Until now, change in business has been an either-or Cracking the Code of proposition: either quickly create economic value for Change shareholders or patiently develop an open, trusting corporate culture long term. by Michael Beer and Nitin Nohria But new research indicates that combining these “hard” and “soft” approaches can radically transform the way businesses change.
Included with this full-text Harvard Business Review article:
1 Article Summary The Idea in Brief—the core idea The Idea in Practice—putting the idea to work
2 Cracking the Code of Change
10 Further Reading A list of related materials, with annotations to guide further exploration of the article’s ideas and applications
Reprint R00301 Purchased by: Tanya Perry [email protected] on June 10, 2014
Cracking the Code of Change
The Idea in Brief The Idea in Practice Here’s the brutal fact: 70% of all change The UK grocery chain, ASDA, teetered on bankruptcy in 1991. Here’s how CEO Archie Norman initiatives fail. Why? Managers flounder in combined change Theories E and O with spectacular results: a culture of trust and openness— an alphabet soup of change methods, and an eightfold increase in shareholder value. drowning in conflicting advice. Change Change How to Combine Examples from ASDA efforts exact a heavy toll—human and Dimension Theories E and O economic—as companies flail from one Goals Embrace the paradox Norman started his tenure by stating, “Our number change method to another. between economic one objective is to secure value for our shareholders” To effect successful change, first grasp the value and organiza- and “We need a culture built around common two basic theories of change: tional capability ideas. and listening, learning, and speed of response, from the stores upwards.” 1) Theory E change emphasizes economic value—as measured only by shareholder Leadership Set direction from the Norman unilaterally set a new pricing strategy and returns. This “hard” approach boosts returns top and engage peo- shifted power from headquarters to stores. His forth- through economic incentives, drastic lay- ple from below right “Tell Archie” program encouraged dialogue with offs, and restructuring. “Chainsaw Al” Dun- all employees. He hired warm, accessible Allan Leigh- lop’s firing 11,000 Scott Paper employees ton to complement his own Theory O leadership style and selling several businesses—tripling and strengthened emotional commitment to the shareholder value to $9 billion—is a stun- new ASDA. ning example. Focus Focus on both hard Norman set out to win both hearts and minds. He and soft sides of the boosted economic value through hard, structural 2) Theory O change—a “softer” ap- organization changes, e.g., removing top layers of hierarchy and proach—focuses on developing corporate freezing all wages. He paid equal attention to the soft culture and human capability, patiently side by spending 75% of his early months as HR direc- building trust and emotional commitment tor creating a more egalitarian and transparent orga- to the company through teamwork and nization—“a great place for everyone to work.” communication. Process Plan for spontaneity Norman encouraged experimentation, setting up Then, carefully and simultaneously balance three “risk-free” stores where employees could fail these very different approaches. It’s not without penalty. Managers experimented with store easy. Employees distrust leaders who alter- layout, product range, employee roles. A cross- nate between nurturing and cutthroat be- functional team redesigned ASDA’s entire retail orga- havior. But, done well, you’ll boost profits nization—and produced significant innovations. and productivity, and achieve sustainable Reward Use incentives to rein- ASDA applied Theory E incentives in an O-like way. It competitive advantage. System force rather than drive encouraged all employees to participate actively in change changing ASDA. And it rewarded their commitment with stock ownership and variable pay based on cor- porate and store performance. OPYRIGHT © 2001 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. BUSINESS SCHOOLOPYRIGHT © 2001 HARVARD PUBLISHING CORPORATION. C page 1 Purchased by: Tanya Perry [email protected] on June 10, 2014
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.
