[MUSIC] Every organization has a culture better suited to the past than the future. As a result, sooner or later, every organization, no matter how successful, struggles. For example, Microsoft's market value peaked in 1999, and has fallen since. Apple, Starbucks, IBM have all struggled. To succeed in the future, organizations will need to change. Abandoning the most important lessons of the past is difficult and risky, so most organizations cling to their culture as long as possible, denying the need to change, but then lurching forward when the need to change becomes undeniable. In my research, I've examined how companies like IBM and Harley Davidson have successfully reinvented themselves. Our research suggests that most companies know the key changes that need to be made. Reorganize, change incentives, learn about customers. But what makes the difference between success and failures is the sequence in which the changes are made. We found that some organizations approached creating a greater market focus the way one might make a salad. Identify the ingredients, chop, prepare, combine, dress, toss. These firms failed. The successful firms approached the process more like baking a cake. Identifying the ingredients, but carefully folding in one ingredient, taking time, and then introducing the next. Very mindful that resources are scarce. This is a complex process. This process is impossible to reverse. You can't after all unbaked a cake. Our analysis shows that the process has four stages. It begins with the recognition that the firm's culture is not well suited to the challenges it confronts. Usually this realization occurs in a response to a threat, such as a new competitor or new technology. But why is recognition so difficult? As Bill Gates once remarked, success is a lousy teacher. It seduces smart people into thinking they can't lose. The companies that have the most difficult time changing, are the ones that had been the most successful. Recognition is a difficult act to admitting that a challenge is real, not a fad or a temporary lowal, but a definitive threat to the company's survival. And it includes admitting that the company is vulnerable. That it does not have what it needs at that moment to tackle the challenge. After recognizing the need to change, the actual change begins with a new vision for the firm. Buts it's not the sort of vision that you might think of at first. Its not about finances or revenue but about how the firm operates and ultimately, its values. Developing these new values often requires new experiences. One of the most important experiences is immersing the entire organization in the lives of customers. Through such an immersion, organizations develop this shared understanding, leading to more collaboration. And more collaboration leads to greater trust and greater trust produces more openness in a virtuous cycle. The emergence of a new culture creates a tension between the former hierarchical organization and the new needed organization. This leads to formal changes, new structures, new incentives and new processes. But rather than being imposed on the organization from the top down these changes flow from the shared understanding of what needs to be done. At Harley Davidson, then CEO Richard Teerlink, described their efforts to reorganize this way, the Harley organization should be only as complicated as it absolutely needed to be. And should derive organically from the functions the organization needed to carry out. But we didn't wanna draw boxes and lines on org charts until it was clear exactly what the organization needed to do. And when the time came, the employees themselves should decide of the specifics of those boxes and lines. Once the formal changes have been made and the pressure is reduced, the reason for change fades from memory. The threat has passed and the firm has survived. There is a surprising tendency in these organizations to revise history. Some people deny a problem ever existed. Maintaining a market focused culture requires vigilance on the part of its leaders. Continuing to focus on customers is key. As one executive remarked, every opportunity you get to leave these four walls, you always learn something. It affects how I direct resources, how I get projects approved, how I run projects, everything. Based on his transformation, Harley Davidson overtook Honda in a few short years, went public in 1987, and has become the best selling motorcycle brand in the US. The success of Harley Davidson and other firms as a result of cultural change depends on changing values. Changing values depends fundamentally on leadership. Once the new values emerge leaders focus the organization on the most attractive opportunities, unleash the creativity and potential of its people and implement strategies to win with customers. My colleague Sanjay Kosla, looks for those topics next. [MUSIC]
