GE, Toshiba, J&J: Reorganizing Is Not Transformation

Serious transformation is not for the faint-hearted, and, so, it isn’t every week that an iconic firm announces such an initiative. The week before this past week, three such organizations, GE, Toshiba and Johnson and Johnson (J&J) each indicated they were moving forward with serious restructuring, if not transformation. The Financial Times suggested that “…this week stands out for scale of the break-ups planned & the former loftiness of the corporate names involved.” The possible opportunities that could be result from such dramatic leadership choices are considerable. Last week could well go down into corporate history as “the week that was!”. More likely, however, it will come to be remembered as “the week that wasn’t.” In each instance, major transformation is certainly called for, if not way overdue, but in each instance, simple reorganization will not be enough to realize the possibilities imaginable.  

General Electric

GE’s journey into decline, the most spectacular of the three, has been painful to watch, and long in unfolding. Admired for its reputation as a “maker of managers,” the multidimensional conglomerate that Jack Welch so successfully led in the last two decades of the twentieth century, will now be partitioned into three independent companies, aviation, health-care and power, each publicly-listed, and independent of each other. One of the goals is to better unlock hidden value that is under-appreciated in a conglomerate structure.

A succession of GE CEOs, who followed Welch, tried their best to hold it all together, but the bureaucracy that was required by GE’s multi-business character sapped corporate energies, and no organizational remedy seemed to work. Despite repeated efforts at downsizing, divestitures, a refreshing of leadership ranks, and constant pressure for improved operational excellence over the past few years, particularly under the custodianship of outsider-CEO Larry Culp, the consensus view in the business press was that “investors hadn’t rewarded [such] moves.” Perhaps, the Financial Times’ John Gapper had the most interesting post-mortem of all, when he attributed GE’s demise as a single corporate entity to “boredom”. While the next chapter of GE’s story will have more corporate entities, and fewer people, there is little indication that the boredom is even recognized.

Toshiba

Toshiba, also iconic, and also more than one hundred years old, is also presently going through a prolonged journey into decline, which is no less dramatic than that of GE’s. A story in the Financial Times described a seven year “Epic of Toshiba,” where the organization has careened between new perils & new precedents, and, where “at no time did it appear in control of its destiny.” It has subsequently announced splitting into three independent organizations, one of which will have an infrastructure focus, a second new firm will be device-focused, and the third will include memory chip pioneer Kioxia Holdings Corp. and Toshiba Tec Corporation. This third business is seen as especially attractive to private equity firms, who can further dismember this organization and sell-off the acquired assets, quickly. The activist shareholders who precipitated this outcome, are apparently looking for a fifty-percent increase per share.

Was this foreseeable? Preventable? Yes, to both. A recent analysis of Toshiba’s situation, by a group of non-Toshiba executives participating in StrategyTools’ “Building The Transformational Company Program”  identified a strong need that Toshiba has had for radical transformation, for a long while, using the canvas shown below:  

It was the judgement of these non-Toshiba executives that Toshiba was displaying considerable  vulnerability to every one of the six prominent reasons why organizations turn to transformation for relief, revealing a situation that was calling-out for fast, and radical readjustment. Declining profits, profound changes in the structures of the industries that Toshiba competes in, the presence of rapid technology shifts, financial under-performance, a need for urgency, and the likelihood of imminent market disappearance, had all appeared to be ignored by the strategists at Toshiba. As a result of failing to respond in a timely and meaning fashion, Toshiba was in trouble. Chris Rangen, founder of StrategyTools explains it this way: “Toshiba, like many Japanese conglomerates, has had a poor run from a capital markets point of view: low growth, low innovation, missing industry shifts, heavy capital expenditures and poor governance, just to name a few…. In simple terms, Toshiba lost this battle many years ago.”

Nonetheless, despite the gravity of this situation, Toshiba’s proposed reorganization was far from instinctive, and was only precipitated by the actions of activist shareholders who instigated a shareholder vote in which they defeated Toshiba’s management over the pressing need for consideration of radically restructuring the organization. For many organizations, even in dire straits, real transformation remains an unwelcome option. The report of Toshiba’s Strategic Review Committee, which suggested the three-prong approach of restructuring is entitled “Transforming Toshiba to Enhance Shareholder Value,” and is replete with references to “unlocking value,” without suggesting real transformation. In terms of actually laying out a genuine transformation roadmap, the report offers little.

Johnson and Johnson

The third iconic firm to announce an organizational split last week was Johnson and Johnson, an 135 year old innovator, which has been entangled over a myriad of legal issues regarding such products as: baby powder, opioids, sunscreens, the anti-psychotic drug Risperdal, hip implants and pelvic mesh.

