6.

5: Strategic change

BB835   The dynamics of strategy

6.5: Strategic change

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6.5: Strategic change

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6.5: Strategic change
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2.1

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Contents
 Introduction
 The need for change
 Stop and think
 Perspectives on how change happens
 The planned perspective
 The incremental perspective
 The punctuated equilibrium model of change
 Activity 5.1
 Change roles
 Stop and think
 Designing change
 Inhibiting strategic change
 Stop and think
 Summary
 Glossary
 References

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Introduction
Previous: 6.4: Culture and strategy.

Making strategy happen implies change as organisations move from an existing state
to a new one. This occurs irrespective of whether that transformation results from the
ordered implementation of a formal strategy, or emerges from the messy activities of
people as they create their strategies informally. The sustainability of an
organisation’s competitive advantage is based on its ability to review, redirect and
renew strategy as contexts change. Managing strategic change, therefore, consists of
‘managing changes which specific strategies give rise to and imply’ (Whipp, 2003, p.
241).

In this session, we shall discuss how the need for strategic change is realised, how it is
conceptualised, what the different views say about change and how that affects our
thinking around strategic change. Through this, you will become better informed
about how strategic change occurs and better able to discern different forms of
change.

The content of change (what is actually changed) and the process (the way change is
implemented) are both influenced by internal as well as external contexts of change.
Managing change therefore requires sensitivity towards the specifics of the situation
faced, an appreciation of the contexts, and an understanding of how these may
interact. As Balogun and Hope Hailey (2008, p. 2) note, ‘successful change requires
the development of a context-sensitive approach. There are no formulae or ready-
made prescriptions that can be rolled out’. Rather than hoping to apply a simple step-
by-step framework, managers embarking on strategic change would do better to
recognise that every circumstance will be different, carefully evaluate internal and
external environments, consider what they mean by change, and ensure the types of
changes they pursue are appropriate to their contexts.

The need for change

Historical studies of organisations that have failed to respond to the need for strategic
change have highlighted how organisations become ‘blind’ to the need for change.
One framework that has been offered as an explanation of this is the idea of
strategic drift (Johnson et al., 2008, pp. 179–84), which is shown in Figure 5.1.
Strategic drift explains the tendency for strategies to develop incrementally as a result
of historical and cultural influences, but fail to keep pace with a changing
environment. This results in the organisation’s strategy having ‘drifted’ away from a
neat fit with its external environment. So, while originally the organisation may have
had a strategy that effectively incorporated its external environment’s characteristics,
over time the two have drifted apart.

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6.5: Strategic change
Johnson et al.’s idea of strategic drift is a dynamic model of strategy that is, it
recognises that strategies evolve over time, as do environments. This is in contrast to
most strategy models, which tend to be fixed snapshots in time. While we shall
concentrate on the notion of strategic drift in this session it is important to remember
there are others ways of assessing an organisation’s ‘fit’ with its environment. The
scenario planning approach that you explored during the residential school is another
way of doing this.

Figure 5.1 Strategic drift (Johnson et al 2008, p. 180)

View description - Figure 5.1 Strategic drift (Johnson et al 2008, p.

180)

It is important to remember that most cases of strategic drift happen not because of
dramatic environmental changes, but as a result of gradual changes over a period of
time, usually years, that have gone unnoticed by the organisation. This is why
Johnson et al. use the term ‘drift’ – to denote a gradual separation of the organisation
from its environment. Strategic drift, phase 2 in Figure 5.1, can occur for at least five
main reasons:

 The problem of hindsight – managers may be understandably

wary of changing what has been a winning strategy on the basis of
what might be only a fad or a temporary downturn in demand.
Significant changes in the environment are often hard to detect as
they are happening and may only be truly understood retrospectively.
 Building on the familiar – when managers encounter complex
and confusing signals from the external environment, the temptation
is to ignore them in favour of concentrating on change signals that are
familiar and therefore understandable in the dominant managerial
worldview.
 Core rigidities – as you have learned in Unit 3, capabilities that
helped to ensure an organisation’s success can become core rigidities
if they no longer deliver success. The taken-for-granted way of doing

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6.5: Strategic change
things may inhibit an organisation as its external environment
evolves.
 Relationships restrain strategic thinking – long-term
relationships with customers, suppliers and stakeholders are needed
for an organisation to perform effectively, but can also prove barriers
to making fundamental changes to strategy that will affect accepted
ways of working. For example, new products or services may require
working with a different set of suppliers rather than the traditional
ones.
 Lagged performance effects – during the early stages of drift,
financial performance may continue to hold up. Loyal customers may
continue to purchase from an organisation because the cost of
transferring to another supplier may be too great. However, the
‘costs’ of staying with the supplier may become too much and
customers may eventually shift their business to the new supplier.

