JOURNAL OF MANAGEMENT AND CHANGE No 34/35 2015/2016 A Concept for Diagnosing and Developing Organizational Change Capabilities A Concept for Diagnosing and Developing Organizational Change Capabilities Christina Schweiger, Barbara Kump and Lorena Hoormann Abstract Key Words In modern industries, organizations are facing the need to continuously change and adapt to dynamic environmental conditions. To address this change, organizations require several specific capabilities, which will be referred to as organizational change capabilities. As the paper will outline, organizational change capabilities are a type of dynamic capability grounded in an organization’s change logic. The model of organizational change capabilities presented in this paper distinguishes search, reflection, seizing, planning, implementation, and strategy making capabilities. Based on this model, (a) concepts for diagnosing and improving change capabilities, and (b) an innovative intervention design for organizational development are developed, which are generic and can be tailored to the needs of a specific firm. The theoretical analysis sketched in this paper may further stimulate theory development at the interface of dynamic capabilities and dominant logic. At the same time, the innovative intervention design is expected to be of high practical value for managers and practitioners in the field of organizational development. Change capabilities, dynamic capabilities, organizational change logic, organizational development, organizational diagnosis Christina Schweiger is Senior Researcher and Lecturer in the Entrepreneurship Competence Team at Vienna University of Applied Sciences of WKW (Austria). She has worked in international applied R&D projects for many years. Currently she works as a team leader in research and consultant projects in the field of the development of small and medium sized enterprises, strategic management, organizational development and change management. She holds a doctoral degree in Business Management and Business Education from the University of Graz. E-mail: ous international and interdisciplinary R&D and consulting projects in the field of change, organizational learning and knowledge management. She has co-authored more than 30 peer reviewed scientific articles. Her current research interests include organizational knowledge creation, leadership and organizational development. Barbara Kump is Endowed Professor of Organizational Development and Organizational Learning at the department of Human Resources and Organization at Vienna University of Applied Sciences of WKW (Austria). She holds both a diploma (MA) and a doctoral degree in cognitive psychology from the University of Graz. She has worked as a team leader in vari- 12 Introduction Due to increasing turbulence in the markets and intense competition, organizations need to continuously change and adapt to their environments to survive. Dynamically changing operating environments require a proactive approach, where change occurs in a strategic way in anticipation of prospective alterations (Judge & Douglas, 2009; Worley & Lawler, 2006). Proactive organizational change requires the identification and development of strategic options and the implementation of the planned strategic changes. To achieve these changes, organizations need certain capabilities, which have been referred to as organizational change capabilities (Soparnot, 2011). A lack of change capabilities may lead to structural inertia; that is, the inability to address Lorena Hoormann is Research Associate and Lecturer in the Entrepreneurship Competence Team at Vienna University of Applied Sciences of WKW (Austria). During her studies she worked in different projects in Germany, Spain, Chile and Austria. She has been working for more than four years as a Junior Consultant at the Viennese Institute for Systemic Organizational research (I.S.O.). Her current research interests include organizational development, applied research in evaluation and participation as well as systemic organizational research and interventions. Christina Schweiger, Barbara Kump, Lorena Hoormann changing conditions. Negative development paths and corporate crises are possible consequences (Hannan & Freeman, 1984; Trispas & Gavetti, 2000; Vergne & Durand, 2011). Organizational change capabilities can intercept structural inertia and path dependencies, thereby sustaining competitive advantage over time, and increase the likelihood of long-term survival. Change capabilities may thus safeguard organizations from being “stuck in the middle” – from being without targeted strategic positioning in relevant markets (Borch & Madsen, 2007). The aim of this article is to introduce concepts and methods that support the improvement of organizational change capabilities. More concretely, the developed methods will enable (a) organizational diagnosis and (b) the initiation of capability development. The concept of organizational change capabilities, which will be outlined in this paper, builds on the dynamic capabilities framework (Eisenhardt & Martin, 2000; Helfat, 1997; Teece, Pisano, & Shuen, 1997), but has a stronger focus on the implementation of strategic change. Moreover, it integrates the concept of organizational change capabilities with that of organizational dominant logic (Bettis & Prahalad, 1995; Prahalad & Bettis, 1986) by introducing the concept of organizational change logic. As an initial theoretical contribution, a model of change capabilities will be developed. The model builds on the concept of dynamic capabilities but takes into account the actual implementation of strategic changes. Moreover, the link between organizational change capabilities and an organization’s change logic will be elaborated. As a second contribution, implications and requirements for diagnosing change capabilities and the organization’s change logic will be derived, and an intervention design for developing change capabilities will be developed. The design is standardized but can still be adapted to the demands of a specific firm. This paper is organized as follows. First, the theoretical concept of change capabilities JOURNAL OF MANAGEMENT AND CHANGE No 34/35 2015/2016 will be outlined by extending the concept of dynamic capabilities and linking this with the concept of organizational dominant logic. Then, a multi-method approach to diagnosing change capabilities and organizational change logic and an intervention design for developing change capabilities within organizations will be described. Finally, implications for future research and practice will be discussed. Change Capabilities and Change Logic This section provides the theoretical rationale for developing and diagnosing organizational change capabilities. Because change capabilities can be seen as specific types of dynamic capabilities (Eisenhardt & Martin, 2000; Helfat, 1997; Teece et al., 1997), the section starts with a brief review of dynamic capability research, before the concepts of organizational change capabilities and organizational change logic are introduced. Dynamic Capabilities The concept of dynamic capabilities emerged from contributions by Teece et al. (1997), Helfat (1997), and Eisenhardt and Martin (2000). It is grounded in the resource-based view of the firm, which assumes that competitive advantage is generated by a firm’s individual combination of internal resources such as knowledge, rules, routines and capabilities and by its capability to reconfigure existing resources into specific resource configurations (e.g. Barney, 1991; Grant, 1991; Nelson & Winter, 1982). These resource configurations enable firms to generate new valuable market strategies and innovations that are difficult to copy. Dynamic capabilities are usually defined as those capabilities that enable an organization to recognize the need for changes, to understand the likely consequences of the change, and to reconfigure its firm-specific resource base to match the requirements of changing environments. 