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100% found this document useful (1 vote)
3K views209 pages

Implementing Organizational Change 3rd Edition

Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
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Third Edition

Implementing
Organizational Change
THEORY INTO PRACTICE

Bert Spector
Northeastern University

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Library of Congress Cataloging-in-Publication Data

Spector, Bert.
Implementing organizational change : theory into practice / Bert Spector. — 3rd ed.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-13-272984-0
1. Organizational change. 2. Organizational behavior. 3. Personnel management. I. Title.
HD58.8.S667 2013
658.4'06 — dc23
2011043785

10 9 8 7 6 5 4 3 2 1

ISBN 10: 0-13-272984-9


ISBN 13: 978-0-13-272984-0
CONTENTS

Preface v
Chapter 1 Organizational Change 1
Introductory Case: Organizational Change at Nokia 2
Strategic Responsiveness 3
The Three Faces of Change 5
Transformational Change 7
Employee Participation and Resistance to Change 10
Trigger Events and Change 14
Going Global and the Requirement for Organizational Change 14
Conclusion 15 • Discussion Questions 16 • Case Discussion: The
ASDA Way of Working 16 • Endnotes 21

Chapter 2 Theories of Effective Change Implementation 24


Introductory Case: Turnaround and Transformation at Duke University
Children’s Hospital 25
Theories of Change Implementation 26
Organization Development and Change Implementation 30
Putting It All Together: Building a Theory of Change Implementation 40
Conclusion 46 • Discussion Questions 46 • Case Discussion: Blue
Cloud Gets Agile 47 • Endnotes 49

Chapter 3 Mutual Engagement and Shared Diagnosis 51


Introductory Case: “A Deer Caught in the Headlights” at HP 51
Diagnosing the Organization 52
Starting with Mutual Engagement 56
The Consultant Role 60
Getting Started with Organizational Diagnosis 61
Conclusion 69 • Discussion Questions 70 • Case Discussion:
Managing Transformation at National Computer Operations 70 •
Endnotes 73

Chapter 4 Organizational Redesign 75


Introductory Case: Dr. Gayle Brings Collaboration to CARE 76
Organizational Redesign 76
Understanding Design Challenges 80
Building Commitment 87
Building Collaboration 91
iv Contents

Conclusion 95 • Discussion Questions 95 • Case Discussion:


Transferring Innovation Across National Boundaries 96 •
Endnotes 97

Chapter 5 People Alignment 99


Introductory Case: Expanding the Market for Best Buy 100
People Alignment and Change 101
Help 102
People Change 108
Getting the Sequence Right: Fair Process 117
Conclusion 118 • Discussion Questions 119 • Case Discussion:
“Employee First, Customer Second”: Vineet Nayar Transforms HCL
Technologies 119 • Endnotes 122

Chapter 6 Reinforcing New Behaviors 125


Introductory Case: Localizing a Retail Giant Chain 126
Selecting the Appropriate Organizational Focus 127
Using Incentives to Support New Behaviors 138
Technology and Behavior Change 145
Conclusion 146 • Discussion Questions 147 • Case Discussion:
Making the Problem Worse 147 • Endnotes 149

Chapter 7 Leading Change 151


Introductory Case: Collaboration and Leadership at Cisco Systems 151
Understanding Leadership 152
The Tasks of Leadership 154
Beyond Individual Leadership 161
Conclusion 163 • Discussion Questions 163 • Case Discussion:
Leading Change—Carlos Ghosn at Renault and Nissan 164 •
Endnotes 173

Chapter 8 Going Green 175


Introductory Case: Nike Just Does It 176
Moving Toward the Sustainable Corporation 178
The Process of Changing to Green 182
Shaping a Green Culture 190
Conclusion 192 • Discussion Questions 193 • Case Discussion:
Going Green at an Oil Company (?) 193 • Endnotes 195
Index 199
PREFACE

NEW TO THE THIRD EDITION


Welcome to the third edition of Implementing Organizational Change–Theory into Practice. This
edition is significantly enhanced based on recommendations for reviewers and users, as well
as on new research:
• Chapter 8—“Going Green”—is completely new, covering in detail a topic that had not
been included in the previous editions.
• Chapter 7—“Organizational Culture and Change”—has been eliminated as a separate
chapter. Key concepts from the chapter have been integrated throughout the text.
• Five new opening cases have been included. These are all cases written exclusively for
the third edition.
• Four new closing cases have been included. These are all cases written exclusively for
the third edition.
• The “Theory into Practice” sections have been expanded throughout the text. At the same
time, many of them have been rewritten to make even clearer the application of change
implementation theory.
• New examples have been added throughout the text.
• A new framework for organizational diagnosis has been added in Chapter 3.
• A case on a not‐for‐profit organization—CARE—has been added to Chapter 4.
• A section on change in multinational organizations has been added to Chapter 4.
• Greater emphasis on the process of building collaboration has been added to Chapter 4.
• A case on workforce diversity has been added to Chapter 5.
Talking about what has changed in a book on change management is inevitable and im-
portant. However, I also want to make clear what has not changed. From the outset, I intended
to write a text that would allow the reader to bring change management theory to implementa-
tion and practice. A COO recently told me that this was a book that he kept on his desk rather
than his bookcase so he could refer to it regularly. I’m proud of that complement. I’m equally
proud when students tell me that I have helped “make sense” of theory. Thanks to all of you
for your input, and I hope that you are pleased with the revisions in this third edition.

UNDERSTANDING ORGANIZATIONAL CHANGE


Organizational change comes in an almost endless variety of types and approaches. Just con-
sider these examples:
• To open new growth and revenue opportunities for the Internet‐based social network
company, Facebook, the CEO announces a new business model.
• To respond to shifting demands of multinational customers, the CEO of IBM attempts to
achieve seamless global responsiveness in an organization long noted for its highly de-
centralized multinational operations.
• To encourage ongoing innovation, the cofounders of Internet search engine Google
move to create greater tolerance for mistakes.
vi Preface

• To respond to criticism of its global labor practices, Nike commits itself to sustainable
business and innovation.
• To overcome its image as a cookie cutter chain and help to recover from a recession,
Macy’s pushes decision making down into its regional operations.
• To improve the efficiency of software development, a small company adopts Agile, a
new approach based on multiple releases in short time frames.
From multinational colossuses to small businesses, employees at all levels seek to respond
to the competitive dynamics that impact their organization’s performance.
Volatile swings in national and international economies, new competitive environments,
shifting customer expectations, increasing pressure from financial markets, emerging govern-
mental regulation and deregulation, not to mention dramatic and unexpected geopolitical dy-
namics, all demand responsiveness from today’s organizations. Renewed strategies, designed
to achieve and maintain a strong competitive position, demand that organizations abandon
the status quo. Instead of being an occasional event, organizational change is now a way of life.
Implementing organizational change has, as a result, emerged as a core competency for
corporate executives. In fact, any leader today will discover just how vital leading change is.
If you’re not leading change, as the saying goes, you’re not leading.
Knowing that change is vital, however, and successfully navigating an organization
through a change effort are quite different matters. Despite good intentions, enthusiastic sup-
port, and the availability of resources, change efforts often fall short of the expectations and
promises of their champions. Frequently, the flaw can be found in the misconceptualization of
the implementation process. How change is conceived and how it is implemented—that is
where the barriers usually reside.

THEORETICAL ORIENTATION
The purpose of Implementing Organizational Change—Theory into Practice is to understand
and analyze effective change implementation. In order to achieve that objective, Implementing
Organizational Change focuses on change that can be understood as strategically aligned altera-
tions in patterns of employee behavior. While recognizing the multiplicity of change efforts that
span the corporate landscape, the two core concepts of that definition allow us to pay special
attention to change that is strategic and behavioral. That definition shapes the core perspec-
tives of the book, which examines change that is strategic, purposeful, and behavioral. Let’s look
briefly at each one:
1. Strategic—the goal of change management is to help an organization support strategic
renewal in order to achieve and maintain outstanding performance in the face of a dy-
namic environment. A strategic perspective focuses on aligning behaviors with renewed
strategy and the requirements of outstanding performance.
2. Purposeful—change can occur to an organization or by an organization, most often some
combination of the two. A purposeful perspective focuses on explicit interventions into
the organization that are designed to respond to a dynamic competitive environment.
3. Behavioral—although change can occur in many forms, it is the alteration in employee
behaviors—how employees conduct themselves at work—that allows organizations to
implement their new strategies and achieve outstanding performance. A behavioral per-
spective focuses on the process of motivating employees at all levels of the organization
to alter their patterns of behavior in ways that are sustainable, adaptive to shifts in the
external environment, and will contribute to outstanding performance.
Preface vii

Wanting to achieve strategic behavioral change is relatively easy—implementing change


is difficult. For that reason, the thread of effective implementation runs through the entire text.
This is a book not just about what to change, but also how to change.
Implementing Organizational Change is informed primarily by the research and practice
offered by the field of Organizational Development (OD). Leading writers have combined
rigorous social science research with action learning to create an awareness of organizations
as systems, suggesting that change efforts must be aware of the need to achieve and sustain a
state of “fit” between various organization divisions and components. In terms of change pro-
cesses, OD suggests that when individuals are involved in defining problems and solutions,
they will be more motivated to achieve the desired outcomes.
Although richly informed by that field, Implementing Organizational Change is not in-
tended to be an OD text. Instead, the book offers a view that integrates key OD insights with
major perspectives from three additional fields:
1. Strategic renewal—This field recognizes that highly dynamic environments require
more than occasional incremental improvements in the firm’s operations; new strategic
directions and approaches require new ways of thinking and acting.
2. Strategic human resource management—This field recognizes the requirement to align
human capabilities with an organization’s strategy for achieving and maintaining out-
standing performance.
3. Leadership—This field recognizes the role of leaders at all levels of the organization
working both individually and collaboratively to mobilize adaptive behavior on the part
of employees in order to drive change.
Those contributions, summarized in Exhibit P‐1, will be supplemented by additional
insights from fields such as organizational learning, managerial accounting, conflict manage-
ment, ethics, communications, information systems, supply chain management, and organi-
zational innovation.

Organizational development (OD) Views organizations as open systems; sees alignment and
responsiveness as necessary components of outstanding performance;
emphasizes potential for collaborative effort, individual contribution,
and growth.
Strategic renewal Dynamic competitive environments often require new directions
supported by new systems, structures, and processes.
Strategic human resource Emphasizes the requirement to align human resource policies and
management (SHRM) practices—both individually and systemically—with the strategic goals
of the organization and the requirements of outstanding performance.
Leadership Focuses on the behavior of leaders at all levels of the organization who
mobilize adaptive behavior among employees and orchestrate effective
change interventions.
Others Sustainability, organizational learning, conflict management, ethics,
communications, information systems, supply chain management, and
organizational innovation.

EXHIBIT P-1 Academic Underpinnings of Implementing Organizational Change—Theory into Practice.


viii Preface

BOOK ORGANIZATION
In order to present theories and practice of change, Implementing Organizational Change is
divided into three sections:
• Section 1—“Theories of Effective Change Implementation” (Chapters 1 and 2) analyzes
the forces leading to strategic renewal and organizational change, as well as the theories
that form the basis for effective implementation. The section concludes with a theory of
effective change implementation that combines the insights of previous works.
• Section 2—“Implementing Change” (Chapters 3–6) guides the reader through the theory
and practice of specific methods and approaches to implementing organizational
change.
• Section 3—“A Broader View” (Chapters 7 and 8) steps back from the specifics of change
implementation to examine two larger organizational issues: the role of leadership and
the change involved in “going green.”

TEXT FEATURES
Because Implementing Organizational Change is intended for both practitioners and stu-
dents of change management, the text includes a multiplicity of learning features.
• All chapters open with a bulleted list of key learning objectives. In addition, “Theory
into Practice” highlights the applied, practical applications of the theories being pre-
sented.
• A short opening case study illustrates the core concepts and challenges analyzed in the
chapter. These real‐world examples of change implementation are referred to through-
out the chapter to emphasize learning points.
• Key vocabulary items are highlighted in the text in order to help the reader develop a
vocabulary of change.
• Each chapter includes a conclusion summarizing key points of the chapter and intro-
duces key theme of the following chapter.
• Discussion questions guide readers back through key points of the chapter.
• Finally, a longer concluding case (written by the author exclusively for the text) can be
used to apply and debate key points of each chapter.
The goal of each chapter is to integrate the various learning features with a presentation
and analysis of influential and important theories, as well as examples of organizational
change efforts. Organizations ranging from large multinationals such as Hewlett‐Packard,
Nissan Motors, Nike, and Cisco to nontraditional organizations such as the Rolling Stones
and the nongovernmental organization CARE will help the reader apply change theories to
real‐world experiences.
CHAPTER

1 Organizational Change

W hen we talk about organizational change, we mean many different things. Calling on
new technologies to improve services requires organizational change. So does offering
new products in new markets. When a bank seeks greater control over employees who are
making investment decisions, an athletic shoe company seeks to “go green,” or a hospital
decides to improve quality while simultaneously cutting costs, these, too, are examples of
businesses that will need to engage in organizational change.
In order to understand and analyze the dynamics of change, and particularly the
requirements of effective change implementation, it is important to sort out and distinguish
the various approaches an organization can take. This chapter will explore multiple paths to
change. In particular, this chapter will:
• Identify the role of strategic renewal in propelling change
• Focus on the behavioral aspect of organizational change
• Analyze the dynamics of motivating employees to alter their behaviors
• Differentiate the three faces of change: turnaround, tools and techniques, and
transformation
• Understand the source of both employee resistance to and support for change
• Appreciate the importance of trigger events in initiating change efforts
• Examine the role that “going global” plays in triggering organizational change
We will start by looking at an attempt by a newly appointed chief executive officer (CEO)
to revitalize the fortunes of a global leader in cell phones. As you read this introductory case,
ask yourself:
• Why was Nokia eliminating jobs even though it was performing well?
• What triggered Nokia’s decision to hire an outsider—an American—as CEO in 2010?
• What organizational changes will Stephen Elop need to make in order to revitalize Nokia
in the United States?

1
2 Chapter 1

ORGANIZATIONAL CHANGE AT NOKIA


As 2010 drew to a close, Finland‐based Nokia, the world’s leading producer of
cell phones, announced the elimination of 1,800 jobs.1 Surprisingly, the 3 percent
reduction—which came a little more than one year after a previous 3 percent
workforce reduction—accompanied an announcement of a strong third‐quarter
result. As the impact of the recent global recession slowly receded, Nokia pro-
duced strong sales and profit numbers. So, why the cutbacks?
Nokia’s rise from a 19th‐century paper mill headquartered in Espoo,
Finland to the world’s largest cell phone maker and leading employer in its
native country is the stuff of business legend. In particular, its ability to overtake
the previous market leader Motorola was based in large part on its early aware-
ness of a global market for cell phones. With core competencies in production,
distribution, and research and development, Nokia produced mobile phones
that dominated not just Europe but also the emerging world markets.
As late as 2002, Nokia led the market in the United States as well. However,
by 2009 its U.S. market share had slipped to 7 percent (from a high of 35 percent).
It had been surpassed not only by its old rival Motorola but also by LG and
Samsung, both based in Korea, and Research in Motion, the Canadian‐based
producer of the Blackberry. And then, of course, there was the hottest—or per-
haps more accurately the coolest—smartphone of all, the iPhone.
In some ways, it might be said that Nokia’s weakness in the U.S. market
was the result of conscious strategic decisions made by the company. Nokia
built its phones on the European standard GSM format rather than the U.S. stan-
dard CDMA format. This decision allowed Nokia phones ease of access to world
markets.2 By mass production of phones for a global market, Nokia lowered
production costs. However, the decision limited its access to the U.S. market,
where over half the phones operated with CDMA. Then too, Nokia failed to
forge close ties with wireless providers, instead offering open phones that would
then need to be adapted to a particular provider. Nokia’s approach worked well
globally. In the United States, however, wireless providers—Verizon, Sprint
Nextel, AT&T, which together controlled 96 percent of the U.S. market—wanted
to offer phones themselves that could be cobranded and bundled with long‐
term service contracts.
Perhaps most damaging, however, was Nokia’s lack of responsiveness to
the shifting tastes and expectations of the U.S. customers. Mark Louison, head of
the North American unit, conceded, “In the past, we had a one‐size‐fits‐all men-
tality that worked well on a global basis but did not help us in this market.”
Recognizing its growing weakness in the United States, Nokia placed an
American on its management board in 2007, hired another American to be its
chief development officer and moved its chief financial officer (CFO) to an office
in the States.
Smartphones—phones with both Internet and e‐mail functionality—
represented the fastest growing and most profitable segment of the cell phone
industry. As the Blackberry became a standard business tool, and the iPhone’s
popularity exploded in both the United States and globally, Nokia’s share of
Organizational Change 3

the smartphone market fell dramatically. And its stock price tumbled, even
after stock markets began to recover from the recession.
Many observers, both inside the company and outside, said that Nokia had
become a victim of its own success, complacent and reluctant to rock the boat. In
2010, the Nokia board recruited Stephen Elop from Microsoft to transform the
global giant.
Elop publicly admitted that Nokia had grown complacent and removed
from customers. “It was management by committee,” said one executive describ-
ing the company’s approach to innovation. “Ideas fell victim to fighting among
managers with competing agendas, or were rejected as too costly, risky, or insig-
nificant for a global market leader.” Elop vowed to focus on the internal barriers
that existed to new product development. “Nokia has been characterized as an
organization where it’s too hard to get things done,” he admitted. “But the board
has vested in me the mandate to lead Nokia through this change.” In particular,
Elop said his first priority was to stem the loss of U.S. market share.
Not all news was bad. Nokia still remained the global leader in the basic
phone market. In one of his first moves as new CEO, Elop announced job cuts.
“The cuts were intended,” he said to streamline software development for
Nokia’s smartphones by improving “agility and responsiveness” in the software
development and Web services units.

STRATEGIC RESPONSIVENESS
Building a
Stephen Elop was just one of many business leaders facing the challenge of orga- Vocabulary of
nizational change. Recognizing the need to change is important, of course. But Change
it’s just a first step. Next comes change implementation—the actions taken by Change
organizational leaders in order to support strategic renewal and achieve out- implementation
standing performance. Successful implementation is required to translate that actions taken by
organizational
recognition into an effective strategic response. Poor implementation can under- leaders in order to
mine the best intentions of organizational leaders. support strategic
We live in a period of rapid and dramatic change: significant alterations in renewal and
customer expectations and demands, new technologies, competitors with inno- maintain outstanding
vative business models, shifts in workforce demographics and values, and new performance in a
dynamic
societal demands and constraints. Even the most successful organizations cannot environment.
stand still. They need to respond to external dynamics in order to create and
maintain outstanding performance.
Building a
Vocabulary of
THEORY INTO PRACTICE Change
Strategic renewal a
Successful organizations cannot remain static if they hope to continue that change in an
organization’s
success; they must change in order to keep up with a changing world. strategy involving
some combination of
new products/
In response to those dynamics, organizational leaders often decide to services, new
engage in a process of strategic renewal. Strategic renewal involves some combi- markets, and a new
nation of a new product or service, a new market, and a new business model for business model.
4 Chapter 1

an organization. Some companies have proved to be more nimble at adopting


their strategy to shifting competitive realities:
• Amazon quickly and effectively moved from selling books online to offer-
ing eBooks on its own reader, the Kindle, while Borders lagged behind and
failed to introduce an eReader.
• Netflix adapted to the world of DVDs offered through mail and video‐
on‐demand, while Blockbuster lagged behind.
• Pandora, a Web‐based music radio provider, repeatedly altered its business
model in response to regulatory and technological changes, while less
nimble competitors lagged behind.
Failure to adapt, of course, has serious consequences: both Borders and
Blockbuster declared bankruptcy. As we saw in the opening case, Nokia found
itself falling behind the more nimble Apple.
It is the ongoing demand for strategic renewal created by an ever-shifting
competitive environment that creates the requirement for organizational change
(see Exhibit 1‐1).

THEORY INTO PRACTICE

To implement a renewed strategy, organizational leaders need to engage in a


change process.

