Cracking the Code of Change

by Michael Beer and Nitin Nohria

Until now, change in business has been an either-or proposition: either quickly create economic value for shareholders or patiently develop an open, trusting corporate culture long term. But new research indicates that combining these “hard” and “soft” approaches can radically transform the way businesses change.

by Michael Beer and Nitin Nohria

D B U S I N

E S S S C H O O L P U B L I S H I N G C O R P O R A T I O N . A L L R I G H T S R E S E R V E D .

The new economy has ushered in great busi-ness opportunities—and great turmoil. Not since the Industrial Revolution have the stakes of dealing with change been so high. Most tra-ditional organizations have accepted, in the-ory at least, that they must either change or die. And even Internet companies such as eBay, Amazon, and America Online rec-ognize 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—install-ing new technology, downsizing, restructur-ing, or trying to change corporate culture—have had low success rates. The brutal 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 immers-ing themselves in an alphabet so

up of initia-tives. 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 recommen-dations often leads to muddle when change is attempted. The result is that most change ef-forts exert a heavy toll, both human and eco-nomic. To improve the odds of success, and to reduce the human carnage, it is imperative that executives understand the nature and pro-cess of corporate change much better. But even that is not enough. Leaders need to crack the code of change.

For more than 40 years now, we’ve been studying the nature of corporate change. And although every business’s change initiative is unique, our research suggests there are two ar-chetypes, or theories, of change. These arche-types are based on very different and often un-conscious assumptions by senior executives—and the consultants and academics who advise them—about why and how changes should be made. Theory E is change based on economic value. Theory O is change based on organiza-tional capability. Both are valid models; each

Cracking the Code of Change

Michael Beer is the Cahners-Robb Pro-fessor of Business Administration at Harvard Business Scho

ol in Boston. He can be reached at mbeer@hbs.edu. Nitin Nohria is the Richard P. Chap-man Professor of Business Administra-tion at Harvard Business School and chairs the school’s Organizational Be-havior Unit. He can be reached at nnohria@hbs.edu. They are the authors of Breaking the Code of Change (Harvard Business School Press, 2000). theory of change achieves some of manage-

ment’s goals, either explicitly or implicitly. But

each theory also has its costs—often unex-

pected ones.

Theory E change strategies are the ones that

make all the headlines. In this “hard” approach

to change, shareholder value is the only legiti-

mate measure of corporate success. Change

usually involves heavy use of economic incen-

tives, drastic layoffs, downsizing, and restruc-

turing. E change strategies are more common

than O change strategies among companies in

the United States, where ﬁnancial markets

push corporate boards for rapid turnarounds.

For instance, when William A. Anders was

brought in as CEO of General Dynamics in

1991, his goal was to maximize economic

value—however painful the remedies might

be. Over the next three years, Anders reduced

the workforce by 71,000 people—44,000

through the divestiture of seven businesses and

27,000 through layoffs and attrition. Anders

employed common E strategies.

Managers who subscribe to Theory O be-

lieve that if they were to focus exclusively on

the price of their stock, they might harm

their organizations. In this “soft” approach

to change, the goal is to develop corporate

culture and human capability through indi-

vidual and organizational learning—the pro-

cess of changing, obtaining feedback, reﬂect-

ing, and making further changes. U.S.

companies that adopt O strategies, as

Hewlett-Packard did when its performance

ﬂagged in the 1980s, typically have strong,

long-held, commitment-based psychological

contracts with their employees.

Managers at these companies are likely to

see the risks in breaking those contracts. Be-

cause 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 both. But all too often, managers try to

apply theories E and O in tandem without re-

solving the inherent tensions between them.

This impulse to combine the strategies is direc-

tionally correct, but theories E and O are so dif-

ferent that it’s hard to manage them simulta-

neously—employees distrust leaders who

alternate between nurturing and cutthroat

corporate behavior. Our research suggests,

however, that there is a way to resolve the ten-

sion so that businesses can satisfy their share-

holders while building viable institutions.

