According to a Harvard Business Review Article by Nohria and Colleagues of More Than 200 Mana
The Thought in Brief
Here's the brutal fact: 70% of all alter initiatives fail. Why? Managers flounder in an alphabet soup of change methods, drowning in alien advice. Modify efforts verbal a heavy toll—man and economic—equally companies flail from one change method to another.
To effect successful change, first grasp the two basic theories of change:
ane) Theory E change emphasizes economical value—as measured only by shareholder returns. This "difficult" approach boosts returns through economic incentives, drastic layoffs, and restructuring. "Chainsaw Al" Dunlop'south firing 11,000 Scott Paper employees and selling several businesses—tripling shareholder value to $9 billion—is a stunning example.
ii) Theory O change—a "softer" approach—focuses on developing corporate culture and human capability, patiently building trust and emotional commitment to the visitor through teamwork and communication.
Then, carefully and simultaneously residuum these very dissimilar approaches. It's not easy. Employees distrust leaders who alternating between nurturing and cutthroat beliefs. Only, done well, yous'll heave profits and productivity, and achieve sustainable competitive advantage.
The Thought in Practice
The Britain grocery chain, ASDA, teetered on bankruptcy in 1991. Here's how CEO Archie Norman combined change Theories Due east and O with spectacular results: a culture of trust and openness—and an eightfold increase in shareholder value.
The new economy has ushered in great business organisation opportunities—and cracking turmoil. Non since the Industrial Revolution take the stakes of dealing with change been then high. Most traditional organizations have accepted, in theory at to the lowest degree, that they must either change or die. And even Internet companies such as eBay, Amazon.com, and America Online recognize that they need to manage the changes associated with rapid entrepreneurial growth. Despite some individual successes, nonetheless, alter remains difficult to pull off, and few companies manage the process as well every bit they would like. Most of their initiatives—installing new technology, downsizing, restructuring, or trying to change corporate culture—have had depression success rates. The brutal fact is that well-nigh lxx% of all change initiatives fail.
In our experience, the reason for virtually of those failures is that in their rush to alter their organizations, managers cease up immersing themselves in an alphabet soup of initiatives. They lose focus and get mesmerized by all the advice available in print and on-line about why companies should change, what they should try to accomplish, and how they should do it. This proliferation of recommendations oftentimes leads to muddle when modify is attempted. The effect is that most change efforts exert a heavy cost, both human and economic. To amend the odds of success, and to reduce the man carnage, it is imperative that executives sympathize the nature and process of corporate change much better. But even that is not plenty. Leaders need to crack the lawmaking of modify.
For more than 40 years now, we've been studying the nature of corporate change. And although every business organization'south change initiative is unique, our research suggests there are 2 archetypes, or theories, of change. These archetypes are based on very different and frequently unconscious assumptions by senior executives—and the consultants and academics who suggest them—well-nigh why and how changes should be made. Theory East is change based on economic value. Theory O is change based on organizational capability. Both are valid models; each theory of change achieves some of management'southward goals, either explicitly or implicitly. But each theory also has its costs—often unexpected ones.
Theory East modify strategies are the ones that make all the headlines. In this "hard" approach to change, shareholder value is the merely legitimate measure of corporate success. Alter ordinarily involves heavy utilise of economical incentives, drastic layoffs, downsizing, and restructuring. East change strategies are more than common than O alter strategies amidst companies in the Us, where financial markets push corporate boards for rapid turnarounds. For instance, when William A. Anders was brought in as CEO of General Dynamics in 1991, his goal was to maximize economical value—notwithstanding painful the remedies might be. Over the next three years, Anders reduced the workforce past 71,000 people—44,000 through the divestiture of seven businesses and 27,000 through layoffs and compunction. Anders employed mutual E strategies.
Theory Eastward modify strategies ordinarily involve heavy use of economic incentives, desperate layoffs, downsizing, and restructuring. Shareholder value is the only legitimate mensurate of corporate success.
