products as an artificial lung, a speaking weighing machine, a pulsemonitoring device for athletes, a system for developing mechanical tooling, etc. In 1986 it was split into an industrial electronics division (lED) and a services division, lED got started with two small contracts: one from Digital Equipment Corporation (DEC), for the assembly and testing of video terminals, and the other a small order from Teves for ABS sub-assemblies. These contracts exposed many of IED's weaknesses: its lack of mass production skills, its inability to do business under intense competitive pressures and to meet high customer expectations on delivery and quality. Learning from the DEC and Teves contracts, IED won other contracts from IBM, Toshiba and ITT. By 1989, IED was providing employment to 638 employees, many of whom had been made redundant by ASESA's restructuring plan. Canalejo's sponsorship of lED was at variance from the 'sour-first-sweet-later' philosophy advocated by the stage models of transformation. Proponents of this philosophy point out that it is important to focus the energies of the organization on cost savings initially. The results are immediate. However, this approach fails to deal with the resulting redundancies in the workforce. IED's ability to absorb ASESA's redundant employees was rather modest, numbering 600 at best. But the psychological impact that it created was quite significant. It represented a 'good faith' effort by top management to create new jobs in the company to replace those lost to technological change and growing competition. Restructuring is helped when there are signs of revitalization. IED had acquired a number of new operations and logistics skills through its work on the DEC and Teves contracts. The division sought to move to its own premises at Villaverde. Canalejo provided the necessary funding and support, partly in appreciation of the division's help in creating new jobs at ASESA. This gave lED managers a chance to institutionalize their learning. They created one of the most modem factories within ASESA. Whereas, the investments in fixed assets were rather modest, the lED factory was distinguished by its superior work practices and positive employee attitude. The independent factory was an important milestone for IED. It established a new competence platform for mass European ManagementJournalVo114No 6 December 1996

The IED success story illustrates two other important dynamics within ASESA. The first relates to the division's origins in Canalejo's vision of diversifying away from the telecommunications sector, but motivated equally by his concern for finding alternative employment for ASESA's redundant employees. While vision alone can spark innovation, when combined with fairness it becomes an even more potent force for nurturing it. The employees of lED saw a grander purpose for their work. Another important dynamic to note is the incremental process of trial and error learning within IED. The division achieved its success through a gradual process of learning one competence after another. What encouraged this learning was a combination of strict discipline (the division was expected to be financially self supporting and it was so a mere two years after its creation) moderated by voice (it had complete autonomy to develop its strategies). The pressure of performance moderated by a sense of ownership seems to have sparked learning.

Voice and Cooperation HirshmanI4 has observed that if the demands of a firm's stakeholders are not satisfied, top management is likely to meet with passive opposition, which under certain circumstances may also become an active challenge to its authority or lead to defections from the organization. He labeled these active responses 'voice' and 'exit' respectively. While a stakeholder's ability to exert pressure may be negligible, either because of inability to put forward active opposition or because of limited exit options, the discontent is merely bottled up - ready to spill at the first available opportunity. By providing the compensating inducement of voice when plans and budgets are formulated, top management can ensure the continued cooperation of the firm's stakeholders. Canalejo learned the hard way this lesson on the importance of providing voice to the firm's stakeholders. 535