中国最强音金贵晟

Companies that effectively combine hard and

soft approaches to change can reap big payoffs

in proﬁtability and productivity. Those compa-

nies are more likely to achieve a sustainable

competitive 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 com-

pany successfully resolved the tensions be-

tween 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 The-

ories of Change.”) We’ll look at two compa-

nies in similar businesses that adopted al-

most pure forms of each archetype. Scott

Paper successfully used Theory E to enhance

shareholder value, while Champion Interna-

tional used Theory O to achieve a complete

cultural transformation that increased its

productivity and employee commitment. But

as we will soon observe, both paper produc-

ers also discovered the limitations of sticking

with only one theory of change. Let’s com-

pare the two companies’ initiatives.

Goals. When Al Dunlap assumed leader-

ship of Scott Paper in May 1994, he immedi-

ately ﬁred 11,000 employees and sold off

several businesses. His determination to re-

structure the beleaguered company was al-

most 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 billion in 1994 to about $9 bil-

lion by the end of 1995. The ﬁnancial com-

munity applauded his efforts and hailed

Scott Paper’s approach to change as a model

半生雪歌曲原唱for improving shareholder returns.

Cracking the Code of Change

Champion’s reform effort couldn’t have been more different. CEO Andrew Sigler ac-knowledged that enhanced economic value was an appropriate target for management, but he believed that goal would be best achieved by transforming the behaviors of management, unions, and workers alike. In 1981, Sigler and other managers launched a long-term effort to restructure corporate cul-ture around a new vision called the Cham-pion Way, a set of values and principles de-signed 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 best increase employee productivity and thereby improve the bottom line.

Leadership. Leaders who subscribe to The-ory 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 com-pany’s performance.

Teams drafted value state-ments, and even the industry’s unions were brought into the dialogue. Employees were en-couraged to identify and solve problems them-selves. Change at Champion sprouted from the bottom up.

Focus. In E-type change, leaders typically focus immediately on streamlining the “hard-

Dimensions

of Change Goals

Leadership Focus Process Reward System

Use of Consultants Theory E

maximize

shareholder value

manage change

from the top down

emphasize structure

and systems

plan and establish

programs

motivate through

ﬁnancial incentives

consultants analyze

problems and shape

solutions

Theory O

develop organizational

capabilities

凯特-贝金赛尔encourage participation

from the bottom up

build up corporate

culture:employees’

behavior and attitudes

experiment and evolve

motivate through佟丽娅被扒

commitment—use

pay as fair exchange

consultants support

management in shaping

their own solutions

Theories E and O Combined

explicitly embrace the paradox

between economic value and

organizational capability

set direction from the top

and engage the people below

focus simultaneously on the

hard (structures and systems)

and the soft (corporate culture)

plan for spontaneity

use incentives to reinforce

change but not to drive it

consultants are expert

resources who empower

employees

Comparing Theories of Change

Our research has shown that all corporate transformations can be compared along the six dimensions shown here. The table outlines

the differences between the E and O archetypes and illustrates what

an integrated approach might look like.

Cracking the Code of Change

ware” 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 Pa-per’s corporate functions—beneﬁts and pay-roll administration, almost all of its manage-ment information systems, some of its technology research, medical services, tele-marketing, and security functions. An execu-tive manager of a global merger explained the E rationale: “I have a [proﬁt] goal of $176 mil-lion this year, and there’s no time to involve others or develop organizational capability.”

By contrast, Theory O’s initial focus is on building up the “software” of an organiza-tion—the culture, behavior, and attitudes of employees. Throughout a decade of reforms, no employees were laid off at Champion. Rather, managers and employees were encour-aged to collectively reexamine their work prac-tices and behaviors with a goal of increasing productivity and quality. Managers were re-placed if they did not conform to the new phi-losophy, but the overall ﬁring freeze helped to create a culture of trust and commitment. Structural change followed once the culture changed. Indeed, by the mid-1990s, Champion had completely reorganized all its corporate functions. Once a hierarchical, functionally or-ganized company, Champion 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 moti-vate and mobilize their businesses; it compels them to take tough, decisive actions they pre-sumably 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 choreo-graphed marching orders, they risked being ﬁred.