Managers who subscribe to Theory O believe that if they were to focus exclusively on the price of their stock, they might harm their organizations. In this "soft" approach to change, the goal is to develop corporate culture and human capability through individual and organizational learning—the process of changing, obtaining feedback, reflecting, and making further changes. U.S. companies that prefer O strategies, as Hewlett-Packard did when its functioning flagged in the 1980s, typically have strong, long-held, commitment-based psychological contracts with their employees.
Theory O change strategies are geared toward building up the corporate culture: employee behaviors, attitudes, capabilities, and commitment. The arrangement's power to learn from its experiences is a legitimate yardstick of corporate success.
Managers at these companies are probable to encounter the risks in breaking those contracts. Because they place a high value on employee commitment, Asian and European businesses are also more than likely to prefer an O strategy to change.
Few companies subscribe to but 1 theory. Near companies we have studied accept used a mix of both. But all too often, managers try to apply theories E and O in tandem without resolving the inherent tensions between them. This impulse to combine the strategies is directionally right, simply theories East and O are so different that information technology'due south hard to manage them simultaneously—employees distrust leaders who alternate between nurturing and cutthroat corporate behavior. Our research suggests, still, that at that place is a way to resolve the tension so that businesses tin can satisfy their shareholders while building viable institutions. Companies that finer combine hard and soft approaches to change tin can reap big payoffs in profitability and productivity. Those companies are more than likely to achieve a sustainable competitive advantage. They can also reduce the anxiety that grips whole societies in the face of corporate restructuring.
In this article, we will explore how one company successfully resolved the tensions between E and O strategies. Merely before we exercise that, nosotros need to look at just how different the ii theories are.
A Tale of Ii Theories
To understand how sharply theories Due east and O differ, we can compare them along several key dimensions of corporate change: goals, leadership, focus, process, reward organisation, and use of consultants. (For a side-by-side comparison, see the exhibit "Comparing Theories of Change.") Nosotros'll look at 2 companies in similar businesses that adopted almost pure forms of each archetype. Scott Paper successfully used Theory Due east to heighten shareholder value, while Champion International used Theory O to achieve a complete cultural transformation that increased its productivity and employee delivery. But as nosotros volition soon detect, both paper producers also discovered the limitations of sticking with simply 1 theory of change. Allow's compare the two companies' initiatives.
Comparing Theories of Modify
Goals.
When Al Dunlap assumed leadership of Scott Paper in May 1994, he immediately fired xi,000 employees and sold off several businesses. His conclusion to restructure the beleaguered company was almost monomaniacal. As he said in ane of his speeches: "Shareholders are the number one constituency. Show me an annual written report that lists six or seven constituencies, and I'll testify you a mismanaged company." From a shareholder's perspective, the results of Dunlap'south deportment were stunning. In only 20 months, he managed to triple shareholder returns as Scott Paper'south marketplace value rose from near $three billion in 1994 to most $9 billion by the terminate of 1995. The financial community applauded his efforts and hailed Scott Paper'south arroyo to change equally a model for improving shareholder returns.
Champion's reform try couldn't have been more unlike. CEO Andrew Sigler acknowledged that enhanced economic value was an appropriate target for direction, just he believed that goal would be best achieved by transforming the behaviors of management, unions, and workers alike. In 1981, Sigler and other managers launched a long-term effort to restructure corporate civilisation around a new vision called the Champion Way, a set of values and principles designed to build up the competencies of the workforce. By improving the organization's capabilities in areas such as teamwork and communication, Sigler believed he could best increase employee productivity and thereby improve the bottom line.
Leadership.
Leaders who subscribe to Theory E manage change the sometime-fashioned fashion: from the summit downwardly. They set goals with niggling involvement from their management teams and certainly without input from lower levels or unions. Dunlap was conspicuously the commander in chief at Scott Paper. The executives who survived his purges, for example, had to agree with his philosophy that shareholder value was now the company's primary objective. Zilch fabricated clear Dunlap's leadership style better than the nickname he gloried in: "Chainsaw Al."
By contrast, participation (a Theory O trait) was the hallmark of change at Champion. Every effort was made to get all its employees emotionally committed to improving the company's functioning. Teams drafted value statements, and even the industry's unions were brought into the dialogue. Employees were encouraged to place and solve problems themselves. Modify at Champion sprouted from the lesser up.
Focus.
