Dr. Kotter's latest book, Change, is available for pre-order now. Get your copy today!
By Gaurav Gupta + Dr. John P. Kotter
Restructuring as a strategy to improve profitability or change direction has been used extensively by businesses in the last few decades. Most restructuring efforts are reactive. They occur in response to significant external pressures – from the market, shareholders, and/or the Board – and an anticipated or real drop in profitability. Occasionally, restructuring efforts are proactive, where leaders recognize their organization is not optimally structured to meet the needs of the future, as is often the case in M&A integration. In both cases, restructuring signifies large changes for the workforce, and often include layoffs.
The financial results from restructuring are mixed – with many firms showing a negative impact on overall value – and it is not entirely clear that restructuring efforts are necessary or helpful in many cases. However, there are situations where a restructuring is necessary to regain competitiveness, set the business up for future success, or eliminate redundancy post M&A. In a fast-changing world, M&A activity and other significant organizational changes are increasing, with one survey reporting that 45% of the Fortune 100 firms announced layoffs in 1994 compared with fewer than 5% in 1979. Another survey of 2000 companies found that 65% announced layoffs in the 2008-2011 era.
Multiple research studies have shown that many restructuring efforts result in an immediate loss in productivity amongst the “survivors,” specifically in the arenas of creativity and innovation. When viewed through the lens of Kotter’s latest research and an understanding of brain science, this is not at all surprising. Human beings function within a two-channel system that detects threats and opportunities. The first of these, the Survive Channel, is activated by threats and leads to feelings of fear, anxiety, and stress. These triggers activate the sympathetic nervous system and, when things work well, direct all attention to eliminating the threat. When this system is overwhelmed by repeated or unresolved threats, it leads to a freeze response: despair and demotivation. The second channel, the Thrive Channel, is activated by opportunities and is associated with feelings of excitement, passion, joy, and enthusiasm. These triggers activate the parasympathetic nervous system and, when things work well, result in innovative, creative thinking in the pursuit of those opportunities. Crucially, while the brain-body hard wiring evolved for physical threats, the response to threats to our financial security, egos, status, or psychological security are biologically identical.
For most employees, restructuring represents a threat and triggers a loud Survive response. This leads to feelings of fear, anxiety, and anger – and trust in management goes down. All energy is directed at protecting oneself against this threat, and attention to the real business problems and opportunities evaporates. We have seen repeatedly, that the Survive Channel overwhelms the Thrive Channel, and all innovation and creativity cease, leading to a drop in productivity and specifically innovation – a disaster in an era of increasingly rapid change. Recovery of productivity, creativity, and morale comes far too slowly. In today’s fast paced, highly competitive, and mobile workplace, companies do not have the luxury of time – they have to be able to almost immediately pivot focus to growth and innovation.
When done well, restructuring allows businesses to reallocate resources to the most productive activities and refocus on the most important priorities. The good news is that there is a better way to implement restructuring efforts. Executing restructuring efforts successfully requires leaders to focus as much thought and energy on how the changes will be implemented as on determining what changes are necessary. We have found that the right actions help leaders avoid over-activating the Survive Channel and, by engaging employees in the right way, can even activate the Thrive Channel. In our experience, by focusing on a few key practices, leaders can minimize the loss in productivity and allow employees to more quickly return to a focus on growth and opportunity.
Research on the short-, medium-, and long-term impact of restructuring as a strategic tool suggests that often it is not the right choice for a business. Even in those instances where it is necessary, success is contingent upon many other factors, like the trust in and credibility of leadership, which cannot be shifted in the moment. However, our research and work with clients has demonstrated that there is a better way to implement restructuring; a way to help leaders minimize short-term disruption and focus on the long-term health of the business.
By giving employees a voice, leaders can shift restructuring from an entirely Survive-activating event to one that also activates the Thrive Channel. This is not a trivial shift – it allows businesses to reduce the dip in productivity, return to growth faster, and achieve better long-term business performance.
© 2019 Kotter