Cracking the Code of Change
by Michael Beer and Nitin Nohria
The new economy has ushered in great busi- about why companies should change, what ness opportunities—and great turmoil. Not they should try to accomplish, and how they since the Industrial Revolution have the stakes should do it. This proliferation of recommen- of dealing with change been so high. Most tra- dations often leads to muddle when change is ditional organizations have accepted, in the- attempted. The result is that most change ef- ory at least, that they must either change or forts exert a heavy toll, both human and eco- die. And even Internet companies such as nomic. To improve the odds of success, and to eBay, Amazon.com, and America Online rec- reduce the human carnage, it is imperative ognize that they need to manage the changes that executives understand the nature and pro- associated with rapid entrepreneurial growth. cess of corporate change much better. But Despite some individual successes, however, even that is not enough. Leaders need to crack change remains difficult to pull off, and few the code of change. companies manage the process as well as they For more than 40 years now, we’ve been would like. Most of their initiatives—install- studying the nature of corporate change. And ing new technology, downsizing, restructur- although every business’s change initiative is ing, or trying to change corporate culture— unique, our research suggests there are two ar- have had low success rates. The brutal fact is chetypes, or theories, of change. These arche- that about 70% of all change initiatives fail. types are based on very different and often un- In our experience, the reason for most of conscious assumptions by senior executives— those failures is that in their rush to change and the consultants and academics who advise their organizations, managers end up immers- them—about why and how changes should be ing themselves in an alphabet soup of initia- made. Theory E is change based on economic tives. They lose focus and become mesmerized value. Theory O is change based on organiza- by all the advice available in print and on-line tional capability. Both are valid models; each OPYRIGHT © 2000 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. BUSINESS SCHOOLOPYRIGHT © 2000 HARVARD PUBLISHING CORPORATION. C harvard business review • may–june 2000 page 2 Purchased by: Tanya Perry [email protected] on June 10, 2014
Cracking the Code of Change
theory of change achieves some of manage- however, that there is a way to resolve the ten- ment’s goals, either explicitly or implicitly. But sion so that businesses can satisfy their share- each theory also has its costs—often unex- holders while building viable institutions. pected ones. Companies that effectively combine hard and Theory E change strategies are the ones that soft approaches to change can reap big payoffs make all the headlines. In this “hard” approach in profitability and productivity. Those compa- to change, shareholder value is the only legiti- nies are more likely to achieve a sustainable mate measure of corporate success. Change competitive advantage. They can also reduce usually involves heavy use of economic incen- the anxiety that grips whole societies in the tives, drastic layoffs, downsizing, and restruc- face of corporate restructuring. turing. E change strategies are more common In this article, we will explore how one com- than O change strategies among companies in pany successfully resolved the tensions be- the United States, where financial markets tween E and O strategies. But before we do push corporate boards for rapid turnarounds. that, we need to look at just how different the For instance, when William A. Anders was two theories are. brought in as CEO of General Dynamics in 1991, his goal was to maximize economic A Tale of Two Theories value—however painful the remedies might To understand how sharply theories E and O be. Over the next three years, Anders reduced differ, we can compare them along several the workforce by 71,000 people—44,000 key dimensions of corporate change: goals, through the divestiture of seven businesses and leadership, focus, process, reward system, 27,000 through layoffs and attrition. Anders and use of consultants. (For a side-by-side employed common E strategies. comparison, see the exhibit “Comparing The- Managers who subscribe to Theory O be- ories of Change.”) We’ll look at two compa- lieve that if they were to focus exclusively on nies in similar businesses that adopted al- the price of their stock, they might harm most pure forms of each archetype. Scott their organizations. In this “soft” approach Paper successfully