In E-type modify, leaders typically focus immediately on streamlining the "hardware" of the organization—the structures and systems. These are the elements that can most easily be changed from the meridian down, yielding swift fiscal results. For instance, Dunlap quickly decided to outsource many of Scott Paper'south corporate functions—benefits and payroll assistants, almost all of its management information systems, some of its applied science research, medical services, telemarketing, and security functions. An executive manager of a global merger explained the E rationale: "I have a [profit] goal of $176 one thousand thousand this year, and there'south no fourth dimension to involve others or develop organizational capability."
By contrast, Theory O's initial focus is on edifice up the "software" of an organization—the culture, behavior, and attitudes of employees. Throughout a decade of reforms, no employees were laid off at Champion. Rather, managers and employees were encouraged to collectively reexamine their work practices and behaviors with a goal of increasing productivity and quality. Managers were replaced if they did not conform to the new philosophy, but the overall firing freeze helped to create a civilisation of trust and commitment. Structural change followed in one case the civilisation changed. Indeed, by the mid-1990s, Champion had completely reorganized all its corporate functions. In one case a hierarchical, functionally organized visitor, Champion adopted a matrix construction that empowered employee teams to focus more than on customers.
Process.
Theory E is predicated on the view that no boxing can exist won without a articulate, comprehensive, common plan of activity that encourages internal coordination and inspires conviction amidst customers, suppliers, and investors. The plan lets leaders quickly motivate and mobilize their businesses; information technology compels them to take tough, decisive actions they presumably haven't taken in the past. The changes at Scott Paper unfolded like a military battle plan. Managers were instructed to attain specific targets by specific dates. If they didn't adhere to Dunlap'southward tightly choreographed marching orders, they risked being fired.
Meanwhile, the changes at Champion were more evolutionary and emergent than planned and programmatic. When the company's decade-long reform began in 1981, there was no main blueprint. The idea was that innovative work processes, values, and civilization changes in ane plant would be adjusted and used by other plants on their manner through the corporate organization. No unmarried person, not even Sigler, was seen as the driver of change. Instead, local leaders took responsibility. Top management simply encouraged experimentation from the footing upward, spread new ideas to other workers, and transferred managers of innovative units to lagging ones.
Reward System.
The rewards for managers in E-type change programs are primarily financial. Employee compensation, for example, is linked with fiscal incentives, mainly stock options. Dunlap'southward ain compensation package—which ultimately netted him more than than $100 million—was tightly linked to shareholders' interests. Proponents of this system fence that financial incentives guarantee that employees' interests match stockholders' interests. Financial rewards also assistance pinnacle executives experience compensated for a difficult chore—one in which they are frequently reviled by their onetime colleagues and the larger community.
The O-style bounty systems at Champion reinforced the goals of culture alter, but they didn't drive those goals. A skills-based pay system and a corporatewide gains-sharing program were installed to draw union workers and direction into a community of purpose. Financial incentives were used only every bit a supplement to those systems and not to push button particular reforms. While Champion did offering a companywide bonus to achieve business goals in two separate years, this came late in the change process and played a minor function in actually fulfilling those goals.
Use of Consultants.
Theory E change strategies often rely heavily on external consultants. A SWAT team of Ivy League–educated MBAs, armed with an arsenal of state-of-the-art ideas, is brought in to find new ways to look at the business organisation and manage it. The consultants can help CEOs get a gear up on urgent issues and priorities. They also offer much-needed political and psychological support for CEOs who are under fire from financial markets. At Scott Paper, Dunlap engaged consultants to identify many of the painful cost-savings initiatives that he after implemented.
Theory O change programs rely far less on consultants. The handful of consultants who were introduced at Champion helped managers and workers make their ain business analyses and arts and crafts their ain solutions. And while the consultants had their ain ideas, they did not recommend whatever corporate program, dictate any solutions, or whip anyone into line. They simply led a process of discovery and learning that was intended to change the corporate culture in a mode that could not exist foreseen at the kickoff.
