Select Page

Compare Kotter’s eight-stage process with the change process described in the article “Cracking the Code of Change.” Create a table outlining the major components of each, including similarities and key differences.Be sure to analyze how Kotter’s See/Feel/Change core method aligns with Beer and Nohria’s (2000) E and O strategies?Analyze your own approach to managing change. Which of the two models most appeals to you? Why?
cracking_the_code_of_change.pdf

Unformatted Attachment Preview

Until now, change in business has been
an either-or proposition: either quickly
create economic value for shareholders
or patiently develop an open, trusting
Cracking
the Code
of
T
corporate culture long term. But new
research indicates that combining these
“hard”and “soft”approaches can radically
transform the way businesses change.
HE NEW ECONOMY has ushered in great business
opportunities -and great turmoil. Not since the Industrial
Revolution have the stakes of dealing with change heen so
high. Most traditional organizations have accepted, in theory
at least, 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, however, change remains difficult to pull off, and
few companies manage the process as well as they would like.
Most of their initiatives-installing new technology, downsizing, restructuring, or trying to change corporate culture-have
had low success rates. The hrutal fact is that about 70% of all
change initiatives fail.
In our experience, the reason for most of those failures is
that in their rush to change their organizations, managers
end up immersing themselves in an alphabet soup of initiatives. They lose focus and become 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 often
leads to muddle when change is attempted. The result is that
most change efforts exert a heavy toll, both human and economic. To improve the odds of success, and to reduce the human carnage, it is imperative that executives understand the
nature and process of corporate change much hetter. But even
that is not enough. Leaders need to crack the code of change.
HARVARD BUSINESS REVIEW
May-func 2000
by Michael Beer
and Nit±i Nohria
133
Cracking the Code of Change
For more than 40 years now, we’ve been studying United States, where financial markets push corporate boards for rapid turnarounds. For instance,
the nature of corporate change. And although every
when William A. Anders was brought in as CEO of
busincss’s change initiative is unique, our research
General Dynamics in 1991, his goal was to maxisuggests there are two archetypes, or theories, of
mize economic value-however painful the remechange. These archetypes are based on very differdies might be. Over the next three years, Anders
ent and often unconscious assumptions by senior
executives- and the consultants and academics reduced the workforce hy 71,000 people-44,000
through the divestiture of seven husinesses and
who advise them- about why and how changes
27,000 through layoffs and attrition. Anders emshould be made. Theory E is change based on economic value. Theory O is change based on organi- ployed common E strategies.
zational capability. Both are valid models; each
Managers who subscrihe to Theory O helieve
theory of change achieves some of management’s
that if they were to focus exclusively on the price
goals, either explicitly or implicitly. But each theof their stock, they might harm their organizaory also has its costs -often unexpected ones.
tions. In this “soft” approach to change, the goal is
to develop corporate culture and human capability
Theory E change strategies are the ones that
through individual and organizational learningmake all the headlines. In this “hard” approach
the process of changing, obtaining feedback, reflectto change, shareholder value is the only legitiing, and making further changes. U.S. companies
mate measure of corporate success. Change usually
involves heavy use of economic incentives, drastic layoffs, downsizing, Theory E change strategies usually involve heavy
and restructuring. E change strate- use of economic incentives, drastic layoffs, downgies are more common than O change
strategies among companies in the sizing, and restructuring. Shareholder value is the
only legitinnate measure of corporate success.
that adopt O strategies, as Hewlett-Packard
did when its performance flagged in the
1980s, typically have strong, long-held, commitment-hased psychological contracts with
their employees.
Managers at these companies are likely
to see the risks in breaking those contracts.
Because they place a high value on employee
commitment, Asian and European businesses
are also more likely to adopt an O strategy
to change.
Few companies subscribe to just one theory. Most companies we have studied have
used a mix of hoth. But all too often, managers try to apply theories E and O in tandem
without resolving the inherent tensions hetween them. This impulse to comhinc the
strategies is directionally correct, but theories E and O are so different that it’s hard to
manage them simultaneously-employees
distrust leaders who alternate hetween nurturing and cutthroat corporate behavior. Our
research suggests, however, that there is a
way to resolve the tension so that husinesses
can satisfy their shareholders while building
viable institutions. Companies that effectively comhine hard and soft approaches to
change can reap hig payoffs in profitahility
and productivity. Those companies are more
likely to achieve a sustainable competitive
134
HARVARD BUSINESS REVIEW
May-Tune 2000
Cracking the Code of Change
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
hetween E and O strategies. But before we
do that, we need to look at just how different
the two theories are.
