The Truth About Corporate Transformation

Empirical analysis reveals that conventional wisdom about big, risky change initiatives is often wrong.

Corporate transformation sits atop the strategic agenda for many CEOs. While transformation is ideally undertaken preemptively, in practice it is much more commonly a reaction to changing — and challenging — circumstances. Such transformations represent a fundamental and risk-laden reboot of a company, with the goal of achieving a dramatic improvement in performance and altering its future trajectory.

Given the stakes, we were startled to find that the research underpinning the design and execution of corporate transformations is surprisingly thin. As a result, transformations are often guided by beliefs that, while seemingly plausible, are more anecdotal than empirical in nature. It’s time for a more evidence-based approach.

To study corporate transformation and its success factors, we analyzed financial and nonfinancial data of all U.S. public companies with $10 billion or more market cap between 2004 and 2016.1 We identified companies with a demonstrated need for fundamental change, namely, those companies with an annualized deterioration, relative to their industry average, in total shareholder return (TSR) of 10 percentage points or more over two years. This definition provided us with a large data set for empirical analysis including more than 300 companies across different industries over more than a decade.

Further, we trained a proprietary algorithm to quantify the strategic orientation of companies, based on semantic patterns within the “Management’s Discussion and Analysis” section of 70,000 10-K filings. We built a prediction model to identify formalized transformation programs, based on restructuring costs and major corporate announcements (as reported by Standard & Poor’s Financial Services LLC). And we conducted a multivariate regression analysis to determine the impact of a number of factors on change in TSR during transformations.

Empirical Patterns of Transformation

Our analysis reveals that leaders must be ready to transform their companies: At any given point in the 12-year period we studied, 32% of all large companies were experiencing a severe deterioration in TSR, and that share has stayed roughly constant in recent years. We also found that successful recovery from a severe episode of deterioration is the exception rather than the norm: Only one-quarter of the companies were able to outperform their industry in the short and long run after the point of deterioration.

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