13 JOURNAL OF MANAGEMENT AND CHANGE No 34/35 2015/2016 A Concept for Diagnosing and Developing Organizational Change Capabilities Since its introduction, the dynamic capabilities framework has been the subject of numerous theoretical debates (for overviews see, e.g. Ambrosini, Bowman, & Collier, 2009; Barreto, 2010; Di Stefano, Peteraf, & Verona, 2014; Vogel & Güttel, 2013). Dynamic capabilities are deemed responsible for seizing the opportunities that a dynamic operating environment opens up and for presenting the innovations required to continuously maintain competitive advantage. Such capabilities include the balance of the present and future activities of the firm; for example, the management of the creation of product and process innovations, the operational management of the present business, and the improvement and advancement of present routines and competencies (Borch & Madsen, 2007; Wang & Ahmed, 2007; Winter, 2003; Zahra, Sapienza, & Davidsson 2006). Thereby, dynamic capabilities prepare the firm for prospective challenges. Teece (2007, see also Teece, 2014) presents a model of dynamic capabilities that distinguishes sensing, seizing, and transforming capabilities. Sensing refers to various activities related to identifying new business opportunities, or innovations (e.g. searching, scanning). Seizing includes designing various new business opportunities and selecting among various strategies and business models, and it is closely related to investment decisions that primarily take place under uncertainty (e.g. changing markets). Transforming refers to conducting activities that aim to recombine and to reconfigure assets within an organization such that path dependencies and inertia are avoided (Vergne & Durand, 2011). Teece (2014) highlights the importance of strategic decision-making with regard to sustainable change. In line with previous approaches (e.g. Eisenhardt & Sull, 2001; Mintzberg, 1994), Teece emphasizes that strategy should build the basis for investment decisions and should be aligned with changing environmental conditions. Research into dynamic capabilities provides insights into how firms can strive to gain or 14 to sustain a competitive advantage by strategically altering their resource base. However, this stream of research is largely disconnected from the question of how well firms can actually implement strategic change (Soparnot, 2011). Therefore, the concept of change capabilities has been introduced. Change Capabilities Soparnot (2011: 642) defines a firm’s change capability as ‘the ability of the company to produce matching outcomes (content) for environmental (external context) and/or organizational (internal context) evolution, either by reacting to the changes (adaptation) or by instituting them (pro-action) and implementing the transition brought about by these changes (process) in the heart of the company’. This definition, however, remains vague with regard to the concrete capabilities firms need for successful strategic change. To actually diagnose and improve change capabilities, the concept must be further refined. Teece’s (2007, 2014) distinction of dynamic capabilities into sensing, seizing, and transforming provides a useful starting point for further refining the concept of change capabilities, and Teece’s components can partly be transferred to change capabilities: First, organizations need to sense ideas for change, from both outside and within the firm. Teece’s category of sensing is primarily oriented towards the organization’s environment, for example, towards identifying changing customer needs or new competitors. However, ideas for changes may also arise from within the organization, for example, because the current processes do not lead to the expected outcomes. Second, ideas for change both from outside and within the organization must be seized, that is, formed into concrete opportunities for change that fit the firm’s strengths and weaknesses and are in line with the firm’s strategy. Christina Schweiger, Barbara Kump, Lorena Hoormann As described above, Teece (2014) highlights that dynamic capabilities can unfold their full potential only in conjunction with a strong organizational strategy. This also holds true for organizational change, which should take place in a strategic, planned manner. Therefore, decisions for implementing a change opportunity should be in line with an organization’s strategy. Third, transformation must occur in the sense that the decided changes must be implemented. This aspect of implementation goes beyond Teece’s concept of transformation: As Soparnot (2011: 645) puts it, even if the concept of dynamic capability ‘identifies the routines at the origin of the strategic and organizational reconfigurations, it does not explain how these renewals may be carried out; this is what the change capacity is trying to identify’. By combining Soparnot’s (2011) concept with Teece’s (2007, 2014) components, the definition of change capabilities can be refined by regarding them as those capabilities that enable an organization to recognize the need for change, both from inside the organization and its environment, develop and seize ideas for change opportunities which fit the firm’s strengths and weaknesses, make decisions for change, taking into account the firm’s strategy, and successfully plan and implement changes. From this definition, the following change capabilities can be derived: search, reflection, seizing, planning, implementation and strategy making (see Figure 1; a similar model is presented by Güttel, 2006, in the context of strategic entrepreneurship). Search refers to a firm’s ability to effectively recognize, sense and explore the external environment for prospective innovative products, services and processes (e.g. Danneels, 2008). That is, they are all routines that support organizations in observing their environment to find new relevant external information about, for example, the market, customer needs, JOURNAL OF MANAGEMENT AND CHANGE No 34/35 2015/2016 competition and new technologies. Reflection focuses on processes and developments within the organization. It constitutes the firm’s ability to continuously challenge internal organizational routines, behaviour and the general “status quo” (strategy, goals, vision, etc.; e.g. West, 2000). Reflection is related to the questions of what is working well within the organization, what is not working and what has to be changed. Seizing, in the sense of Teece (2007, 2014), refers to all organizational processes that enable organizations to assimilate relevant information and to transform it into suitable change opportunities. With regard to organizational change, this means that ideas for change, which the organization has developed based on (external) search and (internal) reflection processes, are adapted to a firm’s current characteristics. Concerning the implementation of the change, planning and implementation can be distinguished. Planning becomes visible in the ability to bring change visions “down to earth” by operationalizing strategic change goals (e.g. Kapsali, 2011; McElroy, 1996; Noble, 1999). This includes the planning of change and innovation projects and the identification of existing resources, potentials and barriers. Implementation refers to the firm’s ability to bring intended change activities into action and to transform change ideas consistently into new products, structures and systems (e.g. Davis, Kee, & Newcomer, 2010; Meyer & Stensaker, 2006; Vacar, 2013). Only through consequential action can change take place. Finally, the capability of strategy making is required for successful