A Tale of Two Theories
To understand how sharply theories E and O
differ, we can compare them along several
key dimensions of corporate change: goals,
leadership, focus, process, reward system,
and use of consultants. (For a side-by-side
comparison, see the exhibit “Comparing
Theories of Change.”) We’ll look at two companies in similar businesses that adopted
almost pure forms of each archetype. Scott
Paper successfully used Theory E to enhance shareholder value, while Champion
International used Theory O to achieve a
complete cultural transformation that increased its productivity and employee commitment. But as we will soon observe, both
paper producers also discovered the limitations of sticking with only one theory of
change. Let’s compare the two companies’
initiatives.
Theory O change strategies are geared toward building
up the corporate culture: employee behaviors, attitudes.
capabilities, and commitment.The organization’s ability
to learn from its experiences is a legitimate yardstick of
corporate success.
Goals. When Al Dunlap assumed leadership of
Scott Paper in May 1994, he immediately fired
11,000 employees and sold off several businesses.
His determination to restructure the heleaguered
company was almost monomaniacal. As he said
in one of his speeches: “Shareholders are the number one constituency. Show me an annual report
that lists six or seven constituencies, and I’ll show
you a mismanaged company.” From a shareholder’s
perspective, the results of Dunlap’s actions were
stunning. In just 20 months, he managed to triple
shareholder returns as Scott Paper’s market value
rose from about $3 biUion in 1994 to about $9 billion by the end of 1995. The fmancial community
applauded his efforts and hailed Scott Paper’s approach to change as a model for improving shareholder returns.
HARVARD BUSINESS REVIEW
May-June 2000
champion’s reform effort
couldn’t have been more differem. CEO Andrew sigler acknowiedged that enhanced eco-
nomic value was an appropriate
target for management, but he
believed that goal would be best achieved hy transforming the behaviors of management, unions, and
workers alike. In 1981, Sigler and other managers
launched a long-term effort to restructure corporate
culture around a new vision called the Champion
Michael Beer is the Cahners-Robb Professor of Business
Administration at Harvard Business School in Boston.
He can be reached at mbeer@hbs.edu. Nitin Nohria is
the Richard P. Chapman Professor of Business Administration at Harvard Business School and chairs the
school’s Organizational Behavior Unit. He can be reached
at nnohria@hbs.edu. The authors’ book Breaking the
Code of Change will be published by Harvard Business
School Press in October 2000.
To discuss this article, join HBR’s authors and readers in
the HBR Forum at www.hhr.org/forum.
135
Cracking the Code of Change
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 hest increase employee productivity and
thereby improve the bottom line.
Leadership. Leaders who subscribe to Theory E
manage change the old-fashioned way: from the top
down. They set goals with little involvement from
their management teams and certainly without input from lower levels or unions. Dunlap was clearly
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. Nothing
made 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 performance. Teams drafted value statements, and even
the industry’s unions were hrought into the dialogue. Employees were encouraged to identify and
solve prohlems themselves. Change at Champion
sprouted from the bottom up.
Focus. In E-type change, 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 top down, yielding swift financial results.
For instance, Dunlap quickly decided to outsource
many of Scott Paper’s corporate functions – henefits and payroll administration, almost all of its management information systems, some of its technology research, medical services, telemarketing,
and security functions. An executive manager of a
Scott Paper’s CEO trebled shareholder
returns but failed to build the capabilities
needed for sustained competitive
advantage -commitment, coordination,
communication, and creativity.
glohal merger explained the E rationale: “I have a
[profit] goal of $176 million this year, and there’s no
time to involve others or develop organizational
capability.”
By contrast. Theory O’s initial focus is on huilding 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
136
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
Our research has shown
conform to the new philosophy, but the overall
that all corporate
firing freeze helped to cretransformations can
ate a culture of trust and
be compared along
commitment. Structural
the six dimensions
change followed once the
shown here. The table
culture changed. Indeed,
outlines the differences
hy the mid-1990s. Chambetween the E and
pion had completely reorganized all its corporate
0 archetypes and
functions. Once a hierarillustrates what an
chical, functionally orgaintegrated approach
nized company. Chammight look like.
pion adopted a matrix
structure that empowered employee teams to
focus more on customers.
Process. Theory E is
^^^^^^^^^^^
predicated on the view
that no battle can be won without a clear, comprehensive, common plan of action that encourages internal coordination and inspires confidence among
customers, suppliers, and investors. The plan lets
leaders quickly motivate and mohiiize their businesses,- it compels them to take tough, decisive actions they presumahly haven’t taken in the past.
The changes at Scott Paper unfolded like a military
battle plan. Managers were instructed to achieve
specific targets by specific dates. If they didn’t adhere to Dunlap’s 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 hegan in 1981, there was no master blueprint.