For strategic renewal to be effective, organizations need to do more than


announce a new strategy. Announcements such as Elop’s determination to revi-
Building a talize Nokia’s lagging mobile phone business in the United States come regularly.
Vocabulary Announcements such as these are useful: they alert employees, customers,
of Change suppliers, and investors to new directions the company plans to take. They are
Organizational not, however, sufficient.
capabilities the
collective talents and
Leaders need to align internal processes, structures, and systems with the
skills of a firm’s demands of that new strategy. New organizational capabilities—talents and
employees. skills possessed by employees—need to be built. Underlying all those shifts is

EXHIBIT 1-1
Strategic
Responsiveness in Company Altered Strategy
Sample Companies. IBM Move from product to service/consulting company
Netflix Move from providing DVDs through the mail to providing streaming,
in‐demand entertainment
Renault Move from French‐based to internationally focused automobile company
Pandora Move from selling through third‐parties to selling directly to end users
Facebook Move from restricted, college campus‐only social network to become a
“universal utility” open to everyone
Organizational Change 5

the requirement to engage in discontinuous change: large‐scale, long‐term reori- Building a


entation of most or all of the central aspects of organizational life.3 The goal is to Vocabulary of
Change
create lasting alterations in patterns of employee behavior in order to support Discontinuous change
strategic renewal. large‐scale, long‐
term reorientation of
most or all of the
THE THREE FACES OF CHANGE central aspects of
organizational life.
We noted at the beginning of the chapter that there are different approaches to
change. Although there are many diverse methods, they can be placed within
one of three broad categories:
1. Turnaround
2. Tools and techniques
3. Transformation
Let’s examine each, and also take note of the overlaps that exist among them.

THEORY INTO PRACTICE

Not all change is behavioral.

To understand turnaround, look at MySpace. There was a time—the peak


of which was 2005—when MySpace stood at the top of the social networking
heap. Facebook had just emerged from the confines of college campuses, while
major communications conglomerates entered a bidding war for the company
started by Tom Anderson and Chris DeWolfe. However, soon after Rupert
Murdoch’s News Corporation paid $580 million for My Space, Mark Zuckerberg’s
Facebook emerged as its main competitor. By 2009, it was Facebook and not
MySpace that had emerged as the preeminent social networking site. Perhaps it
was complacency or the lack of managerial skills or the clash of cultures between
MySpace and the News Corporation. Whatever the reason, MySpace began a
steep decline. “MySpace was like a big party,” said one media consultant, “and
then the party moved on.”4
MySpace management made attempts to respond redesigns, shifts in focus,
new management, and so forth. Finally, it came time to cut costs. In January 2011,
the company announced the layoff of 500 employees, over 40 percent of its total
workforce. Analysts speculated that the News Corporation might be preparing
Building a
to sell its once prized possession. Vocabulary of
MySpace’s most recent approach to change can be characterized as Change
turnaround. Rather than focusing on new behaviors, turnaround looks at a Turnaround an
company’s assets and seeks to manage them in a new way in order to stabi- attempt to improve
the immediate
lize cash flow, shore up the balance sheet, and maximize shareholder wealth.
financial position of
Turnaround can involve adding assets as well as cutting. During the reces- an organization by
sion, when many companies in the entertainment industry were cutting back, focusing on the
Disney grabbed the opportunity to expand. The company invested $1 billion in income statement
updating its California Adventure Park, purchased Marvel Entertainment for and the balance
sheet.
$4.3 billion and Playdom, a Facebook‐oriented game maker, for $563 million.
6 Chapter 1

This was turnaround by adding rather than subtracting. Disney saw these invest-
ments in assets as a way of ensuring continued performance of the company.

THEORY INTO PRACTICE

Turnaround may be necessary, but it is not sufficient to ensure long‐term


effective change.

Building a Another nonbehavioral face of change focuses on techniques and tools.5


Vocabulary of Exhibit 1‐2 summarizes a number of change management tools and tech-
Change niques that have been popular in recent years. Attending to techniques and tools
Techniques and tools
without paying at least equal attention to the behavior of employees can be a path
organizational
processes, not just to disappointment but also to dysfunction. When employees participate
mechanics, and other in the design and implementation of new technology, they are more likely to alter
interactions intended their behaviors in ways that will help ensure effectiveness.
to produce a product
or service.
THEORY INTO PRACTICE

Effective strategic renewal efforts combine aspects of turnaround, tools and


techniques, and transformational behavioral change.

EXHIBIT 1-2
Popular Change
Tools and
Tool Key Points Company Examples
Techniques. Total quality Align operational processes with the Globe Metallurgical, Inc.
management requirement for customer‐defined quality Motorola
and continuous improvement. Westinghouse
Agile A process for product development, mainly GKN Aerospace
development software, based on collaborative cross‐ PNC Financial
functional team effort. Acxiom
Balanced Use of a measurement system that balances VW of Brazil
scorecard financial objectives alongside internal Ricoh
business process, customer satisfaction, and Weichert Relocation
employee learning and growth.
Value‐chain Capture value by linking and coordinating ComputerWorld
integration the primary activities—inbound logistics, IBM Electronics
production, outbound logistics, marketing, Microsoft
and sales—of the organization.
Lean Eliminate activities that do not add value Sealy
from the perspective of the customer. Toyota
Conmed
Considered Ecological impact is considered at Nike
design beginning of new product design process Hewlett‐Packard
rather than as an afterthought Ford
Organizational Change 7

EXHIBIT 1-3
Three Faces
Type Target Rationale of Change.
Turnaround Assets Improve short‐term bottom‐line performance
Tools and techniques Processes Increase internal efficiencies
Transformation Behaviors Enhance human capabilities

The third face of change involves transformation, a change intervention Building a


that directly targets the patterns of employee actions and interactions: how will Vocabulary of
Change
employees work to meet the company’s strategy and to achieve and sustain
Transformation an
outstanding performance. Transformation, which focuses on behaviors, will be intervention
addressed at greater length in the next section and will, in fact, be the main focus designed to alter
for the remainder of the text. patterns of employee
All three faces offer options available to leaders in search of strategic behavior.
renewal (summarized in Exhibit 1‐3). Although leaders may opt to approach
each of these “faces” as separate and independent options, effective change
efforts combine the three. We can now turn our attention to transformation.

TRANSFORMATIONAL CHANGE
THEORY INTO PRACTICE

If change interventions are to achieve significant and sustainable impact on


performance, they must focus on altering patterns of employee behavior.

It’s easy to think of examples of how organizations might wish to alter the
behaviors of employees:

• Employees accustomed to following orders issued by supervisors might


now have to make decisions on their own.
• Employees used to working as individuals might now have to work as a team.
• Employees, who have been focused purely on technology, might need to
understand the needs and requirements of customers.
• Employees accustomed to working entirely within their own functional
area might have to work collaboratively with people from other functions
and backgrounds.
Behaviors involve how employees conduct themselves at work: what they
do and how they do it, how much effort they bring to their roles, and how com-
mitted they are to achieving desired outcomes.
Behavior also involves how employees work with others: co‐workers, cus-
tomers, suppliers, the host community, and so forth. It is this enactment of roles,
responsibilities, and relationships that constitutes employee behavior in
organizations. The collective enactment of those roles, responsibilities, and rela-
tionships—that is, the patterns of employee behavior within organizations—
constitutes the target of transformational change efforts.
8 Chapter 1

Transformational change seeks more than a short‐term alteration in


behavior. In order to support strategic renewal and outstanding performance,
new behaviors need to be sustainable and adaptive to shifts in the external
environment.
The reason sustainability of new behaviors matters can be stated simply:
the ways in which employees conduct themselves significantly impacts the orga-
nization’s bottom‐line performance.6

THEORY INTO PRACTICE

Transformational organizational change seeks to create long‐term, sustain-


able alterations in employee behaviors.

Just how does that happen? How is it that of the way employees conduct
themselves at work impacts a company’s bottom‐line performance? The key to
Building a
Vocabulary of
understanding the relationship of behaviors and performance can be found in
Change the idea of motivation.
Motivation the Motivation refers to the degree to which employees are committed to the
degree to which achievement of outstanding performance both for themselves and for their com-
employees are pany. Employee motivation pays off in bottom‐line performance. High motiva-
committed to the
achievement of
tion creates in employees the capability and willingness to work together to
outstanding solve problems. Quality improves, customer responsiveness increases, and
performance both adaptation to shifts in the competitive environment occurs.
for themselves and
for their company. THEORY INTO PRACTICE

Employee motivation pays off in bottom‐line performance.

Chapter 4 will examine in detail the efforts to redesign organizations to


enhance employee motivation. For now, we can suggest that behaviors matter.
The competitive advantage delivered by the conduct of employees can be long
term and sustainable. The manner in which work is organized, information is
shared, decisions are made, coordination occurs, and problems are solved are all
performance differentiators.7 Highly motivated employees can deliver a perfor-
mance edge is sustainable for decades, leading to significant and often stagger-
ing competitive advantage.8

THEORY INTO PRACTICE

The way employees conduct themselves at work impacts the bottom‐line


performance of the company.

Sources of Behavior
Effective change implementation needs to start with an appreciation of the
sources of an individual employee’s behavior. If the goal of organizational
change is to alter employee behaviors, after all, it is useful to understand why an
employee behaves as he or she does.
Organizational Change 9

Part of that answer resides in the individual psychology of the employee.


Understanding who the individual is, what values he or she brings to the work-
place, even how that individual thinks and learns can help provide insight into
the question of why. But let’s face it, individual psychology can be difficult to
assess and slow to change.
Transformational change demands more than one‐person‐at‐a‐time change.
A leader seeking leverage over the behaviors of many employees can start by
focusing not on individual psychology but on the organizational context in
which employees work.

THEORY INTO PRACTICE

Behavior comes from both the individual and the organizational context in
which the individual works. Building a
Vocabulary of
Change
Organizational context—the setting and circumstances in which employees Organizational context
work—exerts a powerful impact on behavior. Companies as diverse as the setting and
Apple, General Electric, and Google endeavor to promote an organizational con- circumstances in
which employees
text that shapes individual behavior. They call upon organizational culture and work.
values, the behaviors of leaders, as well as rules and procedures to define a con-
text that shapes employee conduct.
It’s worth remembering that organizational context can produce negative as
well as positive results. It was a context of huge rewards for risk‐taking and win‐
at‐all‐costs that led to the collapse of the financial services industry that triggered
the global recession in 2008. We need to appreciate the power of organizational con-
text to shape behaviors by examining a specific example of an employee mistake.
Sheryl Sandberg, an advertising manager at Google, made a mistake that
cost the company millions of dollars. “Bad decision,” she admitted, “moved too
quickly, no controls in place, wasted some money.”9 Sandberg quickly informed
Google cofounder Larry Page.
Employees make mistakes, even occasionally big ones such as Sandberg’s.
Leaders have an important opportunity to shape organizational context by the
manner in which they respond to those errors. Quick and harsh repercussions—
firing, for example, or demotion—will have one kind of impact on the organiza-
tional context in which employees work. That response may be justified and
reasonable, but it may also work to stifle future risk‐taking behaviors. Or perhaps
employees will be less willing to admit mistakes, slowing down an organization’s
response time.
The boss may also respond in a less harsh and punishing manner. Listen to
the reaction of Google cofounder Larry Page, to Sandberg’s admission:

I’m so glad you made this mistake, because I want to run a company
where we are moving too quickly and doing too much, not being too
cautious and doing too little. If we don’t have any of these mistakes,
we’re not taking enough risk.

The point is not that Page’s response is the only “correct” or reasonable
response to the admission of a mistake. Leaders have to determine what type of
10 Chapter 1

organizational context they seek to create. That context will need to be aligned
with the company’s strategy and purpose.
Page and Google cofounder Sergey Brin believed that mistakes could pro-
vide fuel for improvements, even innovation. “We’re willing to tolerate ambigu-
ity and chaos,” said senior vice president Shona Brown, “because that’s where
the room is for innovation.” Google’s leaders wanted a context that tolerated risk
in order to generate innovation.

EMPLOYEE PARTICIPATION AND RESISTANCE TO CHANGE


Building a
Vocabulary of
Not all employees greet change with equal enthusiasm. It is useful, therefore, to
Change examine the sources of employee resistance to change and the ways in which
Resistance efforts managers can overcome resistance. Resistance refers to action, overt or covert,
exerted by exerted on behalf of maintaining the status quo.10
employees either
overtly or covertly to
maintain the status
Why Employees Resist Change
quo. You’re either for this change or you’re against it. That refrain may be familiar; it is
not, however, accurate. Employee response to change is not either/or, not “for”
or “against.” Instead, it runs across a broad spectrum, ranging from “commit-
ment” at one end to “aggressive resistance” on the other (see Exhibit 1‐4). Each of
these reactions to change helps shape the behavior of individuals and, ultimately,
the success of a change effort.

THEORY INTO PRACTICE

Employees do not naturally resist change, but they often resist change because
of the way change is implemented.

EXHIBIT 1-4
Continuum of
Individual Response Commitment Involves a strong emotional attachment to the goals of
to Change. the organization and the aims of the change effort
Involvement Involves a willingness to participate in the behaviors, being
called for by the change effort
Based on Leon Support Involves speaking on behalf of the change effort without
Coetsee, “From taking any other explicit actions to promote the effort
Resistance to Apathy Represents a neutral zone in which individuals know
Commitment”; about the change effort and engage in no behavior either
Public Affairs to support or oppose it
Quarterly (Summer Passive resistance A mild form of opposition that involves a willingness to
1999), pp. 204–222. voice reservation or even threatening to resign if the
change goes through
Active resistance Involves behaviors that block or impede change, usually
by behaving in ways that contradict the goals of the
change effort
Aggressive resistance Involves purposeful sabotage and subversion of the
change effort
Organizational Change 11

THEORY INTO PRACTICE

Managers can try to understand the reasons behind employee resistance to


change.

Most attention to employee resistance has focused on how to avoid or, failing
that, overcome it; which is to say, how to get employees “on board” change efforts.
Managers can see employee resistance in negative terms: it is a “bad thing” that
represents an irrational response to a dynamic competitive environment. In this
way, employee resistance can be dismissed as invalid or disobedient.11 Resistance
to change, in this view, is a force to be overcome.
There is another way of thinking about resistance to change, however; one
that may actually improve the effectiveness of implementation.

THEORY INTO PRACTICE

Employee resistance is not just a negative force to be overcome; it also presents


an opportunity to learn.

How Managers Can Inadvertently Fuel Resistance During


Implementation
It is tempting to believe that a certain type of individual is likely to resist change.
Perhaps you’ve heard, or even thought, ideas such as:
• Older workers are more likely to resist change than are younger workers.
• Middle managers are more likely to resist change than lower‐level workers or
higher‐level executives.
• Men are more likely to resist change than women.
Don’t believe these explanations.
Study after study of employee resistance to change in organizations refutes
these and other contentions that certain types of individuals are more likely to
resist change than others. Individual differences may account for some vari-
ance in employee acceptance of or resistance to change. But the overwhelming
determinant of employee reaction to change comes from how the process is
managed and the degree to which employees are allowed to participate in the
process.12

THEORY INTO PRACTICE

Resistance or acceptance of change depends mainly on how the change is


implemented.

Managers do not set out to create resistance, of course, but do just the opp-
osite. They believe that the proposed changes are being made for the good of the
company and that employees will accept the need for change. Still, the manner in
12 Chapter 1

which change is implemented can have that effect. Here’s a checklist of employee
resistance and possible sources of that resistance:13
• Employees resist because they remain satisfied with the status quo. Perhaps
management has not included employees in the diagnosis and learning
process.
• Employees resist because they view change as a personal threat. Perhaps
management has not offered employees the opportunity to acquire the new
skills that will be required in the renewed organization.
• Employees resist because they see the cost of change outweighing the ben-
efits. Perhaps management has not articulated the goals of the change
adequately to allow a true assessment of the costs and benefits.
• Employees resist because they believe that management is mishandling
the process. Perhaps employees have not been given a voice in the process
itself.
• Employees resist because they believe that the change effort is not likely to
succeed. Perhaps management needs to articulate why this change pro-
cess is more likely to be effective than past efforts.
By looking at that checklist, we can see how often employee resistance can
be understood in part as a natural and expected outcome of implementation.

THEORY INTO PRACTICE

Participation in the change process is the best way to build support and over-
come resistance to change; but remember—it is no guarantee.

In treating employee resistance as a negative force to be overcome, manag-


ers risk shutting down the possibility that they can learn from resistance. When
employee voice has been excluded from the change process, there is likely to be
valuable data missing from the diagnostic and action planning phases of the
effort. Employees may ask whether management really understands what cus-
tomers expect from their products or services or what barriers the organization
has erected to outstanding performance.
Even when employees question whether management has selected an
appropriate strategic response, it is important for managers to learn about
employee hesitations and concerns. Instead of treating resistance as a force to be
overcome, managers may decide to treat resistance as an opportunity to learn
from employees and improve the change process.

THEORY INTO PRACTICE

Employee resistance can offer leaders the opportunity to learn.

Not all resistance to change offers an equal opportunity to learn, of course.


Eventually, resistance will have to be addressed and overcome. But when? At what
point does resistance to change stop presenting an opportunity to learn and start
Organizational Change 13

being a barrier to overcome? We will address that question in Chapter 2. For now,
let us understand employee resistance as a form of expression that is not always a
bad thing and that needs to be considered and understood by change leaders.

THEORY INTO PRACTICE

There comes a point in the change process where employee resistance will
need to be addressed and overcome.

Employee Participation Builds Support for Change


Change imposed from “above”—top executives telling employees that they must
alter their behaviors in order to implement a new strategy or perform better under
the old strategy—is likely to engender resistance. Employees often feel that they are
being excluded from discussions of how best to respond to competitive pressures.
Building a
Just as there are ways in which a change implementation process may inad- Vocabulary of
vertently fuel resistance to change, there are also techniques for building support. Change
Participation in the process of defining problems and designing solutions will Participation the
help build commitment to the new directions that result from that process.14 By process of allowing
employees a voice in
diagnosing problems, understanding their importance, and being part of the
work‐related
process of formulating solutions, people develop a psychological sense of “own- decisions.
ership” over the outcome. That ownership now creates in employees the height-
ened motivation to implement change in order to achieve desired goals.15
The difficult challenge for managers, then, becomes how and when to engage
employees in the process of diagnosis, problem solving, and planning for change.

THEORY INTO PRACTICE

People don’t resist change, they resist being changed.

Imposed change encourages resistance. Individuals can feel manipulated,


coerced, or even ignored. When people participate in designing change, on the
other hand, they are more likely to feel they are making an informed choice
about altering their behaviors. Individuals can develop commitment to the
choice as well as feeling responsibility for implementing that choice. When peo-
ple participate in the design of change (in the diagnosis, action planning, and
implementation stages), they will be more motivated to alter their behaviors.
And, to emphasize a point made earlier, employee motivation matters.
New behaviors will not be sustainable if they have been prompted by manipula-
tion or coercion. Effective change does not seek to fool employees into setting
aside their better judgment. Rather, it seeks to encourage employees to find con-
tinually new and improved ways of applying their better judgment. How can
internal processes be improved? What are customers telling employees about
our products and services? How might we eliminate waste and improve quality?
To support behaviors that can sustain outstanding performance, effective change
14 Chapter 1

efforts avoid manipulation and coercion, aiming instead to enhance employee


willingness and ability to contribute their own judgment.

THEORY INTO PRACTICE

Transformational change seeks to motivate employees to change their behaviors;


not to force, coerce, or trick them into changing.

Because motivation is internal to each employee, the manager’s challenge is


complex. The task involves shaping the organizational context in such a way as to
encourage and support an internal desire on a large number of employees to alter
their behaviors in ways consistent with the shifting demands of the new strategy.
Building a
Vocabulary of TRIGGER EVENTS AND CHANGE
Change
Trigger event a shift Organizational change is typically initiated in response to a trigger event—a shift
in the environment in the environment that creates a need for altered strategies and new patterns of
that precipitates a
employee behavior. For Nokia, the trigger event was the launch and overwhelm-
need for
organizational ing public enthusiasm for the iPhone. Often, the arrival of a new CEO—Anne
change. Mulcahy at Xerox, Patricia Woertz at Archer Daniels Midland, and Carlos Ghosn
at Nisan, for example—triggers a demand for change. The world‐wide recession
of 2008–2009 triggered a requirement in a wide range of companies—financial,
manufacturing, service providers among them—to reconsider their strategies.
Trigger events, says Lynn Isabella, “are so named because their magnitude
and potential for organizational as well as personal impact set into motion a
series of mental shifts as individuals strive to understand and redefine a situa-
tion. By their very nature, they unbalance established routines and evoke con-
scious thought on the part of organizational members. They stir up feelings and
emotions that come to affect people’s reactions to the change. In short, trigger
events bring people’s mindsets into the arena of change.”16

THEORY INTO PRACTICE

Trigger events, either external or internal to an organization, precipitate the


need to alter behavioral patterns of employees.

GOING GLOBAL AND THE REQUIREMENT FOR ORGANIZATIONAL


CHANGE
When organizations “go global,” they may mean one or more of several changes:
• They may seek to outsource certain activities that had previously been per-
formed in the home country. For example, a company moves its customer
Help Desk operation from the United States to India.
• They may seek to enter new, nondomestic markets. For example, a
U.K.‐based grocery store chain seeks to open outlets in the United States.
Organizational Change 15

• They may seek nondomestic suppliers for needed raw materials. For exam-
ple, a food processor in Russia seeks wheat supplies in the United States.
• They may seek strategic alliances with related companies in other coun-
tries. For example, a French‐based car manufacturer enters into an alliance
with a large Japanese company.
• They may seek to locate research and development activities in multiple
nations as a way of better understanding the needs of nondomestic custom-
ers. For example, a Brazilian‐based jet manufacturer opens a market
research office in the United States.
These are among the numerous variations on what it might mean for an
organization to “go global.” As varied as the opportunities are, what they all
have in common is this: going global will require organizational change.