used Theory E to enhance to change, the goal is to develop corporate shareholder value, while Champion Interna- culture and human capability through indi- tional used Theory O to achieve a complete vidual and organizational learning—the pro- cultural transformation that increased its cess of changing, obtaining feedback, reflect- productivity and employee commitment. But ing, and making further changes. U.S. as we will soon observe, both paper produc- companies that adopt O strategies, as ers also discovered the limitations of sticking Hewlett-Packard did when its performance with only one theory of change. Let’s com- flagged in the 1980s, typically have strong, pare the two companies’ initiatives. long-held, commitment-based psychological Goals. When Al Dunlap assumed leader- contracts with their employees. ship of Scott Paper in May 1994, he immedi- Managers at these companies are likely to ately fired 11,000 employees and sold off see the risks in breaking those contracts. Be- several businesses. His determination to re- cause they place a high value on employee structure the beleaguered company was al- commitment, Asian and European businesses most monomaniacal. As he said in one of his are also more likely to adopt an O strategy to speeches: “Shareholders are the number one Michael Beer is the Cahners-Robb Pro- change. constituency. Show me an annual report fessor of Business Administration at Few companies subscribe to just one theory. that lists six or seven constituencies, and I’ll Harvard Business School in Boston. He Most companies we have studied have used a show you a mismanaged company.” From a can be reached at [email protected]. mix of both. But all too often, managers try to shareholder’s perspective, the results of Nitin Nohria is the Richard P. Chap- apply theories E and O in tandem without re- Dunlap’s actions were stunning. In just 20 man Professor of Business Administra- solving the inherent tensions between them. months, he managed to triple shareholder tion at Harvard Business School and This impulse to combine the strategies is direc- returns as Scott Paper’s market value rose chairs the school’s Organizational Be- tionally correct, but theories E and O are so dif- from about $3 billion in 1994 to about $9 bil- havior Unit. He can be reached at ferent that it’s hard to manage them simulta- lion by the end of 1995. The financial com- [email protected]. They are the authors neously—employees distrust leaders who munity applauded his efforts and hailed of Breaking the Code of Change (Har- alternate between nurturing and cutthroat Scott Paper’s approach to change as a model vard Business School Press, 2000). corporate behavior. Our research suggests, for improving shareholder returns. harvard business review • may–june 2000 page 3 Purchased by: Tanya Perry [email protected] on June 10, 2014
Cracking the Code of Change
Champion’s reform effort couldn’t have and certainly without input from lower levels been more different. CEO Andrew Sigler ac- or unions. Dunlap was clearly the commander knowledged that enhanced economic value in chief at Scott Paper. The executives who was an appropriate target for management, survived his purges, for example, had to agree but he believed that goal would be best with his philosophy that shareholder value achieved by transforming the behaviors of was now the company’s primary objective. management, unions, and workers alike. In Nothing made clear Dunlap’s leadership style 1981, Sigler and other managers launched a better than the nickname he gloried in: long-term effort to restructure corporate cul- “Chainsaw Al.” ture around a new vision called the Cham- By contrast, participation (a Theory O trait) pion Way, a set of values and principles de- was the hallmark of change at Champion. signed to build up the competencies of the Every effort was made to get all its employees workforce. By improving the organization’s emotionally committed to improving the com- capabilities in areas such as teamwork and pany’s performance. Teams drafted value state- communication, Sigler believed he could best ments, and even the industry’s unions were increase employee productivity and thereby brought into the dialogue. Employees were en- improve the bottom line. couraged to identify and solve problems them- Leadership. Leaders who subscribe to The- selves. Change at Champion sprouted from the ory E manage change the old-fashioned way: bottom up. from the top down. They set goals with little Focus. In E-type change, leaders typically involvement from their management teams focus immediately on streamlining the “hard-
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.