The enormity of these long-simmering issues peaked this past summer when J&J announced the formation of a new subsidiary, LTL Management, which was “essentially designed to go broke paying legal liabilities,” and which is presently in bankruptcy court pursuing what is better known as the “Texas Two-Step,” a method of moving liabilities onto the balance-sheet of a legal entity that tries of absorb the damage, without taking down the original business. This was followed by the recognition that consumer health-care product markets are today so different from pharmaceutical and medical-device markets, that they deserve different organizational responses. Separating the consumer-health business, with brands such as Band-Aid, Tylenol, Benadryl, Aveeno, Zyrtec, Neutrogena and Neosporin, from pharmaceuticals, such as the covid-19 vaccine and Darzalex multiple-myeloma treatment and Uptravi for pulmonary-arterial hypertension, and medical-devices, such as trauma-surgery, robotic surgical tools and joint-replacements, promises to allow each of these very different segments to best manage their own businesses, by performing as separate companies. Once again, as with GE and Toshiba, “unlocking value” becomes the guiding force for the organizational changes to follow. Somewhat ironically, J&J, once the most loosely connected of multi-business businesses, where the independence of business units was such that a move to headquarters was seen as a demotion, now finds itself splitting into two, seemingly very centralized parts, in an effort to reduce ever-encroaching bureaucracy.

Why Are These Efforts Disappointing?

While it’s much too early to proclaim underwhelming transformational results, there are several points that merit watching as these three sagas unfold:

1.    Not all transformations are triggered in the same way. Chris Rangen has suggested that you can characterize three types of transformation by the journey that they take:

a.    Transformation triggered by surprise or shock, and typically portrayed in terms of a “burning platform” are the most difficult to deal with. Usually driven by outside forces, such a journey is largely out of their hands because of lack of awareness, preparation or simply due to hesitation and delay. Typically, they are behind the change curve, and scrambling to retrieve some semblance of continued relevance.

b.    Shift: Sudden and yet strategic, these transformations are colloquially referred to as pivots, and often represent jarring changes in status-quo ante practices, as a result late awareness of external market and technology changes that have been in motion without their recognizing so. These preemptive, internally authored transformation journeys often are built around  major business-model shifts, leading to a scramble to assemble talent and resources needed to pursue a new strategic path.

c.    Evolution: Long-term, planned and well-executed strategic responses to a recognition of unfolding external conditions.

Rangen’s appraisal of the three transformations discussed here suggests that “J&J and Toshiba are both in Shock, while GE has long tried and failed at the Evolutionary type.” None of which offer promising starts to any subsequent transformation journey. 

 2.    For the most part, what we will be watching is reorganization, not transformation, and what we are seeing at the moment is much more akin to simple dismemberment than to real transformative change. As a result, the most likely result of what these organizations are speaking about will be smaller replicas of their former larger selves. Yes, there will be marginally less bureaucracy, as Headquarters’ headcounts will be reduced, and distributed downward, but there is no suggestion, at all, of different work styles or of distributed leadership autonomy; mindset goes totally unmentioned. Apparently, “unlocking value,” which is mentioned in all three cases, is seen more as increased variance-reduction (efficiency) typically associated with maturing markets, rather than variance-enlargement (differentiation through innovation and novelty), which would be preferred for sustaining an organization in dramatically disruptive markets.

3.    The Customer Experience is missing-in-action in every case. Each of these change narratives are addressed to their investor communities, and spoken in investor jargon. There is almost no mention of impact on customers or employees in these sagas. Peter Drucker’s admonition that “the purpose of a business is to create and keep customers” has been completely disregarded.

4.    Real transformation should be an outside-in approach that results in changed mindsets among all of the principal stakeholders, and requires leadership courage to pursue, often on a ten to fifteen year timeline.  None of this is acknowledged in the announcements by these companies, nor in the analysis by the press. Nor is there any sense of a transformation journey in any of these proposals; in other words, what comes next and how it will be executed.

Dismemberment of the existing organizations into smaller replicas of their former larger organization appears, in each case, assumed to be quick and clean, and also unimaginative, unlike the messy challenges more typically associated with profound change. Real transformation takes time, requires thought and is often far from straight-forward. Chris Rangen, whose analysis of Toshiba was illustrated above, and whose work on strategy is some of the most imaginative and impactful around, offers ten principles of an effective transformation journey, in the following graphic. Most of these go unmentioned in the narratives being spun by senior management.

What is clear from this scheme is that simple reorganization, without attention to the social side of an organization’s culture, is far from sufficient to change existing mindsets. Attending to organizational culture is critically important if real, fundamental, transformation has a chance. Since 1943, J&J’s “credo,” the values that have guided its decision-making, has been a key point of pride in its organizational culture. Strikingly, that same credo is missing from today’s major reorganization discussions, as if culture is no longer a principal concern. Jay Galbraith, one of the masters of organizational culture, used to say that “culture is the result of managerial choices made, and not made.” In the cases of GE, Toshiba and J&J, it is, in each instance, the choices not being made that will likely determine the eventual success or failure of the transformation efforts they are embarking upon.