The dangerous time for an organisation occurs in phase 3 in Figure 5.1, when a period
of flux is triggered by one or more of the five reasons above. Strategies may change
but with no very clear direction. There may be senior management changes; internal
rivalries and power games may occur; senior managers may have simply become over
focused on operational matters and have neglected strategy; or there may be
boardroom discontent. All this may result in further deterioration of confidence in the
organisation – perhaps a further drop in performance or share price, a difficulty in
recruiting high-quality management, or a further loss of customers’ loyalty.

As things get worse, organisations can find themselves in phase 4. The likely outcome
will be one of three possibilities:

 the organisation may die and cease to function as an organisational

entity
 it may get taken over by another organisation
 it may go through a period of transformational change.

Such change can take one of two forms. It can consist of a small number of major
changes, for example when a car manufacturer moves into a new market sector such
as the hybrid fuel vehicle market. Or it can consist of a huge number of smaller
changes aimed at returning the organisation to a greater fit with its environment – in
short, re-establishing strategy and external environment alignment. In both
approaches, transformational change is not easy. In the rest of this session we look at
how organisations may accomplish strategic change.

Stop and think

Can you think of any organisation you are familiar with that may have suffered from
strategic drift? It is likely that such an organisation will have been well established
with a good reputation, but that over time it began to suffer and perform less well. It

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6.5: Strategic change
may have made efforts to address this and have experienced transformational change,
or it may have been taken over, or died and no longer exists.

Perspectives on how change happens

As we have said many times already, there is no single right answer in strategy.
Therefore in this section we shall first look at two perspectives on how change
happens – planned and incremental change – and then introduce a third perspective
that seeks to combine elements of both.

The planned perspective

You encountered the planning school of strategy in Unit 1 which suggested that
strategy is created out of careful, objective analysis and planning by senior managers.
The planned perspective of change largely adopts this view. It implies that top
managers have systematically examined the organisation’s strategic position and
deliberately formulated a new strategy that requires it and its members to operate
differently in some way. The key point about the planned perspective is that the
changes necessary to implement change are specified beforehand. Strategic control
mechanisms, such as those you encountered in Section 6.3, are instigated to ensure
that such changes take place.

An example of planned change is a decision to modify an existing product line to

meet an immediate competitive need; this would require relatively minor changes to
the organisation and would remain well within the familiar boundaries of its
operation. Alternatively, an elaborate planned change in strategic direction (e.g.,
launching totally new product lines to enter new markets) could have profound
implications for structure, internal systems and cross-cultural working in the
organisation.

The problem with this view is that it ignores much of the messiness involved in
successful strategy implementation. Among other things, it fails to take account of the
human aspects of strategy work, the social aspects of dealing with people internally
and externally, the cultural and cross-cultural relations through which work flows, and
the unpredictable nature of work in general. Analytical and planned approaches to
change are useful first-stage thinking frameworks for conceiving change and its
consequences at an abstracted, broad, macro-level, but they fail to address the in-
depth, micro problems (e.g., middle manager resistance) that are present in any
process of significant organisational change.

The incremental perspective

A second view on the nature of change can be seen, to some extent, as a reaction to
the planned view and can be explained by referring to the rationale of logical
incrementalism. The incremental perspective has clear parallels with the emergent
view of strategy that you met in Unit 1. It questions the view that fundamental shifts

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6.5: Strategic change
in strategic direction, the kind we most often think of when considering strategic
change, are common in organisations and argues that in fact they are comparatively
rare. More common is incremental change in which related strategic decisions emerge
in small stages and build on one another. Strategy is made to happen through many
small decisions and actions that often can be made sense of only in retrospect, when
we look back to understand what happened.

This approach conceptualises strategic change as a negotiated process. It is

characterised by overlapping series of decisions, compromises and adjustments
between people at all levels of the organisation. Such processes constitute the
discourse of strategy and are unique to each organisation. They are influenced by
organisational histories and shaped by the specific contexts in which they take place.

The drawback of incremental change is that this type of activity can become an
expression of managerial consensus, and reflect the dominant and accepted strategy
discourse, which can be constraining rather than productive. Therefore, the strategic
activity produced by this kind of change can blind the organisation to potential
opportunities and possible new threats. Strategic inertia traps organisations in a
dominant discourse that allows no room for constructive questioning and can lead to
the type of strategic drift we discussed earlier in this session. You will see in Session
6.6 how senior managers and middle managers working together in trusting
relationships can help to reduce the chances of this happening.

