Strategy Paper: Strategic Change Management
Today, many CEOs face the same problem: They lead their company into a comprehensive transformation, but 80 percent fail due to employee resistance and a lack of competence for the desired change. The reason for this is often an outdated understanding of the function of the human brain. But how can executives of large organizations truly activate their people for their strategic transformation? In its new white paper, Porsche Consulting identifies the "Five Forces of Change" for successfully leading employees through change. The five forces of strategic change management include: leadership, communication, guidelines and policies, new ways of working and competencies of the future. Incorporating new insights from behavioral economics, they make it possible to address people through both instinctive and rational thinking. With the aim of achieving a win-win situation: Improving business goals as well as an increase in employee commitment.
Strategic Change Management
How executives transform large organizations with the five forces of change.
01 | Some 80% of transformations fail—the main reasons: employee resistance (72%) and lack of necessary skills (78%)
02 | Behavioral economics shed light on decades-old shortfalls and drive a fundamental shift from traditional explanatory approaches to intelligent activation
03 | Evidence shows that five forces are key for sustainable behavioral change in large organizations
01 | What is at stake—Strategic transformations at risk
Many CEOs are burdened by a headache: they steer their company towards unprecedented transformations, but their people don’t share their enthusiasm and lack necessary skills. The malaise is widespread—data gathered for the Porsche Consulting Change Management Compass 2020 suggest that two out of three large corporations in Germany have defined ambitious strategies and implementation plans for the next 24 months. Only then can corporations take advantage of all-engulfing megatrends like digitalization and sustainability that disrupt industries and have the potential to reshape the face of entire economies and societies.
All the more worrisome, the success rate of the largest German companies did not live up to their ambitions in recent years, according to numbers from the same survey. Only 20 percent of good ideas make it all the way through a transformation. In other words, 80 percent of strategic initiatives fail! Digging deeper into the issue, thorough analyses reveal the major root cause: a large part of the workforce is either unable or unwilling to cope with necessary changes. three quarters of middle managers and employees actually refuse to change. And even if they wanted to, they lack the relevant skills for bringing new strategies to life.
What is your company’s likely success rate?
Drivers of the need to transform are diverse, ranging from “traditional” themes like process optimization and reorganization to more progressive ones, such as the prospect of productivity gains through new work and agility and metatrends like sustainability and digitalization. No industry is immune from the need to reconsider their strategic outlook, and consequently the necessity to change. The recent Porsche Consulting leadership survey “Change Management Compass” provides insights into the background and practices of strategic transformations and change management at Germany’s 100 largest companies.
While mapping the best course for their company, top-level executives juggle buy-in of key players in the boardroom, seek to maintain loyalty and trust of direct reports, and set out to win over the workers’ council as a cooperative partner, all the while serving as a role model to the entire organization. While forging the future for hundreds of thousands of people, they are expected to master the present by delivering high-quality products and services, improving efficiency and cost structures, ensuring compliance and integrity, and rapidly reacting to changing situations and regulations mandated by the continuing COVID-19 pandemic.
With everything on the line, the need for a waterproof change approach was never greater than today. However, decades-old change management theory—seemingly covering every imaginable aspect—continues to fail corporate leaders in their quest. What exactly is the missing ingredient that brings the “human factor” in line with transformation goals? Which new approach has the power to overcome stalling strategic transformations? These are the questions pondered in many top floor offices every day, as senior executives realize that the future of the company they oversee, as well as their very own professional success, hinges on them. This white paper sets out to identify the missing link so direly needed and gives an outlook to a cure for this headache shared by so many, many top executives.
