Management And Accounting Web

Malone, D. and M. Mouritsen. 2014. Change management: Risk, transition, and strategy. Cost Management (May/June): 6-13.

Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Change and Risk Management Main Page | Strategy Main Page

The purpose of this paper is to improve our understanding of change management by focusing on the interactions of change management with three organizational priorities: risk management, the nature of the transition in different change initiatives, and an organization's strategic alignment. The first part of the article includes a discussion of change management in various ways including, definitional, contextual, and typological. The following sections include discussing change management's relationship to risk management, the ways change takes place (continuous improvement and tipping point), and the organization's strategy.

Change Management

The authors provide several definitions of change management. For example, the Change Management Learning Center defined it as "the application of the set of tools, processes, skills and principles for managing the people side of change to achieve the required outcomes of a change project or initiative." Another author described three kinds of change related to innovation including: disruptive or empowering innovations, sustaining innovations, and efficiency innovations. Many authors describe change management in terms of specific industries such as health services, and higher education. Change management has also been described in terms of project management, and in terms of various typologies of change. For example, one typology included, the task of managing change, as an area of professional practice, and as a body of knowledge. Another author used a three step sequential typology: organization equilibrium is unfreezed, change is achieved, and then a new equilibrium is refreezed.

Change Management and Risk

There are risks associated with change, and risks associated with the failure to change. Examples of risks associated with the failure to change include Eastman Kodak's failure to recognize the market's shift to digital media, and the U.S. auto industry's failure to identify the threat of a worldwide oil shortage in the 1970s.

Risks associated with change are influenced by the firm's preference for change and the rate of change in the industry. A firm's preference for change can range from low to high. However, a low preference for change will be safe only if the rate of change in the industry is also relatively low. If the firm's preference for change is low and the rate of change in the industry is high, the firm will be exposed to a higher risk of becoming obsolete. The upper most arrow in the graphic illustration below indicates that a firm with a risk avoidance preference in a rapidly changing industry should move towards a culture that promotes change. On the other hand, there is greater risk associated with a change culture that is too far ahead of the rate of change in the industry. The lower arrow indicates that a firm with a risk seeking preference in an industry with a low rate of change might choose to move towards a culture to inhibit change. Note that the line labeled risk neutral is where the firm's preference for change matches the rate of change in the industry. The area between the dashed lines is the comfort zone where the firm may be somewhat risk-adverse or somewhat risk-tolerant, but not an outlier with respect to change.

Risk and Change Management

Change Management and Transition

There are essentially two ways that change takes place in an organization: continuous improvement, and change initiated at a tipping point. Continuous improvement has been promoted for many years by statisticians, quality management experts and lean enterprise advocates.1 However, Malone and Mouritsen point out that improving on a continuous basis is not sufficient. As indicated in the discussion above, organizations must improve at a rate compatible with the rate set by the industry and markets in which it competes.

A tipping point2 change occurs when a firm faces a severe condition that threatens its competitive position or survival. The examples mentioned above related to Eastman Kodak and the U.S. auto industry illustrate change initiated by tipping points. Eastman Kodak did eventually make changes compatible with the digital media and equipment market, but was too late and took bankruptcy in 2102. The U.S. auto industry survived by producing more fuel efficient autos, but during the transition lost a considerable share of their market to Japanese and European competitors. To avoid tipping point change many firms have developed teams of experts who attempt to identify industry trends, threats, and events that might initiate a tipping point change.

Change Management and Strategic Alignment

According to Balanced Scorecard authors Kaplan and Norton, "managing strategy is about managing change". Aligning change management with strategy includes selling a desired change internally, providing the necessary training, revising performance measurements to fit the change, and adopting the appropriate incentive systems. An organization must be able to sustain the change needed to execute the desired strategy from both technical and human resource perspectives (e.g., culture, leadership, teamwork).

Conclusion

The authors quote Andres who said, there is nothing permanent except change. However, there are risks related to any change and there are risks involved when not changing, or not changing fast enough. To survive, organizations must be diligent in predicting, adapting, and aligning change with a carefully designed strategy.

_________________________________________________

Footnotes

1 See MAAW's sections on Continuous Improvement, Deming's Management Theory, Quality Related, and Lean Enterprise.

2 See Gladwell, M. 2002. The Tipping Point: How Little Things Can Make a Big Difference. Back Bay Books. (Summary).

Summaries related to Enterprise Risk Management:

Axson, D. A. J. 2011. Scenario planning: Navigating through today's uncertain world. Journal of Accountancy (March): 22-27. (Summary).

COSO. 2016. Enterprise Risk Management: Aligning Risk with Strategy and Performance. Public Exposure Draft. (June). (Summary).

McKay, S. 2016. CGMA tools: How to communicate risks using a heat map. Journal of Accountancy (June): 35-40. (Summary).

Merchant, K. A. 2012. ERM: Where to go from here. Journal of Accountancy (September): 32-34, 36. (Summary).

Kaplan, R. S. and A. Mikes. 2012. Managing risks: A new framework. Smart companies match their approach to the nature of the threats they face. Harvard Business Review (June): 48-60. (Summary).

Shenkir, W. G. and P. L. Walker. 2006. Enterprise risk management and the strategy-risk-focused organization. Cost Management (May/June): 32-38. (Summary).

Other related summaries:

Abernethy, M. A. and P. Brownell. 1999. The role of budgets in organizations facing strategic change: An exploratory study. Accounting, Organizations and Society 24(3): 189-204. (Summary).

Abrahamson, E. 2000. Change without pain. Harvard Business Review (July-August): 75-79. (Summary).

Beer, M. and N. Nohria. 2000. Cracking the code of change. Harvard Business Review (May-June): 133-141. (Summary).

Beynon, R. 1992. Change management as a platform for activity-based management. Journal of Cost Management (Summer): 24-30. (Summary).

Coutu, D. L. 2002. The anxiety of learning. Harvard Business Review (March): 100-107. (Summary).

Johanson, U., M. Martensson and M. Skoog. 2001. Mobilizing change through the management control of intangibles. Accounting, Organizations and Society 26(7-8): 715-733. (Note).

Kaplan, R. S. and D. P. Norton. 1996. The Balanced Scorecard: Translating Strategy into Action Boston: Harvard Business School Press. (Summary).

Kaplan, R. S. and D. P. Norton. 2001. The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. Harvard Business School Press. (Summary).

Karmarkar, U. 2004. Will you survive the services revolution? Harvard Business Review (June): 100-107. (Summary).

Pascale, R., M. Millemann and L. Gioja. 1997. Changing the way we change. Harvard Business Review (November-December): 127-139. (Summary).

Porter, M. E. 1996. What is a strategy? Harvard Business Review (November-December): 61-78. (Summary).

Rafii, F. and L. P. Carr. 1997. Why major change programs fail: An integrative analysis. Journal of Cost Management (January/February): 41-45. (Summary).

Sull, D. N. 1999. Why good companies go bad. Harvard Business Review (July-August): 42-48, 50, 52. (Summary).