THEORY INTO PRACTICE

”Going global” takes many forms, and they all require organizational change. Building a
Vocabulary of
Change
Psychic distance
Anytime an organization embraces multiple national cultures, it adds a differences in
degree of sociocultural diversity and uncertainty. This complexity is the result of culture, language,
what is known as psychic distance.17 Differences exist not only in culture, but and the political–
also in language, and the political–economic–legal infrastructure of countries. In economic–legal
later chapters, we will discuss the specific implications for organizational change infrastructure of
countries that add to
when multiple countries are involved. The point now is that organizations will the complexity of
need to develop new structures, new ways of thinking, and new ways of behav- managing across
ing if they are going to be successful operating in a global arena. national borders.

Conclusion
Strategic responsiveness to a dynamic environ- change leaders. By allowing employees to
ment requires organizational change. Change, participate in the formulation of change plans,
however, is not a singular concept. The three however, leaders will increase employee owner-
faces of change suggest that change leaders face ship over and support for those efforts.
options. Turnaround addresses the need to Trigger events—either discontinuities in
improve the balance sheet. Tools and techniques a firm’s competitive environment, new leader-
focus on improved processes. By themselves, ship, or a combination of the two—precipitate
however, neither will achieve the full, intended the requirement for strategic renewal and
impact of strategic renewal. Effective change organizational change. One of the most common
will also require attention to employee behav- trigger events is when organizations go global,
iors—patterns of action and interaction—no less dealing with people and organizations in multi-
than financial and technological effectiveness. ple cultures.
Not all employees will greet change efforts Recognizing the requirement for change
with equal enthusiasm. Employee resistance and being able to manage change effectively are,
arises from a number of sources, some internal of course, two different matters. Chapter 2 will
to individual employees and others externally examine the theoretical underpinnings of effec-
located in the implementation processes of tive change implementation.
16 Chapter 1

Discussion Questions
1. Review Exhibit 1‐1. Select one of the companies. 4. Identify the main external forces triggering the
Based on the brief statement of its renewed strat- requirement for organizational change. Pick any
egy (or research the company for further details), three and discuss how they might necessitate
think about how patterns of employee behavior behavioral change on the part of organizational
will have to change. employees.
2. Explore the challenges facing Stephen Elop at 5. Why is motivation important to behavioral
Nokia. What can he do to revitalize the company change? How might leaders approach change dif-
in the U.S. smartphone market? ferently if they are trying to motivate employees
3. What are the three approaches to organizational to change rather than forcing employees to
change? In what ways are they different, and in change?
what ways do they overlap?

Case Discussion
Read “The ASDA Way of Working” and prepare answers to the following questions:
1. What are the types of changes that Archie Norman needs to undertake at ASDA?
2. Referring to Exhibit 1‐3, what faces of change does ASDA need to engage?
3. What actions can Norman and his top management team take to build employee motivation to engage in
change?

THE ASDA WAY OF WORKING


ASDA, the grocery store chain that Archie Norman had just been hired to lead,
teetered on the edge on bankruptcy.18 While ASDA had enjoyed a long run of
success in the United Kingdom, upscale competitors and down‐market deep
discounters had sharply eroded its customer base. Norman, an outsider to ASDA
who had never run any retailing operation, believed that ASDA could not afford
the luxury of piecemeal or incremental improvement. Everything about the
organization—from the way they purchased and displayed products to the way
store managers interacted with shop floor employees—would have to change.
Everything.

Company Background
With 65,000 employees in 205 ASDA stores and another 2,000 at corporate head-
quarters, ASDA was the fourth largest grocery store chain in the United
Kingdom. ASDA enjoyed annual sales of $6 billion† and claimed 8 percent of the
supermarket business, ranking fourth in market share.
Starting in the late 1960s, ASDA pioneered the concept of large super-
markets located outside of downtown areas with expansive parking lots and
low prices. Flourishing particularly in working‐class areas, ASDA became


All figures are given in equivalent U.S. dollars.
Organizational Change 17

known as a blue‐collar store, specializing in low prices in a warehouse like


atmosphere. (“Pile it high and sell it cheap” was a phrase commonly associ-
ated with this type of operation.) The demographic of their customer base was
decidedly “down market.” In that niche, ASDA was quite successful, operat-
ing without any real competition. The larger grocery store chains vied for more
upscale (i.e., wealthy) customers and simply could not compete with ASDA on
price.
ASDA’s problems began when top management embarked on two equally
disastrous paths. First, they diverted much of the profit from the grocery opera-
tions into nonfood acquisitions: retail operations such as furniture and carpeting.
And second, management moved to change their customer base from blue‐collar
to more upscale shoppers. As part of that upscale strategy, ASDA moved out of
their traditional blue‐collar strongholds into wealthier suburban locations. That
move had two negative effects:
1. In the wealthy suburbs, it placed them in competition with chains not
burdened with the reputation of being blue‐collar warehouse stores.
2. In their traditional working‐class areas, they allowed competitors to steal
market share from the very blue‐collar base that ASDA seemed to be aban-
doning.
Top management exacerbated the problem by spending lavishly on them-
selves: corporate jets, high‐style corporate offices, and the like. Soon ASDA prod-
ucts were pricier than its competitors’ were. ASDA began to spiral downward.
While the company borrowed money to expand into new markets and open new
stores, same‐store sales declined and overall growth slowed. In response, ASDA’s
board of directors fired its chief executive and brought in Archie Norman to turn
ASDA around.

Enter Archie Norman


Thirty‐seven‐year‐old Archie Norman had joined the McKinsey & Company
consulting organization after receiving an MBA in the United States to work in
the company’s retail division. From McKinsey he moved to a large retail opera-
tion where he served as CFO. Norman arrived at ASDA with no specific experi-
ence in the grocery business and no general management experience aside from
his graduate school training.
What Norman found when he arrived at ASDA was complete demoraliza-
tion of the workforce; a highly politicized central headquarters; people caught
up in their “chimneys”—operations—people did not talk to the trading people,
and nobody listened to marketing. It was a place, noted one observer, completely
bereft of any notion of where it was headed or how it might weather the crisis.
And that crisis was deeper and more profound than Norman had expected:

We had so much debt we thought we would be in breach of our loan cove-


nants shortly. Our sales were running at 2 percent below the industry like
for like, and the trend was heading south. We had, if anything, worse value
than our competitors. And while everyone was very loyal about it, morale
was actually quite poor.
18 Chapter 1

Norman inaugurated his intervention by reaching an understanding with


his board of directors. The turnaround would not happen overnight, they agreed.
If the board would tolerate Norman’s investments in renewing the chain, he
would deliver significant return by the end of the third year:

I told the stockholders and the market analysts, that I had a three‐year plan
that ASDA should be returned to profitability and growth within that time
frame. The stockholders agreed to let me make short‐term sacrifices for
long‐term profitability.

Building a Top Team


Norman immediately set out to attract other outsiders to the top management team.
Over a six‐month period, he replaced two of his three direct reports,‡ creating a
team that consisted of:
• Allen Leighton, vice president, marketing
• Phil Cox, chief financial officer
• Tony Campbell, vice president, trading
Of his three direct reports, only Campbell was a holdover from the previ-
ous ASDA regime. His past position had been vice president of operations. None
of the new hires had any previous retail experience.
Among his direct reports, Allen Leighton emerged as the first among
equals. He was friendly, outgoing, dynamic, expansive, bright, and creative—a
complement to the generally more cerebral and contained Norman. Top manag-
ers suggested that nothing of significance occurred in the organization without
the direct involvement and approval of Norman and/or Leighton.

The First Six Months


Norman’s first task was to pull the organization back from disaster. “Archie had to
convince people that there was a problem,” said Phil Cox, “that our poor perfor-
mance wasn’t just a momentary hiccup.” In speech after speech, to employees as
well as investors, Norman laid out the details of what he referred to as ASDA’s “dark
moment.” He ignored frequent advice that he soften his blunt message of “gloom
and doom.” A regional manager shook his head after one such speech, admitting:

None of us understood how serious our financial difficulties were. When


Archie brought all this out into the open, it finally dawned on people just
how close to the edge we’d been. It became clear that we couldn’t just wave
a magic wand and make all things right.

In the first six months of Norman’s tenure, all of the top management team
took up residence in a local hotel. They were often joined by Chrispin Tweddle, a
consultant hired by Norman with considerable retail experience. During the day,


Before walking in the door on his first day, Norman had decided to fire the current CFO and had
already reached an agreement with Phil Cox to join the company.
Organizational Change 19

Cox focused on ASDA’s financial crisis,§ while Norman toured the stores, talking
to employees at all levels and taking copious notes. Then, the team would sit up
together until past midnight talking about a vision for a new ASDA.
Every discussion was based on the shared assumption that the total organi-
zation was dysfunctional. Said Norman:

We wouldn’t survive if we simply created a little change. We had to revital-


ize the entire organization. We had to take the organization paradigm,
which was over here, and move it over there. We assumed that however the
organization worked when we got here was wrong.

In particular, the team believed that they needed to address ASDA’s stove-
piped functional culture, which made companywide collaboration a virtual
impossibility. Observed Norman:

The whole place was dysfunctional. The top management never met
together except once a month at a board meeting. They never talked from
week to week. And the whole organization ran down these functional
pipelines.

Renewal
The process of change, which the top team came to refer to as “renewal,” would
occur within the 205 stores. But the team provided guidance to the renewal
process in three forms: a statement of corporate strategy, an articulation of
company values, and a blueprint for what came to be known as the ASDA Way
of Working.

Strategic Renewal
Norman called on consultants from McKinsey to help him and his team formu-
late a new strategic position. Their deliberations started with gaining a thorough
understanding of the grocery industry and ASDA’s position in it. They then form-
ulated a strategy statement: “We will supply the weekly shopping needs of
ordinary working families.”

Culture Change
The team realized early on that they would have to do more than change the old
ASDA culture; they would have to shatter it and then rebuild it from the ground‐
up. To set the parameters for that new culture, they drew up a statement of com-
pany values, plus a set of operational concepts that became known as the ASDA
Way of Working. Store‐based renewal would flow from a few key concepts:
greater autonomy to store management in making operational decisions and,
within the stores, self‐managed autonomous teams focusing on particular prod-
uct lines such as produce, bakery goods, and so forth.

§
A number of steps were taken to raise money. Nonfood operations were either sold off or, failing that,
shut down; head count at corporate headquarters was reduced by 30 percent; in-store middle-manager
positions were cut by 10 percent; and an 18-month pay freeze was initiated for all employees.
20 Chapter 1

In a speech laying out the ASDA Way of Working to store managers, Norman
said, “I see a day when our stores consist of clusters of businesses, each with their
own profit‐and‐loss responsibilities.” A store manager, who had been with ASDA
in the pre‐Norman era, reflected on the message he heard concerning the ASDA
Way of Working: “What they told me was to involve everybody in everything. As
long as you’re doing that, you’re going to get the best out of people.”
This sense of empowerment and responsiveness “will be a unique source
of advantage,” insisted Norman, “against the militarized and straight‐jacketed
competition.”

Moving Renewal into the Stores


With his top management team in place to provide a general sense of direction,
Norman turned his attention to the 205 stores. Renewal must become a reality
within those stores, and Norman thought about how to proceed. As he consid-
ered his options for action, Norman analyzed several key issues.
1. Because ASDA’s previous management had underinvested in the stores,
physical plant had deteriorated precipitously. ASDA’s new management
estimated that each store required an average investment of $3.25 million to
become a state‐of‐the‐art facility, but they wondered about the connection
between the required plant retooling and the cultural upheaval implied by
the value statement and the ASDA Way of Working. Should the two pro-
cesses be coupled or separated? If handled together, would physical re-
vamping and cultural renewal simply be too much change for any one
store to handle?
2. Norman wondered whether somebody—either an individual or a group—
should be assigned responsibility for oversight and coordination of the
renewal efforts within the stores. Or was ASDA likely to achieve greater
innovation by allowing each store to finds its own way to define and apply
renewal?
3. While Norman had shaken up his top management group, he knew that
the functional stovepipes that had prevented collaboration in the past still
existed. Could real innovation occur within a functional structure? How
would he address the lingering constraints still being felt because of the
company’s past culture?
4. Ultimately, Norman knew everything about how the stores operated would
have to change. But how much change should occur and how fast? Could
he focus on all the stores at once, or should he concentrate on a small num-
ber of pilot stores?
5. Part of the concern over the pace of renewal had to do with the depth of
managerial talent—or, more precisely, the lack of depth—at ASDA. At the
corporate level, the 16 managers who reported directly to members of the
top management team were all ASDA “veterans.” The same could be said
of the 205 store managers. Could individuals who had survived, or even
thrived, under the old culture make the transition required of the new strat-
egy, values, and way of working? Conversely, large‐scale termination at the
managerial level might prove disastrous: depriving ASDA of much needed
grocery industry experience, undermining already shaky morale, fostering
Organizational Change 21

risk‐averse behavior, and stifling innovation. Plus, there was hardly a large
queue of talented managers seeking employment at ASDA.
Finally, Norman wondered about his own role in the renewal effort. Already
his colleagues on the top management team had reached consensus on his per-
sonal management style, and “controlling” was the most frequently applied
label. Among the evaluations offered:
• He must have learned the lesson as a young boy that if you want to do any-
thing right, you have to do it yourself.
• In truth, and I’m sure Archie would admit this, his preferred style is a
controlling style. The issue of devolving power does not sit comfortably
with him.
• The only thing you will never hear Archie say is, “I think you’re wrong, but
do it anyway.”
Norman offered the following self‐assessment:

I do believe I give people the right to argue and challenge. But I still make
decisions, and I don’t want to delude people into thinking I don’t. I simply
won’t tolerate any deviation around basic values and strategy.

While expressing his desire to avoid the “cult of personality” at ASDA,


Norman realized that he would play a large role in determining the shape and
direction of the renewal effort. The challenge going forward was to ensure that
role be positive and productive.

Endnotes
1. Information for this case comes from Kevin J. 2. The rise of Nokia as a world leader in cellphones
O’Brien, “Nokia Dominates, but Rivals Insist is analyzed in Yves Doz, José Santos, and Peter
that Could Change,” New York Times (Feb. 13, Williamson, From Global to Metanational: How
2008); Kevin J. O’Brien, “Nokia Plans to Slash Companies Win in the Knowledge Economy
1,700 Jobs amid Sluggish Sales of Cellphones,” (Boston, MA: Harvard Business School Publishing,
New York Times (Mar. 18, 2009); Kevin J. O’Brien, 2001).
“Nokia Tries to Undo Blunders in US,” New 3. D. A. Nadler, Discontinuous Change: Leading
York Times (Oct. 19, 2009); Nelson D. Schwartz, Organizational Transformation (San Francisco, CA:
“Can Nokia Recapture Its Glory Days?” New Jossey‐Bass, 1995).
York Times (Dec. 13, 2009); “The Curse of the 4. Quoted in Tom Arango, “A Hot Social Net-
Alien Boss,” The Economist (Aug. 7, 2010); Kevin working Site Cools as Facebook Flourishes,”
J. O’Brien, “Nokia Seeks to Reconnect with the New York Times (Jan. 12, 2011), p. A1.
US Market,” New York Times (Aug. 15, 2010); 5. M. Hughes, “The Tools and Techniques of
Kevin J. O’Brien, “Nokia Executive to Leave; Change Management,” Journal of Change
Hints of Chairman’s Exit,” New York Times Management 7 (Mar. 2007), pp. 37–49.
(Sept. 13, 2010); Kevin J. O’Brien, “Nokia’s New 6. D. Ulrich and D. Lake, Organizational Capacity:
Chief Faces Culture of Complacency,” New York Competing from the Inside Out (New York: Wiley,
Times (Sept. 26, 2010); and Kevin J. O’Brien, 1990); J. Arthur, “The Link Between Business
“Nokia to Cut Jobs as It Tries to Catch Up to Strategy and Industrial Relations Systems in
Rivals,” New York Times (Oct. 21, 2010). American Steel Minimills,” Industrial and Labor
22 Chapter 1

Relations Review 45 (1992), pp. 448–506; A. A. Swanson, T. M. Newcombe, and E. L. Hartley,


Lado and M. C. Wilson, “Human Resource eds., Readings in Social Psychology, 2nd edn.
Systems and Sustained Competitive Advantage: (New York: Holt, 1952), pp. 459–473.
A Competency‐Based Perspective,” Academy of 11. Several authors have argued for a reconsidera-
Management Review 19 (1994), pp. 699–727; M. A. tion of the meaning of “change resistance,”
Huselid, “The Impact of Human Resource suggesting even that the term “resistance”
Management Practices on Turnover, should be dropped because of its pejorative
Productivity, and Corporate Financial Per- implications. See, for example, Tony J. Watson,
formance,” Academy of Management Journal 38 “Group Ideologies and Organizational Change,”
(1995), pp. 635–677; J. J. Lawler, R. W. Anderson, Journal of Management Studies 19 (1982), pp.
and R. J. Buckles, “Human Resource 259–275; Sandy Kristin Piderit, “Rethinking
Management and Organizational Effectiveness,” Resistance and Recognizing Ambivalence:
in G. R. Ferris, S. D. Rosen, and D. T. Barnum, A Multidimensional View of Attitudes Toward
eds., Handbook of Human Resource Management an Organizational Change,” Academy of
(Cambridge: Blackwell, 1995), pp. 630–649; J. T. Management Review 25 (2000), pp. 783–794.
Delaney and M. A. Huselid, “The Impact of 12. That research was highlighted at a session,
Human Resource Management Practices on “Changing Individuals,” at the 2007 Academy
Perceptions of Organizational Performance,” of Management meetings. See, in particular,
Academy of Management Journal 39 (1996), pp. Jane D. Parent and D. Anthony Butterfield, “A
949–969; S. A. Snell, M. A. Youndt, and P. M. Model and Test of Individual and Organization
Wright, “Establishing a Framework for Factors Influencing Individual Adaptation to
Research in Strategic Human Resource Change.”
Management: Merging Resource Theory and 13. Kenneth E. Hullman, “Scaling the Wall of
Organizational Learning,” in G. R. Ferris, ed., Resistance,” Training and Development (Oct.
Research in Personnel and Human Resource 1995), pp. 15–18.
Management, Vol. 14 (Greenwich, CT: JAI Press, 14. See, for example, L. Coch and J. R. French,
1996), pp. 61–90; J. E. Delery and D. H. Doty, “Overcoming Resistance to Change,” Human
“Modes of Theorizing in Strategic Human Relations 1 (1948), pp. 512–533; Lewin, Field
Resource Management: Tests of Universalistic, Theory in Social Science; R. Likert, The Human
C o n t i n g e n c y, a n d C o n f i g u r a t i o n a l Organization (New York: McGraw‐Hill, 1967);
Performance,” Academy of Management Journal Edwin A. Fleishman, “Attitude versus Skill
39 (1996), pp. 802–835; M. A. Huselid, S. E. Factors in Work Productivity,” Personnel
Jackson, and R. S. Schuler, “Technical and Psychology 18 (1965), pp. 253–266; C. Argyris,
Strategic Human Resource Management Intervention Theory and Method (Reading, MA:
Effectiveness As Determinants of Firm Addison‐Wesley, 1970); W. W. Burke, Organization
Performance,” Academy of Management Journal Development: Principles and Practices (Boston:
40 (1997), pp. 171–188; David Ulrich, Little, Brown, 1982); F. Heller, E. Pusic, G. Strauss,
“Intellectual Capital = Competence × and B. Wilpert, Organizational Participation: Myth
Commitment,” Sloan Management Review 39 and Reality (New York: Oxford University Press,
(1998), pp. 15–26. 1998).
7. D. R. Denison, Corporate Culture and Organizational 15. The connection between employee participa-
Effectiveness (New York: Wiley, 1990). tion and commitment to change has been
8. J. P. Kotter and J. L. Heskett, Corporate Culture demonstrated in Rune Lines, “Influence of
and Performance (New York: Free Press, 1992); Participation in Strategic Change: Resistance,
Jim Collins and Jerry I. Porras, Built to Last: Organizational Commitment and Change Goal
Successful Habits of Visionary Companies (New Achievement,” Journal of Change Management 4
York: HarperCollins, 2004). (Sept. 2004), pp. 193–215.
9. This story is reported in Adam Lashinsky, “Chaos 16. L. A. Isabella, “Managing the Challenges of
by Decision,” Fortune, October 2, 2006, p. 88. Trigger Events: The Mindsets Governing
10. This definition of resistance is from Kurt Lewin, Adaptation to Change,” Business Horizons 35
“Group Decision and Social Change,” in G. E. (Sept.–Oct. 1992), pp. 59–60.
Organizational Change 23

17. J. Johanson and J. E. Vahlne, “The Interna- Studies, 33 (2002), 515–532; C. M. P. Sousa and F.
tionalization Process of the Firm – A Model of Bradley, “Cultural Distance and Psychic
Knowledge Development and Increasing Distance: Two Peas in a Pod?” Journal of
Foreign Market Commitments,” Journal of International Marketing, 14 (2006), 49–70.
International Business Studies, 8 (1977), 22–32; 18. The case is based on research conducted for
J. Evans and F. T. Mavondo, “Psychic Distance Bert Spector, Taking Charge and Letting Go: A
and Organizational Performance: An Empirical Breakthrough Strategy for Creating and
Examination of International Retailing Managing the Horizontal Company (New York:
Operations,” Journal of International Business Free Press, 1995).
CHAPTER

2 Theories of Effective Change


Implementation

A dynamic competitive environment prompts organizational leaders to alter or transform


their strategies. That process of strategic renewal places new expectations on employees
at all levels. Behaviors will be altered, some subtly, others fundamentally. Translating renewed
strategies into new patterns of behavior—behavior that supports the new strategy and
contributes to outstanding performance by the organization—that is, the change
implementation challenge.
This chapter will explore theories of implementing change that can be called upon to help
guide interventions. In particular, the chapter will:
• Present the three phases of the planned change theory of Kurt Lewin
• Delineate the key insights to effective implementation offered by the field of organizational
development (OD)
• Differentiate between content-driven and process-driven change
• Explain an approach to change the management that emphasizes task requirements and
performance results
• Offer a framework for change implementation that encompasses multiple theories
First, we will look at an attempt by the director of a university-based hospital to respond
to a deep financial crisis. As you read this introductory case, ask yourself:
• What triggered the organizational transformation at Duke University’s Children’s Hospital?
• How did Jon Meliones build support among employees?
• What behaviors needed to be changed?
• Was it a good idea to start by focusing on a single unit?