Dimensions of Change Theory E Theory O Theories E and O Combined Goals maximize develop organizational explicitly embrace the paradox shareholder value capabilities between economic value and organizational capability
Leadership manage change encourage participation set direction from the top from the top down from the bottom up and engage the people below
Focus emphasize structure build up corporate focus simultaneously on the and systems culture: employees’ hard (structures and systems) behavior and attitudes and the soft (corporate culture)
Process plan and establish experiment and evolve plan for spontaneity programs
Reward System motivate through motivate through use incentives to reinforce financial incentives commitment—use change but not to drive it pay as fair exchange
Use of consultants analyze consultants support consultants are expert Consultants problems and shape management in shaping resources who empower solutions their own solutions employees harvard business review • may–june 2000 page 4 Purchased by: Tanya Perry [email protected] on June 10, 2014
Cracking the Code of Change
ware” of the organization—the structures and one plant would be adapted and used by other systems. These are the elements that can most plants on their way through the corporate sys- easily be changed from the top down, yielding tem. No single person, not even Sigler, was swift financial results. For instance, Dunlap seen as the driver of change. Instead, local quickly decided to outsource many of Scott Pa- leaders took responsibility. Top management per’s corporate functions—benefits and pay- simply encouraged experimentation from the roll administration, almost all of its manage- ground up, spread new ideas to other workers, ment information systems, some of its and transferred managers of innovative units technology research, medical services, tele- to lagging ones. marketing, and security functions. An execu- Reward System. The rewards for managers tive manager of a global merger explained the in E-type change programs are primarily finan- E rationale: “I have a [profit] goal of $176 mil- cial. Employee compensation, for example, is lion this year, and there’s no time to involve linked with financial incentives, mainly stock others or develop organizational capability.” options. Dunlap’s own compensation pack- By contrast, Theory O’s initial focus is on age—which ultimately netted him more than building up the “software” of an organiza- $100 million—was tightly linked to sharehold- tion—the culture, behavior, and attitudes of ers’ interests. Proponents of this system argue employees. Throughout a decade of reforms, that financial incentives guarantee that em- no employees were laid off at Champion. ployees’ interests match stockholders’ inter- Rather, managers and employees were encour- ests. Financial rewards also help top execu- aged to collectively reexamine their work prac- tives feel compensated for a difficult job—one tices and behaviors with a goal of increasing in which they are often reviled by their one- productivity and quality. Managers were re- time colleagues and the larger community. Theory E change placed if they did not conform to the new phi- The O-style compensation systems at Cham- losophy, but the overall firing freeze helped to pion reinforced the goals of culture change, strategies usually involve create a culture of trust and commitment. but they didn’t drive those goals. A skills-based heavy use of economic Structural change followed once the culture pay system and a corporatewide gains-sharing changed. Indeed, by the mid-1990s, Champion plan were installed to draw union workers and incentives, drastic had completely reorganized all its corporate management into a community of purpose. Fi- functions. Once a hierarchical, functionally or- nancial incentives were used only as a supple- layoffs, downsizing, and ganized company, Champion adopted a matrix ment to those systems and not to push particu- restructuring. structure that empowered employee teams to lar reforms. While Champion did offer a focus more on customers. companywide bonus to achieve business goals Shareholder value is the Process. Theory E is predicated on the view in two separate years, this came late in the only legitimate measure that no battle can be won without a clear, change process and played a minor role in ac- comprehensive, common plan of action that tually fulfilling those goals. of corporate success. encourages internal coordination and inspires Use of Consultants. Theory E change strate- confidence among customers, suppliers, and gies often rely heavily on external consultants. investors. The plan lets leaders quickly moti- A SWAT team of Ivy League–educated MBAs, vate and mobilize their businesses; it compels armed with an arsenal of state-of-the-art ideas, them to take tough, decisive actions they pre- is brought in to find new ways to look at the sumably haven’t taken in the past. The business and manage it. The consultants can changes at Scott Paper unfolded like a military help CEOs get a fix on urgent issues and priori- battle plan. Managers were instructed to ties. They also offer much-needed political and achieve specific targets by specific dates. If psychological support for CEOs who are under they didn’t adhere to Dunlap’s tightly choreo- fire from financial markets. At Scott Paper, graphed marching orders, they risked being Dunlap engaged consultants to identify many fired. of the painful cost-savings initiatives that he Meanwhile, the changes at Champion were subsequently implemented. more evolutionary and emergent than planned Theory O change programs rely far less on and programmatic. When the company’s de- consultants. The handful of consultants who cade-long reform began in 1981, there was no were introduced at Champion helped manag- master blueprint. The idea was that innovative ers and workers make their own business anal- work processes, values, and culture changes in yses and craft their own solutions. And while harvard business review • may–june 2000 page 5 Purchased by: Tanya Perry [email protected] on June 10, 2014