The idea was that iimovative work processes, values, and culture changes in one plant would he
adapted and used hy other plants on their way
through the corporate system. No single person,
not even Sigler, was seen as the driver of change. Instead, local leaders took responsibility. Top management simply encouraged experimentation from
the ground up, 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
Comparing
Theories
of Change
HARVARD BUSINESS REVIEW
May-June 2000
Cracking the Code of Change
Dimensions
of Change
Theory E
Theory 0
Theories E and 0 Combined
Goals
maximize
shareholder vaiue
develop organizational
capabilities
explicitly embrace the paradox
between economic value and
organizational capability
Leadership
manage change
from the top down
encourage participation
from the bottom up
set direction from the top
and engage the people below
Focus
emphasize structure
and systems
buiid up corporate
culture: employees’
behavior and attitudes
focus simultaneously on the
hard (structures and systems)
and the soft (corporate culture)
Process
pian and establish
programs
experiment and evolve
pian for spontaneity
Reward System
motivate through
financial incentives
motivate through
commitment-use
pay as fair exchange
use incentives to reinforce
change but not to drive it
Use of
Consuitants
consultants analyze
problems and shape
solutions
consultants support
management in shaping
their own solutions
consultants are expert
resources who empower
empioyees
financial mcentives, mainly stock options. Dunlap’s own compensation package-which ultimately
netted him more than $ioo million-was tightly
linked to shareholders’ interests. Proponents of this
system argue that financial incentives guarantee
that employees’ interests match stockholders’ interests. Financial rewards also help top executives
feel compensated for a difficult job-one in which
they are often reviled hy their onetime colleagues
and the larger community.
The O-style compensation systems at Champion
reinforced the goals of culture change, hut they
didn’t drive those goals. A skills-hased pay system
and a corporatewide gains-sharing plan were installed to draw union workers and management
into a community of purpose. Financial incentives
were used only as a supplement to those systems
and not to push particular reforms. While Champion
did offer a companywide bonus to achieve husiness
goals in two separate years, this came late in the
change process and played a minor role 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 and manage it.
The consultants can help CEOs get a fix on urgent
issues and priorities. They also offer much-needed
HARVARD BUSINESS REVIEW
May-June 2000
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 subsequently 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 own husiness analyses and craft
their own solutions. And while the consultants had
their own ideas, they did not recommend any 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 way that could not be foreseen at the outset.
In their purest forms, hoth change theories clearly
have their limitations. CEOs who must make difficult E-style choices understandably distance themselves from their employees to ease their own pain
and guilt. Once removed from their people, these
CEOs begin to sec their employees as part of the
problem. As time goes on, these leaders become
less and less inclined to adopt O-style change
strategies. They fail to invest in building the company’s human resources, which inevitably hollows
out the company and saps its capacity for sustained
performance. At Scott Paper, for example, Dunlap
trebled shareholder returns but failed to build the
137
Cracking the Code of Change
capabilities needed for sustained competitive advantage-commitment, coordination, communication, and creativity. In 1995, Dunlap sold Scott Paper to its longtime competitor Kimberly-Clark.
CEOs who embrace Theory O find that their
loyalty and commitment to their employees can
prevent them from making tough decisions. The
temptation is to postpone the bitter medicine in
the hopes that rising productivity will improve the
business situation. But productivity gains aren’t
enough when fundamental structural change is required. That reality is underscored by today’s global
financial system, which makes corporate performance instantly transparent to large institutional
CEOs who embrace Theory O
find that their loyalty and commitment
to their employees can prevent them
from making tough decisions.
shareholders whose fund managers are under enormous pressure to show good results. Consider
Champion. By 1997, it had become one of the leaders in its industry based on most performance measures. Still, newly instated CEO Richard Olsen was
forced to admit a tough reality: Champion shareholders had not seen a significant increase in the
economic value of the company in more than a
decade. Indeed, when Champion was sold recently
to Finland-based UPM-Kymmene, it was acquired
for a mere 1.5 times its original share value.
Managing the Contradictions
clearly, if the objective is to build a company that
can adapt, survive, and prosper over the years. Theory E strategies must somehow be combined with
Theory O strategies. But 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 we’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 better off to pick
either pure E or pure O strategies – with all their
costs. At least one set of stakeholders would have
benefited.
The obvious way to combine E and O is to sequence them. Some companies, notably General
Electric, have done this quite successfully. At GE,
CEO Jack Welch began his sequenced change by
imposing an E-type restructuring. He demanded
138
that all GE businesses be first or second in their industries. Any unit that failed that test would be
fixed, sold off, or closed. Welch followed that up
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 phase, GE people
began to call Welch “Neutron Jack,” after the fabled bomb that was designed to destroy people but
leave buildings intact. Once he had wrung out the
redundancies, however, Welch adopted an O strategy. In 1985, he started a s …
Purchase answer to see full
attachment