strategic change, which is closely related to all other capabilities. Strategy making is seen as the firm’s ability to define long-term change goals, to take into account the existing means and resources, and to orient entrepreneurial decisions towards these goals. Strategy making includes processes for defining the vision, mission, value 15 JOURNAL OF MANAGEMENT AND CHANGE No 34/35 2015/2016 A Concept for Diagnosing and Developing Organizational Change Capabilities Figure 1: Organizational Change Capabilities (search, reflection, seizing, planning, implementation, strategy making) that Operate on the Organizational Change Logic statements and strategies for competition (e.g. Ackermann & Eden, 2011). Organizational Change Logic An organization’s change capabilities do not operate in a vacuum; they are deeply embedded in the organization’s basic assumptions, beliefs and emergent decision rules regarding change and learning. One framework, which elaborates on the emergence and effects of organizational beliefs and rules within organizations, is the concept of a dominant logic introduced by Prahalad and Bettis (1986) (see also Bettis & Prahalad, 1995). The dominant logic constitutes the firm’s collective mind set or “view of the world”, which configures and arranges the business model, the management, and the firm’s structure to make decisions, to allocate resources, and to realize goals (Bettis & Wong, 2003; Drazin, Glynn, & Kazanjian, 2004; Eggers & Kaplan, 2013; Kor & Mesko, 2013). 16 Expressed as the firm’s typical learning and problem solving behaviour, the dominant logic is “an emergent property of organizations as complex adaptive systems” (Bettis & Prahalad, 1995: 10) and part of the organization’s deep structure or subconscious (Bettis & Prahalad, 1995; Bettis & Wong, 2003; Gersick, 1991; Tushman & Romanelli, 1985), which underlies a firm’s visible strategy, structure and systems (Drazin et al., 2004; Eggers & Kaplan, 2013; Kor & Mesko, 2013; von Krogh & Roos, 1996). The organization’s dominant logic comprises, among others, values (e.g. trust, reliability), beliefs (e.g. “leaders must be strong”), mental models (e.g. what does “conflict” mean) or norms (e.g. dress code, addressing extra hours). An organization’s dominant logic affects all aspects of organizing, including how the organization addresses change. This facet of the dominant logic, which addresses organizational change, is defined here as organizational change logic. More specifically, an Christina Schweiger, Barbara Kump, Lorena Hoormann JOURNAL OF MANAGEMENT AND CHANGE No 34/35 2015/2016 organization’s change logic is seen as that part of the dominant logic that conceptualizes its change and learning processes through basic assumptions, beliefs and emergent decision rules, structures and systems. Therefore, the organizational change logic is the organization’s collective mind set, which shapes and steers all types of change and learning processes within an organization. Because each organization has its unique dominant logic, it also has a specific way of addressing change; that is, a particular, idiosyncratic, organizational change logic. Diagnosing Change Capabilities and Change Logic In more practical terms, the organizational change logic is the organization’s typical way of addressing change (e.g. avoiding risk, involving many people in decisions). The organization’s change logic may affect questions such as “How important is change in general for the organization?”, “Who usually makes suggestions for change?”, “Who decides whether an idea is actually being implemented?”, or “To what extent are changes being planned?” An Outcome-oriented Approach to Diagnosing Change Capabilities As a set of invisible, cognitive rules, assumptions and beliefs, the organizational (change) logic is responsible for prospective changes and for maintaining present routines and behaviour (Bartunek & Moch, 1994). The organizational change logic therefore can be seen as the framework on which change capabilities may bring out the intended change and innovations. Although it was not in the focus of their work, Kor and Mesko (2013) described a similar link between dynamic capabilities and the organizational logic. In line with these considerations, the presented model suggests that the development of change capabilities is shaped by the firm’s change logic, and in turn, the development of change capabilities may shape the organizational change logic (Bettis & Wong, 2003; Kor & Mesko, 2013). The aim underlying this article was to develop concepts for organizations to improve their change capabilities, taking into account their change logic. Therefore, concepts were developed for diagnosing both change capabilities and the change logic. Due to the different nature of the two, different methods are needed to diagnose them, which will be outlined in the following. Organizational change capabilities manifest themselves in practice when firms are addressing change. They are basically observable and measurable. They may appear in various shapes in different organizations but they have similar outcomes regardless of how these outcomes are achieved. This property of achieving similar outcomes with different means has been referred to as equifinality by Eisenhardt and Martin (2000). To account for this property of equifinality, the extent of change capabilities may be best measured by focusing on outcomes. Therefore, a definition of outcomes was developed that may indicate a high level of the competence under consideration (e.g. “How well are you aware of what our competitors are doing?”). This output orientation allows for measuring change capabilities regardless of how they are enacted in the firm under consideration. The definition of outcomes for each of the components of change capabilities can be seen in Table 1: Firms with high search capability are aware of what happens in their environment and are able to identify ideas for change. If the reflection capability is high, firms are aware of what happens inside their organization and are able to identify ideas for change from within. Firms with high seizing capability are able to recognize ideas that bear market opportunities and to derive ideas for innovation and 17 JOURNAL OF MANAGEMENT AND CHANGE No 34/35 2015/2016 A Concept for Diagnosing and Developing Organizational Change Capabilities Table 1: Output-oriented Definition of Organizational Change Capabilities Organizational change capability Search Reflection Seizing Planning Output-oriented definition We are aware of what happens in our organization’s environment, and we are able to identify ideas for change. We are aware of what happens inside our organization, and we are able to identify ideas for change. We are able to recognize ideas that bear market opportunities and to derive ideas for innovation and change. We are able to realistically plan changes within our organization. Implementation Once we initiate a change in our organization, we are able to allocate the required resources, to define appropriate processes, and to acquire the required know-how. Strategy making We have long-term goals and strategies of how to achieve these goals, and we are able to align our decisions with these long-term goals. change that fit the organization’s strengths and weaknesses. A firm with good planning capability is able to realistically plan changes. If the implementation capability within a firm is well developed, the firm is able to allocate the required resources, to define appropriate processes and to acquire the required know-how once the change has been initiated. Organizations with high capability of strategy making in the context of organizational change have long-term goals and strategies with which to achieve these goals, and they are able to align their change-related decisions