Cracking the Code of Change
the consultants had their own ideas, they did combined with Theory O strategies. But unless not recommend any corporate program, dic- they’re carefully handled, melding E and O is tate any solutions, or whip anyone into line. likely to bring the worst of both theories and They simply led a process of discovery and the benefits of neither. Indeed, the corporate learning that was intended to change the cor- changes we’ve studied that arbitrarily and porate culture in a way that could not be fore- haphazardly mixed E and O techniques proved seen at the outset. destabilizing to the organizations in which In their purest forms, both change theories they were imposed. Managers in those compa- clearly have their limitations. CEOs who must nies would certainly have been better off to make difficult E-style choices understandably pick either pure E or pure O strategies—with distance themselves from their employees to all their costs. At least one set of stakeholders ease their own pain and guilt. Once removed would have benefited. from their people, these CEOs begin to see The obvious way to combine E and O is to their employees as part of the problem. As sequence them. Some companies, notably time goes on, these leaders become less and General Electric, have done this quite success- less inclined to adopt O-style change strategies. fully. At GE, CEO Jack Welch began his se- They fail to invest in building the company’s quenced change by imposing an E-type re- human resources, which inevitably hollows out structuring. He demanded that all GE the company and saps its capacity for sustained businesses be first or second in their indus- performance. At Scott Paper, for example, tries. Any unit that failed that test would be Dunlap trebled shareholder returns but failed fixed, sold off, or closed. Welch followed that to build the capabilities needed for sustained up with a massive downsizing of the GE bu- competitive advantage—commitment, coordi- reaucracy. Between 1981 and 1985, total em- Theory O change nation, communication, and creativity. In 1995, ployment at the corporation dropped from Dunlap sold Scott Paper to its longtime com- 412,000 to 299,000. Sixty percent of the cor- strategies are geared petitor Kimberly-Clark. porate staff, mostly in planning and finance, toward building up the CEOs who embrace Theory O find that their was laid off. In this phase, GE people began to loyalty and commitment to their employees call Welch “Neutron Jack,” after the fabled corporate culture: can prevent them from making tough deci- bomb that was designed to destroy people but sions. The temptation is to postpone the bitter leave buildings intact. Once he had wrung out employee behaviors, medicine in the hopes that rising productivity the redundancies, however, Welch adopted an attitudes, capabilities, will improve the business situation. But pro- O strategy. In 1985, he started a series of orga- ductivity gains aren’t enough when fundamen- nizational initiatives to change GE culture. and commitment. The tal structural change is required. That reality is He declared that the company had to become organization’s ability to underscored by today’s global financial system, “boundaryless,” and unit leaders across the which makes corporate performance instantly corporation had to submit to being chal- learn from its transparent to large institutional shareholders lenged by their subordinates in open forum. whose fund managers are under enormous Feedback and open communication eventu- experiences is a pressure to show good results. Consider Cham- ally eroded the hierarchy. Soon Welch applied legitimate yardstick of pion. By 1997, it had become one of the leaders the new order to GE’s global businesses. in its industry based on most performance Unfortunately for companies like Cham- corporate success. measures. Still, newly instated CEO Richard pion, sequenced change is far easier if you be- Olsen was forced to admit a tough reality: gin, as Welch did, with Theory E. Indeed, it is Champion shareholders had not seen a signifi- highly unlikely that E would successfully fol- cant increase in the economic value of the low O because of the sense of betrayal that company in more than a decade. Indeed, when would involve. It is hard to imagine how a dra- Champion was sold recently to Finland-based conian program of layoffs and downsizing can UPM-Kymmene, it was acquired for a mere 1.5 leave intact the psychological contract and cul- times its original share value. ture a company has so patiently built up over the years. But whatever the order, one sure Managing the Contradictions problem with sequencing is that it can take a Clearly, if the objective is to build a company very long time; at GE it has taken almost two that can adapt, survive, and prosper over the decades. A sequenced change may also require years, Theory E strategies must somehow be two CEOs, carefully chosen for their contrast- harvard business review • may–june 2000 page 6 Purchased by: Tanya Perry [email protected] on June 10, 2014