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The reconversion plan of 1984 was already in place were given, in the general meeting that followed the survey I when Canalejo took charge of ASESA. He found out presented our budget and showed how much we were going to later that the plan had been hastily put together. Parties spend on ROD, operations, etc., and why we were not to the agreement had made commitments that they spending money on new furniture. Then some guys started could not possibly keep. ASESA's parent ITT, for asking questions about R&D, they asked me a lot about its example, had agreed to transfer 2250 new jobs to Spain usefulness; they reasoned through and convinced themselves from 1984 to 1987. Telef6nica had agreed to increase its that if more money was spent now on R&D, more revenues orders so as to create I000 new jobs at ASESA, in could be earned in the future which could buy new furniture addition to absorbing 900 ASESA employees as the next time, so we waited for another year. maintenance workers to service the equipment that it had already bought from ASESA. With all of these One can distinguish between four types of voice, each promises, the forecasted redundancy at ASESA could eliciting a different level of cooperation. The most have been dealt with through early retirement alone in elementary way of involving stakeholders is by keeping the space of three short years. The reality was that there them informed. Even though decisions are centrally were 2,270 redundant employees made, management makes special efforts still left in 1987, at the end of the to keep stakeholders informed on all iiiiii!i! It is this complan. When Canalejo renegomajor decisions. This is unlikely to tiated the 're-conversion plan' obtain more than acquiescence from bimd iou of voice and in I987, he first made sure that stakeholders and may even be met with the key stakeholders were d sc phne t:k t t A S L A I passive resistance to the extent that the closely involved with each detail decisions affect the interests of stakeattributes to tile of the plan. One of the conholders negatively. The second way in clusions that came out of these which stakeholders may be involved in successful co-opera#bin negotiations was that ASESA the decision-making process is through it subseqmmtJy needed an additional five years two-way communication. In this form, to deal with its redundancies. stakeholders' views are actively sought enjoyed with all its Besides giving each stakeholder and recorded by management. While stakekotder ... a real voice in the decision stakeholders have the opportunity to process, Canalejo ensured that influence the final decision, the there was strict follow-up against all commitments. It is organization does not have any established mechanisms this combination of voice and discipline that the through which such influence can be secured. company attributes to the successful cooperation that it has subsequently enjoyed with all of its stakeholders. The third form of stakeholder involvement is cooption, where the intent is not to share power but to assimilate Voice was an important issue with the firm's internal potential or actual sources of opposition. Cooptive stakeholders as well. In describing his style of leadership, mechanisms do not call into question top-down Canalejo noted: management; rather, they circumstantially release bureaucratic control as a way to deal with a de facto distribution of power that does not match the existing I try to keep in close touch with the representatives of all formal arrangements. Although cooptive tactics may at internal stakeholders. Some are for change. I value their ideas. times elicit active support, acquiescence is the most likely Others are against it. I value their caution. The fine art of outcome. Finally, the fourth form of voice envisages managing any change process is not so much in knowing giving stakeholders the institutional mechanisms where to go, but rather what is the prudent speed to get there. through which they can actually influence the decisionI believe in participation. That does slow things down a bit. making process within the firm. It is this type of voice But whoever said revolutions are the way to go? I believe in that is vital to sustaining cooperative behaviors within evolutionary change. the firm. Canalejo's strong belief in participative management began to find broad acceptance within ASESA. For The special efforts that ASESA's top management took to encourage full participation by the company's example, ASESA's vice president in charge of employee relations had daily breakfast meetings with representastakeholders, especially its employees, helped nurture a tives from the unions to deal quickly with any cooperative relationship with each of them. Each stakeholder had the right, under the 're-conversion plan', misunderstanding, and to seek their help in resolving to file grievances against ASESA management with a difficult problems. The general manager of one of the divisions tells a further story: specially appointed Commission. The Commission was required under the plan to report all non-performance to the government, and to offer whatever corrective actions Our workers know the division's strategic plan because I tell were appropriate. The Commission did not receive any them everything. Once a year we all go to a hotel for a day to discuss strategy and everybody, and I do mean everybody, is complaints about ASESA after 1987, despite the involved in the discussions. When a survey carried out by company's continued failure to meet some of the external consultants showed that one of the things our people conditions under the plan. True cooperation had made resented mosL was the poor quality of the furniture that they contractual obligations superfluous. 536

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Managing Corporate Transformation The ASESA story, despite its very particular setting, offers a number of useful lessons on how corporate transformation can be managed more successfully.

A Process Focus Corporate transformation should not be reduced to the achievement of a sequence of business outcomes: financial solvency, profitability, growth, etc. These are important milestones. Focusing on them can enhance the discipline within the organization. However, as Figure 2 illustrates, a single-minded focus on outcomes to the exclusion of the process through which these are achieved will stall the transformation process. David Johnson, the CEO credited with turning Campbell Soup around, states emphatically that when a company is fighting for its life there is no room for niceties like a vision statement or guiding principles that folks carry around on little cards. If you don't win in the short run you are dead. He coined the 20--20--20 business vision, which his managers understood clearly as a shorthand for earnings, returns, and cash. Managing towards financial outcomes is an important part of corporate transformation. But as Johnson observes there is no reason to presume that this can only be the concern of top management. Every stakeholder is interested in the same outcome and given the opportunity can make a valuable contribution. In fact, providing internal stakeholders with a voice in the transformation process not only mobilizes their creative energies, it leaves a lasting legacy of cooperation that can come in handy when the firm wants to move past restructuring to revitalization.