with these longterm goals. Starting from this output-oriented operationalization, change capabilities may be diagnosed with the help of (quantitative) surveys or semi-structured (qualitative) interviews. A quantitative survey-based diagnosis may be useful to gain an overview of different (aggregated) perspectives on each of these change capabilities. A survey-based quantitative operationalization may enable the collection of data in more breadth (e.g. many employees in different positions). In addition, qualitative interviews may take place individually or in group settings, and they may focus on the question of how each of these capabilities is enacted in practice within an organization. Qualitative methods help achieve greater depth and richer pictures 18 of how change capabilities manifest within the organization at hand and of their strengths and weaknesses. A combination of qualitative and quantitative methods may provide an overview of the status quo of each of the change capabilities, concerning both their extent (quantitative) and their shape (qualitative). An Interpretative Method for Diagnosing the Organizational Change Logic Because a firm’s logic is rooted in its “deep structures”, a firm’s members are largely unaware of it (Bettis & Wong, 2003). Therefore, the organizational change logic cannot be directly diagnosed with, for example, a survey or direct interview questions such as “How would you describe the change logic of your firm?” Instead, more indirect methods are needed with which the organizational change logic is inferred from other data (e.g. Alderfer, 1987; 2011). The method that has been developed for diagnosing the organizational change logic is based on an associative-interpretative analysis (e.g. Alderfer, 2011; Dijksterhuis & Nordgren, 2006) of qualitative data from multiple sources (e.g. qualitative interviews, observations, analyses of the website). The following basic assumptions underlie the developed method for diagnosing the change logic: (a) An organization’s change logic is Christina Schweiger, Barbara Kump, Lorena Hoormann idiosyncratic; that is, each organization has its unique change logic; (b) the organization’s change logic manifests in patterns that reoccur in different organizational contexts; (c) an organization’s change logic is a collective phenomenon, but each individual has his own perspective on it; (d) some aspects of the logic are directly observable, whereas others must be inferred; and (e) an organization’s change logic develops based on experiences and reinforcement learning from the past. From these assumptions, several methodological implications were derived: Because the change logic is assumed to manifest as an idiosyncratic pattern that re-occurs in different organizational contexts, multiple data sources should be considered for data collection. In addition to interviews, as much additional information as possible should be collected, which could potentially reveal insights into a firm’s change logic (e.g. explicated values on walls, layout of offices, salient symbols). Because it is assumed to be a collective phenomenon, multiple members of the organization should be asked to provide information. To identify the more observable/conscious aspects of the change logic, semi-structured interviews should be conducted. The inter- JOURNAL OF MANAGEMENT AND CHANGE No 34/35 2015/2016 view protocol could include questions about the firm’s foundation and past handling of change, the significance of change within the organization, the general attitude towards change, the frequency of change, how the need for change is recognized and communicated, how ideas for change are developed and by whom, who makes decisions for change, to what extent changes are planned, and what are typical obstacles with regard to change. Moreover, to better understand the firm as a whole, the interview protocol should also contain questions about the current market situation and questions regarding the firm’s overall strategy. To extrapolate an organization’s change logic; that is, the pattern of how it usually addresses change, from the vast amount of information from multiple sources (e.g., interviews, field protocols), a group interpretation procedure was developed. This procedure foresees involving multiple individuals (we suggest four to six) who have varying degrees of familiarity with the organization under consideration. For the group interpretation, interview transcripts and documentation of all other data collections are needed. The procedure proposed for the group interpretation follows six Table 2: Procedure of the Group Interpretation to Diagnose an Organization’s Change Logic Step Preparation Information sharing Content Multiple researchers familiarize themselves with field data (interviews, protocols) to ensure that all information is “available”. Researchers present short versions of the data to the interpretation group to ensure that all available field information is “on the table”. Individual associations (intuitive) Each individual (alone) comes up with free associations (words, images, stories, feelings, emotions) and intuitions about the case. Time pressure is used to ensure intuitive thinking. Collective pattern recognition Associations are shared in the group, patterns and similarities among these associations are identified, and assumptions about the change logic are developed. Linking identified patterns Assumptions about patterns of the change logic are validated based on the data; to data (systematic) assumptions that are not substantiated by the data are discarded. Communicative validation Assumptions about the change logic that are supported by data from interviews and observations are presented to members of the organization for communicative validation purposes. 19 JOURNAL OF MANAGEMENT AND CHANGE No 34/35 2015/2016 A Concept for Diagnosing and Developing Organizational Change Capabilities steps (see Table 2): (i) In preparation, each of the interview transcripts and other protocols is read by at least two participants (in the following referred to as owners) to reduce researcher biases. (ii) At the beginning of the session, the owners present a concise summary of each interview and protocol to all participants to make sure that all information is “in the room” at the same time. During this step, the other participants do not comment; they only ask comprehension questions. (iii) All participants (including the owners) note their mental associations regarding the organization’s logic; for example, metaphors, images, or words. (iv) These associations are presented to the others in the interpretation group, starting from the person with the least knowledge about the firm to the person with the most knowledge. The associations are discussed and synthesized, and assumptions about the firm’s change logic are derived. (v) The developed assumptions are then cross-checked with the interview data. If no evidence for a specific assumption is found in the data, that assumption is discarded. The group interpretation is finished once the group has developed a collection of assumptions concerning the firm’s organizational change logic, each of which is substantially grounded in multiple pieces of data. Eventually, (vi) the collection of assumptions is presented to members of the firm (e.g. the management board) for them to validate. Intervention Model: Improving Organizational Change Capabilities Once the organization’s change capabilities and change logic have been diagnosed, interventions can be conducted to trigger the development of change capabilities. As described above, every organization is assumed to have a specific change logic – to address change in its own idiosyncratic way. Because change capabilities are embedded in and shaped by the firm’s organizational change logic, change