Meanwhile, the changes at Champion were more evolutionary and emergent than planned and programmatic. When the company’s de-cade-long reform began in 1981, there was no master blueprint. The idea was that innovative work processes, values, and culture changes in one plant would be adapted and used by other plants on their way through the corporate sys-tem. 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 ﬁnan-cial. Employee compensation, for example, is linked with ﬁnancial incentives, mainly stock options. Dunla

p’s own compensation pack-age—which ultimately netted him more than $100 million—was tightly linked to sharehold-ers’ interests. Proponents of this system argue that ﬁnancial incentives guarantee that em-ployees’ interests match stockholders’ inter-ests. Financial rewards also help top execu-tives feel compensated for a difﬁcult job—one in which they are often reviled by their one-time colleagues and the larger community.

The O-style compensation systems at Cham-pion reinforced the goals of culture change, but they didn’t drive those goals. A skills-based pay system and a corporatewide gains-sharing plan were installed to draw union workers and management into a community of purpose. Fi-nancial incentives were used only as a supple-ment to those systems and not to push particu-lar reforms. While Champion did offer a companywide bonus to achieve business goals in two separate years, this came late in the change process and played a minor role in ac-tually fulﬁlling those goals.

Use of Consultants. Theory E change strate-gies 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 priori-ties. They also offer much-needed political and psychological su

pport 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 manag-ers and workers make their own business anal-yses and craft their own solutions. And while

Theory E change strategies usually involve heavy use of economic incentives, drastic layoffs, downsizing, and restructuring. Shareholder value is the only legitimate measure of corporate success.

Cracking the Code of Change

the consultants had their own ideas, they did not recommend any corporate program, dic-tate any solutions, or whip anyone into line. They simply led a process of discovery and learning that was intended to change the cor-porate culture in a way that could not be fore-seen at the outset.

In their purest forms, both 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 see 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 capabilities needed for sustained competitive advantage—commitment, coordi-nation, communication, and creativity. In 1995, Dunlap sold Scott Paper to its longtime com-petitor Kimberly-Clark.

CEOs who embrace Theory O ﬁnd that their loyalty and commitment to their employees can prevent them from making tough deci-sions. The temptation is to postpone the bitter medicine in the hopes that rising productivity will improve the business situation. But pro-ductivity gains aren’t enough when fundamen-tal structural change is required. That reality is underscored by today’s global ﬁnancial system, which makes corporate performance instantly transparent to large institutional shareholders whose fund managers are under enormous pressure to show good results. Consider Cham-pion. 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 signiﬁ-cant increase in the economic value of the company in more than a decade. Indee

拔剑的声音d, 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 compa-nies 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.青花瓷的歌词

The obvious way to combine E and O is to sequence them. Some companies, notably General Electric, have done this quite success-fully. At GE, CEO J ack Welch began his se-quenced change by imposing an E-type re-structuring. He demanded that all GE businesses be ﬁrst or second in their indus-tries. Any unit that failed that test would be ﬁxed, sold off, or closed. Welch followed that up with a massive downsizing of the GE bu-reaucracy. Between 1981 and 1985, total em-ployment at the corporation dropped from 412,000 to 299,000. Sixty percent of the cor-porate staff, mostly in planning and ﬁnance, was laid off. In this phase, GE people began to call Welch “Neutron J ack,” aft

er 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 orga-nizational 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 chal-lenged by their subordinates in open forum. Feedback and open communication eventu-ally eroded the hierarchy. Soon Welch applied the new order to GE’s global businesses.

Unfortunately for companies like Cham-pion, sequenced change is far easier if you be-gin, as Welch did, with Theory E. Indeed, it is highly unlikely that E would successfully fol-low O because of the sense of betrayal that would involve. It is hard to imagine how a dra-conian program of layoffs and downsizing can leave intact the psychological contract and cul-ture 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 contrast-

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.

Cracking the Code of Change

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