In their purest forms, both change theories conspicuously have their limitations. CEOs who must make hard Eastward-style choices understandably distance themselves from their employees to ease their own pain and guilt. Once removed from their people, these CEOs begin to see their employees as part of the problem. As time goes on, these leaders become less and less inclined to adopt O-fashion alter strategies. They fail to invest in building the company'southward human resource, which inevitably hollows out the visitor and saps its capacity for sustained performance. At Scott Paper, for example, Dunlap trebled shareholder returns just failed to build the capabilities needed for sustained competitive advantage—delivery, coordination, communication, and creativity. In 1995, Dunlap sold Scott Paper to its longtime competitor Kimberly-Clark.
Scott Paper's CEO trebled shareholder returns but failed to build the capabilities needed for sustained competitive reward—delivery, coordination, communication, and creativity.
CEOs who embrace Theory O find that their loyalty and commitment to their employees can foreclose them from making tough decisions. The temptation is to postpone the bitter medicine in the hopes that rising productivity will meliorate the business situation. But productivity gains aren't enough when fundamental structural change is required. That reality is underscored past today's global financial system, which makes corporate performance instantly transparent to big institutional shareholders whose fund managers are under enormous pressure level to bear witness proficient results. Consider Champion. By 1997, it had get i of the leaders in its industry based on virtually functioning measures. Still, newly instated CEO Richard Olsen was forced to admit a tough reality: Champion shareholders had non seen a significant increase in the economic value of the company in more a decade. Indeed, when Champion was sold recently to Finland-based UPM-Kymmene, it was caused for a mere ane.five times its original share value.
Managing the Contradictions
Clearly, if the objective is to build a company that can suit, survive, and prosper over the years, Theory E strategies must somehow be combined with Theory O strategies. Just unless they're carefully handled, melding E and O is likely to bring the worst of both theories and the benefits of neither. Indeed, the corporate changes nosotros've studied that arbitrarily and haphazardly mixed E and O techniques proved destabilizing to the organizations in which they were imposed. Managers in those companies would certainly have been ameliorate off to pick either pure E or pure O strategies—with all their costs. At least 1 set of stakeholders would have benefited.
To thrive and adapt in the new economy, companies must simultaneously build up their corporate cultures and enhance shareholder value; the O and E theories of concern modify must be in perfect pace.
The obvious way to combine E and O is to sequence them. Some companies, notably General Electric, accept washed this quite successfully. At GE, CEO Jack Welch began his sequenced change past imposing an Eastward-type restructuring. He demanded that all GE businesses be first or second in their industries. Whatever unit that failed that examination would be fixed, sold off, or closed. Welch followed that upward with a massive downsizing of the GE bureaucracy. Between 1981 and 1985, total employment at the corporation dropped from 412,000 to 299,000. Sixty percent of the corporate staff, mostly in planning and finance, was laid off. In this stage, GE people began to call Welch "Neutron Jack," subsequently the fabulous bomb that was designed to destroy people but leave buildings intact. One time he had wrung out the redundancies, withal, Welch adopted an O strategy. In 1985, he started a serial of organizational initiatives to change GE civilisation. He declared that the company had to go "boundaryless," and unit leaders across the corporation had to submit to being challenged past their subordinates in open forum. Feedback and open communication somewhen eroded the hierarchy. Soon Welch applied the new order to GE's global businesses.
Unfortunately for companies like Champion, sequenced change is far easier if you begin, as Welch did, with Theory East. Indeed, it is highly unlikely that Due east would successfully follow O considering of the sense of expose that would involve. It is hard to imagine how a draconian plan of layoffs and downsizing can exit intact the psychological contract and culture a company has then patiently congenital up over the years. But whatever the order, i certain problem with sequencing is that information technology can take a very long fourth dimension; at GE it has taken near ii decades. A sequenced alter may also require two CEOs, carefully chosen for their contrasting styles and philosophies, which may create its own set of problems. Most turnaround managers don't survive restructuring—partly because of their own inflexibility and partly considering they can't live downward the distrust that their ruthlessness has earned them. In most cases, even the best- intentioned effort to rebuild trust and commitment rarely overcomes a encarmine past. Welch is the exception that proves the rule.