capabilities may also appear in different forms across different organizations. The method for developing change capabilities (Figure 20 2), which will be presented in the following, is generic and standardized but can be easily adapted to the needs of each firm. To enable this individual adaptability, again an outcome-oriented approach was chosen. For each step in the generic design, specific outcomes were defined that should be achieved for each change capability (Table 3). How exactly one and the same intended outcome is achieved may strongly vary across firms, depending on their organizational change logic. In the following, both the overall design for capability development and specific outcomes for each change capability in each step of the design will be detailed. Possible effects of the designed interventions on the organizational change logic will then be briefly discussed. A Generic Design for the Development of Organizational Change Capabilities The standardized design that has been designed for the outcome-oriented development of change capabilities follows four basic steps: (1) Status Quo and Awareness, (2) Preferred Future, (3) Resources and Barriers and (4) Routines and Specification. The intervention methods and focus areas within each step are easily adaptable to the organization’s individual learning needs. Step 1. Status Quo and Awareness aims to create a common view of the status quo of the firm’s change capabilities and change logic based on organizational diagnoses. The main content of this step is the presentation and discussion of the results from the organizational diagnoses. Step 2. Preferred Future seeks to achieve a common view of the firm’s specific outcomes for the change capability to be developed. This includes a definition of the preferred future regarding competence development and an explication of the expected benefits for the organization. Questions to be addressed in this step are: What would the indicators be if this change capabil- Christina Schweiger, Barbara Kump, Lorena Hoormann JOURNAL OF MANAGEMENT AND CHANGE No 34/35 2015/2016 Figure 2: Design for developing change capabilities, which comprises four steps: (1) Status Quo and Aware-ness, (2) Preferred Future, (3) Resources and Barriers and (4) Routines and Specification ity were perfectly developed? What would be the benefits for our organization if this change capability were highly developed? Step 3. Resources and Barriers aims to identify existing resources and barriers for the development of change capabilities. The main questions to be answered in this step are therefore: Which resources are critical for our preferred future? What hinders us from further developing this change capability in the intended direction? At this stage, the organization’s change logic can be considered both a resource and a constraint. Step 4. Routines and Specification targets the development of an organizational action plan for developing the respective change capability. The main question to be answered is: How can we reach the intended learning outcomes and with the help of which methods, taking into consideration our existing change logic? In this phase, the focus lies on defining concrete steps for competence development, which lead to an agreed-upon “learning contract” for the implementation of the intended processes and routines. It is important to note that the learning activities within the suggested intervention model do not end with step 4. To ensure that the organization puts the planned actions to use, further monitoring, reflection and adaptation are required, as long as the development of change capabilities is still in progress. Hence, further (internal or external) process facilitation may be helpful to provide support for the organization’s developmental process. Intended Outcomes for Specific Change Capabilities The initiation of organizational learning and development processes requires the definition of clear learning goals to steer and shape these processes in the intended direction (e.g. Edmondson & Woolley, 2003; Levitt & March 1988; Schein, 1993). Therefore, the generic learning goals described in the previous section were specified for each of the change capabilities, based on the outcome-oriented 21 JOURNAL OF MANAGEMENT AND CHANGE No 34/35 2015/2016 A Concept for Diagnosing and Developing Organizational Change Capabilities Table 3: Specification of Outcomes in Each Step of the Design for Change Capability Development Organizational Change Capability Search Reflection Seizing 22 Intended Outcomes Continuous knowledge and awareness of market trends, customers, competitors Status Quo and Awareness Preferred Future Aspects to Status quo of search for search capability Examples: awareness of new technology trends, competitors, markets Status quo of reflection capability Examples: competitors’ activities, new technologies, market movements, new market segments Aspects to reflect upon Examples: customer satisfaction, efficiency of strategic processes, quality of outcomes, employee satisfaction Resources and Barriers What enables/ hinders the search? Examples: access to data sources, communication structures/ information distribution, interest of employees in topic What enables/ hinders reflection? Routines and Specification Concrete steps to establish search routines Examples: responsibilities for search topics, subscription to magazines, networking events Concrete steps to establish reflection routines Examples: jour fixes, collection of relevant Examples: data as basis awareness of for reflection, the firm’s core systematized competences, feedback, core processes, supervision, blind spots customer and employee surveys Concrete steps to establish routines for What enables/ recognizing Status quo of Aspects to ‘seize’ hinders seizing? and generating seizing capability options for Continuous Examples: Examples: change and recognition of Examples: new products, reward structure, innovation strategic options product new business clear strategy, for change and and service models, new time for creative Examples: innovation innovations in management processes, innovation days, line with existing methods culture of idea awards, strategy innovation R&D position/ department, cooperation with universities Continuous reflection about strengths, weaknesses, and opportunities for improvement Examples: documentation/ data, existing meeting formats, (physical) infrastructure, time, feedback culture, attitude towards errors Christina Schweiger, Barbara Kump, Lorena Hoormann JOURNAL OF MANAGEMENT AND CHANGE No 34/35 2015/2016 Table 3: (continued): Specification of Outcomes in Each Step of the Design for Change Capability Development Organizational Change Capability Intended Outcomes Status Quo and Awareness Status quo of planning capability Planning Implementation Preferred Future Aspects to plan before/during change Examples: Planned change resources processes adequately Examples: allocated responsibilities, to planned time, money changes, project management Structure and knowledge for enabling consequent and competent implementation of intended change Status quo implementation capability Examples: workforce skilled for change, required structures Status quo of strategic handling of change Clear (changerelated) vision and coherent Strategy Making strategy regarding change Examples: presence/ absence of vision/mission, formal strategy including the aspect of change, clear decision criteria definitions introduced above in Table 1. For example, search was defined as a firm’s ability to effectively recognize, sense, and explore the external environment for prospective innovative products, services, and processes. Strong search capabilities are indicated by the defined outcomes (e.g. continuous knowledge and awareness of the market, trends, customers and