24
Theories of Effective Change Implementation 25

TURNAROUND AND TRANSFORMATION AT DUKE UNIVERSITY


CHILDREN’S HOSPITAL
In 1996, the 135‐bed Duke University Children’s Hospital faced a deep finan-
cial crisis.1 Key administrators at the hospital provided the following dire
assessment:

A decrease in Medicaid allowances and an increase in patients with


capitated reimbursement* were driving revenues down. Expenses
were down as cost per case for children’s services ballooned from
$10,500 in fiscal year (FY) 93 to $14,889 in FY96. This caused a dra-
matic reduction in the net margin—from (−)$2 million in FY93 to
(−)$11 million in FY96. Programs were slated to be eliminated and
services were targeted for reduction. Sales productivity had fallen
from the 80th to the 70th percentile range. In addition, patient and
staff satisfaction was at an all time low.

Jon Meliones, the hospital’s chief medical director, realized that he and fel-
low hospital executives faced a particular challenge. “No matter how effective
the chief executive officer (CEO) and chief operating officer (COO) are,” he
observed, “they can control only a portion of the components that drive the orga-
nization’s financial performance.” Physicians determined length of stay, drug
prescriptions, and tests, while accepting referrals that helped determine reve-
nues. Nurses drove quality. Any effective change would require a united effort
among administrators and clinicians.
Meliones led his staff through a diagnosis of the root causes of the hospi-
tal’s financial crisis. They found a particularly troubling pattern of behavior.
“The problem was that our hospital was a collection of fiefdoms,” said Meliones.
“Each group, from accountants to administrators to clinicians, was focusing on
its own individual goal rather than on the organization as a whole.” Creating a
shared sense of responsibility for the hospital’s performance and realigning pat-
terns of behavior would be required.
A team consisting of Meliones, the chief nurse executive, and nurse manag-
ers agreed upon an approach that emphasized the interdependence between
financial performance and excellence of health care. “We want patients to be
happy … and for them to have the best care,” the team concluded. They also
adopted a motto for their planned strategic renewal: “No margin, no mission.”
Excellent patient care and excellent financial performance would be the twin
hallmarks of the hospital’s strategic renewal.
Implementation next moved to a single unit: pediatric intensive care.
Meliones and his team worked to operationalize new behaviors through a rede-
sign of roles, responsibilities, and relationships. With the participation of doc-
tors, nurses, the medical staff, and even accountants, the team redesigned how

*
Under capitated reimbursement, insurance companies reimburse providers at a fixed amount, typi-
cally based on some calculation of the average cost of a procedure.
26 Chapter 2

all members of the unit would undertake their responsibilities. The unit called
on a popular measurement tool, the balanced scorecard that looks not just at
financial outcomes but also customer perceptions, internal business processes,
and the ability of an organization to learn and grow, to help reinforce desired
new behaviors.2 Meliones and his leadership team returned the hospital to prof-
itability in three years.

THEORIES OF CHANGE IMPLEMENTATION


Organizational leaders, such as Jon Meliones at Duke Children’s Hospital, have
multiple tools and levers at their disposal that they can apply in pursuit of
effective change implementation. The question that needs to be addressed to
understand effective change implementation is not just what levers can be applied—
diagnosis, cross‐functional teams, and measurement systems, in Meliones’ case—
but also in what order or sequence should those levers be called upon.
Look carefully at the sequence of Meliones’ interventions:
1. Involving his staff in a shared diagnosis of the root causes of the hospital’s
financial woes.
2. Putting together a cross‐functional team—doctors, nurses, medical staff,
and accountants—with the goal of figuring out how to provide both excel-
lent patient care and excellent financial performance.
3. Piloting change within the pediatric intensive care unit.
4. Redesigning the roles, responsibilities, and relationships of all unit
members.
5. Reinforcing the new behaviors with a new measurement system, the bal-
anced scorecard.
That sequence, repeated in unit after unit, effectively transformed the hospital
over a three‐year period.
Would Meliones have been equally—or even more—effective if he had
altered the sequence, say, by introducing a balanced scorecard earlier in the
effort? To seek answers to the all‐important sequencing question, we can turn to
the body of theories that has been developed concerning organizational and
behavioral change.

THEORY INTO PRACTICE

Effective change involves both content—what is being changed—and pro-


cess—how the changes are being implemented.

Kurt Lewin’s Field Theory in Social Science


The scientific study of change implementation can be traced back to the work of
psychologist Kurt Lewin. In the aftermath of World War II, Lewin published two
pathbreaking essays, “Behavior and Development as a Function of the Total
Situation” (1946) and “Frontiers in Group Dynamics” (1947).3
Theories of Effective Change Implementation 27

It may be hard to think that a social scientist working over 60 years ago
could have anything relevant and important to say about today’s organizations.
But Lewin offered two insights that, to this day, shape our understanding of how
to alter patterns of behavior.
First, he highlighted the important, even decisive role that context plays in
shaping individual behaviors. And second, he argued that the only way to moti-
vate an individual to change her pattern of behavior is to create a sense of dis-
equilibrium or dissatisfaction with the status quo within that individual. To fully
appreciate Lewin’s contribution, it is worth spending some time looking at each
of these ideas.

CHANGING BEHAVIORS BY CHANGING CONTEXT We made the point in Chapter 1


that companies often call on organizational context to help shape employee
behaviors. The leaders of Google, as we saw, attempted to create a context that
encouraged risk‐taking and tolerated failure in order to spur creativity.
Lewin made the same point about context. The behavior of an individual
within a group setting—social groups were the context that Lewin was con-
cerned with—is shaped both by that individual’s psychology and the group set-
ting or context in which she finds herself.
Lewin captured this duality in a simple formula: B = f (P, E). Behavior (B) is
a function of the person herself (P) and the environmental context (E) in which
that person operates. Person and context are interdependent variables shaping
behavior.
The question Lewin addressed was: How can that context be changed? To
start, Lewin insisted that what does not work is telling people to change. Giving
a speech about the need for change will not motivate new behaviors.
You might be able to imagine what such a speech about the need for change
would sound like. An executive explains to employees that they need to be more
responsive to customers, coordinate better with international operations, bring
new products to market more quickly, work more effectively across functions,
develop products that are eco‐friendly, and so forth. That executive might be an
extraordinarily effective communicator. Nonetheless, the likelihood that telling
people about the need for behavioral change will lead to real and sustained
change is quite small.
When leaders rely on “lectures” to drive change—in today’s organizational
context, that may mean speeches, small group meetings, PowerPoint presenta-
tions, video conferences, chat rooms, and so forth—they fail to take into account
the power of context in reinforcing the status quo. In Lewin’s view, getting group
members to change their behaviors, and having those new behaviors become
lasting rather than fleeting, involves breaking a “social habit.” Building a
To make matters more challenging, group members tend to assign positive Vocabulary of
value to those existing social habits. Those positive values become the norms that Change
support behavioral habits. Norms are shared expectations of how group mem- Norms shared
bers ought to behave and come to be viewed by group members as good things: expectations of how
group members
standards to be cherished and upheld. ought to behave.
Whatever an individual may glean from a speech, no matter how well
delivered that speech may be, he is not likely to alter his behaviors. The positive
28 Chapter 2

value associated with the existing social arrangements continues to exert a pow-
erful force on the individual, “keeping the individual in line with the standards
of the group.”4 The old habits have not been broken; the positive value associ-
ated with past behaviors still exerts powerful pressure; so individual behavior
returns to the status quo.

THEORY INTO PRACTICE

Telling employees why they need to change will not build motivation to
change; it is necessary, but not sufficient.

The next important question, therefore, is how to exert a force that will alter
not just the individual but also the social context of that individual.

CREATING DISSATISFACTION Leaders seeking to implement organizational


change are often surprised by the degree of complacency they face. Why are
employees clinging to the status quo—doing things the way they always have—
even in the face of declining organizational performance? Isn’t it obvious that we
need to change?
When Carlos Ghosn took over leadership at Nissan Motors, he was puz-
zled by the apparent lack of urgency among company employees. At that
moment, Nissan was $19.9 billion in debt with annual losses exceeding $250 mil-
lion. Despite the obviously unacceptable level of performance, Ghosn encoun-
tered resigned acceptance among Nissan executives.
“For a company that has been losing money for seven years out of eight,”
he observed, “there is not enough of a sense of urgency. People should be bang-
ing their heads on the walls everywhere.”5 Instead, Ghosn observed a disturbing
lack of dissatisfaction with the status quo.

THEORY INTO PRACTICE

Don’t assume that poor organizational performance will create an urgent


need to change within a company.

Potential change leaders are often stumped by the same situation that
greeted Ghosn when he first arrived at Nissan: why, in the face of such appar-
ently obvious distress, do employees remain attached to the status quo? Lewin
had an explanation for that.
Group membership often confers a positive sense of belonging to members;
they like being part of the group, accept the group’s norms, and are pleased with
what the group has been able to accomplish in the past. And the more they assign
positive value to group membership and group norms, the greater the resistance
will be on the part of individual group members to alter those norms.
Group membership creates a kind of inertia, or at least reluctance, to change
what it is about that group that seems so positive. That is the phenomenon we
often refer to as “complacency.” The task of motivating individuals to alter their
Theories of Effective Change Implementation 29

established behaviors, then, is a complex one. That is the challenge for leaders
seeking change.
The act of announcing the need for change, of proclaiming new goals, of
presenting a rational argument for how the changes will improve performance
simply will not motivate behavioral change. What is needed, Lewin argued, is a
kind of deliberate “emotional stir‐up,” a powerful intervention designed to
“open the shell of complacency” and “unfreeze” the existent equilibrium.

THEORY INTO PRACTICE

To break the “social habits” that support existing patterns of behaviors, start
with creating dissatisfaction, disequilibrium, and discomfort.
Building a
Vocabulary of
To be effective, then, a change leader’s initial task is to create what Lewin Change
called unfreezing. Look at the approach taken by Jon Meliones at the Children’s Unfreezing the first
Hospital. Rather than lecturing employees on why they needed to change, he stage in Lewin’s
involved them in a diagnostic process, allowing them to learn—just as he had— change model in
which group
the financial situation of the hospital and to shape the appropriate response. members become
Imagine if Meliones had, instead, given a talk about the dire need for dissatisfied with the
change, supplemented with elaborate PowerPoints. Then, he would have told status quo.
employees how they needed to alter their behaviors, and work together in differ-
ent ways: doctors, nurses, medical technicians, even accountants pulling together
to ensure outstanding performance. He would have then explained why he felt
the balanced scorecard was an excellent tool for measuring their progress and
reinforcing their new behaviors. Had he approached change implementation
Building a
that way, he may well have faced a great deal of initial resistance, making the Vocabulary of
unfreezing stage extremely difficult to implement. Change
The second stage of Lewin’s model involves moving, wherein members of Moving the second
the group move from one set of behaviors to another. Those new behaviors, in stage in Lewin’s
Lewin’s view, must become permanent, for at least a desired period of time. It is change model in
which group
the refreezing stage where a newly created equilibrium “is made relatively members alter their
secure against change.”6 Refreezing is the stage where structures and systems patterns of behavior.
align with and reinforce new behaviors. This is the stage at which measurement Building a
tools like the balanced scorecard—there are many others that we will discuss in Vocabulary of
Chapter 6—can be called upon to reinforce new behaviors. Change
Refreezing the final
LEWIN’S CONTRIBUTION TO CHANGE IMPLEMENTATION Lewin is best known for stage in Lewin’s
his three stages of change implementation: unfreezing, moving, and refreezing change model in
which group
(summarized in Exhibit 2‐1). Equally important is Lewin’s recognition that the
members
most effective way to manage behavioral change among individual members of institutionalize the
a group is to work first on changing the group’s norms, then focus on individual new patterns of
behaviors. If “one succeeds in changing group standards, this same force field behavior into a new
will tend to facilitate changing the individual and will tend to stabilize the indi- status quo.
vidual conduct on the new group level.”7 Context exerts a powerful shaping
force on individual behaviors.
Lewin urged a kind of implementation sequence. To create sustainable
behavioral change, organizational leaders need to work both at the individual
30 Chapter 2

EXHIBIT 2-1
Implementation
State 1: Unfreezing Stage 2: Moving Stage 3: Refreezing
Implications of
Lewin’s Change Create dissatisfaction with Redesign organizational Align pay/reward systems
Model. the status quo roles, responsibilities, and
relationships

Benchmark operations Train for newly required Re‐engineer measurement/


against other companies skill control systems

Diagnose internal barriers Promote supporters/ Create new organization


to improved performance remove resisters structures

and contextual levels. There is a far greater leverage to be gained, however, from
first working at the contextual level.
The positive social values created by the new equilibrium will motivate
individuals to adapt to the new norms. If, instead, leaders first focus on the indi-
vidual level, they risk undermining their best intentions. No matter how much
impact they have on changing the expectations and behaviors of individuals,
those new expectations and behaviors will not endure as long as the old equilib-
rium continues to exert a powerful and attractive force.

THEORY INTO PRACTICE

In order to implement change, target group norms first and then focus on
individual behaviors.

Lewin’s focus was on behavior within groups rather than on organizations


in their totality. His approach does not transfer in its entirety to the current work
of business organizations. For example, his linear approach—first unfreeze, then
move, and finally refreeze—underestimates the potential for complex group
dynamics to shift significantly during the intervention process. Additionally, his
notion of refreezing assumes that a group will return to a stable state once the
change intervention has passed. In fact, highly dynamic environments exert con-
Building a stant demand for adaptation and change.8 Nonetheless, Lewin’s attention to
Vocabulary of both the impact of context on behaviors and the requirement to create disequilib-
Change rium in order to motivate behavioral change continues to inform current theories
Organizational of effective change implementation.
development (OD)
an approach to
organizational
effectiveness that
ORGANIZATION DEVELOPMENT AND CHANGE
calls on the fields of IMPLEMENTATION
behavioral and social
sciences to provide Lewin’s work represents an early foray by behavioral scientists in the world of
guidance to planned organizational behavior and change management. The field of organizational
change efforts. development (OD) soon coalesced around emergent learnings from the behavioral
Theories of Effective Change Implementation 31

and social sciences (mainly psychology, sociology, and systems dynamics) to


inform approaches to planned organizational change. OD offers a complex and
systemic perspective on how and why people behave and organizations operate.
For that reason, OD provides particular insight into the process of changing peo-
ple’s behavior and organizations’ operations.
Although different theorists and practitioners have offered their own
insights into these matters, ten key perspectives and assumptions—summarized
in Exhibit 2‐2—underlie the field.9 Three insights in particular help advance an
understanding of effective change implementation.

EXHIBIT 2-2
Ten Defining
Perspective Underlying Assumptions
Perspectives of
1. Systems Outstanding performance depends on interactions between and Organizational
perspective among the multiple elements of organization; between the Development.
people, processes, structure, and values of the organization; and
between the organization and its external environment.
2. Alignment The effectiveness of organizations will be determined by a state
perceptive of congruence between people, process, structure, values, and
environment.
3. Participation People will become more committed to implementing solutions if
perspective they have been involved in the problem‐solving process.
4. Social capital To achieve outstanding performance, organizational leaders seek
perspective to create a network of interdependent relationships that provides
the basis for trust, cooperation, and collective action.
5. Teamwork Accepting shared purpose and responsibility for interdependent
perspective tasks enhances coordination, commitment, and creativity and
supports outstanding performance.
6. Multiple Outstanding performance requires that organizational leaders
stakeholder balance the expectations of multiple stakeholders: shareholders,
perspective employees, customers, suppliers, host community, labor unions,
trade associations, governments, etc.
7. Problem‐solving Conflicts over task issues can increase the quality of decisions if
perspective they occur in an environment of collaboration and trust.
8. Open Open and candid communication, especially upward in the
communications hierarchy, creates the opportunity for learning and development
perspective while building trust and collaboration.
9. Evolution/ Organizations must develop competencies to engage in both
revolution incremental (evolutionary) and fundamental (revolutionary)
perspective change.
10. Process Individuals who reside outside of the organizational hierarchy can
facilitation become both facilitators and teachers of effective implementation
perspective processes in partnership with organizational members.
32 Chapter 2

Building a ORGANIZATIONS ARE OPEN SYSTEMS OD sees the organization as an open sys-
Vocabulary of tem: a unit that exists in constant interaction with its external environment and
Change
between its own internal elements. Effectiveness in an open system arises not
Open system an
organism or entity just out of the actions of employees but also out of interactions that occur at mul-
that exists in a tiple levels:
constant interactive
state with its • Between the personalities and activities of various employees
external • Between employees and the requirements of their tasks
environment. • Between the tasks and the culture of the organization
• Between the culture and the strategy of the organization
• Between the strategy of the organization and its external environment
Organizational effectiveness is best achieved when a state of fit or congru-
ence exists between various elements of the open system (see Exhibit 2‐3).

THEORY INTO ACTION

Performance problems often reside in the hand‐offs between employees,


between tasks, between functions, and between units; these are the problems
to be targeted first for change.

EXHIBIT 2-3
A Congruence
Model of External Environment
Effectiveness. Internal Context • Customer, employee,
• Organizational and investor expectations
purpose • Social/cultural forces
• Strategy • Technological changes
• Business model • Labor market shifts
• Organizational design • Government regulation
• World events

Organizational
Effectiveness

Patterns of Employee Behavior


• Enactment of roles and
responsibilities
• Process of interaction among
employees
Theories of Effective Change Implementation 33

A view of organizations as open systems emphasizes alignment of the Building a


internal dynamics of an organization (how employees act and interact) with the Vocabulary of
Change
external marketplace in which the organization lives and competes. Alignment is Alignment the degree
a state of congruence between organizational sub‐elements and their environ- of congruence or
ment. Because the external environment changes, elements of the system must compatibility
respond. between and among
various elements of
a system.
ORGANIZATIONS SERVE MULTIPLE STAKEHOLDERS OD assumes a multiple
stakeholder perspective. Stakeholders are individuals or groups that have a Building a
stake in how the organization is doing. Those who have a financial investment in Vocabulary of
a company possess a legitimate interest in its performance, to be sure. So do Change
Stakeholders
employees, not to mention customers and suppliers. The host community, whose individuals or
economy is impacted by the company’s performance and who share an ecosys- groups who lay
tem with that company, also has a legitimate interest in how the company is legitimate claim to
performing. the performance of
The multiple‐stakeholder perspective represents, in part, an ethical view of the organization.
the role of business organizations in a community’s life. Businesses, in that view,
do not sit above or apart from other stakeholders; they must instead play a
responsible citizenship role.
The multiple‐stakeholder view also represents a perspective on effective-
ness. A key source of outstanding performance lies in the willingness of organi-
zational leaders to commit time, energy, and resources to tending to the interests
of multiple stakeholders. That commitment translates into a responsive, adap-
tive organization capable of sustaining outstanding performance in a dynamic
environment.