02 | Why transformations fail— The blind spot of human behavior
Almost everybody agrees on the proverb “Old habits die hard,” and for good reason. Simply optimizing one’s own behavior challenges even individuals with a strong will and advanced self-management mechanisms. The challenge rises significantly when the task is extended to the behavior of other people. It takes a certain talent and many years of experience to build up the people skills and to be effective in motivating and leading those around you to change their mindset and behavior—that, and Nobel Prize-winning learnings from behavioral economics:
The root cause for the alarming failure rate of transformations, despite the extensive business experience and people skills many business leaders undoubtedly have, is a fundamental misunderstanding about the human brain, which leads to the catastrophic success rate of transformation projects. In recent years, however, scientists from the field of behavioral economics have made great strides in better understanding the underlying mechanisms that render even well-planned change projects unsuccessful. According to Nobel laureate Daniel Kahnemann, the gross majority of our behavior, be it in private or in a professional context, is determined by fast, instinctive thinking that evades our conscious reasoning and is instead stimulated by the environment and impressions surrounding us every day.5
People-centricity requires a deep understanding of how humans “tick”
That being said, most change management schemes and interventions take place in the slow-thinking conscious and rational realm of our brain. Telling a sound change story and providing all the necessary information is important, yet falls short of the ultimate task of successfully ingraining the necessary changes in every day behavior patterns.
Long gone are the days in which major transformations took place every five years or so. Then, it was logical to create a “sense of urgency,” a state of unrest to motivate staff for a temporary phase of reorientation and the effort to adopt new ways of working—assuming after that was under everyone’s belt, the new state would be the new normal in which everyone was able to settle into their new comfort zone. This is the world from which today’s most prevalent change approaches stem. However, the ability to constantly meet dynamically changing market demands, take advantage of cataclysmic megatrends that might seem to be at odds with what the company has stood for since, and mitigate risks brought about by unforeseen natural catastrophes—COVID-19 as a case in point—will make or break market leaders in the future. That being said, it would be unwise to keep all employees in a constant state of stress, as this would paralyze the long-term performance and innovative capabilities of a company, bearing significant implications to how change frameworks and content need to be redesigned.
It seems change management itself, as broadly practiced in many companies today, is overdue for a transformation to put the people, their experience and fundamentally the way their brains work at the center of attention and address both their rational thinking as well as their instincts.6
From Explanation to Activation
Context stimuli need to be altered to naturally encourage favorable behavior patterns, with the effect that it is harder to relapse into old habits. A comprehensive approach and interventions activating both parts of the human brain have the power to change mindset and behavior and allow executives to bring strategies and concepts to reality. To master complex strategic transformations means to understand and embrace the fact that individuals and groups change their behavior most effectively if rational and instinctive thinking are in sync.
Thanks to the findings of yet another Nobel laureate, Richard Thaler, and his research partner Cass Sunstein, it became evident that small changes in the environment— nudges—have a significant effect on unconscious thinking and thus human behavior.7 Applied to a transformation, setting the right nudges in daily work life can in fact influence behavior towards the goal of the transformation. Hence, as part of strategic change management, which encompasses reason and instinct, “nudge management” represents a powerful tool to align behavior with the overarching transformation goals.8
Ideally, change interventions and formats should thus leverage this powerful tool to fully activate everyone holding stakes in a transformation, far beyond the five percent that is actually accessible through conscious information processing.
03 | How to get it right—Five forces to activate behavioral change
Once the way how people actually process information and form behavior patterns and habits has sunk in, the next big challenge is to put this knowledge into practice. The goal is to create a change approach that yields tangible and sustainable results, as opposed to traditional schemes with a flat-lining 20 percent success rate that certainly leaves something to be desired. Executives should rely on scientific evidence to steer the social process of transformations, boiling down to five forces based on which any change activity should be designed.
How can executives of large organizations truly activate their people for their strategic transformation?
Easily scalable and infused into all corners of the organization in a pragmatic manner, the following five forces of change serve as powerful levers that guide and activate people in transformations on all levels of consciousness.
Change Force #1: Leadership
Executives must actively animate people to passionately drive the change. Their enthusiasm will serve as a gravitational force for staff across the entire organization to push towards the common goal of the transformation.
To achieve this, executives must provide a sense of direction in the form of vision and mission statements that convey a compelling purpose for the entire organization. In doing so, leaders shouldn’t shy away from pushback, as any transformational endeavor is likely to provoke some sort of countercurrent. Thus, controversial dialogue should be facilitated and embraced, in which the arguments for the transformation can play out and critics can emotionally let go of old ways to mentally vacate themselves for the changes ahead. New social standards then need to improve the traditional corporate culture, which will institute the desired behavior patterns by defining behavioral guidelines, including rewards for compliance and sanctions for disobedience.