competitors). Aspects to implement in preparation for/during change Examples: employee competences, consulting, machines and devices required for the change -resource management Aspects regarding change to take into account in vision and strategy Resources and Barriers What enables/ hinders the planning for change? Examples: discontinuous order situation, planning tools/ databases, workload What enables/ hinders the implementation of change? Examples: commitment to change, prioritization, ownership of change, number of concurrent change projects What enables/ hinders strategy development regarding change? Examples: managerial Examples: style, ownership decision for structures, legal innovation regulations, areas, customer organizational types, role of flexibility (e.g. innovation, production growth/no vs. service growth business) Routines and Specification Concrete steps to establish routines for planning change Examples: allocation of responsibilities, project management, controlling Concrete steps to establish implementation routines Examples: enacting assigned roles, rewards (at least no disadvantages) for changerelated activities, training, regular communication of project status Concrete steps to establish routines for strategic development Examples: definition of decision criteria, regular SWOT analyses, regular strategy meetings, vision work On the basis of these overall learning goals for each change capability, sub-goals for each of the steps in the generic process (Figure 2) were specified. These sub-goals guide the development of the change capability under consideration. Table 3 details the learning goals for each of the change capabilities in each step in the generic design. How these learning goals can be utilized in the process of capability 23 JOURNAL OF MANAGEMENT AND CHANGE No 34/35 2015/2016 A Concept for Diagnosing and Developing Organizational Change Capabilities development is described using the search capability as an example: The aim of step 1, Status Quo and Awareness, is to achieve a common awareness of the firm’s current status quo in regard to its search capability. Different indicators exist for the extent of a firm’s search capability, such as the firm’s awareness of new technology trends, competitors and markets. Step 2, Preferred Future, focuses on the desired aspects the firm should be aware of in the future. Competitors’ activities, new technologies, market movements and new market segments are examples of prospective aspects worth seeking. Step 3, Resources and Barriers, aims to answer the question of what may enable and hinder the firm with regard to search activities in the aspects worked out in step 2. Examples for such resources and barriers are access to data sources, communication structures and the degree of employee interest in the topic under consideration. Step 4, Routines and Specification, aims to define concrete steps for establishing search routines, such as determining clear responsibilities for the defined search topics, subscribing to relevant magazines, or participating regularly in networking events. & Winter, 2002). However, as graphically insinuated in Figure 2, in addition to capability development, each design step may affect the organizational change logic because it may mean challenging basic assumptions, making decisions unconsciously, or learning rules. This goal-oriented specification of process steps takes into account the fact that the manifestation of each of the change capabilities may differ across organizations. The methods for the development of change capabilities in each of the process steps can be chosen flexibly, as long as they lead to the outcomes specified in Table 3. That way, the generic intervention model can be adapted to each of the change capabilities while still being sensitive to the needs of a specific firm. Discussion and Conclusion Effects on the Organizational Change Logic In this methodology, direct interventions primarily target change capabilities, particularly by making use of collective learning processes, for example, through group reflection and discussions (e.g. Isaacs, 1993; Zollo 24 In addition to these rather indirect interventions, alterations in the organizational change logic may be triggered by more direct methods (Corley & Gioia, 2003; Schein, 1993; Zollo & Winter, 2002), such as the explication of mental models (e.g. “What do we mean by ‘change’?”, “What does ‘success’ mean for us?”) or the questioning of basic assumptions (e.g. “change must take place fast”, “change is dangerous”), and beliefs (e.g. “never change a winning team”, “change must start from the top”). As a next step, these mental models, assumptions and beliefs may be analysed with regard to effects on the organization’s handling of change. To maintain sustainable change at the level of the organizational change logic, regular supervision of the top management may also be a highly effective method (e.g. Swart & Harcup, 2012). The paper presents an extended conceptualization of a firm’s strategic change capabilities, and makes two theoretical advancements. First, previous research on capabilities related to change have almost entirely been identified and discussed in terms of dynamic capabilities, which focus on the identification of strategic options and the transformation of the resource base. The model of change capabilities introduced in this paper follows Soparnot’s (2011) suggestion to extend the dynamic capabilities perspective by highlighting the actual implementation of the planned changes, and considers perspectives of strategic change, the generation of change ideas and innovations, and their actual implementation within the organization in accordance with corporate strategy and strategic goals. Christina Schweiger, Barbara Kump, Lorena Hoormann The second theoretical advancement presented in this paper is the integration of the theory on capabilities for strategic change with the concept of the organization’s dominant logic – it is suggested that the development of specific capacities and processes for the realization of change and innovation (organizational change capabilities) is embedded in this set of invisible rules and assumptions (organizational change logic), which steer organizational development processes and need to be considered for capability development. The two aspects are assumed to mutually influence each other – the development of change capabilities is supposed to be shaped by the firm’s change logic, and in turn, the development of change capabilities may shape the organizational change logic. The idea that change capabilities are shaped by the organization’s change logic has important implications for the practical development of change capabilities. Since it is assumed that every organization addresses change in its own specific way, enforcing effective interventions to develop change capabilities systematically requires taking into account an organization’s change logic. This perspective contradicts the prevalent practice within business schools and management courses, which often propagate “one best way” of searching the business environment, or planning change initiatives. Building on the theoretical concept of change capabilities that are embedded in a change logic, a generic, outcome-oriented approach for diagnosing and developing the change capabilities was suggested. This outcomeoriented approach aims to assess the extent of change capabilities by focusing on their desired outcomes, thereby taking into account the idea of equifinality (i.e. achieving one and the same outcome with different means). Instead of suggesting a specific tool, the paper describes considerations for the design and operationalization of quantitative and qualitative diagnostic methods. Future work may be dedicated to developing standardized quantitative