The Organizational Identity Trap

What do Kmart, Lucent, Bull, Marks & Spencer, Moulinex, Polaroid and Xerox have in common? All are examples, say the authors of a recent white paper, of once thriving companies that seem unable to reinvent themselves in response to environmental change. The paper's central argument is that certain companies are unable to adapt to shifts in the competitive environment, despite the best efforts of their CEOs and management teams, because the required adaptive response is inconsistent with the company's core identity.

The paper is “Escaping the Identity Trap” by Hamid Bouchikhi, professor of strategy and management and director of the New Business Center at ESSEC Business School in Cergy-Pontoise, France, and John R. Kimberly, the Henry Bower Professor at the University of Pennsylvania's Wharton School, who is also the Novartis Chaired Professor at INSEAD.

The authors' concept of corporate identity emerged from field-based, inductive research. While conducting an eight-month investigation into consistent underperformance by a multinational company's North American subsidiary, they noted puzzling decision-making patterns — in strategy, hiring and resource allocation — that seemed rooted not in pragmatic analysis but in deeply held beliefs about the company's identity that had emerged early in the company's history and had been reinforced over time. Building on their initial fieldwork, the authors conducted primary and secondary research based on surveys and interviews at companies of varying sizes and from a cross section of industries.

This research suggests that, similar to how an individual's identity can be anchored — consciously or subconsciously — in a gender, a generation, a life style, an ethnic group and/or a profession, a company's identity may be anchored in a core business, a knowledge base, a nationality, a charismatic leader, an ownership and governance structure, and/or an operating philosophy. Organizational identity thus forms a cognitive framework that filters how members of the organization, and all its stakeholders, view the world and perceive issues.

For example, a company whose identity is primarily anchored in manufacturing would typically pay more attention to engineering, production capacity, productivity, quality, product innovation or long-term investment. A company whose identity is invested in a brand would be more likely to view the world in terms of differentiation, brand awareness and consistency, customer loyalty or communication. Organizational identity has a political component, too, in that it influences the distribution of resources and power among stakeholders, both internal and external. Changing a company's identity is therefore difficult, in part, because it disrupts the balance of power between constituencies.

Among other examples, the authors cite Moulinex, the French appliance maker that embodied the postwar French industrial renaissance for several decades. Since its founding in 1932, the company had emphasized building a large and modern industrial base. But imported goods from low-wage countries and their saturation of western markets since the 1980s weakened that model and, in 2001, the company went into liquidation after two decades of losses. Although the founder and his successors sought to reduce the payroll burden, rationalize manufacturing, launch new products and streamline the organization's structure, they never questioned the company's specialization in small appliances or the centrality of their French industrial base. As a result, they were unable to successfully redefine Moulinex as a “household brand” (as opposed to a small appliance manufacturer) and improve the company's cost structure in order to focus on brand management, new product innovation and distribution.

Although a strong identity can become a sort of strategic prison, the authors offer examples of some companies that have successfully transformed their identities and have reinvented themselves. On the basis of their research, the authors describe an empirically grounded typology of four successful corporate renewal trajectories, defined by the purpose of the transformation (adapt to the current industry or mutate into a new one) and its pace (slow or swift).

The authors conclude that managers who want their organizations to achieve a qualitative leap forward need to take on the elusive, but critical, job of anticipating identity obsolescence, much as they anticipate the obsolescence of products, systems or business strategies. They suggest that continuously assessing the degree of fit between a company's identity and its environment should be a component of all strategic considerations.