With the storm of stimuli engulfing any working person these days, high-level executives need to carefully choose the time and place to convey their message and focus on key moments that leave a mental imprint and maximize the effectiveness. When imprinting on their direct reports, for instance, the quarterly performance review or promotion negotiations would be perfect to weave in one’s intentions regarding the future of the company, and the contribution everyone is expected to make. Given the gravity and relevance of such meetings, the message won’t be lost on the counterparts. Apart from factual incentive schemes, the impact of the conversation will lead them to gear their own efforts towards achieving the goal formulated by their superior, sensing the relevance to their own advancement in the organization.
Another example that encompasses all hierarchy levels and that is already practiced in progressive corporations is a live chat across all hierarchies on internal corporate social media formats, hosted by the respective intranet. Similar to physical town hall meetings that often only leave room for a few select questions, executives engage in an open dialogue and answer any question coming their way. Hierarchies are leveled, the CEO is made accessible to the apprentice and vice versa. The digital nature removes inhibitions to speak up that might be more prominent in a physical setting, and is made available to colleagues all over the world and on their favorite mobile devices wherever they currently go about their tasks.
Leadership role modelling is crucial according to 99%, yet is practiced in just 30% of transformations.
96% agree on the importance of a coherent target image—only 60% actually create one.
Nearly 99% of all leaders see the need to act as a role model through their behavior, yet a mere 21% heed that insight.
Change Force #2: Communication
Communications in a transformation must come from the top. In order to truly activate individuals and teams in their organization, executives need to be an integral part of the communication measures to fascinate all employees for where the company is headed. Only the C-level is able to do this with the same amount of credibility, authority, and weight.
Communication from the top is by no means a one-way street and should feature bidirectional formats. The exchange between leadership and workforce is central to convey transparency, trust, and address possible fears and rumors head-on.
When doing so, executives shouldn’t meander along tiring details but tell it to the point. Also, they would be well advised to generally focus on emotional rhetoric instead of dry facts. Facts do not drive change. People will forget sheer numbers and arguments, but they will always remember how someone made them feel. This narrative needs to be repeated over and over. Research shows that individuals need to hear a message at least ten times before it sinks in. As for the channels, it needs to be critically assessed if old formats—e.g., the good old Outlook newsletter—are the right choice for the audience. Social media-type communication platforms, which many corporate intranets already support, are very likely to create more traction with younger generations who source much of their media use from formats to the effect of Instagram. For that reason, well-established channels should be complemented by 1–2 innovative digital formats that create attention and cater to the media needs of younger generations.
At all times, psychological safety needs to be conveyed as the prerequisite for individuals to be open to changes coming their way, thereby setting aside the decades-old formula “create a sense of urgency.” To put it differently: There is no need to fluster people to “run from danger.” It would serve the purpose better to let them strive for a better future and towards happiness!
Putting the above theory into practice, a tangible measure central to all types of transformations is a coherent key messaging compendium that contains clear, concise, and simple messages. It serves as the blueprint for all communication formats related to the transformation, its messages being repeated in the carefully chosen vocabulary over and over, in existing and new communication channels. Such a document is to be created early on and provided to the internal communications department to be infused in existing channels, as well as talking points for all management levels. The consistent and repeated penetration of the entire organization with clear statements ensures that important messages are absorbed by relevant target groups, leading to better knowledge on and compliance to upcoming changes.
Professional communication is deemed important by 88% of German managers, but only practiced in 30% of the cases.
89% see the need to tailor change measures to their specific corporate culture and context, yet just 21% put it into practice.
Change Force #3: Guidelines and policies
To create the necessary organizational framework for the visionary goal, executives need to adjust the regulatory context so that it encourages favorable new behavior patterns.
In most transformation scenarios this means to enlarge authorities, empowering teams and individuals to make their own informed decisions that serve the overarching transformation goal. To ensure the right amount of guidance nonetheless, rigid rules and the resulting constricting bureaucracy and micromanagement should be replaced by easily relatable joint behavioral guidelines. And, last but not least, the question of any individual boils down to the question of one’s personal benefit. To ensure the organizational reply will motivate employees to support the transformation process, goals and incentives need to be adjusted accordingly. Left untouched, existing financial and social benefits do not necessarily support—and may in fact counteract—the envisioned organizational goal.
