Management And Accounting Web

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

Summary by Charles Hart
Master of Accountancy Program
University of South Florida, Summer 2003

Change Management Main Page | Strategy Main Page

Installing new technology, downsizing, restructuring, or trying to change corporate culture has startling low success rates. The brutal fact is that 70% of all change initiatives fail. The reason for these 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 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.

Each business’ change is unique but each change is a variant of one of two archetypes. These archetypes are based on different and unconscious assumptions by senior executives and the consultants and academics advising them. The two theories are Theory E and Theory O. Theory E is change based on economic value. Theory O is change based on organizational capability.

Theory E change strategies are ones that make all the headlines. In this “hard” approach to change, shareholder value is the only legitimate concern. Change usually involves heavy use of economic incentives, drastic layoffs, downsizing, and restructuring. E change strategies are more common than O change strategies among companies in the United States.

Managers using Theory O believe if they 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. This theory is the process of changing, obtaining feedback, reflecting, and making further changes. Companies that enact this strategy have a strong, long-held, commitment-based psychological contract with their employees.

The key differences between Theory E and Theory O are:

of Change
Theory E Theory O Theories E and
O Combined
Goals Maximize shareholder value Develop organizational capabilities Explicitly embrace the paradox between economic value and organizational capability.
Leadership Manage 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 Build up corporate culture; employees’ behavior and attitudes Focus simultaneously on the hard (structures and systems) and the soft (corporate culture)
Process Plan and establish programs Experiment and evolve Plan 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 Consultants Consultants analyze problems and shape solutions Consultants support management in shaping their own solutions Consultants are expert resources who empower employees

The problem is that companies cannot enact just one of these theories when trying to change their organization. Rather, companies combine the theories and lose focus. Because the theories are so different, managers cannot juggle them simultaneously and the resulting mess leaves the company no better off. Worse, the employees lose any trust for the company and management whatsoever.

Equally said, a company who enacts only Theory E ignores the feelings and attitudes of their employees. These companies lose the commitment, the coordination, the communication, and the creativity needed for sustained competitive advantage. Companies who only enact Theory O never have the impetus to make hard and bitter decisions. Therefore, these companies hope their rising gains in productivity outdistance their business situation. This is a losing situation because however high the gain in productivity a company experiences cannot overcome losing market share and consumers. Additionally, the company enacting Theory O gains productivity but does not gain economic value beyond the gains in performance measures.

Companies can enact Theory O and Theory E in sequence. For example, a company can first lay-off employees (Theory E) and then cut down organizational hierarchy and improve communication (Theory O). However, it is often too hard to manage even this circumstance because it takes years to fully implement. Additionally, if there is a change in senior management during the process the program of sequencing may lose momentum and direction. This lack of speed and possible loss of direction can cause doubt and disillusionment with the process. Finally, if the entire strategy is not well thought out it may cause more trouble than it is worth. For example, if Theory E (Employees last policy) follows Theory O (Employees first policy) policies, employees and managers may feel betrayed.

Instead of using only one theory or sequencing both theories, a company should implement both Theory E and Theory O at the same time. The simultaneous use of both theories is more likely to be the source of sustainable competitive advantage. The company should explicitly confront the tension between E and O goals and embrace the paradox between the two theories. This should become a balancing act between initiating actions that follow one theory and then contradict that theory.

The company should be lead by a leader at the top who clearly sets and organizes company changes. At the same time, this leader should listen and look for input from the lower levels of the company by shifting power from the company’s headquarters to where the company does business. Additionally, the company may want to have divergent personalities within senior management. For example, the CEO is reserved and quiet while the COO is personable and loud.

The company should focus on simultaneous “hard” and “soft” changes. Hard changes such as corporate structure and systems should be changed while making “soft” changes to the dynamic of the corporate workplace and its culture. The goal should be to make the company a sound financially and a great place to work.

The company should look for spontaneity. Rather than strictly follow a pattern of reorganization or a policy of experimentation, the company should look to learn. Managers should be encouraged to learn at all costs. However, those who do not learn and cannot learn should be replaced. The idea should be having the company use what it learns in order to remove the dead weight from the company.

The company should use a variety of incentives to encourage good work within the corporate structure. Rather than only pay managers when they meet financial goals, the company should pay managers when they meet performance goals as well. Additionally, employees should be rewarded for meeting performance goals too. Rather than rely on a single form of incentives that concentrate on a single issue, the company should tailor its incentives to get the managers and employees to be the best they can be.

Finally, consultants should get managers to think and not just blindly act on a set of procedures. Often the presence of consultants can make managers abdicate any sense of leadership; rather, consultants should help managers become better leaders. Managers should be encouraged to use consultants as a tool and nothing else.

Theory E and Theory O can be successful when used together at the same time. To do so, requires great skill and will to achieve adequate results. Companies should not shrink from this challenge.


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