Fluent Essays

Compare Kotter’s eight-stage process with the change process described in the article “Cracking the Code of Change.” Create a table outlining the major components of each, including similarities and key differences.Be sure to analyze how Kotter’s See/Feel/Change core method aligns with Beer and Nohria’s (2000) E and O strategies?Analyze your own approach to managing change. Which of the two models most appeals to you? Why? cracking_the_code_of_change.pdf Unformatted Attachment Preview Until now, change in business has been an either-or proposition: either quickly create economic value for shareholders or patiently develop an open, trusting Cracking the Code of T corporate culture long term. But new research indicates that combining these hardand softapproaches 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, weve 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 busincsss 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 managements 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 its 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.) Well 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. Lets compare the two companies initiatives. Theory O change strategies are geared toward building up the corporate culture: employee behaviors, attitudes. capabilities, and commitment.The organizations 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 Ill show you a mismanaged company. From a shareholders perspective, the results of Dunlaps actions were stunning. In just 20 months, he managed to triple shareholder returns as Scott Papers 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 Papers approach to change as a model for improving shareholder returns. HARVARD BUSINESS REVIEW May-June 2000 champions reform effort couldnt 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 schools 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 HBRs 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 organizations 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 companys primary objective. Nothing made clear Dunlaps 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 companys performance. Teams drafted value statements, and even the industrys 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 Papers 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 Papers 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 theres no time to involve others or develop organizational capability. By contrast. Theory Os 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 havent 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 didnt adhere to Dunlaps tightly choreographed marching orders, they risked being fired. Meanwhile, the changes at Champion were more evolutionary and emergent than planned and programmatic. When the companys 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. Dunlaps 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 didnt 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 companys 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 arent enough when fundamental structural change is required. That reality is underscored by todays 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 theyre carefully handled, melding E and O is likely to bring the worst of both theories and the benefits of neither. Indeed, the corporate changes weve studied that arbitrarily and haphazardly mixed E and O techniques proved destabilizing to the organizations in which they were imposed. Managers in those companies would certainly have been better off to pick either pure E or pure O strategies - with all their costs. At least one set of stakeholders would have benefited. The obvious way to combine E and O is to sequence them. Some companies, notably General Electric, have done this quite successfully. At GE, CEO Jack Welch began his sequenced change by imposing an E-type restructuring. He demanded 138 that all GE businesses be first or second in their industries. Any unit that failed that test would be fixed, sold off, or closed. Welch followed that up with a massive downsizing of the GE bureaucracy. Between 1981 and 1985, total employment at the corporation dropped from 412,000 to 299,000. Sixty percent of the corporate staff, mostly in planning and finance, was laid off. In this phase, GE people began to call Welch Neutron Jack, after the fabled bomb that was designed to destroy people but leave buildings intact. Once he had wrung out the redundancies, however, Welch adopted an O strategy. In 1985, he started a s ... Purchase answer to see full attachment