The Importance of an Early Vision Corporate transformation is not about various types of engineering alone. While financial engineering, portfolio restructuring, and business process reengineering are all much needed and helpful, it is important that vital human behaviors like trust, cooperation, learning and innovation are not destroyed in the process. It is not uncommon to assume that a firm in need of transformation cannot be rich in these behaviors. Indeed this may be the case in some firms. However, as the ASESA example suggests it is equally likely that these behaviors are not lacking in any way but merely misdirected within the firm. A simple vision statement, provided early in the transformation process acts as a magnet for reorienting these behaviors. Stanley Gault of Goodyear Tire & Rubber is another CEO who is credited with a major turn around. Like Johnson, he actively encouraged employee participation in the firm's transformation process, going so far as to call them 'associates' to recognize their partnership role within the firm. Unlike Johnson, however, Gault found it European Management JournalVo114 No 6 December 1996

useful to announce very early in his tenure 'The 12 Objectives for Managing Goodyear Successfully in the '90s'. As in the case of ASESA, these were not grandiose statements of vision crafted by an outside advertising agency but rather common sense items like assuming leadership in quality, costs, customer service and innovation. It reminded the firm's associates that while financial results may be paramount in the short run, they must try to achieve these without hurting the firm's long term competitiveness.

Discipline has many Shades In marketing and high technology companies, in particular, product innovation is a key to competitive success and core competencies take time to be established. The sequential approach to restructuring first and then revitalization makes no sense in these settings. Both have to be pursued simultaneously. Investments in marketing and technology have to be made continuously, albeit on a more selective basis. However, the simultaneous pursuit of restructuring and revitalization initiatives can create problems of control for the firm The latter initiative, for example, can be used as an excuse to pad budgets within the firm thus taking a bite out of the former. The 'sour-first-sweet-later' approach to transformation is designed explicitly to avoid this problem. But as was shown earlier, this may not be a valid approach in many industry contexts. An alternative approach is to modify the budgetary control system used by the firm. ASESA addressed this problem by setting explicit revenue enhancement and cost cutting objectives for its managers through the firm's MBO system and monitored these individually tailored objectives for compliance. In general, it is a good idea to separate a firm's budget into two parts: one focused on current operations and the other on future strategy initiatives. These are called the operating and strategic budgets respectively. A manager focused primarily on restructuring may have only an operating budget, whereas a manager focused solely on revitalization would have only a strategic budget. The hope is that most managers would have both budgets, even though the emphasis on each would vary among the managers. The monitoring of the two budgets would also have to be distinct, the operating budget being monitored for compliance with targeted outcomes whereas the strategic budget being monitored more for the quality of the effort expended and the intermediate milestones that are reached.

Fairness is not a Sign of Weakness Despite its many advantages, a dual budgetary control system is not widely used in corporate transformations. The primary reason is that it takes time to establish such a system. An alternative approach would be for leaders to 537

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exercise their judgment and condone non-performance against the budget when the situation so warrants. The story is told of one of the heroes in GE's transformation, a manager by the name of Carl Schlemmer who headed its transportation systems business. When his $300 million investment on a new locomotive model went awry, Jack Welch - GE's tough CEO - was expected to fire him. Instead, W elch noted: 15

successfully through restructuring, but would leave it unprepared for revitalization. The firm needs in addition the moderating influence of fairness. Also, without voice discipline alone cannot nurture cooperation in the firm. Whereas vision is a prerequisite for revitalization, without voice and fairness it cannot encourage the trials (and errors) that are so crucial to learning and innovation.

The leadership in our transportation business did a terrific job. They had a vision, and then the vision fell apart in the recession. The world had changed. They went through hell. But this team said, 'Hey, we called it wrong'. We didn't have to change anyone - they had the self-confidence to change by themselves.

A quick scan of the business press does not readily yield examples of such a balanced approach to leadership. Obviously, this does not mean such a balance is non existent, only it is not reported. Nevertheless, there may be an opportunity here for North American general managers to learn from their European counterparts and vice-versa. Vision and discipline have to be complemented by fairness and voice to take the company beyond restructuring.

Moderating strict discipline with fairness, whether it be towards a senior manager like Schlemmer or any of the other stakeholders of the firm is an important attribute for leading a successful transformation.