Cracking the Code of Change
ing styles and philosophies, which may create ation of the hard and soft approaches is ASDA, its own set of problems. Most turnaround man- the UK grocery chain that CEO Archie Nor- agers don’t survive restructuring—partly be- man took over in December 1991, when the re- cause of their own inflexibility and partly be- tailer was nearly bankrupt. Norman laid off cause they can’t live down the distrust that employees, flattened the organization, and their ruthlessness has earned them. In most sold off losing businesses—acts that usually cases, even the best- intentioned effort to re- spawn distrust among employees and distance build trust and commitment rarely overcomes executives from their people. Yet during Nor- a bloody past. Welch is the exception that man’s eight-year tenure as CEO, ASDA also be- proves the rule. came famous for its atmosphere of trust and So what should you do? How can you openness. It has been described by executives achieve rapid improvements in economic at Wal-Mart—itself famous for its corporate value while simultaneously developing an culture—as being “more like Wal-Mart than open, trusting corporate culture? Paradoxical we are.” Let’s look at how ASDA resolved the as those goals may appear, our research shows conflicts of E and O along the six main dimen- that it is possible to apply theories E and O to- sions of change. gether. It requires great will, skill—and wis- Explicitly confront the tension between E dom. But precisely because it is more difficult and O goals. With his opening speech to than mere sequencing, the simultaneous use of ASDA’s executive team—none of whom he O and E strategies is more likely to be a source had met—Norman indicated clearly that he of sustainable competitive advantage. intended to apply both E and O strategies in One company that exemplifies the reconcili- his change effort. It is doubtful that any of his listeners fully understood him at the time, but it was important that he had no conflicts about recognizing the paradox between the Change Theories in the New Economy two strategies for change. He said as much in Historically, the study of change has Other entrepreneurs, however, are his maiden speech: “Our number one objec- been restricted to mature, large compa- driven by an ideology more akin to The- tive is to secure value for our shareholders and nies that needed to reverse their com- ory O—the building of an institution. secure the trading future of the business. I am petitive declines. But the arguments we Accumulating wealth is important, but not coming in with any magical solutions. I in- have advanced in this article also apply it is secondary to creating a company tend to spend the next few weeks listening and to entrepreneurial companies that need that is based on a deeply held set of val- forming ideas for our precise direction.…We to manage rapid growth. Here, too, we ues and that has a strong culture. These need a culture built around common ideas believe that the most successful strategy entrepreneurs are likely to subscribe to and goals that include listening, learning, and for change will be one that combines an egalitarian style that invites every- speed of response, from the stores upwards. theories E and O. one’s participation. They look to attract [But] there will be management reorganiza- Just as there are two ways of chang- others who share their passion about tion. My objective is to establish a clear focus ing, so there are two kinds of entrepre- the cause—though they certainly pro- on the stores, shorten lines of communication, neurs. One group subscribes to an ideol- vide generous stock options as well. The and build one team.” If there is a contradiction ogy akin to Theory E. Their primary goal goal in this case is to make a difference, between building a high-involvement organi- is to prepare for a cash-out, such as an not just to make money. zation and restructuring to enhance share- IPO or an acquisition by an established Many people fault entrepreneurs who holder value, Norman embraced it. player. Maximizing market value before are driven by a Theory E view of the Set direction from the top and engage peo- the cash-out is their sole and abiding world. But we can think of other entre- ple below. From day one, Norman set strategy purpose. These entrepreneurs empha- preneurs who have destroyed businesses without expecting any participation from be- size shaping the firm’s strategy, struc- because they were overly wrapped up in low. He said ASDA would adopt an everyday- ture, and systems to build a quick, the Theory O pursuit of a higher ideal low-pricing strategy, and Norman unilaterally strong market presence. Mercurial lead- and didn’t pay attention to the pragmat- determined that change would begin by hav- ers who drive the company using a ics of the market. Steve Jobs’s venture, ing two experimental store formats up and strong top-down style are typically at the Next, comes to mind. Both types of en- running within six months. He decided to shift helm of such companies. They lure oth- trepreneurs have to find some way of power from the headquarters to the stores, de- ers to join them using high-powered in- tapping the qualities of theories E and claring: “I want everyone to be close to the centives such as stock options. The goal O, just as large companies do. stores. We must love the stores to death; that is is to get rich quick. our business.” But even from the start, there harvard business review • may–june 2000 page 7 Purchased by: Tanya Perry [email protected] on June 10, 2014