So what should yous do? How can you achieve rapid improvements in economic value while simultaneously developing an open up, trusting corporate culture? Paradoxical as those goals may appear, our research shows that it is possible to apply theories E and O together. It requires great volition, skill—and wisdom. But precisely because it is more than difficult than mere sequencing, the simultaneous employ of O and E strategies is more likely to exist a source of sustainable competitive advantage.
Ane company that exemplifies the reconciliation of the hard and soft approaches is ASDA, the UK grocery chain that CEO Archie Norman took over in December 1991, when the retailer was nearly bankrupt. Norman laid off employees, flattened the arrangement, and sold off losing businesses—acts that ordinarily spawn distrust amidst employees and distance executives from their people. Yet during Norman's eight-year tenure equally CEO, ASDA also became famous for its atmosphere of trust and openness. It has been described by executives at Wal-Mart—itself famous for its corporate culture—every bit beingness "more like Wal-Mart than we are." Let'southward look at how ASDA resolved the conflicts of Eastward and O along the six primary dimensions of change.
Explicitly confront the tension between E and O goals.
With his opening spoken language to ASDA's executive squad—none of whom he had met—Norman indicated clearly that he intended to apply both E and O strategies in his change endeavour. It is hundred-to-one that whatever of his listeners fully understood him at the fourth dimension, but it was important that he had no conflicts nigh recognizing the paradox betwixt the ii strategies for change. He said every bit much in his maiden speech: "Our number one objective is to secure value for our shareholders and secure the trading time to come of the business. I am non coming in with any magical solutions. I intend to spend the next few weeks listening and forming ideas for our precise direction… We need a culture built around mutual ideas and goals that include listening, learning, and speed of response, from the stores upwards. [But] at that place will exist management reorganization. My objective is to found a articulate focus on the stores, shorten lines of advice, and build one team." If there is a contradiction betwixt edifice a high-involvement arrangement and restructuring to enhance shareholder value, Norman embraced information technology.
Set direction from the pinnacle and appoint people below.
From 24-hour interval ane, Norman set strategy without expecting any participation from below. He said ASDA would adopt an everyday-low-pricing strategy, and Norman unilaterally determined that change would brainstorm by having ii experimental store formats up and running within 6 months. He decided to shift power from the headquarters to the stores, declaring: "I want anybody to be close to the stores. Nosotros must love the stores to expiry; that is our business organization." But even from the start, at that place was an O quality to Norman'due south leadership style. As he put it in his first speech: "First, I am forthright, and I similar to argue. Second, I want to discuss issues as colleagues. I am looking for your advice and your disagreement." Norman encouraged dialogue with employees and customers through colleague and customer circles. He ready a "Tell Archie" program so that people could voice their concerns and ideas.
Making way for reverse leadership styles was also an essential ingredient to Norman's—and ASDA's—success. This was nearly clear in Norman's willingness to rent Allan Leighton before long later he took over. Leighton somewhen became deputy chief executive. Norman and Leighton shared the same E and O values, just they had completely dissimilar personalities and styles. Norman, cool and reserved, impressed people with the power of his mind—his intelligence and business acumen. Leighton, who is warmer and more people oriented, worked on employees' emotions with the ability of his personality. As 1 employee told usa, "People respect Archie, but they love Allan." Norman was the outset to credit Leighton with having helped to create emotional delivery to the new ASDA. While information technology might exist possible for a single individual to embrace opposite leadership styles, accepting an equal partner with a very different personality makes it easier to capitalize on those styles. Leighton certainly helped Norman reach out to the arrangement. Together they held quarterly meetings with store managers to hear their ideas, and they supplemented those meetings with impromptu talks.
Focus simultaneously on the hard and soft sides of the organization.
Norman's immediate deportment followed both the E goal of increasing economic value and the O goal of transforming culture. On the E side, Norman focused on structure. He removed layers of hierarchy at the top of the organization, fired the fiscal officeholder who had been part of ASDA's disastrous policies, and decreed a wage freeze for everyone—management and workers akin. But from the start, the O strategy was an equal part of Norman's plan. He bought time for all this alter by warning the markets that fiscal recovery would take iii years. Norman later said that he spent 75% of his early months at ASDA as the company'south man resources director, making the arrangement less hierarchical, more egalitarian, and more transparent. Both Norman and Leighton were keenly aware that they had to win hearts and minds. As Norman put it to workers: "We need to make ASDA a great place for everyone to work."