Notes

The Duality in Leadership The ASESA story also raises an interesting question about the kind of leader who is required to manage a successful corporate transformation. The business press tends to hype the macho characteristics of such a leader. There is a grudging admiration for the 'Neutron Jacks' of the corporate community. Clearly the ability to instil discipline in an organization is a very desired characteristic in a CEO leading a corporate transformation effort. The other heroes of corporate transformation are the great visionaries, who can define a firm's strategic intent unerringly. Unfortunately, their numbers are dwindling given the turbulent environment that confronts many of our large corporations. Beyond the tired examples of NEC's computers and communications vision or the more cute H P = M C z, describing HP's vision of integrating computers, communications and medical instrumentation, we do not read much about corporate transformations being led by the visionary genius at the top. But this does not mean that this characteristic in a leader is not idolized. CEOs like Jack Welch are touted as the simultaneous embodiment of a strict disciplinarian and a brilliant visionary. In terms of the model shown in Figure 2, the emphasis on leadership characteristics seems to be mostly along the north-south dimension. In contrast, Canalejo's leadership style also emphasized the east-west dimensions in Figure 2. These are alluded to as the more 'female' characteristics of leadership. Distinct from the 'male' emphasis on outcomes, the 'female' emphasis is more on the process. If the northsouth dimension addresses the what (vision), who and when (discipline) questions; the east-west dimension focuses more on the how (fairness) and why (voice) questions. The ASESA story suggests that both of these dimensions are necessary for a successful transformation. A predominant focus on discipline can take the firm 53 8

1. James Kelly and Francis Gouillart, Transforming the Organization, McGraw Hill, I995, suggest a fourth R: Reffaming. The description of Restructuring used here includes reffamin8. 2. Noel Tichy and Stratford Sherman Control your Destiny or Someone else Will, Currency Doubleday, 1993 describe GE's transformation in three acts, the first of which they call 'Awakening.' The other two acts are: 'Creating a Vision' and 'Making Revolution a Way of Life'. 3. Charles Baden-Fuller and John Stopford Rejuvenating the Mature Business, Harvard Business School Press, 1994, their detailed study of corporate transformationsin the UK offer a four stage model. However, the first of these has to flo with galvanizing the top management team. The other three stages are: Simplifythe task, Buildmultiple capabilities and Leverage. 4. This is as described by Gary Hamel and C.K. Prahalad in their book, Competing for the Future, Harvard Business School Press, 1994. 5. Richard Freeman and J o e l Rogers, 'Workplace Representation and Participation survey', Princeton Survey Research Associates, 1994. 6. Noel Tichy and Stratford Sherman, Control your Destiny or Someone else Will Currency Doubleday, I993, p.3. 7. See Sumantra Ghoshal and Christopher A. Bartlett, Linking Organizational Context and Managerial Action: The Dimensions of Quality of Management, Strategic Management Journal 15, 1994. 8. See J.B. Quinn, Intelligent Enterprise, The Free Press, 1992. 9. See Bala Chakravarthy and Peter Lorange, Managing the Strategy Process,Prentice-Hall, 1991 for a fuller discussionon how the management processes have to be tailor made. 10. Chester Barnard, The Functions of the Executive. Harvard University Press, 1938. I1. See R. Calori and P. De Woof, A European Management Model Prentice-Hall, 1994. 12. See Sumantra Ghoshal and Christopher A. Bartlett, Linking Organizational Context and Managerial Action: The Dimensions of Quality of Management, Strategic Management Journal, 15, 1994. 13. Awardgiven by the Spanish magazineActualidad Econbmica. The award was the result of a survey carried out among different companies in different sectors and took into account things like customer satisfaction,R&D investment, product quality, etc. European ManagementJournaIVo114 No 6 December 1996

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14. A.O. Hirshman, Exit, Voiceand Loyalty. Responsesto Decline in Firms, Organizations and States, Harvard University Press, 1970. 15. In Noel Tichy and Stratford Sherman, Controlyour Destiny or Someone else Will, Currency Doubleday, 1993, p. 98.

BALA CHAKRAVARTHY, Curtis L. Carlson School of ManagemenL 835 Management and Economics Building, University of Minnesota, 271 I9th Avenue South, Minneapolis, Minnesota 55455, USA.

Professor Bala Chakravarthy holds the Spencer Chair in Technological Leadership and directs the Strategic Management Research Center at the Carlson School of Management, University of Minnesota, Minneapolis. His current research interests are in three related areas: corporate transformation, management of competencies, and the evolving roles of senior managers in MNCs. Dr Chakravarthy has also taught at the Wharton School and more recently at INSEAD, where he directed its corporate renewal initiative (CORE) from I993-94. The research for this article was supported by the CORE initiative.

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