THEORY INTO PRACTICE

If leaders are successful at aligning the interests of multiple stakeholders—


shareholders, employees, customers, suppliers, the host community, and so
forth—they can contribute to outstanding performance.

DEAL WITH CONFLICT THROUGH PROBLEM SOLVING, OPENNESS, AND TRUST Don’t
argue. Go along. Don’t stir the pot. Get on board. Be a team player. All of these expres-
sions, and others you have surely heard, represent a particular view about con-
flict and its role in organizational life. Conflict is disruptive and dysfunction.
Avoid it or soothe over it.
OD takes a fundamentally different view; it is that conflict, when managed
properly, can improve effectiveness, increase innovation, and enhance adaptive-
ness. Not all conflict is desirable; interpersonal conflict based on personalities
can be harmful. But conflict about how best to perform tasks can have a positive
value on an organization.
Conflict can, for example, improve innovation by highlighting a diversity
of viewpoints. Additionally, conflict can encourage individuals to articulate their
personal points of view and assumptions while considering the viewpoints and
assumptions of others. The potential benefits, therefore, involve both an
enhanced grounding in reality and an increased opportunity for creativity.10
34 Chapter 2

THEORY INTO PRACTICE

Don’t shy away from conflict. As individuals articulate and analyze differ-
ences, they can improve organizational effectiveness.

Not all approaches to conflict produce equally desirable outcomes.


Avoiding, accommodating, or even compromising when faced with conflicts
around how best to perform the tasks of the organization will suboptimize the
ability of organizational members to work together while achieving realistic and
creative solutions. Collaboration, in which conflicting parties combine advocacy
for a particular position while inquiring into the legitimate and conflicting views
of others, leads to both superior solutions as well as commitment on the part of
participants to implement that solution.11

ORGANIZATIONAL DEVELOPMENT’S CONTRIBUTION TO CHANGE IMPLEMEN-


TATION The insights offered by OD can help leaders implement behavioral
change in a manner that is both effective and sustainable. The major perspectives
and assumptions of the field suggest that interventions that target just one aspect
of an organization—say, its structures or its pay systems or its work processes—
will likely fail to deliver the hoped‐for performance improvements.
Because organizations are highly interactive systems, the keys to outstand-
ing performance reside not in any one independent component of the organiza-
tion but rather at the interface between many interdependent factors. Piecemeal
approaches to change will likely fail, especially over the long run, because they
target discrete units or issues rather than focusing on the “joints” of the organiza-
tion, the places where organizational processes and activities come together.12
Additionally, OD points to the importance of an implementation process that
builds a sense of ownership: trust, open communication, collaborative problem
solving, and participation in the change process. Questions of both what needs to be
changed and how the change should be implemented can be exclusive or inclusive.
In an exclusive mode, top executives exclude all stakeholders except a small
group of fellow senior executives who decide what behaviors need to be targeted
and how the change process should proceed. In an inclusive process, representa-
tives of multiple stakeholders are all included in the diagnostic, action planning,
and implementation efforts. Employee motivation to adopt and sustain required
new behaviors will be enhanced, making implementation more likely to be suc-
cessful in the short run and sustainable in the long run.

THEORY INTO PRACTICE

Be sure to create an inclusive change process—one that builds ownership of


and commitment to the desired improvements.

Process‐Driven Change Interventions


Given the complexity and dynamism of the competitive environment, it is not sur-
prising that change efforts have proliferated over the past several decades: employee
Theories of Effective Change Implementation 35

involvement, customer relationship management, balanced scorecard, and lean Building a


enterprise, to name just a few. These efforts represent content‐driven change that Vocabulary of
Change
emphasizes programmatic responses to organizational requirements. Content‐driven change
As an alternative methodology of implementation, process‐driven change programmatic
suggests that the manner in which change is conceived, introduced, and institu- change in which
tionalized will be more determinate of effectiveness than the specific content of specific programs—
any given change program.13 While content‐driven changes may serve as useful customer
relationship
tools in reinforcing behavioral change, they can be ineffective as drivers and management,
shapers of the transformation effort. balanced scorecard,
and lean enterprise,
for example—are
THEORY INTO PRACTICE used as the driver
and centerpiece of
There are no one‐size‐fits‐all solutions to performance problems in an implementation.
organization.
Building a
Vocabulary of
Change
To help understand and identify content‐driven change, we can identify a
Process‐driven change
set of characteristics that are common across different particular change efforts. an approach
Content‐driven change: to change
implementation that
• Serves as the initial centerpiece for launching and driving transformation emphasizes the
throughout the company or unit. Company executives pick a single methods of
initiative—say, the balanced scorecard—in order to drive a whole range of conceiving,
changes across the organization. introducing, and
institutionalizing
• Is imposed by the top management. Top management selects the pro-
new behaviors and
gram, drives it through the organization, and makes decisions about uses content as a
whether to continue the initiative. reinforcer rather
• Does not proceed from shared diagnosis. By virtue of their position atop than a driver of new
the hierarchy, executives can simply impose change programs. Is there behaviors.
even dissatisfaction with the status quo? Content‐driven change often
flows from the assumption that if top management is dissatisfied, then
everyone else is equally dissatisfied with the status quo.
• Relies on standardized, off‐the‐shelf solutions. Executives select a change
program that has been used elsewhere. But is it apoprorpriate for all orga-
nizations? That question is often not asked.
• Is imposed uniformly across the organization. Perhaps one program is
appropriate for some units, but does it fit all circumstances? Top manage-
ment may not engage in such a diagnosis; instead, they applied the same
program across the entire company.
The characteristics of content‐driven change are summarized in Exhibit 2‐4.

EXHIBIT 2-4
• Serve as the initial centerpiece for launching and driving transformation throughout Characteristics of
the company or unit. Content‐Driven
• Are imposed by top management. Change Programs.
• Do not proceed from shared diagnosis.
• Rely on standardized, off‐the‐shelf solutions.
• Are imposed uniformly across the organization.
36 Chapter 2

THE LIMITATIONS OF CONTENT‐DRIVEN CHANGE The uniform nature of content‐


driven change creates its own set of problems. To decree that all managers in all
divisions and units “should” undergo a training program or that all processes
“should” use a particular methodology ignores the diversity extant in any com-
plex organization, including differences in customer expectations, in competitive
realities, in key task demands, and/or in workforce characteristics. Applied uni-
versally across organizational boundaries, change programs can drive out cre-
ativity and usually lack the specific relevancy needed to help managers in a
given unit solve their real and immediate business problems.
The fact that change programs are imposed from above may reflect the
commitment on the part of top management to the need for change. But the
transformation effort often bogs down because that commitment is not widely
distributed throughout and across the organization.14 Only those individuals
dissatisfied with the status quo—with the performance of their unit and the pat-
terns of behavior supporting that performance—will be motivated to alter their
patterns of behavior. Top‐down change programs may assume the preexistence of
such dissatisfaction, but they do little to actually build dissatisfaction and direct
that dissatisfaction toward new patterns of behavior.

THEORY INTO PRACTICE

Just because top leaders believe in the need for change doesn’t mean that all
employees share that belief.

The cost of continued reliance on content‐driven change as a way of trans-


forming the organization is significant. In addition to the inefficient use of organi-
zational resources, each unsuccessful and discarded program makes it much harder
to effect successful transformation in the future. As one failed program leads to
another, employees begin to discount and ignore all programs. Because employees
have little commitment to these efforts, what they offer—at best—is compliance.
They may tolerate the program, carry out procedures to the best of their ability, but
fail to provide any lasting support for program continuation. They may complete
the minimal requirements expected of them by filling out the proper forms or
attending the expected conferences, but disdain and criticize all aspects of the effort.
And to the extent that they can get away with it, they may avoid the effort entirely.

THEORY INTO PRACTICE

Content‐driven change often fails because of inadequate attention to the pro-


cess of change.

THE POPULARITY OF CONTENT‐DRIVEN CHANGE Given the complexity and dyna-


mism of the competitive environment, it is not surprising that content‐driven
change efforts have proliferated over the past several decades. Exhibit 1‐2 in the
previous chapter offered an overview of some of the most popular change efforts.
The popularity of content‐driven change can be understood in terms of the
dynamics in place in many organizations. Content‐driven change efforts represent
Theories of Effective Change Implementation 37

actions that can be put into place quickly. Faced with competitive crisis, top man-
agers want to make change quickly. Pressures for quarterly earnings coupled with
impatience and high task orientation lead managers to seek a lever that will dem-
onstrate forward movement. Although simplistic and often ineffective, change
programs are highly visible and provide tangible evidence of concerted effort.

THEORY INTO PRACTICE

Repeated failure to implement change effectively can build cynicism in an


organization, “inoculating” it against future change efforts.

Furthermore, managers like to emulate well‐known success stories, and


they do so by importing programs. Best‐selling management books present doc-
umented studies of the transformative impact of popular programs. Why
shouldn’t we do that, too? As one manager said of his support for a particularly
trendy change program: “We were one of the Fortune 500 companies and we
were all into this buzzword kind of stuff, and so let’s get with the program here.
We don’t want to be left behind.”15
The tangibility of change programs offers another apparent advantage:
they are easily measurable. Thus, they make it convenient for top managers to
hold subordinates accountable. Executives can point to the number of teams or
the number of managers who have attended a training program as a proxy—and
not an especially useful or valid proxy at that—for accomplishment.

THEORY INTO PRACTICE

Content‐driven change is both tangible and measurable—but that doesn’t


make it effective.

PROCESS‐DRIVEN CHANGE AND ITS CONTRIBUTION TO CHANGE IMPLEMEN-


TATION A process‐driven approach to change works from the opposite direc-
tion of content‐driven change. Process‐driven change seeks to create a context
and environment in which employees at all levels of the organization engage in
a collaborative way to achieve the strategic goals of the organization.
Collaborative, participative, and problem‐solving approaches work to align
behaviors with strategic requirements. Change programs including Six Sigma,
business process reengineering, the balanced scorecard, lean enterprise, and
Agile may then be used to reinforce rather than drive new behaviors. The leader-
ship task becomes one of establishing purpose and strategic directions for the
organization, then creating the fertile soil out of which new patterns of behavior
may emerge.

THEORY INTO PRACTICE

Process‐driven change seeks to create an organizational context in which


employees will be motivated to adopt new behaviors consistent with the stra-
tegic direction of the organization.
38 Chapter 2

THEORY INTO PRACTICE

Change programs—balanced scorecard, concurrent engineering, agile devel-


opment, and so forth—are useful in reinforcing new behaviors; but avoid
using them to drive change.

Building a
Vocabulary of Task Alignment as a Driver of Behavioral Change
Change
Task alignment an Task alignment offers an approach to change intended to sharpen the connec-
approach to tions between Lewin’s requirement to alter the context and create a disequilib-
behavioral change rium, OD‐based interventions, process‐driven change, and strategic renewal.
that starts with the
identification of the
Effective change implementation efforts display a common thread: management
key strategic tasks of focused on the business’ central competitive challenges as the means for moti-
an organization or vating change and developing new behaviors and skills.16
unit and then asks Task alignment takes as a starting point for change, the work that needs to
employees to be undertaken in order for a unit to achieve its strategic goals and sustained out-
redefine their roles,
responsibilities, and
standing performance. That was precisely the point at which Jon Meliones
relationships in started his shared diagnosis at Children’s Hospital. He did not ask, “How can we
order to perform work together better?” Instead, he asked, “How can we achieve excellent patient
those tasks. care and excellent financial performance?”
In a dynamic environment, strategic renewal typically requires new behav-
iors in order to perform those tasks. Task alignment embeds the insights of OD in
a drive to produce outstanding performance. Employees redefine their roles,
responsibilities, and relationships in order to perform those tasks.

THEORY INTO PRACTICE

Task alignment combines the insights of organizational development with a


bottom‐line focus on performance.

TASK‐ALIGNED CHANGE To understand task alignment as a performance‐


focused approach to change, let’s look at a counter‐example: a change process
that was not task aligned.
At General Product’s Technical Center, upper management focused on an
“employee involvement” initiative aimed at white‐collar, professional‐level
employees.17 Intrigued by reports of improved performance due to increased
employee involvement in manufacturing operations, management formed com-
mittees to address issues of urgent concern to employees. Because employees
often mentioned their interest in career development, one committee discussed
how to get employees more involved in their own career planning.
Top management at the center began holding regular meetings to discuss the
meaning of employee involvement: Just how far should employee involvement go
and over what issues should employees be involved? The head of the center, feeling
that he could not be overly directive about an initiative heralding employee involve-
ment, watched in frustration as two years of effort yielded few tangible results.
Theories of Effective Change Implementation 39

THEORY INTO PRACTICE

A task‐aligned approach to change implementation can help create motiva-


tion to adopt new behaviors by focusing on real, immediate business prob-
lems, and producing tangible results.

Interestingly, a different change effort was occurring simultaneously fur-


ther down the company. This one, however, followed more closely the frame-
work of task alignment. Struggling with the requirement to speed up the new
product development process, an implementation task force uncovered poor
cross‐functional coordination reinforced by strict functional lines and a lack of
teamwork throughout the organization as the culprit. Several cross‐functional
product development teams were created as a result.
As teams began to produce results, relationships among functions
improved, engineers and production specialists began to feel empowered, and
demands for team skills were met with a training program.18 Although the efforts
of the employee involvement team spurred by upper management’s desire to
meet “urgent” employee concerns withered, employees’ involvement increased
on cross‐functional teams designed to develop new products.

TASK ALIGNMENT’S CONTRIBUTION TO CHANGE IMPLEMENTATION The dra-


matic differences in the impact of these two interventions—one task aligned
and one not—highlight a flaw of many change interventions. Look at the first
non‐task‐aligned approach. Hearing “good things” about employee involve-
ment and desirous of gaining the benefits that had apparently accrued to other
companies, corporate management urged employee involvement initiatives.
One employee involvement task force recommended placing artwork in the
center’s atrium as a way of enhancing the ambience of the facility. But what did
employee involvement mean to managers and workers? And more importantly,
how did it impact on the ability of the center to achieve and sustain outstanding
performance?
The second task‐aligned approach started with a different premise: not we
need to bring the idea of employee involvement into the organization but we need to
improve new product development performance and involving employees will help us do
that. By following a task alignment approach to change implementation, employ-
ees at all levels of the organization are motivated to engage in behavioral change
to the extent that they appreciate how that change is related to the performance
of the core tasks of the organization.
Line managers have far greater ability to diagnose business and performance
problems than to engage in psychological or therapeutic analysis of individuals.
By focusing on solving real business problems, task alignment takes advantage of
the knowledge and expertise in the organization. Tangible performance results
that accrue from task‐aligned change interventions reinforce the efficacy of such
efforts, which in turn create momentum for renewed change intervention. Results
build conviction.19 Task alignment builds commitment by focusing on real and
immediate performance drivers and producing tangible results.
40 Chapter 2

PUTTING IT ALL TOGETHER: BUILDING


A THEORY OF CHANGE IMPLEMENTATION
Each body of theory examined in this chapter offers critical insight into the effec-
tive implementation of change. Those theories and their implementation impli-
cations are summarized in Exhibit 2‐5. The challenge for change implementation

EXHIBIT 2-5
Key Theoretical
Theoretical Main Theoretical Help Explain How
Approaches to
Approach Contribution to Implement Change
Change
Implementation. Lewin’s Field Begin behavioral change by • Build a pervasive sense of
Theory in Social focusing on context and dissatisfaction with the status
Science unfreezing existing social quo on the part of employees
habits • Offer operational models for
what new behavioral patterns
will be
• Reinforce new behavior with
alterations to systems and
structures
Organizational Organizations are dynamic, • Target entire organizational
development open systems system for change
• Create a climate of open
discussion and upward
feedback concerning the
efficacy of change
implementation
• Call on process consultants to
facilitate interventions
Process‐driven Focus on organically developed • Do not use externally
change and implemented efforts to developed program as driver
improve organizational of change
performance • Focus on the unique
requirements of each
organization and unit
• Build support for change while
implementing it
Task alignment Link desired new behaviors to • Analyze and identify key
requirements of performing performance indicators and
key tasks of the organization behavioral implications
required for outstanding
performance
• Attach requirements for new
behavioral to new strategic
objectives of organization
• Build line‐management
support for change effort
Theories of Effective Change Implementation 41

becomes: how can multiple theories of change be integrated into a common Building a
approach to effective change implementation? Vocabulary of
Change
The change implementation model presented in Exhibit 2‐6 provides just shared diagnosis: a
such an integrated roadmap.20 By melding theory and practice, the model sug- widely held and
gests both what tools can be applied and the most effective sequence for that understood view of
application. It suggests that once strategic renewal triggers a new requirement the barriers to
for transformation, effective implementation will start with shared diagnosis: a strategic
implementation and
widely held and understood view of the barriers to strategic implementation outstanding
and outstanding performance. performance.

Starting Implementation with Shared Diagnosis


Trigger events often lead to strategic renewal. Driving change from strategic
renewal assures that implementation aligns with the requirements of outstand-
ing performance. However, in and of itself, the decision to alter or renew an
organization’s strategy does not create the disequilibrium that Lewin said is
required to motivate changed behaviors.
For Duke University Children’s Hospital, a trigger event—changes in
insurance reimbursement that created a financial crisis—created a need for
change. Jon Meliones did not impose a solution. Instead, he involved a cross
section of administrators of health care providers in a diagnostic process
that surfaced the interconnection between financial outcomes and patterns of
behavior.

EXHIBIT 2-6
Step 1: Redesign Step 2: Help A Sequential Model
Designing new strategically • Training of Effective Change
aligned behaviors • Mentoring Implementation.
ign
• Roles
R edes Ste • Coaching
• Responsibilities
p 1: p 2:
• Relationships te
S

H
elp

Shared Mutual
Diagnosis Engagement
an ople
Ch : Pe
ge
3
ep

Step 3: People
Step 4: Systems
St

Change
and Structures St
an ep 4:
• Assessment
• Reporting relationships
• Compensation
d S Syste m s • Promotion
tr u c t • Replacement
• Information u re s
• Recruitment
• Measurement and control
42 Chapter 2

THEORY INTO PRACTICE

Kicking off change implementation with shared diagnosis builds both dissat-
isfaction with the status quo and a commitment to enact new behaviors.

Change requires the commitment of a variety of employees. Meliones had


to impact the behaviors of accountants and administrators no less than physi-
cians and nurses. A participative and involving diagnostic process can be used to
build that commitment. Broad‐based participation helps overcome defensive-
ness and resistance to change. Dissatisfaction with the status quo is no longer a
lecture from above; rather, it is an agreement among many employees concern-
ing what needs to be changed and why.

Moving to Redesign
Building a
Vocabulary of Once diagnosis generates dissatisfaction with the status quo, employees can par-
Change ticipate in redesigning behavioral patterns to support strategic renewal and out-
Redesign an standing performance. As part of that redesign effort, employees seek answers
alteration in to these questions:
employee roles,
responsibilities, and • What can employees do to contribute to the achievement of the company’s
relationships. strategy (roles)?
• What are the performance outcomes employees strive to achieve (responsi-
bilities)?
• With whom must employees work in order to meet the expected outcomes,
and what is the nature of those interactions (relationships)?
Redesigning roles, responsibilities, and relationships through shared diag-
nosis serves to align behavioral patterns with the competitive realities facing the
organization; with the values, goals, purpose, and principles of the organization;
and with the requirements of outstanding performance. Additionally, the partici-
pation of employees in the redesign process builds their commitment to imple-
mentation.
For Meliones and his team at Children’s Hospital, the diagnostic phase pro-
duced a new understanding of how roles, responsibilities, and relationships
should be enacted to support outstanding performance. Meliones explains:

We moved from mission‐bound departments in which people identi-


fied only with their particular jobs (“I am a manager,” “I am a nurse,”
and so on) to goal‐oriented multidisciplinary teams focused on a par-
ticular illness or disease (“We, the ICU team, consisting of the man-
ager, the nurse, the physician, the pharmacist, and the radiologist,
help children with heart problems”).21

Note that the new definition of roles, responsibilities, and relationships


flowed from a shared diagnosis of the performance problems facing Children’s
Hospital, and a common understanding of the hospital’s new strategy, employ-
ees who would have to enact new behaviors were committed to making them
Theories of Effective Change Implementation 43

work. Now the redesign of the unit—multidisciplinary teams focused on specific


diseases—was not imposed by upper management. Rather, the new design rep-
resented an emergent consensus among employees concerning how to imple-
ment the hospital’s “no margin, no mission” strategy.