Plan for spontaneity.
Preparation programs, total-quality programs, and height-driven culture alter programs played little function in ASDA'southward transformation. From the showtime, the ASDA alter effort was set up to encourage experimentation and development. To promote learning, for example, ASDA prepare an experimental store that was later expanded to three stores. It was declared a run a risk-free zone, meaning there would be no penalties for failure. A cross-functional job force "renewed," or redesigned, ASDA's unabridged retail proposition, its system, and its managerial structure. Store managers were encouraged to experiment with store layout, employee roles, ranges of products offered, so on. The experiments produced significant innovations in all aspects of store operations. ASDA'south managers learned, for example, that they couldn't renew a store unless that shop's management team was fix for new ideas. This led to an innovation called the Driving Examination, which assessed whether shop managers' skills in leading the change process were aligned with the intended changes. The exam perfectly illustrates how E and O tin can come together: it bubbled up O-fashion from the bottom of the company, still it bound managers in an E-type contract. Managers who failed the examination were replaced.
Let incentives reinforce change, not drive it.
Any synthesis of E and O must recognize that compensation is a double-edged sword. Money can focus and motivate managers, simply it can too hamper teamwork, commitment, and learning. The way to resolve this dilemma is to apply Theory E incentives in an O mode. Employees' high involvement is encouraged to develop their commitment to modify, and variable pay is used to reward that commitment. ASDA'due south senior executives were compensated with stock options that were tied to the company's value. These helped concenter key executives to ASDA. Unlike about E-strategy companies, even so, ASDA had a stock-buying plan for all employees. In addition, shop-level employees got variable pay based on both corporate functioning and their stores' records. In the end, compensation represented a fair commutation of value between the company and its individual employees. But Norman believed that compensation had not played a major role in motivating alter at the visitor.
Use consultants as proficient resources who empower employees.
Consultants can provide specialized knowledge and technical skills that the company doesn't have, especially in the early stages of organizational change. Direction'southward task is figuring out how to use those resources without abdicating leadership of the change effort. ASDA followed the middle ground between Theory Due east and Theory O. It made limited utilise of four consulting firms in the early on stages of its transformation. The consulting firms always worked alongside management and supported its leadership of change. However, their appointment was intentionally cut short past Norman to prevent ASDA and its managers from condign dependent on the consultants. For example, an practiced in store system was hired to support the task forcefulness assigned to renew ASDA's kickoff few experimental stores, but later stores were renewed without his involvement.
This commodity also appears in:
Past embracing the paradox inherent in simultaneously employing E and O change theories, Norman and Leighton transformed ASDA to the advantage of its shareholders and employees. The organization went through personnel changes, unit sell-offs, and hierarchical upheaval. Yet these potentially destructive actions did non prevent ASDA's employees from committing to modify and the new corporate civilization considering Norman and Leighton had won employees' trust by constantly listening, debating, and beingness willing to learn. Candid nigh their intentions from the commencement, they counterbalanced the tension between the two change theories.
By 1999, the visitor had multiplied shareholder value eightfold. The organizational capabilities congenital by Norman and Leighton also gave ASDA the sustainable competitive reward that Dunlap had been unable to build at Scott Paper and that Sigler had been unable to build at Champion. While Dunlap was forced to sell a demoralized and ineffective organization to Kimberly-Clark, and while a languishing Champion was sold to UPM-Kymmene, Norman and Leighton in June 1999 found a friendly and culturally compatible suitor in Wal-Mart, which was willing to pay a substantial premium for the organizational capabilities that ASDA had so painstakingly developed.
In the stop, the integration of theories E and O created major modify—and major payoffs—for ASDA. Such payoffs are possible for other organizations that desire to develop a sustained reward in today'southward economy. Just that advantage can come merely from a constant willingness and ability to develop organizations for the long term combined with a abiding monitoring of shareholder value—East dancing with O, in an unending minuet.
A version of this article appeared in the May–June 2000 issue of Harvard Business concern Review.
Source: https://hbr.org/2000/05/cracking-the-code-of-change
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