measures for diagnosing the extent of change capabilities within an organization or JOURNAL OF MANAGEMENT AND CHANGE No 34/35 2015/2016 to developing standardized interview guidelines for analysing how change capabilities are enacted. Another innovative contribution of the present article is the design of a theory-based, associative-interpretative group analysis technique for diagnosing an organization’s change logic, which cannot be diagnosed directly (e.g. by asking explicit questions such as “What is your change logic like?”). Because this more qualitative branch of research into organizational (change) logics is still in its infancy, no standard tools exist for assessing it. Future work should be dedicated to further refining the methodology and testing its diagnostic strengths and weaknesses. Moreover, the ecologic validity and practical usefulness of the methodology should be explored by practitioners such as change agents in their practical work. The paper also contributes to current organization development practice by presenting an output-oriented intervention design for the improvement of an organization’s change capabilities. The output-oriented approach enables the adaptation of concrete interventions for both the organization’s idiosyncratic change logic and the firm-specific learning needs and circumstances. The intervention model can be seen as a standardized and outcome-oriented learning framework that encourages the development of organizational change capabilities for pro-active strategically relevant organizational change. In conclusion, the paper makes several theoretical and practical contributions to the question of how organizations can improve their capabilities for strategic change and innovation and how they can be supported during this improvement process. One possible avenue for future research could be investigating the effect of the presented intervention model and methods on the development of strategic change capabilities, particularly on the basis of longitudinal case studies. Another suggestion for future work would be enriching the 25 JOURNAL OF MANAGEMENT AND CHANGE No 34/35 2015/2016 A Concept for Diagnosing and Developing Organizational Change Capabilities theoretical basis of the change capabilities concept and its relationship with the organizational change logic with more theoretical and empirical findings, to further strengthen the theoretical foundation of this novel approach. 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Copyright of Journal of Management & Change is the property of EBS Review and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. 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 series of organizational initiatives to change GE culture. He declared that the company had to become "boundaryless," and unit leaders across the corporation had to submit to being challenged by their subordinates in open forum. Feedback and open communication eventually 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 E. Indeed, it is highly unlikely that E would successfully follow O because of the sense of betrayal that would involve. It is hard to imagine how a draconian program of layoffs and downsizing can leave intact the psychological contract and culture a company has so patiently built up over the years. But whatever the order, one sure problem with sequencing is that it can take a very long time; at GE it has taken almost two decades. A sequenced change 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 because they can't live down the distrust that their ruthlessness has earned them. In most cases, even the bestintentioned effort to rebuild trust and commitment rarely overcomes a bloody past. Welch is tbe exception that proves the rule. So what should you do? How can you achieve rapid improvements in economic value while simultaneously developing an open, 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 will, skilland wisdom. But precisely because it is more difficult than mere sequencing, the simultaneous use of O and E strategies is more likely to be a source of sustainable competitive advantage. One company that exemplifies the reconciliation of the hard and soft approaches is ASDA, the UK grocery chain that CEO Archie Norman took over HARVARD BUSINESS REVIEW May-June 2000 Cracking the Code of Change in December 1991, when the retailer was nearly and Norman unilaterally determined that change bankrupt. Norman laid off employees, flattened the would begin by having two experimental store organization, and sold off losing businesses-acts formats up and running within six months. He dethat usually spawn distrust among employees and cided to shift power from the headquarters to the distance executives from their people. Yet during stores, declaring: "I want everyone to be close to Norman's eight-year tenure as CEO, ASDA also the stores. We must love the stores to death; that became famous for its atmosphere of trust and is our business." But even from the start, there openness. It has been described by executives at was an O quality to Norman's leadership style. As Wal-Mart-itself famous for its corporate culture-as being "more ^^^^^H like Wal-Mart than we are." Let's look at how ASDA resolved the conflicts of E and O along the six main dimensions of change. Historically, the study of Explicitly confront the tension change has been restricted between E and O goals. With his to mature, large companies that needed to reverse their competitive opening speech to ASDA's execudeclines. But the arguments we have advanced in this article also apply tive team - none of whom he had met-Norman indicated clearly to entrepreneurial companies that need to manage rapid growth. Here, that he intended to apply both E too, we believe that the most successful strategy for change will be one and O strategies in his change efthat combines theories E and O. fort. It is doubtful that any of his Just as there are two ways of changing, so there are two kinds of listeners fully understood him at the time, but it was important that entrepreneurs. One group subscribes to an ideology akin to Theory E. he had no conflicts about recogTheir primary goal is to prepare for a cash-out, such as an IPO or an nizing the paradox between the acquisition by an established player. Maximizing market value before two strategies for change. He said the cash-out is their sole and abiding purpose.These entrepreneurs as much in his maiden speech: "Our number one objective is to emphasize shaping the firm's strategy, structure, and systems to build secure value for our shareholders a quick, strong market presence. Mercurial leaders who drive the and secure the trading future of the company using a strong top-down style are typically at the helm business. I am not coming in with of such companies.They lure others to join them using high-powered any magical solutions. I intend to spend the next few weeks listenincentives such as stock options.The goal is to get rich quick, ing and forming ideas for our preOther entrepreneurs, however, are driven by an ideology more akin cise direction.... We need a culture toTheoryO-the building of an institution. Accumulating wealth huilt around common ideas and is important, but it is secondary to creating a company that is based goals that include listening, learning, and speed of response, from on a deeply held set of values and that has a strong culture. These the stores upwards. iBut] there will entrepreneurs are likely to subscribe to an egalitarian style that invites be management reorganization. everyone's participation. They look to attract others who share their My objective is to establish a clear passion about the cause-though they certainty provide generous focus on the stores, shorten lines of communication, and build one stock options as well.The goal in