Help
At the Children’s Hospital, Jon Meliones asked employees who were used to
working as individuals to join in a collaborative team effort. Not only that, but he
was asking doctors and nurses to become familiar with the financial situation of
the hospital, and accountants to develop an appreciation of excellent health care
practices. It is typical, in fact, for change efforts to ask employees to develop new
skills to match the required new behaviors.
It is in the help stage of change that organizations can offer employees
assistance with enacting those new behaviors. Employees being asked, often
for the first time, to work on a team will need to learn the skills of teamwork.
Sales people being asked to demonstrate new products will need to learn
the skills associated with that new functionality. Shop floor supervisors being
asked to work as facilitators with work teams will have to learn a new set of
skills.
In Chapter 5, we will look at specific tools for providing that help. The
point to make for now is that training can be used most effectively in a change
process when it follows a participative process of redesigning roles, responsibili-
ties, and relationships. The commitment to enact new behavior drives a desire to
learn the skills required of that behavior.

THEORY INTO PRACTICE

Asking employees to enact new behaviors—roles, responsibilities, and relation-


ships—can be supported by organizational help in learning required new skills.

People Change
After a shared diagnostic process produces a shared understanding of the renewed
Building a
strategy and a commitment to change, and after employees engage in a process of Vocabulary of
redesigning roles, responsibilities, and relationships, implementation calls upon Change
people change: the process of matching the attributes of employees—their skills, People change the
motivation, attitudes, and behaviors—with the strategic requirements of the process of matching
the attributes of
organization.
employees with
The process is designed, to borrow a phrase from Jim Collins’ book, Good to the strategic
Great, to get the right people with the right competencies on the bus and the requirements of the
wrong people off the bus.22 organization.
The specific interventions that can be called upon in this stage of imple-
mentation include:
• Assessment of employees—which can now reflect the new set of required
competencies
44 Chapter 2

• Recruitment—which seeks to attract and select new employees based on


the demand for new competencies and fit with the redesigned organization
• Promotion—which identifies current employees whose skill makes them
effective enablers of the change
• Removal and replacement—which deals with individuals who cannot or
will not alter their patterns of behavior in ways consistent with the newly
defined roles, responsibilities, and relationships
Aligning human resource capabilities with the new strategic requirements
of the organization—that is, the goal of the people change step.

THEORY INTO PRACTICE

Effective change implementation requires new skills and competencies on the


part of the organization’s employees.

Reinforcing New Behaviors


Now comes the point in the change implementation process when leaders
reinforce altered patterns of behavior through new structures, systems, and tech-
nologies. Roles, responsibilities, and relationships have been redesigned, indi-
viduals have been offered the opportunity to learn and enact new behavioral
patterns and competencies, and the right people are in place.
Making formal systems alterations early in the change process risks creat-
ing resistance. Meliones and his team at Children’s Hospital decided together to
call upon a performance measurement system—the balanced scorecard—to help
institutionalize the new behaviors designed at early stages of the change. The
measurement system became “an essential component of our culture and sup-
ports ongoing change.”23 “Hardwiring” changes, such as structures and systems
that grow organically out of employees’ experiences and are not imposed from
above early in the change implementation process, have a far better chance of
receiving the support of affected employees.

THEORY INTO PRACTICE

Altering formal organizational systems and structures can come at the back
Building a
Vocabulary of end of a change implementation in order to institutionalize new patterns of
Change behavior.
Mutual engagement
the process of
building a
Mutual Engagement at the Core
participatory
dialogue among At the center of the model and accompanying every stage is a process of mutual
employees at all
engagement.24 Participation in decision making, as we noted in Chapter 1, helps
organizational levels
to the requirements build commitment to the outcomes of that decision‐making process. The cycle of
of and process for change implementation, then, needs to create opportunities for dialogue, discus-
achieving change. sion, communication, and participation as a way of building commitment to the
Theories of Effective Change Implementation 45

changes. Those opportunities are what can be called mutual engagement. Mutual
engagement rests on the assumption that multiple stakeholders—particularly
the employees at all organizational levels whose behaviors have to change—will
need to be committed to the change.
Beyond building commitment, mutual engagement provides another asset
indispensable to effective change implementation. In all organizations, vital
knowledge about the current state of the company’s operations, shifting expecta-
tions of customers, required interface with suppliers, and emerging technologi-
cal trends and developments in the industry are embedded deeply in and widely
across the firm. Employees have a unique perspective on how well the organiza-
tion is meeting its strategic goals and living up to its espoused values. Mutual
engagement ensures that such critical knowledge is constantly considered in the
change process.

THEORY INTO PRACTICE

Mutual engagement at every stage of the implementation process helps assure


learning and builds commitment.

How does an organization gain access to such vital knowledge? By allow-


ing employees to influence important change decisions at each step in the imple-
mentation process, organizations invite employees to share their knowledge and
ensure that decision‐making proceeds in full awareness of that knowledge, as
well as the consequences of the decisions on the employees who will be impacted.
We will address specific steps that can be taken to ensure mutual engagement in
Chapter 3.

Avoiding Implementation Traps


Organizational leaders can maximize the likelihood that their implementation
efforts will succeed if they orchestrate an intervention that moves sequentially
through these required stages in a manner that integrates theoretical insights Building a
into specific interventions. The road map offered in the sequential implementa- Vocabulary of
tion model provides both an analytic and planning tool. It also provides insights Change
into implementation traps: the application of appropriate change tools at inap- Implementation trap
applying the right
propriate points in the implementation process.
tools at the wrong
Organizational leaders, for example, may call on Step 4 to initiate change. time in the
The difficulty with that, however, is that they are substituting “refreezing” for implementation
“unfreezing.” When used to drive change, new structures have the effect of process.
imposing new behavioral expectations on employees who are still attached to
the “social habits.” By leaping over the process of shared diagnosis and redesign,
leaders who initiate change through Step 4 interventions have often failed to
build commitment to new behaviors or to exploit the knowledge and insights
embedded deeply and widely in their employees. Exhibit 2‐7 presents different
ways that change leaders can fall into the implementation trap by calling on
interventions out of sequence.
46 Chapter 2

EXHIBIT 2-7
Change
Trap For Example Why It Is a Trap
Implementation
Traps. Starting at Step 4 Imposing new system or Will be experienced as
structure (e.g., global “change from above”; likely
matrix, balanced scorecard to be poorly understood and
measurement system) resisted.
Starting at Step 2 Driving change with Because employees work in
training program an unchanged organizational
context, their learning is
likely to be short‐lived and
will fade out.
Starting at Step 3 Recruiting new employees, Easy to make mistakes due
removing and replacing, to lack of understanding
and replacing individuals concerning what is required
seen to be resisters to and who can adapt to new
change demands; can be viewed by
employees as arbitrary, thus
diminishing trust and
commitment.
Starting implementation Redesigning work (e.g., New designs will be seen as
without shared diagnosis creating cross‐functional unconnected to strategic
teams) reality and performance
demands of organization;
can lead to compliance or
resistance on the part of line
managers.
Ignoring mutual Driving change through Leadership may be out of
engagement top management touch with realities of
organization while employees
may not understand strategic
imperatives.

Conclusion
The sequential model of effective change imple- effective implementation. For an understanding
mentation represents an integration of the key of how that diagnostic stage can be the most
insights offered by previous theorists of organiza- helpful in propelling change implementation,
tional change. The diagnosis stage, as the model we can turn to an analysis of organizational
suggests, becomes the opening intervention in diagnosis.

Discussion Questions
1. According to Kurt Lewin, why is it so difficult to 2. Discuss the various ways in which change theo-
motivate employees to alter their patterns of rists have attempted to introduce performance
behavior? and results into the implementation process.
Theories of Effective Change Implementation 47

Case Discussion
Read “Blue Cloud Gets Agile,” and prepare answers to 3. What behavioral changes, if any, does Agile
the following questions: require of employees?
1. What was the trigger event that led Shel Skinner 4. How do you account for such widely varied
to adopt Agile? responses to Agile among Blue Cloud employees?
2. What is your evaluation of the change implemen- 5. What should Skinner do now?
tation steps followed by Skinner?

BLUE CLOUD GETS AGILE


After attending a conference on a new methodology for software development
known as Agile, Shel Skinner, CEO of Blue Cloud Development, a small software
development company located in Mountain View, California, hired consultants
to introduce the methodology.
At its core, Agile emphasized multiple iterations and short time frames.
Created by a group of software developers, the Agile Manifesto (2001) declared:
We are uncovering better ways of developing software by doing it and
helping others do it.
Through this work we have come to value:
• Individuals and interactions over processes and tools
• Working software over comprehensive documentation
• Customer collaboration over contract negotiation
• Responding to change over following a plan
That is, while there is value in the items on the right, we value the items on
the left more
In addition, Agile held 12 principles:
1. Our highest priority is to satisfy the customer through early and continu-
ous delivery of valuable software.
2. Welcome changing requirements, even late in development. Agile pro-
cesses harness change for the customer’s competitive advantage.
3. Deliver working software frequently, from a couple of weeks to a couple of
months, with a preference to the shorter timescale.
4. Business people and developers must work together daily throughout the
project.
5. Build projects around motivated individuals. Give them the environment
and support they need, and trust them to get the job done.
6. The most efficient and effective method of conveying information to and
within a development team is face‐to‐face conversation.
7. Working software is the primary measure of progress.
8. Agile processes promote sustainable development. The sponsors, develop-
ers, and users should be able to maintain a constant pace indefinitely.
9. Continuous attention to technical excellence and good design enhances
agility.
48 Chapter 2

10. Simplicity—the art of maximizing the amount of work not done—is essential.
11. The best architectures, requirements, and designs emerge from self‐
organizing teams.
12. At regular intervals, the team reflects on how to become more effective,
then tunes and adjusts its behavior accordingly.
“These principles spoke to me on a very fundamental level,” said Skinner. “These
folks were saying out loud for what I’d been thinking most of my career.”
Blue Cloud’s traditional developmental cycle emphasized a deliberate
sequence of development, with verification (testing and debugging) often occur-
ring after a year’s worth of work. “Why waste a year to find out whether our
product is working,” Skinner wondered. No more alpha and beta testing of new
software: “Our new motto around here is, ‘Release early, release often!’ ”
What appealed to Skinner was Agile’s emphasis on teamwork, collabora-
tion, and monthly releases. Cross‐functional development teams held a daily
“scrum” to ensure that all members were fully onboard with the progress and
that all questions and concerns were raised in a timely manner. Skinner provided
a description of the Scrum:25

Scrum is an agile method for project management developed by Ken


Schwaber. Its goal is to dramatically improve productivity in teams previ-
ously paralyzed by heavier, process‐laden methodologies. Its intended use
is for management of software development projects as well as a wrapper to
other software development methodologies such as Extreme Programming.
Scrum is characterized by:

• A living backlog of prioritized work to be done.


• Completion of a largely fixed set of backlog items in a series of short
iterations or sprints.
• A brief daily meeting (called a scrum), at which progress is explained,
upcoming work is described, and obstacles are raised.
• A brief planning session in which the backlog items for the sprint will be
defined.
• A brief heartbeat retrospective, at which all team members reflect about
the past sprint.

Scrum is facilitated by a scrum master, whose primary job is to remove


impediments to the ability of the team to deliver the sprint goal. The scrum
master is not the leader of the team (as they are self‐organizing) but acts as
a productivity buffer between the team and any destabilizing influences.
Scrum enables the creation of self‐organizing teams by encouraging
verbal communication across all team members and across all disciplines
that are involved in the project. A key principle of scrum is its recognition
that fundamentally empirical challenges cannot be addressed successfully
in a traditional “process control” manner. As such, scrum adopts an empiri-
cal approach—accepting that the problem cannot be fully understood or
defined, focusing instead on maximizing the team’s ability to respond in an
agile manner to emerging challenges.
Theories of Effective Change Implementation 49

By bringing together business people, developers, customers’ representa-


tives, and other concerned parties in a disciplined, face‐to‐face encounter, Agile
methodology was intended to simultaneously increase efficiency and improve
quality.
After a year of applying Agile, Skinner asked his engineers to evaluate the
effort. “Wonderful,” said some, “what’s new?” asked others, and “this is a defi-
nite step in the wrong direction,” complained a few. Skinner remained unsure
about whether to continue with the Agile methodology or look for a new
approach to software development.

Endnotes
1. Information in this case is based on Jon N. Management Review 38 (Winter 1997), pp. 11–21;
Meliones, Richard Ballard, Richard Liekweg, Alexander Styhre, “Non‐linear Change in
and William Burton, “No Mission No Margin: Organizations: Organization Change
It’s That Simple,” Journal of Health Care Finance Management Informed by Complexity Theory,”
27 (Spring 2001); Jon Meliones, “Saving Money, Leadership and Organization Development Journal
Saving Lives,” Harvard Business Review (Nov.– 23 (2002), pp. 343–351.
Dec. 2000); and ITWeek.com (Jan. 1, 2001). 9. Based, in part, on Michael Beer and Bert
2. Robert S. Kaplan and David P. Norton, “Trans‐ Spector, “Human Resource Management: The
forming the Balanced Scorecard from Integration of Industrial Relations and
Performance Measurement to Strategic Organization Development,” in Kendrith M.
Management: Part I,” Accounting Horizons 15 Rowland and Gerald R. Ferris, eds., Research in
(Mar. 2001), p. 87; Robert S. Kaplan and David Personnel and Human Resources Management: A
P. Norton, “Using the Balanced Scorecard as a Research Annual, Vol. 2 (Greenwich, CT: JAI
Strategic Management System,” Harvard Press, 1984), pp. 261–297.
Business Review (Jan.–Feb. 1996), p. 3; Robert S. 10. That perspective on conflict is fully explored in
Kaplan and David P. Norton, Integrating Richard E. Walton, Interpersonal Peacemaking:
Shareholder Value and Activity‐Based Costing with Confrontations and Third‐Party Consultation
the Balanced Scorecard In Context (Boston, MA: (Reading, MA: Addison‐Wesley, 1969).
Harvard Business School Publishing, 2001), p. 4. 11. Kenneth W. Thomas, “Conflict and Conflict
3. These essays and others are collected in Kurt Management,” in Marvin D. Dunnette, ed.,
Lewin, Field Theory in Social Science: Selected Handbook of Industrial and Organizational
Theoretical Papers (New York: Harper & Row, Psychology (Chicago, IL: Rand McNally, 1976),
1951). pp. 889–935.
4. Ibid., p. 226. 12. Michael Beer and Bert Spector, “Organizational
5. Emily Thornton, “A New Order at Nissan,” Diagnosis: Its Role in Organizational Learning,”
Business Week (Oct. 11, 1999), p. 54. Journal of Counselling and Development 71 (1993),
6. Lewin, Field Theory in Social Science, p. 229. pp. 642–650.
7. Ibid, p. 231. 13. On the importance of process‐driven change, see
8. Critiques of Lewin’s theories can be found in Beer, Eisenstat, and Spector, The Critical Path to
Ralph Stacey, “Management and the Science of Corporate Renewal; Richard P. Rumselt, “How
Complexity: If Organizational Life Is Non‐linear, Much Does Industry Matter?” Strategic
Can Business Strategies Prevail?” Research and Management Journal 12 (1991), pp. 167–185; Robert
Technology Management 39 (1996), pp. 2–5; Wanda Macintosh and Donald MacLean, “Conditioned
J. Orlikowski and Debra Hofman, “An Emergence: A Dissipative Structures Approach to
Improvisational Model for Change Management: Transformation,” Strategic Management Journal 20
The Case of Groupware Technologies,” Sloan (1999), pp. 297–316; Richard H. Axelrod, Changing
50 Chapter 2

the Way We Change Organizations (San Francisco: 20. The framework presented here builds on one
Berrett‐Koehler, 2000); L.C. Harris and E. presented earlier, in Beer, Eisenstat, and
Ogbonna, “The Unintended Consequences of Spector, The Critical Path to Corporate Renewal.
Culture Interventions: A Study of Unexpected 21. Meliones, Saving Money, Saving Lives, pp. 59–60.
Outcomes,” British Journal of Management 12 22. James C. Collins, Good to Great: Why Some
(2002), pp. 31–49. Companies Make the Leap and Others Don’t (New
14. Bert Spector, “From Bogged Down to Fired Up: York: Harper Business, 2001).
Inspiring Organizational Change,” Sloan 23. Meliones is quoted in ITWeek.com (Jan. 1, 2001),
Management Review 30 (Summer 1989), pp. p. 1.
29–34. 24. The concept of mutual engagement is devel-
15. Beer, Eisenstat, and Spector, The Critical Path to oped in José Santos, Bert Spector, and Ludo
Corporate Renewal, p. 40. van‐der‐Hayden, “Toward a Theory of
16. Ibid., pp. 45–46. Corporate Business Model Innovation,”
17. This case is detailed in Beer, Eisenstat, and Northeastern University College of Business
Spector, The Critical Path to Corporate Renewal. Administration Working Paper, (2008).
18. Ibid., p. 52. 25. See http://www.mariosalexandrou.com/methodolo-
19. Robert H. Schaffer and Harvey A. Thomson, gies/scrum.asp.
“Successful Change Programs Begin with
Results,” Harvard Business Review (Jan.–Feb.
1992), p. 83.
CHAPTER

3 Mutual Engagement and Shared


Diagnosis

E ffective organizational change requires an alteration in patterns of employee behavior.


At the outset of effective change implementation, leaders engage employees in a process
of shared diagnosis. The goal of that diagnostic process is to unfreeze “social habits” and
create a sense of dissatisfaction with the status quo. Mutual engagement helps build
commitment to the change process among those who participate.
This chapter will describe and analyze mutual engagement and shared diagnosis. In
particular, the chapter will:
• Describe the role of diagnosis in assessing behaviors and values and in creating
dissatisfaction with the status quo
• Discuss the use of a systemic framework for guiding diagnosis
• Explore ways to overcome the “climate of silence” that blocks mutual engagement
• Provide the key ingredients of a diagnostic intervention
• Define the role played by after-action reviews (AARs) in creating quick learning and
improvement
First, we will look at the initial days and weeks of a newly hired CEO intent on energizing
transformational change. As you read the introductory case, ask yourself:
• How did Fiorina formulate her ideas for how to transform Hewlett-Packard (HP)?
• How did HP’s top executives respond to Fiorina’s direction of change?
• How would you evaluate her initial efforts to improve the HP’s performance?

“A DEER CAUGHT IN THE HEADLIGHTS” AT HP


Plagued by poor performance in its computer and printer business, Hewlett‐Packard’s board
hired Carleton (Carly) Fiorina from Lucent.1 This represented the first time since its 1939
founding that HP had reached outside the company for a CEO. Appreciating the urgency of
the situation, Fiorina hit the ground running. Her first public appearances were well staged

51
52 Chapter 3

and electric. What she had in mind was clear. She would reorganize HP in order
to centralize decision making, revitalize the sales force, trim costs, and energize
employees.
Based on her previous experience at Lucent, Fiorina had a clear idea of how
she would achieve her goals, which she revealed at her first strategic meeting
just a month after her arrival. To reverse the company’s “sacred” emphasis on
decentralization, she proposed a simpler, more centralized structure: two “back‐
end” divisions (each back‐end division included design, manufacturing, and
distribution—one for printers, the other for computers) and two “front‐end”
marketing and sales operations—one for consumers and the other for corporate
customers. The company would also begin to focus on far fewer products. “This
is a company that can do anything,” she told executives, “it is not a company
that can do everything.” Finally, the culture would change dramatically and
immediately to emphasize performance. “Let me make something very clear,”
Fiorina told executives. “You will make your numbers. There will be no excuses.
And if you can’t make your numbers, I will find someone who will.”
Fiorina asked for the support of HP’s top executives on her centralization
and reorganization plan, and she got it. That is not to say, however, that they all
agreed with her. “I don’t know anyone who was in favor of it [her back‐end/
front‐end reorganization plan] other than Carly,” said one. “She came in with a
recipe,” said another, “and come hell or high water, she was going to use it.”
Carolyn Ticknor, head of laser printing, recalled, “I was a deer caught in the
headlights when she [Fiorina] described the front and back end.”
Six years after the announcement of the reorganization plan, the company’s
board demanded Fiorina’s resignation. The board again looked outside of HP for
a replacement; this time selecting Mark Hurd of NCR. When reporters asked
Hurd about his plans to revitalize the company, he responded that it was too
soon to tell. “We’ll look at the entire enterprise,” he said. “I can’t give you any
guarantees on anything,” he added.2

DIAGNOSING THE ORGANIZATION


The desire on the part of executives such as Carly Fiorina to “hit the ground
running” with solutions, particularly when their organizations are mired in
poor performance, may be perfectly understandable. The tendency to believe
that what has worked for them in the past can provide a kind of recipe for the
future is also strong. Reorganization worked at Lucent; why not do the same
at HP?
Taking that approach, however, fails to create mutual engagement and
shared diagnosis that is so critical in shaping and guiding change. It can lead to
solutions that are inappropriate to the target organization and are not supported—
perhaps even actively resisted—by employees.

THEORY INTO PRACTICE

Effective change starts with action, not solutions.