A change prevalent in many transformations around the globe today is the desire to create more diverse work teams, taking advantage of greater innovation levels and higher-quality decision-making processes—as also corroborated by the following change force “new ways of working.” However, while many internal stakeholders will agree that this is in fact true, there are often no real incentives to actually create a situation like that. A veritable measure to be taken would thus be an adjusted incentive scheme for both HR business partners as well as department heads and team leads that are based on diversity KPIs of new hires and team compositions. While of course respecting the fact that performance must always represent the key denominator, this additional factor might shift decisions towards greater diversity if several candidates with a similar qualification are considered. At the same time, it would counteract the “mini-me” bias, a scientifically proven phenomenon rooted in the fast-thinking realm of our brain in which decision makers unconsciously favor candidates that are similar to themselves, both in appearance, demeanor, and upbringing.
While 58% agree that guidelines and policies need to be aligned with transformation goals, merely 21% act on that finding.
The need to adjust incentive systems to reflect transformation goals are seen by 58%, but only 10% follow through with it.
GUIDELINES AND POLICIES
Change Force #4: New ways of working
Executives should evolve current modes of collaboration into more agile work methods and design the facilitating physical and digital workspaces accordingly.
Dynamically changing environments—which cause organizations to embark on transformation journeys in the first place —continue to require swift and effective responses to fulfill market and stakeholder demands. Thus, if required by the task at hand, resources should be allocated flexibly, allowing for temporarily staffed teams across departments that address immediate business priorities, and whose diverse perspectives strengthen innovation capabilities and decision quality. Based on the enlarged authorities suggested in the preceding change force, the henceforth more empowered people can choose time, location, and focus of their work more freely—which will lead to greater productivity.
A very vivid example of these new ways of working can be observed in how many corporations are currently completely reinventing their communications departments. Former silo-oriented responsibilities—e.g., based on formats, channels, specific product groups, and departments—are broken up and reassigned to cross-departmental “theme teams.” These task forces, composed of colleagues from different backgrounds, drive, track, and answer for a communication campaign of a certain theme. Depending on the specific nature and aspects comprising it, a person from the most relevant department will take the lead. Example: a new product (department A) embodying the sustainability strategy of the company (department B), to be communicated online (department C) and to be advertised with a focus on sustainability right at the point of sale (department D). While in the past, a theme like that would have been compartmentalized and dealt with in a very fragmented way by the respective silos with their very own interests, the new team composition ensures a comprehensive and effective approach. Strongly theme- and results-oriented, even hierarchies are leveled for these temporary, project-like collaboration units.
The result: end-to-end responsibility, fast and goal-oriented decision-making, and high-quality outcomes. Apart from this specific example, the concept can be transferred to any theme-oriented working group, such as the launch of a new product or the implementation of a new strategy.
As individuals and teams need to abandon long-loved ways of working, however flawed they may be from an outside view, they need to develop and solidify new habits to sustain favorable behavior patterns that, in their entirety, will shape the face of the transformed organization. Additionally, taking into account the new work reality of remote and hybrid collaboration, digital tools need to be leveraged to facilitate new ways of working throughout the entire organization, regardless of where colleagues choose to go about their tasks.
A 60% majority agrees on breaking up hierarchies, but only 8% follow through.
50% regard a modernization of the work environment relevant, yet merely 20% actually change the surrounding.
NEW WAYS OF WORKING
Change Force #5: Future skills
Obviously, the clearest purpose and mission statement, the most innovative collaboration model and work environments are worthless if staff members don’t know how to put it into practice. Will and skill are the foundation upon which every transformation needs to build. Thus, executives must up- and reskill their workforce to build up the required competences.
Technological disruptions, such as the shift from the combustion engine to battery-powered EVs require a fundamental reskilling of the workforce to acquire strategy-relevant competencies. Knowledge that was crucial five years in the past may no longer be of any relevance another five years down the road. Contrary to evolutionary competence-building that many companies have been practicing thus far, skillsets of entire workforces need to change on an unprecedented level. The transition from engineers to software developers many car manufacturers around the world are currently undergoing, may serve as a prime example. Companies need to find a way to identify the relevant competencies and then seamlessly close the skill gap at a large scale, without infringing on legal and labor union-related requirements, or endangering business continuity in everyday operations that still need to run uninterruptedly and flawlessly.