Cracking the Code of Change
was an O quality to Norman’s leadership style. ian, and more transparent. Both Norman and As he put it in his first speech: “First, I am Leighton were keenly aware that they had to forthright, and I like to argue. Second, I want win hearts and minds. As Norman put it to to discuss issues as colleagues. I am looking for workers: “We need to make ASDA a great your advice and your disagreement.” Norman place for everyone to work.” encouraged dialogue with employees and cus- Plan for spontaneity. Training programs, tomers through colleague and customer cir- total-quality programs, and top-driven culture cles. He set up a “Tell Archie” program so that change programs played little part in ASDA’s people could voice their concerns and ideas. transformation. From the start, the ASDA Making way for opposite leadership styles change effort was set up to encourage experi- was also an essential ingredient to Norman’s— mentation and evolution. To promote learn- and ASDA’s—success. This was most clear in ing, for example, ASDA set up an experimen- Norman’s willingness to hire Allan Leighton tal store that was later expanded to three shortly after he took over. Leighton eventually stores. It was declared a risk-free zone, mean- became deputy chief executive. Norman and ing there would be no penalties for failure. A Leighton shared the same E and O values, but cross-functional task force “renewed,” or rede- they had completely different personalities signed, ASDA’s entire retail proposition, its or- and styles. Norman, cool and reserved, im- ganization, and its managerial structure. Store pressed people with the power of his mind— managers were encouraged to experiment his intelligence and business acumen. Leigh- with store layout, employee roles, ranges of ton, who is warmer and more people oriented, products offered, and so on. The experiments worked on employees’ emotions with the produced significant innovations in all aspects power of his personality. As one employee told of store operations. ASDA’s managers learned, CEOs who embrace us, “People respect Archie, but they love Allan.” for example, that they couldn’t renew a store Norman was the first to credit Leighton with unless that store’s management team was Theory O find that their having helped to create emotional commit- ready for new ideas. This led to an innovation loyalty and commitment ment to the new ASDA. While it might be pos- called the Driving Test, which assessed sible for a single individual to embrace oppo- whether store managers’ skills in leading the to their employees can site leadership styles, accepting an equal change process were aligned with the in- partner with a very different personality tended changes. The test perfectly illustrates prevent them from makes it easier to capitalize on those styles. how E and O can come together: it bubbled up making tough decisions. Leighton certainly helped Norman reach out O-style from the bottom of the company, yet it to the organization. Together they held quar- bound managers in an E-type contract. Man- terly meetings with store managers to hear agers who failed the test were replaced. their ideas, and they supplemented those Let incentives reinforce change, not drive meetings with impromptu talks. it. Any synthesis of E and O must recognize Focus simultaneously on the hard and soft that compensation is a double-edged sword. sides of the organization. Norman’s immedi- Money can focus and motivate managers, but ate actions followed both the E goal of increas- it can also hamper teamwork, commitment, ing economic value and the O goal of trans- and learning. The way to resolve this di- forming culture. On the E side, Norman lemma is to apply Theory E incentives in an O focused on structure. He removed layers of hi- way. Employees’ high involvement is encour- erarchy at the top of the organization, fired aged to develop their commitment to change, the financial officer who had been part of and variable pay is used to reward that com- ASDA’s disastrous policies, and decreed a mitment. ASDA’s senior executives were wage freeze for everyone—management and compensated with stock options that were workers alike. But from the start, the O strat- tied to the company’s value. These helped at- egy was an equal part of Norman’s plan. He tract key executives to ASDA. Unlike most E- bought time for all this change by warning the strategy companies, however, ASDA had a markets that financial recovery would take stock-ownership plan for all employees. In three years. Norman later said that he spent addition, store-level employees got variable 75% of his early months at ASDA as the com- pay based on both corporate performance pany’s human resource director, making the and their stores’ records. In the end, compen- organization less hierarchical, more egalitar- sation represented a fair exchange of value harvard business review • may–june 2000 page 8 Purchased by: Tanya Perry [email protected] on June 10, 2014
