Why do organizations find it difficult to change when facing a disruption? The question is not new but it continues to puzzle researchers and managers alike. Part of the answer lies in the observation that over time, what an organization knows migrates: its capability initially lies in its resources (especially human), then it evolves to processes and finally to values. It is at this last stage that change is the most difficult.
The observation that an organization evolves through these three stages was made by innovation expert Clayton Christensen. According to him, at the beginning of its existence, in the so-called “startup” period, all that an organization can do is attributable to its resources, and mainly its human resources (founders and then first employees). The problems that arise in this period are solved directly by the founders. It is quick and efficient, and is the main reason for the startup’s agility.
Over time, the resolution of these problems becomes formalized in terms of processes. This is especially true for recurring problems or activities. This formalization is a result of learning, and it allows the company to grow: new employees no longer have to rediscover the solutions to the problems encountered, or ask the founders; they learn and apply the processes developed by their predecessors. The founders’ knowledge is embodied, so to speak, in processes. The creation of these processes is the necessary condition for a startup’s ability to move from the creative / entrepreneurial era, where the founders’ presence is necessary to problem solving because all of them are new, to growth, where the resolution of these problems, which has become routine, is delegated to a growing number of individuals.
As the company continues to grow, decision-making for the resolution of the main problems becomes unconscious; it is based more and more on assumptions and principles generated from the successful resolution of past problems, and no longer on explicit decision-making. These processes and principles constitute the culture of the organization, a reflection of its mental model of the world, i.e. a set of common values learned collectively by the organization. These values are the basis of prioritization: they make it possible to choose the most interesting customers, make production decisions, and more generally they drive the resource allocation mechanism, which is the heart of the organization’s management.
Values are very important because they allow any employee to act in coherence with the rest of the organization and, most importantly, to link their action to the strategy of the organization. Values are the tool of remote management, which is indispensable when the organization reaches a certain size and the proximity with the founders can no longer exist. Values were what made the strength of the Roman Empire for centuries: a centurion who left Rome to reach a far-away country could not hope to communicate easily with the emperor. The latter briefed him and he went far and wide to make decisions based solely on values and on an idea of the general strategy of the empire. The more these values are shared across the organization, the more effectively the organization operates in its environment, especially in the face of new issues.
Migration of Capabilities
Hence, what defines what the organization is able to do migrates over time: from resources (R) to processes (P) and then to values (V), hence called the RPV model of migration.
This explains why change is so difficult. As long as the environment corresponds to the situations for which the processes were designed and the values of the organization can manage, the business performs well. But a difficulty appears when the environment changes. Indeed, while these processes and these values define what the organization can do, they also, by definition, define what the organization cannot do: if it is optimized for an environment, then by definition it is not optimized for another environment.
When an organization’s capabilities reside in its resources (initial stage of startup), change is easy: the founders decide to change, and the organization can pivot. It is the strength of startups to change very easily when the founders are aware of the need to change their model. But when, at a later stage, an organization’s abilities reside in its processes, and even more so when they reside in its values, change becomes extremely difficult.
That changing values is difficult is illustrated by a classic example: while most people would agree that exercising, traveling less, and eating more balanced food is good for health and can prevent heart attacks, few do it in practice as it implies a deep change in lifestyle that conflicts with other commitments such as career progression and social life.
It is the same for companies facing a disruption. The problem is rarely that they are not aware of the danger. To be aware of a danger and to actually react to it are two different things. Change requires the questioning of assumptions and values that have made the success of the organization sometimes for decades in its current business. If this legacy activity is still healthy, it will be difficult to admit the need to question them, even if the perception of the danger exists, and it will be even more difficult because these values are shared by thousands of employees who see every day their beneficial effects. The strength of management by values, ie remote management, is now its weakness: the leader can proclaim loudly the need to change, the relay is not done precisely because everything has been set up so that employees act in an autonomous way.
As a result of this difficulty, one may be tempted to give up the titanic task of changing the values of an organization, especially since this change undermines the legacy activity long before it allows, possibly, the birth of a new one. A solution often recommended, in particular by Christensen himself, is to create an autonomous entity to take advantage of the disruption. Because it will be starting from scratch, the entity will be able to create a new, relevant RPV. This is what Nestlé did with Nespresso for instance. But while it may ensure the success of the disruptive project, this approach is only tactically useful: it will not contribute to the transformation of the legacy organization. Only a work on the core values and assumptions of the organization, i.e. its mental model, will bring about necessary changes in the face of a disruption. A hard task indeed.
The limits of a purely entrepreneurial approach to corporate transformation are discussed in my previous article: What the Dismissal of Jeffrey Immelt (GE) Tells us About the Limits of a Tactical Approach to Innovation. The importance of the business model in corporate transformation is discussed in the following article: Transformation: The Challenge of Changing the Business Model.