this case is to make a difference, team." If there is a contradiction not just to make money. between building a high-involveMany peopie fault entrepreneurs who are driven by a Theory E view ment organization and restructuring to enhance shareholder value, of the world. But we can think of other entrepreneurs who have Norman embraced it. destroyed businesses because they were overly wrapped up in the Set direction from the top and Theory O pursuit of a higher ideal and didn't pay attention to the engage people below. From day pragmatics of the market. Steve Jobs's venture. Next, comes to mind. one, Norman set strategy without Both types of entrepreneurs have to find some way of tapping the expecting any participation from qualities of theories E and Cjust as large companies do. below. He said ASDA would adopt an everyday-low-pricing strategy, Change Theories in the New Economy HARVARD BUSINESS REVIEW May-June 2000 139 Cracking the Code of Change intelligence and business acumen. Leighton, who is warmer and more people oriented, worked on employees' emotions with the power of his personality. As one employee told us, "People respect Archie, but they love Allan." Norman was the first to credit Leighton with having helped to create emotional commitment to the new ASDA. While it might be 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 organization. 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 actions To thrive and adapt in the new economy, companies he put it in his first speech: "First, I am forthright, and I like to argue. must simultaneously build up their corporate cultures Second, I want to discuss issues as and enhance shareholder value; the O and E theories colleagues I am looking for your of business change must be in perfect step. advice and your disagreement." Norman encouraged dialogue with employees and customers through colleague and customer circles. He set up a "Tell Archie" program so that people could voice their concerns and ideas. Making way for opposite leadership styles was also an essential ingredient to Norman's-and ASDA's-success. This was most clear in Norman's willingness to hire Allan Leighton shortly after he took over. Leighton eventually hecame deputy chief executive. Norman and Leighton shared the same E and O values, but they had completely different personalities and styles. Norman, cool and reserved, impressed people with the power of his mind-his 140 followed both the H 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 financial officer who had been part of ASDA's disastrous policies, and decreed a wage freeze for everyone - management and workers alike. But from the start, the O strategy was an equal part of Norman's plan. He hought time for all this change by warning the markets that financial recovery would take three years. Norman later said that he spent 75% of his early months at ASDA as the company's human resource director, makHARVARD BUSINESS REVIEW May-|une 201X) Cracking the Code of Change ing the organization 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 iot spontaneity. Training programs, totalquality programs, and top-driven culture change programs played little part in ASDA's transformation. From the start, the ASDA change effort was set up to encourage experimentation and evolution. To promote learning, for example, ASDA set up an experimental store that was later expanded to three stores. It was declared a risk-free zone, meaning there would be no penalties for failure. A crossfunctional task force "renewed/' or redesigned, ASDA's entire retail proposition, its organization, and its managerial structure. Store managers were encouraged to experiment with store layout, employee roles, ranges of products offered, and so on. The experiments produced significant innovations in all aspects of store operations. ASDA's managers learned, for example, that they couldn't renew a store unless that store's management team was ready for new ideas. This led to an innovation called the Driving Test, which assessed whether store managers' skills in leading the change process were aligned with the intended changes. The test perfectly illustrates how E and O can come together: it hubhled up O-style from the bottom of the company, yet it bound managers in an E-type contract. Managers who failed the test 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, but it can also hamper teamwork, commitment, and learning. The way to resolve this dilemma is to apply Theory E incentives in an O way. Employees' high involvement is encouraged to develop their commitment to change, and variable pay is used to reward that commitment. ASDA's senior executives were compensated with stock options that were tied to the company's value. These helped attract key executives to ASDA. Unlike most E-strategy companies, however, ASDA had a stock-ownership plan for all employees. In addition, store-level employees got variable pay based on both corporate performance and their stores' records. In the end, compensation represented a fair exchange of value between the company and its individual employees. But Norman believed that compensation had not played a major role in motivating change at the company. Use consultants as expert resources who empower employees. Consultants can provide specialized HARVARD BUSINESS REVIEW May-lunc 2000 knowledge and technical skills that the company doesn't have, particularly in the early stages of organizational change. Management's task is figuring out how to use those resources without abdicating leadership of the change effort. ASDA followed the middle ground between Theory E and Theory O. It made limited use of four consulting firms in the early stages of its transformation. The consulting firms always worked alongside management and supported its leadership of change. However, their engagement was intentionally cut short by Norman to prevent ASDA and its managers from becoming dependent on the consultants. For example, an expert in store organization was hired to support the task force assigned to renew ASDA's first few experimental stores, but later stores were renewed without his involvement. By 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 not prevent ASDA's employees from committing to change and the new corporate culture because Norman and Leighton had won employees' trust by constantly listening, debating, and being willing to learn. Candid about their intentions from the outset, they balanced the tension between the two change theories. By 1999/ the company had multiplied shareholder value eightfold. The organizational capabilities built by Norman and Leighton also gave ASDA the sustainable competitive advantage 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 end, the integration of theories E and O created major change-and major payoffs-for ASDA. Such payoffs are possible for other organizations that want to develop a sustained advantage in today's economy. But that advantage can come only from a constant willingness and ability to develop organizations for the long term combined with a constant monitoring of shareholder value-E dancing with O, in an unending minuet. 9 Reprint R00301 Tb order reprints, sec the last page of this issue. 141 Harvard Business Review Notice of Use Restrictions, May 2009 Harvard Business Review and Harvard Business Publishing Newsletter content on EBSCOhost is licensed for the private individual use of authorized EBSCOhost users. It is not intended for use as assigned course material in academic institutions nor as corporate learning or training materials in businesses. Academic licensees may not use this content in electronic reserves, electronic course packs, persistent linking from syllabi or by any other means of incorporating the content into course resources. 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