The punctuated equilibrium model of change

The punctuated equilibrium model of change (Romanelli and Tushman, 1994) seeks
to combine elements of both the planned and the incremental perspectives. It regards
change as a two-speed process. Organisations take small steps of incremental change
when they are experiencing relative stability. But these periods of equilibrium are
punctuated at critical moments by revolutionary change – which affects structure,
internal systems and cross-cultural working, as new ways of working are introduced.

The punctuated equilibrium model is most useful for explaining change when
organisations are located in environments that are generally stable, but then encounter
radical upheaval, which provokes revolutionary strategic activity.

Activity 5.1
Timing: Allow 30 minutes for this activity.

Purpose: To understand how a major company embarked on a strategic change

process.

Task: To identify how Fiat has changed

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6.5: Strategic change
Read through this brief extract and identify how Fiat changed over the period 2004–
2006. Relate this to the different perspectives of change you have been introduced to
and identify which you feel was the dominant mode of change experienced by Fiat.

Change paths: transforming Fiat

Sergio Marchionne took over as Fiat’s chief executive in June 2004 (the fifth chief
executive in three years). The Fiat Group had underperformed in the industry since
1997, and in 2003, Fiat was losing the equivalent of £1 million a day.

Marchionne put in place a turnaround that involved selling non-core assets (such as
the finance operations and the insurer, Toro Assicurazioni), cutting costs, paying off
debt, and finding partners (such as Tata Motors) to help invest in products. The
turnaround also involved the resolution of a dispute with former partner General
Motors that netted Fiat £2 billion in February 2005.

As part of the cost cutting, factories were closed and senior managers were made
redundant. A total of 210 managers lost their jobs, 30 per cent of the executive core.
This move saved £86 million and the 300-person team overseeing cars, agricultural
equipment and trucks was demolished. In all, by 2006, more than 12,000 jobs, mainly
at Fiat Auto, had gone. Marchionne also fired the head of Fiat’s auto unit in February
2005, taking the job himself and subsequently taking out most of the managers below
him. Stopping the rot in the auto business was Marchionne’s biggest challenge, since
it had lost money for three years in a row by 2005. To complete the turnaround, many
new and redesigned car models have been introduced. Future plans place the success
of the turnaround on the new and redesigned Bravo and Punto.

The turnaround was based on a culture change at Fiat. At the beginning of 2005
Marchionne said ‘a profound cultural transformation is underway following a
management reorganisation that has delivered a more agile & efficient structure’.
Poor performing executives used to be sent to work in more remote places rather than
being sacked, and heavy central control from the HQ in Turin limited local initiative.
There was a traditional command-and-control structure. Marchionne has brought in a
tougher Anglo-American approach. The company now has leaner and flatter
structures. Most top executives have been replaced and younger managers have been
promoted. By 2006 the auto business had just 27 leaders, many below the age of 40.
Marchionne has also brought in outsiders. He has aimed to introduce more freedom
but also more responsibility.

By the end of 2006, not only had the steeply vertical management approach gone, so
had other aspects of the culture. Executives no longer booked meetings via secretaries
rather than walking to a fellow manager’s office close by. Tie wearing is now
optional. Marchionne himself wears pullovers instead of suits and has introduced his
own touches such as playing Bach as a background track in lengthy brainstorming
sessions. He holds management meetings on Saturdays and Sundays.

(Balogun and Hope Hailey, 2008, p. 30)

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6.5: Strategic change
View feedback - Task: To identify how Fiat has changed

Change roles
For change to take hold and succeed, someone, or a small group of people, has to be
responsible for leading that change. This is where the idea of a change agent arises.
Change agents have traditionally been seen as individuals, usually the CEO, the MD
or another senior manager who is a charismatic and heroic figure. However, as change
is being increasingly recognised as complex and requiring consideration and the
management of many different tasks, the idea of the single lone figure leading change
is being challenged. (The Fiat example seems to run counter to this argument, as it
concentrates on Marchionne as leading the turnaround. The business press, including
books by academics, still seems fixated on stories of the lone hero turning around an
organisation seemingly single –handedly. In practice, it takes many people
undertaking many acts to effect a sustainable ‘turnaround’.)

One individual could not hope to manage a major change effort entirely on their own.
A change agent needs to have the support of additional change agents if change is to
hold. This is not to say that the role of leadership has been trivialised in any way.
Major change efforts in particular are likely to require a champion who shows
tremendous commitment to, and enthusiasm for, the vision they want to see
implemented in the organisation. Coalition building to support change efforts is
frequently carried out – possibly bringing in middle managers to replace senior
management blockers. Similarly, while leadership and championing activities are
generally associated with senior managers, it is also possible for middle managers to
perform these tasks and take on a leadership role, as you will see in Session 6.6.

