Organizational Health Key to Transforming Companies, Says McKinsey’s Dichter

Poor understanding of an organization's health, McKinsey & Company Director Alex Dichter T '99 says, is the main reason large change efforts often fail in the corporate world.

Imagine you’re a consultant in 2003 and computer maker Apple Inc. comes to you and tells you it’s interested in entering the mobile handset market.

As a strategy, it looks like a terrible one: cell phones are quickly becoming commoditized, consumers are disengaged from the product, and network providers like Verizon Wireless have all the power in the marketplace. The future is likely to belong to low-cost Chinese manufacturers.

That Apple was able to revolutionize the industry with the iPhone is not so much an indictment of your consulting advice than it is a testament to Apple’s phenomenal organizational health, which enabled the company to align its resources behind a clearly defined vision, execute its strategy, and renew itself as the market adapts, said Alex Dichter T’99, a director in McKinsey & Company’s Tokyo office, in a guest lecture Feb. 12.

Organizational health is oft ignored in efforts to transform companies, but it is the main reason that 70 percent of “Big Step” change efforts fail in the corporate world, according to McKinsey data. Effective consultants must be able to not only produce great ideas for new corporate strategies, but also help manage both performance and organizational health during the transformational process, he said.

“Consulting firms will charge a half million a month or more for three people and there’s no way you justify charging fees like that unless you’re really transforming companies,” said Dichter, who is also a member of Tuck’s MBA advisory board and guest lectures in the Consulting Project Management course. “Transformation programs shift a company’ performance and health to a sustainable way of working at significantly higher levels through a consciously designed and executed set of interventions.”

While performance is often measured through metrics like financial or sales targets, organizational health is gauged through a range of indicators such as whether employees feel like they understand the company’s vision and direction. This isn’t just a feel-good indicator—companies with good measures of organizational health are about twice as likely to perform above the median in financial measures such as net income as their unhealthy counterparts, said Dichter.

Not all healthy organizations look alike. McKinsey categorizes four different archetypes. Some, such as PepsiCo., are leadership driven. In these types of companies, leaders set high goals and then support the organization in achieving them. Others, such as Apple and Google Inc., are market focused and create value through being the first to meet needs and wants in the marketplace. A third group are performance edge companies, such as Toyota Motor Corp. and Exxon Mobil Corp., which succeed by continuously out-executing the competition. The fourth group are knowledge-core companies like Berkshire Hathaway Inc. or Goldman Sachs Group Inc., which create value through their human talent base and a legacy of collective knowledge.

McKinsey tries to help companies manage their performance and organizational changes through a process nicknamed the “Five A’s:”
• Aspire – Set performance goals and the organizational health aspirations that will allow them to be achieved.
• Assess – Determine what changes in mindsets are needed to meet the goals.
• Architect – Design initiatives that will let the goals be accomplished.
• Act – Manage the effort by scaling-up while measuring progress toward performance and health targets.
• Advance – Keep moving forward by setting up the mechanisms and building the leadership abilities to allow continuous improvement.

In general, about 30 percent of a company’s employees will prove reluctant to change, Dichter said. Those employees may need to be replaced or reassigned to areas where they can do no harm. Still, employees in companies that have been struggling for an extended period may prove surprisingly likely to be receptive to a big change in strategy. “When people are at the absolute bottom of the pit, and you show them light, they jump to it pretty quickly,” said Dichter.