Given the speed at which the environment produces new needs for corporations to meet, re- and upskilling of valuable human capital cannot be left to chance by trusting in external institutions to come up with the right programs and content. Very often, it is unclear what skills exactly are needed in the realities of tomorrow, and what exactly the skill gap is that needs to be addressed. No external party can fathom this faster and better than the affected company itself. And even if they did, knowledge would then be available to competitors as well, making potential competitive advantages obsolete. Thus, contrary to the shortsighted, efficiency-oriented outsourcing of capacity building, proprietary knowledge factories should be established or, if already in existence, assigned greater importance and funding.
On the heels of the newly introduced principles and guidelines, individuals should be allowed to engage in self-directed learning. It is scientifically proven that this approach represents the most effective way to qualify adults, who prefer to choose learning content and formats based on their individual needs rather than “being fed” content nuggets. Thus, employees should be entrusted with shaping their individual learning journeys.
A good example of a constantly available learning environment on the shop floor level is practiced by progressive car manufacturers. Right at the workstations at the assembly line, screens inform about correct ways of handling machinery, tools, and safe movements to ensure product quality and safety for the worker. In contrast to mandatory courses in which employees are periodically indoctrinated, the learning content is available at everyone’s fingertips, at the location and time when it is most relevant, and accessible however often needed – a case in point of putting the people in the center when creating change measures.
The gross majority of 78% of the workforce lack necessary skills to master transformations.
51% regard it as important to promote new people to leading positions, but just 22% actually do it.
A win-win for business and people
These five forces cover all aspects of a transforming company. Naturally, no two transformations are alike. They are determined by the respective industry, corporate culture, and the nature of the transformation, ranging from extensive cultural change to full-scale efficiency programs. Thus, different scenarios require tailored approaches, in which the composition and relative focus on the forces, and the respective interventions and formats, are carefully calibrated. Keeping that in mind, the above framework can be tailored to suit any specific industry, corporate culture and transformation, translating mere theory into tangible and sustainable results. At all times, everything should be based on and continuously verified by relevant measurement and metrics, which assess the status quo, set baseline, and define the target state of change readiness and willingness of all stakeholder groups.
To sum it up, strategic change management represents a powerful framework to master today’s and tomorrow’s transformations, and it goes without saying that the success of a company hinges on its capability to change in the face of ever-changing environments. Companies whose achievements are “vast and in the past” have no guarantee that they will continue to ride their train of success, unless they master the art of transformation, whatever its nature. To enable just that, strategic change management comprises a much broader variety of human behavior, encompassing the unconscious realm of our brain that has been left untapped by traditional change approaches. And, not least, it is based on a more scientific and humanistic image of “the employees.” They are no longer flushed into action by evoking fear of being left behind, but rather shown the vision of a more positive future that they are empowered to contribute to more freely than ever before.
01 | Business success is threatened by stalling transformations – change activities based on scientific evidence are key
02 | Both instinctive and rational thinking need to be addressed to maximize the activation rate of the workforce
03 | The five forces of change need to be optimally composed to align behavior and mindset with transformational goals
04 | Different types of transformations require a specific weighting of those forces within the change architecture
05 | Strategic change management represents a win-win situation in which business goals are achieved and staff on all levels is empowered
(01) Porsche Consulting Change Management Compass 2020, Participants: 90 managers from Germany's largest companies (Statista, 2019)
(02) Porsche Consulting Change Management Compass 2020, Participants: 90 managers from Germany's largest companies (Statista, 2019)
(03) Porsche Consulting Change Management Compass 2020, Participants: 90 managers from Germany's largest companies (Statista, 2019)
(04) Based on Nobel Prize winner Daniel Kahneman; Porsche Consulting
(05) Kahneman, Daniel: Thinking, Fast and Slow (Macmillan, 2011)
(06) Sunstein, Cass: How Change Happens (The MIT Press, 2019)
(07) Thaler, Richard and Sunstein, Cass: Nudge: Improving Decisions about Health, Wealth, and Happiness (Yale University Press, 2008)
(08) Ebert, Philip and Freibichler, Wolfgang: Nudge Management: Applying Behavioural Science To Increase Knowledge Worker Productivity (Journal of Organization Design, 2017)