Change can be managed in a number of different ways. They are not mutually
exclusive and there are pros and cons for each. The primary change agent roles are:

 Leadership – the success of the change programme is based on a

key, pivotal figure. The ‘leader’ is usually a senior manager but, as
already mentioned in this section, not necessarily so. If the person
who is championing change is not the CEO or the MD, then they may
well need to gain the support of more powerful individuals in the
organisation. This often involves selling the change to the senior
management team. In geographically disperse organisations like
multinational corporations, a number of individuals may fulfil the
leadership role and they may come from different hierarchical layers
in the organisation. In such cases, there may be one overall leader
such as the chief executive, with local leaders or change champions in
each organisational division or department.
 External facilitation – external consultants may be appointed to
manage change and may play a pivotal role in the change process.
This may be in the form of advice, training in change management, or
more active participation. In Session 6.6 we shall look at how

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consultants work with clients and what the current debates in this area
are.
 Change action team – a team of people within the organisation
may be appointed to lead the changes and this may be in the form of a
steering committee. If this team does not consist of senior and
influential people, it is likely to need the support of a more powerful
individual or group of individuals in major change efforts.
 Functional delegation – change responsibility may be assigned to
a particular function such as human resources or operations
management. Some organisations even appoint a new senior manager
to lead a particular change initiative, for example when entering a
new geographic area. This may be appropriate when the organisation
does not feel it has adequate knowledge of the area within its current
managerial group.

Transition management is a time-consuming activity, and a trade-off may be

necessary between the amount of time managers need to devote to keeping the
business going, and the amount of time they have to act as a change resource. For
example, an organisation’s MD may decide to lead the change, supported by a change
team of other senior managers, but may also appoint external consultants to provide
advice and assistance, plus additional resources when needed.

Stop and think

Have you experienced any form of strategic change? If so, what was your experience
of it? Did it match the kinds of changes described here or was it different? Who led
the change and what other roles were crucial in its successful achievement? If you
have not directly experienced any strategic change (which would be surprising), think
of an organisation you are familiar with and consider what change happened there and
who was involved.

Designing change
Balogun and Hope Hailey (2008) suggest six main design choices that a change agent
needs to examine and they advise that all these choices need consideration in the
context of the change in order to avoid the application of simplistic change recipes.

Within each of the choices there are a number of options, and this creates a wide
variety of permutations. The design choices are summarised below:

1. The change path may involve more than one type of change: for
example an enabling phase of adaptation or reconstruction, followed
by evolution or revolution.
2. The change starting-point options include not just top-down or
bottom-up change, but also some combination of the two or pockets

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6.5: Strategic change
of good practice. These choices can be exercised throughout the
whole organisation or in pilot sites.
3. The change style may vary from highly collaborative to coercive,
and is not necessarily dictated by the change starting point. Top-down
change, for example, can still be collaborative. The change style may
also vary by staff level or occupational groupings.
4. The target of change interventions may be attitudes and
values, behaviours or outputs. However, outputs are normally used to
indirectly achieve behaviour change, and behaviour change may be
used to effect value change.
5. The range of levers is affected by the choice of change target, but
may be influenced by other choices such as change style. The range
of levers and interventions that can be used includes not just harder
technical and political interventions such as structure and systems, but
also softer cultural interventions such as symbols and routines, and
interpersonal interventions to do with communication, education and
training.
6. The change roles are often some combination of leadership,
functional delegation, the use of external consultants and change
action teams.

Inhibiting strategic change

Successful strategic change is not easy and any organisation about to undertake a
period of strategic change should be aware of the potential pitfalls. Johnson et al.
(2008, p. 546) offer five lessons learned from organisations where change did not take
hold:

1. Programme overload – change agents may recognise that change

is not a one-off process but it might require an ongoing series of
initiatives, maybe over years. However, the risk is that these
initiatives are seen by others as ‘change rituals’, signifying very little.
There is also the risk that the original intention of the change
programme becomes eroded by other events taking place, for example
a redundancy programme.
2. Hijacked processes – well-meaning change efforts can be
hijacked by others for different purposes. For example, in an
insurance firm, the introduction of computerised telephone systems to
improve customer service became a vehicle for reducing the number
of personnel dealing with customer enquiries. The result was no
improvement in service and a workforce highly sceptical about future
change initiatives.
3. Reinvention – here the attempted change becomes reinterpreted
according to the old culture. For example, an engineering company’s
intended strategy of adding value for customers was interpreted by
the engineers in the firm as providing high levels of technical
specification.