Cracking the Code of Change
To thrive and adapt in between the company and its individual em- debating, and being willing to learn. Candid ployees. But Norman believed that compen- about their intentions from the outset, they the new economy, sation had not played a major role in motivat- balanced the tension between the two change companies must ing change at the company. theories. Use consultants as expert resources who By 1999, the company had multiplied simultaneously build up empower employees. Consultants can provide shareholder value eightfold. The organiza- specialized knowledge and technical skills tional capabilities built by Norman and Leigh- their corporate cultures that the company doesn’t have, particularly in ton also gave ASDA the sustainable competi- and enhance shareholder the early stages of organizational change. tive advantage that Dunlap had been unable Management’s task is figuring out how to use to build at Scott Paper and that Sigler had value; the O and E those resources without abdicating leadership been unable to build at Champion. While theories of business of the change effort. ASDA followed the mid- Dunlap was forced to sell a demoralized and dle ground between Theory E and Theory O. It ineffective organization to Kimberly-Clark, change must be in perfect made limited use of four consulting firms in and while a languishing Champion was sold step. the early stages of its transformation. The con- to UPM-Kymmene, Norman and Leighton in sulting firms always worked alongside man- June 1999 found a friendly and culturally agement and supported its leadership of compatible suitor in Wal-Mart, which was change. However, their engagement was in- willing to pay a substantial premium for the tentionally cut short by Norman to prevent organizational capabilities that ASDA had so ASDA and its managers from becoming de- painstakingly developed. pendent on the consultants. For example, an In the end, the integration of theories E and expert in store organization was hired to sup- O created major change—and major payoffs— port the task force assigned to renew ASDA’s for ASDA. Such payoffs are possible for other first few experimental stores, but later stores organizations that want to develop a sustained were renewed without his involvement. advantage in today’s economy. But that advan- By embracing the paradox inherent in si- tage can come only from a constant willingness multaneously employing E and O change theo- and ability to develop organizations for the ries, Norman and Leighton transformed ASDA long term combined with a constant monitor- to the advantage of its shareholders and em- ing of shareholder value—E dancing with O, in ployees. The organization went through per- an unending minuet. sonnel changes, unit sell-offs, and hierarchical upheaval. Yet these potentially destructive ac- Reprint R00301 tions did not prevent ASDA’s employees from To order, see the next page committing to change and the new corporate or call 800-988-0886 or 617-783-7500 culture because Norman and Leighton had or go to www.hbr.org won employees’ trust by constantly listening,
harvard business review • may–june 2000 page 9 Purchased by: Tanya Perry [email protected] on June 10, 2014
Cracking the Code of Change
Further Reading ARTICLES Campaigning for Change Why Change Programs Don’t Produce by Larry Hirschhorn Change Harvard Business Review by Michael Beer, Russell A. Eisenstat, and July 2002 Bert Spector Product no. R0207G Harvard Business Review November–December 1990 Hirschhorn describes two additional balanc- Product no. 90601 ing acts you need to perform in order to lead change successfully. To ignite large-scale The authors provide additional detail about change at multiple levels in your organization, Theory O change, explaining how to conduct three simultaneous campaigns: polit- strengthen organizational capabilities by em- ical (amass coalitions), marketing (evoke em- powering managers and employees to exe- ployees’ ideas and emotions), and military (se- cute change. Start by articulating a general di- cure managerial attention). This three- rection to meet your key competitive pronged approach helps you maximize con- challenge. Then let unit managers design and tributions to change from all points in your or- execute specific changes to address that chal- ganization. Also build top-down momentum lenge. Through informal task alignment—al- by developing and communicating an acces- tering employees’ responsibilities and rela- sible theme. Build bottom-up momentum by tionships to solve concrete problems— enlisting employees who already embrace managers focus employees’ energy on work change. And maximize contributions from all itself, not on abstractions like “empower- levels by spreading best practices and knowl- ment.” Spread lessons from successful edge from “beachheads” back into the entire changes. Once revitalization is established, in- company. stitutionalize it by changing formal policies and structures.
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For customized and quantity orders of Harvard Business Review article reprints, call 617-783-7626, or e-mail [email protected] page 10 Purchased by: Tanya Perry [email protected] on June 10, 2014