Mutual Engagement and Shared Diagnosis 53

The desire for quick solutions can lead executives to overlook the critical ele-
ments of learning and commitment that can be built through mutual engagement
and shared diagnosis. The dynamics of every organization are unique. Additionally,
an organization’s external competitive forces are likely to be in a state of flux.
Therefore, applying a recipe—what worked somewhere else in the past will work
here now—can be overly simple, misleading, and even dysfunctional.
Lucent’s best practices may not have been applicable to HP. The act of
imposing those practices is likely to evoke resistance. Lack of mutual engage-
ment—of holding an honest conversation among employees about what needed
to change, why, and how—leads to low levels of employee commitment.
Diagnosis is meant to create learning about the real, current, and unique
dynamics impacting the organization’s performance. When combined with
mutual engagement, it is designed to create deep and wide commitment to the
desired outcome.

THEORY INTO PRACTICE

Don’t expect formulas—solutions that have worked in the past and are
imposed on the current situation—to work for your organization.
Building a
Vocabulary of
At its most fundamental level, diagnosis is about learning: learning what Change
needs to be changed and why. Learning is the process by which individuals Learning the process
receive data from the external environment, analyze that data, and adjust their by which individuals
thinking and behaviors accordingly. The notion of shared diagnosis goes one step receive data from
the external
further. For effective change implementation to occur, many employees at mul- environment,
tiple hierarchical levels and in varied units need to change in the same direction. analyze that data,
A diagnostic process engaged in by an individual, no matter how insightful, and adjust their
highly placed, or influential that individual may be, will not lead to coordinated thinking and
change. It is only when the same diagnosis is shared by multiple individuals that behaviors based on
that analysis.
change implementation can move forward effectively.

THEORY INTO PRACTICE

The most effective change implementation starts with a diagnosis that is


shared by many employees at multiple organizational levels.

Altered and renewed strategies, new business models, and shifting exter-
nal realities typically call for new skills, competencies, and patterns of behavior.
The sequential implementation model depicted in Exhibit 2‐6 starts with diagno-
sis in order to identify both the current state of skills, competencies, and behaviors
and the requirements for future outstanding performance. Mutual engagement
by employees generates awareness of the gap between the status quo and the
desired future state. That awareness, in turn, provides the source of dissatisfac-
tion and the drive for change.
Recall from Chapter 2 Lewin’s warning that “lectures” about the status
quo—speeches on the need for change or PowerPoint presentations on the
54 Chapter 3

new strategy, for instance—will not be sufficient to create the disequilibrium


necessary to motivate change. Instead, effective change starts with a diagnos-
tic process that engages employees in a learning process. Executives learn
why the status quo is unsatisfactory; so, too, do employees at all levels and in
all units.
In addition to generating learning, mutual engagement in shared diagnosis
can create a consensus among employees not just about what needs to be changed
but also how to bring about that change. Engaging employees in the process of
collecting and learning from data and then using that learning to shape an inter-
Building a
Vocabulary of
vention can help build real commitment to implementing change.
Change As an alternative to initiating change by announcing a solution, leaders can
Diagnosis the process instead begin with diagnosis. Diagnosis is the process of learning about the
of learning about the dynamics of an organization’s functioning. It is meant to engage employees in
dynamics of the the process of identifying both the current state and the desired future state of
organization in order
to take action
the organization.3 Employees collect data and engage in a dialogue concerning
intended to improve the meaning of the data. The diagnostic process provides a roadmap for change;
performance. mutual engagement in diagnosis helps build motivation on the part of employ-
ees to alter their behaviors.

THEORY INTO PRACTICE

Use diagnosis as the preliminary stage in implementing change.

Requirement for a Systemic Framework


Diagnosis should be guided by a broad, systemic view of the firm.
Organizations are composed of multiple units and functions and pro-
cesses that link various activities. There are also design elements, both formal
and informal, that organizations call upon to—they hope—align employee
behavior with strategy. Additionally, organizations live in a dynamic world.
New competitors, technologies, business models, customer expectations,
changing government rules and regulations, shifting environmental impera-
Building a
Vocabulary of tives, and ups and downs in the national and global economy all impact the
Change organization.
Diagnostic framework A diagnostic framework—a roadmap for guiding mutual engagement
a roadmap to in shared diagnosis—should help to identify all the key variables that impact
analyzing alignment
the performance of an organization. But it must do more. None of these ele-
that makes explicit
both the key ments, after all, exist in a vacuum. Just think: employee behaviors are shaped
elements of an by organizational design, which should serve the company’s strategy. And all
organization that of the elements, in turn, must find success within an ever-shifting external
need to be aligned environment.
and the intercon-
Understanding that organizations exist in constant interaction with a
nections and
interdependencies dynamic external environment leads to an important insight: An organization
among those whose internal processes are perfectly well suited for one kind of competitive
elements. environment may find those same processes becoming a burden in a new,
shifting landscape.
Mutual Engagement and Shared Diagnosis 55

THEORY INTO PRACTICE

In order to set the stage for effective implementation, diagnosis can do more than
target-specific elements of the organization; it can focus on the entire organization.

Take the Federal Bureau of Investigation (FBI). The FBI built its reputation
by battling crime and arresting criminals. The mission of the FBI—“G‐men bat-
tling notorious criminals”—created a context and a set of structures and policies
that gave absolute primacy to criminal investigations and special agents in the
field. A highly decentralized structure allowed agents to focus their attentions
locally. Additionally, the FBI preferred internally generated data, often distrust-
ing and rejecting information supplied by external agencies and sources.
The attacks of 9/11 on New York and Washington triggered a change in the
strategy of the FBI. Gathering information and preventing an attack—that was the
new strategic task. Recognizing that the new mission would require altered pat-
terns of thinking and behaving, FBI Director Robert Mueller took steps to trans-
form the bureau.
When organizations such as the FBI attempt to undergo strategic renewal,
leaders can call on a diagnostic framework to focus attention on the multiple ele-
ments that contribute to success. But an effective framework can do more; it can
delineate and help make explicit the interactions and interconnects among the
elements. If employee behaviors do not reflect strategy—let’s say, in the case of
the FBI, field agents concentrating most of their efforts on low‐priority national
threats, or, in other cases, salespeople spending most of their time selling prod-
ucts that are no longer core to the company’s strategy, or functional employees
continuing to work mainly within their functions rather than across functions
when the company’s strategy calls for rapid new product development—a
framework can drive employees into analyzing the linkages that have created
those misalignments.

THEORY INTO PRACTICE

Use a common organizational framework to shape mutual engagement and


shared diagnosis.

No framework can, of course, explicate all the interconnects, causes and


effects, and actions and reactions that occur within an organization and impact
performance. That is why relying on a framework is only a preliminary step in
the diagnosis. Mutual engagement and open, honest dialogue will build on the
framework and enrich participants’ understanding of organizational dynamics.
There are numerous frameworks available for judging alignment.4
Exhibit 3‐1 offers one such framework. The goal of any framework is to provide a
common guide to participants as they seek to understand the interconnected link-
ages that affect organizational performance. Exhibit 3‐1 summarizes the criteria
that, according to David Nadler, any useful framework should adhere.5 What
makes a framework effective is that it leads people toward systemic thinking that
56 Chapter 3

Competitors
STEP* Environment

Strategy

Organization

Structure
Systems
- Evaluation
- Reward
- Selection and development
- Budget and control
Task/Work Culture
People
Systems

* Social (incl. History), Technological, Economic, and Political Environment

EXHIBIT 3-1 Diagnostic Framework†

can focus diagnosis on disjunctions that are impeding implementation of the


renewed strategy and achievement of outstanding performance. A framework
helps employees understand that outstanding performance can be achieved or sus-
tained only with alignment between and among all the elements. It builds a com-
mon understanding and language that can form the basis of a shared diagnosis.

STARTING WITH MUTUAL ENGAGEMENT


The mutual engagement that forms the core of an effective change implementa-
tion effort starts at the diagnostic step. Employees can have the opportunity to
engage in a dialogue that focuses on performance and the impediments and bar-
riers to achieving an organization’s strategic goals.


This organizational design framework and analytic model has been adapted from a number of writ-
ers on the contingency theory of organizations: James D. Thompson, Organizations in Action (New
York: McGraw‐Hill, 1967); Paul R. Lawrence and J. W. Lorsch, Organization and Environment
(Homewood, IL: Richard D. Irwin, 1969); Jay R. Galbraith, Designing Complex Organizations (Reading,
MA: Addison‐Wesley, 1973); Jay W. Lorsch and John J. Morse, Organizations and Their Members: A
Contingency Approach (New York: Harper & Row, 1974); Jay R. Galbraith, Organization Design
(Reading, MA: Addison‐Wesley, 1977); Jay W. Lorsch, “Organization Design: A Situational
Perspective,” Organizational Dynamics, 5 (1977) American Management Association, 1977; Jay R.
Galbraith and Daniel A. Nathanson, Strategy Implementation: The Role of Structure and Process (St. Paul,
MN: West, 1978); John P. Kotter, Leonard A. Schlesinger, and Vijay Sathe, “Organization Design
Tools,” Organization: Text, Cases and Readings on the Management of Organizational Design and Change
(Homewood, IL: Richard D. Irwin, 1979). See also H. W. Lane, “Systems, Values and Action: An
Analytic Framework for Intercultural Management Research,” Management International Review 20,
no. 3 (1980), pp. 61–70.
Mutual Engagement and Shared Diagnosis 57

Dialogue is a structured, collective discussion among two or more parties. Building a


Dialogue builds mutuality because the purpose of dialogue is to move beyond Vocabulary of
Change
the understanding of any one individual and create an enriched and shared Dialogue a
understanding and the multiple participants. structured, collective
Dialogue is meant to be more than one-way communication, more even discussion among
than a simple conversation. Because the goal of dialogue is learning, it is a pro- two or more
cess that leads to unexpected conclusions. The process of participating in dia- parties with no
predetermined
logue enriches both the understanding and the commitment of all parties to the conclusion.
implications and conclusions of that dialogue.

THEORY INTO PRACTICE

Creating a dialogue offers the opportunity for an open and honest conversa-
tion among employees.

Achieving an open, honest dialogue, especially in a hierarchical organiza-


tion, can be difficult. Success in creating a dialogue depends on a number of fac-
tors. Because dialogue occurs in an organizational context, that context must be
one that enables rather than impedes openness.

Organizational Enablers of Dialogue


Dialogue does not occur within a vacuum. It is up to organizational leaders to
help create and maintain a context that allows, encourages, and enables an open
and candid dialogue. Speaking openly and honestly can be a risky undertaking.
Employees often feel inhibited when asked to speak up concerning organiza-
tional problems and barriers to outstanding performance.
Building a
The phenomenon that inhibits or even eliminates opportunities for the free Vocabulary of
and open exchange of ideas and views is known as organizational silence.6 Change
Organizational silence refers to the pervasive set of assumptions on the part of Organizational silence
employees that candid feedback and open, shared dialogue is to be avoided. As the lack of truthful
dialogue in
we saw at HP, it is not just employees at lower hierarchical levels who can feel
organizations caused
inhibited. Managers and executives can also hesitate to speak openly and hon- by the widespread
estly, even when they do not understand, agree, or both with the policies being assumption on the
promulgated from the top.7 part of employees
that candid feedback
and the open
THEORY INTO PRACTICE exchange of ideas
will have either no
Don’t confuse passive acceptance with agreement. positive impact
or negative
consequences to the
individual, or both.
Organizational silence hinders mutual engagement. Silence, undermines
an organization’s ability to engage in learning. Learning requires engagement,
participation, and openness. Silence—the unwillingness to engage, to partici-
pate, and to be open—inhibits learning and makes effective change implementa-
tion more difficult.
58 Chapter 3

THEORY INTO PRACTICE

Leaders can take an active role in overcoming the “climate of silence.”

Organizational silence—even in hierarchical organizations—is not inevita-


ble. Leaders can help their organizations overcome silence by paying attention to
particular dynamics that may block openness. Hierarchy, as we know, creates
power distance: distinct differences in power based on hierarchical position. The
problem is, large power distances—say, between a boss and a subordinate or a
CEO and a division vice president—can encourage silence.
When one participant in the dialogue possesses significantly more organi-
zational power than the other, both parties tend to filter their communication.
The boss may be less than totally candid with her subordinates. Do they really
need to know this information, she may ask herself? And what will they do with
the information? The subordinate may think twice about what he says to the
boss. What will my boss do with this information? Will it somehow be used
against me? Both parties tend to withhold, or even distort, intending to protect
and/or advance their self‐interest.

THEORY INTO PRACTICE

A large power distance between parties in a dialogue inhibits openness and


risk taking while distorting communications.

In a hierarchical organization, some power distance is inevitable. Filtering


cannot be avoided entirely. Nevertheless, organizations have undertaken a num-
ber of approaches meant to lessen the distance and increase the effectiveness of
the dialogue. One approach to reducing power distance involves delayering, that
is, eliminating multiple levels of hierarchy. Many of today’s business units have
significantly reduced the number of supervisory and managerial levels existing
in a unit. With fewer hierarchical levels, the distortion that arises from filtering is
reduced significantly.
Decentralizing pushes decision making down to lower levels and can occur
separately or be combined with delayering. By granting lower‐level managers
the autonomy to make decisions, those managers have the opportunity to involve
their direct staff in diagnosis, thus eliminating hierarchical levels that more typi-
cally exist between workers and managers.
Many organizations have taken the symbolic step of creating an egalitarian
culture, eliminating many of the perquisites often associated with hierarchical
status:
• Doing away with executive parking and cafeterias is a now‐common char-
acteristic in new work facilities.
• Putting the entire workforce on salary erases the distinction between hourly
and salaried employees.
Mutual Engagement and Shared Diagnosis 59

• Informal attire and forms of address (calling everyone by his first name, for
example), and an end to opulent executive offices removes obvious exter-
nal signs of status.
These symbolic actions will mean very little if they are seen by employees
as empty gestures or even as contradictions to an otherwise hierarchical, highly
differentiated power structure. If, on the other hand, they are experienced as
manifestations of a deeply embedded egalitarian culture, they can help reduce
perceived power differentials and enable open dialogue.
Third‐party facilitation can also be a powerful antidote to power differen-
tials. In a structured dialogue where multiple hierarchical levels are involved,
facilitators can suggest—and even enforce—communication rules meant to
establish openness and trust. Third‐party facilitators can create “situational”
power equity.8
Most power equalization steps focus on power differences based on hierar-
chical position. Power distance can also exist horizontally. Horizontal power dis-
tance involves units that, in essence, compete for power within the organization.
This will lead to power distances that can develop over time between functional
units within an organization. “Engineering is king.” “Marketing is everything.”
“We’re completely numbers driven.” All of these slogans are expressions of pre-
cisely this type of inequity among functions.
Horizontal power distance can be harmful to open dialogue. Communication
can be filtered and ideas dismissed. A powerful research and development func-
tion can make it difficult for sales and marketing people to inject the customer
perspective into the dialogue about product design decisions. An overly domi-
nant finance function might block the voice of employers and customers. An iso-
lated but influential research and development department might offer new
products that business units feel are unattractive to their local markets.
A well‐balanced top management team with shared purpose will help
maintain mutual engagement, ensuring that all voices are respected and influen-
tial. In that circumstance, the voices of multiple functions and units are more
likely to come through unfiltered in a diagnosis concerning barriers to outstand-
ing performance.
Building a
Steps to equalize power help set the organizational context for dialogue. Vocabulary of
Organizations seeking to encourage mutual engagement will also need to Change
create psychological safety—a belief on the part of employees that the organi- Psychological safety a
zational climate is conducive for taking personal risks, especially around dia- belief on the part of
logue. Leaders can look at all the elements that create or undermine trust employees that the
organizational
between and among stakeholders. Creating a psychological safety zone in climate is conducive
which all employees feel safe from threat and reprisal for both advocating and to taking personal
inquiring will help nurture a context in which mutual engagement can and risks, especially
will continue. Ultimately, in a change implementation process, leaders can around dialogue.
help banish the barrier of silence by committing themselves to the desirability,
even the necessity of entering into a dialogue with employees. Instead of
announcing solutions, leaders can create a process of mutual engagement and
learning, thus inviting employees at all levels to cross barriers of silence and
participate in a dialogue.
60 Chapter 3

EXHIBIT 3-2
Power Equalization
Steps Lead to
Steps.
Delayering Removing hierarchical barriers that create distance and distort
communications
Decentralizing Pushing down decision making to close gap between decision
makers and “doers”
Egalitarianism Removing “artifacts” of status differentials
Third‐party Structuring effective “rules‐of‐engagement” around feedback
facilitation and dialogue
Representation Inserting voice from multiple levels, both vertical (managers,
shop floor employees, etc.) and horizontal (union and
management, various functions, etc.) into dialogue
Teamwork Building shared purpose and mutual responsibility to ensure
equal participation and influence by all members in dialogue

THE CONSULTANT ROLE


Mutual engagement in diagnosis requires more than just motivation, willing-
ness, and psychological safety. It also requires skills. Those skills are different
from the functional competencies—marketing, sales, technology, operations, and
so forth—that are required in the typical workday of an employee.
Participating in an open dialogue where views—both positive and nega-
tive—are freely expressed and performance‐focused might prove both unusual
and uncomfortable. Participating in such a dialogue, not to mention facilitating
the participation of others, might be alien to an employee’s experience.

THEORY INTO PRACTICE

Leaders can call on a consultant to introduce and teach skills required of


mutual engagement and diagnosis.

Employees can learn these skills. In fact, one of the goals of change can be to
Building a
Vocabulary of
develop such skills and competencies among employees. But because diagnosis
Change calls for new roles and skills that have yet to be developed, it often proceeds with
Consultant an the help of a consultant. A consultant is an individual possessing a broad range
individual of diagnostic and developmental skills who facilitates a change intervention.
possessing a broad Consultants may arrive from outside the organization: professional consul-
range of diagnostic
and developmental
tants or academics with a specialization in organizational change and develop-
skills who contracts ment. They may also come from within the firm: specially trained employees,
with the often within the company’s human resource or organization development staff.
organization’s Whether internal or external, the task of the consultant is the same: to facilitate
leaders to facilitate diagnosis and dialogue and to do so in a way that allows employees to develop
an intervention.
those skills themselves.9
Mutual Engagement and Shared Diagnosis 61

GETTING STARTED WITH ORGANIZATIONAL DIAGNOSIS


To increase the effectiveness of diagnosis as an opening stage of organizational
change, the process can follow the principles outlined in Exhibit 3‐3. It is now
time to explore the specific steps that can be pursued based on these principles.
These steps involve:
• Collecting data on the organization and its environment
• Entering into a dialogue of discovery that makes sense of and provides insight
into the data that has been amassed
• Receiving and providing feedback on what has been learned
• Institutionalizing dialogue and diagnosis so that they become an organic and
ongoing part of the organization’s activities
Each step enhances mutual engagement and helps build commitment to
change.

Data Collection
Effective diagnosis is data driven, that is, infused with and informed by valid
information concerning the factors that impact the performance of the organiza-
tion and its ability to implement its renewed strategy. A diagnostic framework
will point to the target areas for data collection.

THEORY INTO PRACTICE

Make sure that diagnosis flows from valid data about the organization.

Data are more than a collection of cold, hard facts. Data amassed through
the diagnostic process can have a powerful impact on the ensuing change by
motivating employees to alter their behavior in ways that will support strategic

EXHIBIT 3-3
Principles for
Systemic focus Targets the entire organization and is guided by a framework
Organizational
that focuses on interactions
Diagnosis.
Consultant Specially trained individual(s) bring external perspective and
facilitated required skills
Participative Employees participate in all stages as full partners in order to
build commitment and competency
Data-based Participants agree on the validity and strategic importance of
data collected about performance
Honest Employees engage the requirements of shared dialogue:
conversation mutuality, reciprocity, advocacy, and inquiry
Psychological Active steps taken to overcome climate of organizational
safety silence
62 Chapter 3

renewal. The motivational impact of data occurs as feelings are aroused and
forces unleashed that bring about behavioral change. The act of collecting data
potentially becomes a key way of mobilizing the considerable energy needed to
abandon the status quo.
So the challenge of data collection becomes twofold:
1. To collect data on the key elements impacting an organization’s capacity to
support the new strategy and to achieve and maintain outstanding perfor-
mance; and,
2. To do so in a way most likely to build motivation and commitment on the
part of employees.
There are three basic forms of data collection: questionnaires, interviews,
and observation. Each holds strengths and weaknesses, especially in light of that
dual requirement.