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6.5: Strategic change
4. Disconnectedness – people affected by change may see the
change programme as being divorced from reality. They may believe
that senior executives, as proponents of the change, do not understand
the realities of change on the ground. Or perhaps they see new
systems and initiatives as out of line with the intentions of the change.
5. Behavioural compliance – there is the danger that people appear
to comply with the changes being pursued in the change programme
without actually buying into them. Change agents may think they see
change occurring, when all they see is superficial compliance.

Stop and think

Can you think of any occasion when you or your department contributed to inhibiting
change? Do any of the change inhibitors outlined above explain your actions? What
might have been done to overcome the resistance you witnessed?

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Summary
In this session we have looked at strategic change. Throughout the unit we have
emphasised that environments are dynamic and that organisations whether public or
private are operating in times of perpetual change. However, some managers seem
blind to change and this leads their organisations to suffer from strategic drift. When
strategic drift occurs, transformational change is required to realign an organisation
with its external environment. Change happens in either a planned or an incremental
way, and when both of these occur the punctuated equilibrium model of change helps
explain how change unfolds. We considered typical change roles, how organisations
may design for change, and some of the issues that inhibit strategic change.

The idea of strategic change takes our investigation of how organisations make
strategy happen to the strategist. We have integrated people into our discussion as
much as possible up to this point, but in the next session we move them to centre
stage and begin our discussion of strategists.

When you are ready, please move on to 6.6: Strategists.

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6.5: Strategic change

Glossary
Change agent
Someone heavily involved in the change process.
Logical incrementalism
Combination of a logical scientific approach with an emergent one.

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References
Balogun, J. and Hope Hailey, V. (2008) Exploring Strategic Change,(3rd edn)
Harlow, Prentice Hall.

Johnson, G., Scholes, K. and Whittington, R. (2008) Exploring Corporate

Strategy (8th edn) Harlow, Prentice Hall.

Romanelli, E. and Tushman, M. (1994) ‘Organizational transformation as punctuated

equilibrium: an empirical test’, Academy of Management Journal, vol.37, no.
5, pp. 1141–66.

Whipp, R. (2003) ‘Managing strategic change’ in Faulkner, D.O. and Campbell, A.

(eds) The Oxford Handbook of Strategy, Oxford, Oxford University Press.

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Task: To identify how Fiat has changed

Feedback
As far as we can tell from the information supplied above, Fiat experienced
revolutionary change as described by the punctuated equilibrium model. As we said
earlier in this section, revolutionary change ‘affects structure, internal systems, and
cross-cultural working, as new ways of working are introduced’. Following this
period of revolutionary change, incremental change should now be possible.

Back

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Figure 5.1 Strategic drift (Johnson et al 2008,

p. 180)
Description
This diagram is in the form of a graph with x and y axis. The vertical y axis is labelled
amount of change. The horizontal x axis is labelled time. The horizontal x axis is
evenly divided up in four segments. Three dotted-lines begin at the x axis and travel
upwards dividing the x axis equally into the four segments. The dotted-lines end at the
point that the y axis line finishes. Each of the four segments has a label. The first
segment, which attaches to the y axis is labelled phase 1, incremental change. The
second segment is labelled phase 2, strategic drift. The third segment is labelled phase
3, flux. The fourth segment is labelled phase 4, transformational change or death.
About a third of the way up the y axis a line emerges that gradually angles upwards as
it travels through the phases. As the line travel through phase 3 this section has a label
that reads environmental change. As the line passes through phase 3 its angle of travel
levels out but still travels upwards. Just below this line a second line emerges from the
vertical y axis. This line travels in parallel to the line above it but gradually the
distance between them increases as the lines travel through the first two phases of the
x axis. This second line travels through the first two phases not as a single travelling
line, but in steps. When the stepped-line arrives in phase three it turns into a spiral.In
phase three, the spiral line remains horizontal and the distance between it and the
diagonal line above it increases substantially. As the spiral line enters the fourth phase
it abruptly travels vertically bringing it back into close proximity to the first line as
this line begins to level out. It then reverts back to being a stepped line and maintains
close proximity to the first line, but does not touch it as it progresses through phase 4.
In phase 4, at the point where the spiral line begins its vertical journey, a dotted line
angles downwards and continues for a short distance. This dotted line ends about
halfway through phase 4 and a short distance above the x axis.

Back

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