THEORY INTO PRACTICE

The process of collecting data can help build motivation and commitment to
altering patterns of behavior.
Building a
Vocabulary of
Change QUESTIONNAIRES The most popular form of collecting data involves written
Questionnaires self‐ questionnaires. Questionnaires are self‐administered paper‐and‐pencil or com-
administered puter‐based data‐collection forms. Questionnaires often stress areas of behav-
paper‐and‐pencil
ioral interaction such as communications, goals, and coordination. Employees
data‐collection
forms, often may be asked, for instance, to rate the clarity of the organization’s strategy, the
stressing areas of quality of information that is shared, or the nature of supervision. Although
behavioral questionnaires can be developed internally, they are more typically packaged by
interaction such as an external consulting firm or an academic center. Exhibit 3‐4 presents a sample
communications,
from one such questionnaire developed by Robert C. Preziosi.10
goals, and
coordination. Questionnaires have some tangible advantages as a source of data. They
can be administered to a large number of employees and results compiled in a
short time period. Because they are administered and returned anonymously,
questionnaires can help overcome the climate of silence by allowing employees a
greater sense of freedom and protection. They can provide a valuable benchmark
for the organization to measure itself against. When administered to multiple
units, they can offer comparisons and highlight units in the organization where
results are especially positive or negative. When administered to the same unit
over time, they can track progress or regression.
There is, however, a downside to the use of questionnaires in a change pro-
cess. The preconceived categories represented in the questionnaires may mea-
sure theoretical constructs that are relevant to the developer of the questions, but
they may not necessarily speak to the true needs of the organization.
Questionnaires, write Jack Fordyce and Raymond Weil, “do not create the kind
of personal involvement and dialogue that is so valuable in changing hearts and
minds. The information generated by questionnaires tends to be canned, anony-
mous, ambiguous, and detached—i.e., cool data rather than hot.”11 Because of
Mutual Engagement and Shared Diagnosis 63

EXHIBIT 3-4
A sampling of 10 questions is reproduced. The complete questionnaire along with an Organizational
analysis by its author can be viewed at: http://www.g-rap.org/docs/icb/preziosi-organ_ Diagnostic
diagnosis_questionnaire_odq.pdf Questionnaire.
From time to time, organizations consider it important to analyze themselves.
It is necessary to find out from people who work in the organization what they think.
This questionnaire will help the organization that you work for analyze itself.

Directions: DO NOT put your name anywhere on this questionnaire. Please answer
all questions. For each of the statements, circle only one number to indicate your
thinking.

Agree Strongly – 1, Agree – 2, Agree Slightly – 3, Neutral – 4,


Disagree Slightly – 5, Disagree – 6, Disagree Strongly – 7

1. The goals of this organization are clearly stated.


1 2 3 4 5 6 7

2. My immediate supervisor is supportive of my efforts.


1 2 3 4 5 6 7

3. This organization is not resistant to change.


1 2 3 4 5 6 7

4. The leadership norms of this organization help its progress.


1 2 3 4 5 6 7

5. I have the information that I need to do a good job.


1 2 3 4 5 6 7

6. The manner in which work tasks are divided is a logical one.


1 2 3 4 5 6 7

7. The opportunity for promotion exists in this organization.


1 2 3 4 5 6 7

8. The structure of my work unit is well designed.


1 2 3 4 5 6 7

9. I have established the relationships that I need to do my job properly.


1 2 3 4 5 6 7

10. All tasks to be accomplished are associated with incentives.


1 2 3 4 5 6 7

Source: Excerpt from “Organizational Diagnosis Questionnaire,” available at http://www.g-rap


.org/docs/ICB/Preziosi%20-%20Organ.%20Diagnosis%20Questionnaire%20ODQ.pdf.
64 Chapter 3

that lack of personal involvement and deep sentiment, managers may be more
likely to respond with token reaction rather than significant response.

THEORY INTO PRACTICE

Be careful about the overuse of employee questionnaires in collecting data


about organizational effectiveness. They can be useful for measurement pur-
pose but do not create mutual engagement.

That is not to say that questionnaires have no important role to play. By


providing a benchmark measurement against either other organizations or
against best‐practice units within the organization, questionnaires can help build
dissatisfaction with the status quo and awareness of the need for change. When
used for internal measurement, the results can serve as an early warning system
for problems developing within a unit.
Building a
Vocabulary of
Change INTERVIEWS Other methods of data collection can provide far richer and more
Diagnostic interviews detailed insight into the dynamics of an organization. Diagnostic interviews
a form of data involve a trained diagnostician—this may be an external expert, an employee
collection in which a
with specific training, or a combination of the two—sitting down with an
trained diagnostician
meets with an employee, or occasionally small groups of employees, and soliciting informa-
employee, or small tion. Interviews can provide far richer data than questionnaires.
groups of Diagnostic interviews can be either structured or unstructured. In struc-
employees, to solicit tured interviews, the interviewer prepares a set of questions to be asked of all
information
respondents. In an unstructured interview, a small number of general questions—
pertaining to the
performance of the “What are the organizational barriers to achieving your strategic objectives?” or
organization. “What are the goals of your unit and what are the organizational barriers you
perceive for achieving those goals?” for example—are intended to precipitate
what Andrew Manzini calls “the respondent’s own definition of relevant prob-
lems and issues.”12 What follows those broad questions is an open dialogue
between the interviewer and the interviewee that helps determine the direction
of the remainder of the interview.

THEORY INTO PRACTICE

Use diagnostic interviews and behavioral observation to collect rich


and valid data about how employees behave and how the organization
functions.

In addition to generating data, open‐ended interviews offer the opportu-


nity to clarify the data as they are being generated. The interviewer can ask ques-
tions of the respondent and probe more deeply: What did you mean by that
response? Or, can you tell me more about why you think that is true? Because unstruc-
tured interviews can become a forum for personal issues that have little to do
with improving organizational performance, interviewers will need to keep
focus on pertinent, performance‐related issues.
Mutual Engagement and Shared Diagnosis 65

Professional consultants can conduct these interviews. There is also an


advantage to training employees as interviewers. The involvement of employees
in the data collection process enhances their commitment to the changes sug-
gested by the process. Also, organizational members inevitably know more
about the hidden but critical aspects of organizational life than would any out-
sider. They bring, in other words, their own expertise to the process. Finally, by
participating in the data collection process, employees are gaining the skills nec-
essary to engage in ongoing data collection and diagnosis in the future.13 Building a
Vocabulary of
OBSERVATIONS Apart from questionnaires and interviews, another source of Change
data is behavioral observation.14 The diagnostician can watch actual behaviors Behavioral observation
of employees: the meetings of top management teams, efforts of work groups to a form of data
collection in which a
solve problems, interactions between boss and subordinate, and so forth.
trained diagnostician
Behavioral observation has the advantage of eliminating self‐reports by focusing can watch actual
directly on behaviors. The observer may remain apart from the behaviors them- behaviors of
selves, acting as a sort of an unobtrusive fly‐on‐the‐wall. Or, the observer may employees.
involve himself in the behaviors being observed. The participant–observer
becomes immersed in the actual behaviors of employees as a way of reaching a
deep understanding of their behaviors.
A broad literature in the social sciences exists on the strengths and weak-
nesses, validity and pitfalls, even the ethics of the participant–observer role.15
For a well‐trained observer, the interactions that result from participation in
meetings, problem‐solving groups, and the like can provide an indispensable
source of data concerning the cognitive and emotional state of employees.

SUMMARIZING DATA COLLECTION METHODS The three types of data collection


(summarized in Exhibit 3‐5) do not have to be thought of as mutually exclusive.
Used together—interviews and observations to collect rich data and question-
naires to validate data on a wider scale—the various methods of data collection
provide invaluable input into the next stage of the diagnostic process: creating a
dialogue about the organization’s functioning.

Creating a Dialogue of Discovery


Data collection is only the preliminary step in diagnosis. The next step addresses
Building a
the question: what does the data mean and what should the organization do Vocabulary of
about it? Change
In the discovery stage, employees engage in an analysis of the data, make Discovery the process
sense of what they have learned, and consider the steps to take to act upon that of analyzing and
learning. When diagnosis is the first step of a change process, the responsible making sense of data
that has been
leaders of the organizational unit being targeted—if it is the entire organization, collected as part of
then the responsible leaders are the top management team—can be engaged in an organizational
that discovery.16 The involvement of the individuals, groups, and teams required diagnosis.
to take action enriches the understanding of the data while simultaneously
building their commitment to the resulting change. Because their own behav-
iors will likely be part of the collected data, their mutual engagement in the
discovery process and commitment to respond to their learnings become par-
ticularly valuable.
66 Chapter 3

EXHIBIT 3-5 Data


Collection Methods
for Organizational Methods Advantages at Disadvantages at
Diagnosis. Initial Stage of Change Initial Stage of Change

Questionnaires • Can be administered to • Based on preconceived ideas


large number of employees about what issues and areas
• Can be processed quickly should be examined
• Data is collected • Can over simplify vague and
anonymously complex issues like culture
• Can be used to create • Do not expose root causes
benchmarks and make of problems
comparisons across • Do not create commitment
organizations and over to outcomes or motivation
time to change

Diagnostic • Collect rich data • Require up‐front investment


interviews • Begin process of creating in training interviewers
dialogue • Data may be hard to
• Teach communication and summarize and quantify
active listening skills to • Lack anonymity
employees
Behavioral • Provides current work‐ • Act of observation will
observation based behavior as data impact behaviors of those
• Offers deep and rich data being observed
on interactions among • Time‐consuming data
people collection process
• Can surface underlying • Requires highly skilled
emotions that impact observers
behavior

Determining who to engage is the first requirement of the discovery process.


A blend of individuals representing a multitude of perspectives on the organiza-
tion (say, representatives from various functions and units and from multiple
hierarchical levels) will help ensure a broad, systemic view. The next vital ques-
tion in designing the discovery process is how.

THEORY INTO PRACTICE

Mutual engagement in the discovery stage will help both to assure the valid-
ity of the conclusions and build commitment to corrective actions.

Mutual engagement in the discovery process can take place in face‐to‐face


meetings: employees gathered in the same room when possible and connected
via electronic means when necessary. Face‐to‐face interaction provides the rich-
ness required to help understand the complexity of the opportunities and prob-
lems to be addressed.
Mutual Engagement and Shared Diagnosis 67

When employees themselves have been involved in the data collection pro-
cess, they can deliver their data directly to the responsible individuals. The con-
sultant can facilitate that exchange by setting ground rules for productive and
open dialogue. The leadership group hearing the feedback, for example, can be
allowed to ask clarifying questions but be stopped by the consultant if their
responses represent defensiveness or denial.17
Mutual engagement in discovery is critical to determining the effectiveness
of the change process. To ensure the systemic nature of the discovery process—
that is, a focus on how the multiple elements of the organization do or do not
align—the consultant can use a diagnostic framework. A discovery process
guided by a systemic diagnostic framework will channel energy, in Michael
Harrison and Arie Shirom’s words, “toward decisions and actions likely to pro-
vide the broadest organizational benefits.”18 By creating disequilibrium with the
status quo, discovery provides a vital staging for the upcoming change process.

Closing the Loop with Feedback


Employees who have engaged in the data collection and discovery phases will
Building a
expect to learn how their efforts have been translated into action. There is an Vocabulary of
expectation, in other words, that feedback will be part of the diagnostic process. Change
Feedback refers to the process of receiving information concerning the effective- Feedback the process
ness of one’s actions and performance. of receiving
information focused
on the effectiveness
THEORY INTO PRACTICE of one’s actions and
performance.
Mutual engagement can be enhanced when top management feeds back to
employees what it has learned from the diagnostic process and uses that feed-
back as an opportunity to generate more learning.

The entire diagnostic process involves feedback, of course. By receiving


data from the organization about performance and about the manner in which
various organizational elements align, or do not align, in order to implement
strategy, management benefits from rich and valuable feedback. In the discovery
phase, management receives feedback not just about the particulars uncovered
through data collection but also about the perceived meaning, importance, and
performance implications of that data.
Feedback can also occur following discovery. Managers can report to
employees on the conclusions reached as part of that process and on the plan of
action intended to address what has been learned. When groups of employees
participate directly in collecting data, the feedback loop can be closed directly if
upper management communicates directly with those participants.
As top management reports its conclusions, mutual engagement can con-
tinue as employees react to the plan of action. The feedback loop can thus become
continuous and ongoing. Two mechanisms advance the feedback process:19
1. The feedback from the top management group empowered to lead the
change can occur in face‐to‐face sessions in order to increase the richness of
68 Chapter 3

the process as well as to create responsibility and accountability for taking


actions.20
2. The learning from the discovery process as well as the change plans that
result can be presented as tentative rather than final, thus inviting addi-
tional dialogue and discovery.
Closing the feedback loop will work to keep mutual engagement continu-
ous during the change process.

Building a After‐Action Reviews


Vocabulary of
Change A form of mutual engagement and diagnosis that has become popular in recent
After‐action review years involves a process of looking back. In an after‐action review (AAR), organi-
(AAR) an organized, zations take an “action” that has just occurred—some event of strategic import—
disciplined approach
and diagnose the dynamics of that action. The goal is to engage participants in a
to shared diagnosis
and mutual dialogue “just‐in‐time diagnosis” that leads to quick performance improvement.
in the immediate An example of such an AAR occurred when Wall Street firm Wills &
aftermath of a Somerset fumbled a potential contract with a large corporate client. Wills
specific action or & Somerset CEO Carol Peters expressed frustration, of course, but also deter-
event.
mination. The client was scheduled to ask for a new bid in six months. To
make sure that Wills & Somerset would be better positioned to succeed this
time around, she called on all the participants in the past effort to engage in an
AAR. The cause of the problem emerged quickly. Sales and technical support
had been unable to agree on either the scope of the product they were devel-
oping for a specific client. As a result, the price quoted to the client fluctuated
wildly from week to week, meeting to meeting. Worse still, the lead salesper-
son had been unable to explain to the client just what the cost drivers were
and why the price had been so difficult to fix. This insight was not a solution,
of course. But the AAR helped point Wills & Somerset set a direction for
needed change.
First developed by the U.S. Army at the Center for Army Lessons Learned,
AARs are a structured effort to collect data, identify deficiencies, sustain posi-
tives, and improve performance.21 The army’s own definition is instructive,
labeling the AAR “a professional discussion of an event, focused on performance
standards, that enables soldiers to discover for themselves what happened, why
it happened, and how to sustain strengths and improve on weaknesses.”22 In
particular, the AAR offers an approach to shared diagnosis and mutual engage-
ment that attempts to compress the elapsed time between action, learning, cor-
rection, and new action. For Wills & Somerset, the need to learn was pressing.
For soldiers involved in military operations, that need is even more urgent.
The AAR is based on the premise that a lesson is not “learned” unless and
until it leads to new behaviors. The review follows the principles of shared diag-
nosis and mutual engagement by involving those who participated directly in
the “action”—in the case of Wall and Somerset, those individuals involved in
putting together the proposal to the client—in gathering and interpreting data
and then building an action plan for future success. Because those involved in
the initial action are also engaged in the analysis and planning, their commit-
ment to future improvements are enhanced.
Mutual Engagement and Shared Diagnosis 69

The specifics of the army’s AARs involved eight key components:


1. The review takes place either during or immediately after the event under
study.
2. The review starts with a shared understanding of the objectives and aims of
the event.
3. The review focuses on the overall performance of the targeted group.
4. The review is conducted by the participants in the event.
5. The review is governed by open‐ended questions such as What occurred?
Why? What can we do about it?
6. The review identifies strengths and weaknesses.
7. The review leads to new actions.
8. The lessons of the review become part of future training.23
In any organizational setting—whether it be the army or a business firm—
the AAR approach to shared diagnosis and mutual dialogue offers an opportu-
nity to learn, interpret, and act quickly. Wills & Somerset was able to overcome
internal barriers to collaboration by forming a small cross‐functional engage-
ment task force and offer a successful rebid. Although AARs are, by definition,
sharply focused on specific actions and activities, the resulting learning can be
amassed by organizations as a way of sharing learning.

THEORY INTO PRACTICE

After‐action reviews provided an opportunity for a sharply focused and


timely mutual engagement that can lead to quick corrections.

Conclusion
If the need for change is urgent, executives may Creating a dialogue within the organiza-
be tempted to rush toward a “solution.” That tion is hampered by many organizational fac-
instinct, while understandable, is likely to harm tors. Power distance encourages participants
the effectiveness of the change implementation to filter information rather than to be com-
process. Mutual engagement in dialogue and pletely open. Organizational silence discour-
diagnosis helps generate vital data. The process ages honesty and must be overcome by
can also create commitment to learning and organizational leaders. Only by creating a
motivation to change on the part of participants, sense of psychological safety will employees
while building diagnostic competencies into the willingly engage in a candid exchange of infor-
organization. mation and insight concerning the perfor-
In order to target the performance of the mance of the organization.
entire organization and its ability to implement Once dialogue and diagnosis have been
a renewed strategy, diagnosis can be shaped engaged, implementation can proceed. Dialogue
and guided by a systemic framework. With the and diagnosis likely will target patterns of
facilitation of a consultant, employees can behavior, asking if employees at all levels of the
engage in data collection and a dialogue of dis- organization are enacting their roles and respon-
covery concerning those elements and their fit sibilities in a way that is aligned with the
with each other, with the strategy, and with the demands of the strategy and the requirements
external environment. of outstanding performance. The ability of an
70 Chapter 3

organization to create and sustain a climate of the values of that organization’s managers.
openness and honest conversation depends a Chapter 4 will focus explicitly on an under-
great deal on the culture of the organization and standing of values and culture.

Discussion Questions
1. How might Carly Fiorina have planned her early 4. In what specific ways can an executive actively
efforts at Hewlett‐Packard? Pay particular atten- promote a sense of psychological safety among
tion to how she might have used the principles of employees to engage them in an honest conversa-
mutual engagement and shared diagnosis. tion about performance?
2. What are the potential advantages of relying on a 5. How might the three forms of data collection be used
systemic framework for guiding diagnosis? Are together in the opening stages of a change process?
there any potential disadvantages? 6. How can an organization make sure that diagno-
3. Why is open dialogue so difficult to achieve in sis becomes a regular and ongoing element of the
many organizations? way it does business?

Case Discussion
Read “Managing Transformation at National Computer 2. How could Finnvold conduct an organizational
Operations” and prepare answers to the following questions: diagnosis that would lead off his implementa-
1. Prepare an implementation plan for change that tion? Be specific about how he could ensure
would enable Gar Finnvold to create a fully com- mutual engagement.
petitive computer service within two years.

MANAGING TRANSFORMATION AT NATIONAL


COMPUTER OPERATIONS
Gar Finnvold knew his organization needed to change, to transform itself over
the next two years. His 1,000 employees had enjoyed for their entire careers what
amounted to monopoly status. They had been the exclusive provider of com-
puter support services to the immense, global enterprises of the U.K.‐based
National Banking Group. All that was about to change. National Bank’s newly
appointed chairman had decreed that, starting in two years, all bank operations
would be free to purchase their computer services from any vendor who could
supply excellent value. Finnvold’s operation would be competing against the
best in Europe. At the same time, Finnvold would be free to market his computer
operations on the outside, to build a customer base external to the bank.
Finnvold’s excitement at the challenge of transforming his National
Computer Operations (NCO) into a truly world‐class competitor was matched
by his anxiety (see Exhibit 3‐6 for a partial organization chart). As the longtime
manager of computer operations, he understood only too well that NCO was
unprepared to compete, not internally and certainly not externally. Internal bank
customers had complained for years of the high‐cost/low‐responsiveness culture
Mutual Engagement and Shared Diagnosis 71

G. Finnvold
Managing Director

N. Krasna H. Ramos M. Gold P. Petit P. Chereau L. Rubio


Manager Manager Chief Manager Manager Manager
Operations Support Financial Branch Distributive Service
Services Officer Services System Delivery

EXHIBIT 3-6 Partial Organization Chart—National Computer Operations.

of the NCO. Buffered by their monopoly status, NCO’s computer technicians


didn’t worry much about whether the customer perceived them as providing
value. We understand better than the customer both what that customer needs
and how much they should be willing to pay for it. We’ll define value.
In two years, Finnvold knew that equation would be reversed. Given a
free-market choice to seek the best provider of computer services, would they
re‐up with NCO? Not likely, he thought.
At least inside the bank, NCO enjoyed a substantial cost advantage over
potential external interlopers. National tax laws exempted bank operations from
having to pay a nearly 20 percent tax on internally provided services. That tax
advantage evaporated when NCO left the safety of the bank to hunt external
customers.
What’s more, no one at any level in NCO possessed real general management
experience. No one, Finnvold included, had ever run a freestanding commercial
enterprise with all that implied: managing costs, customers, and operations within a
fiercely competitive environment. Was two years even close to enough time to
undergo the radical transformation required to make such a venture successful?

NCO Operations
Listen to how Peter Kapok, a longtime NCO manager, described what his orga-
nization was like in the 1990s: “We weren’t client oriented. We very much told
our clients what they could and couldn’t have. We came to work for ourselves
and did pretty much what we wanted. We simply didn’t consider ourselves
working for a client.” The notion that customers might define the ultimate value
of their services was alien to NCO.
Henri Vieuxtemps, who entered the computer operations in 1988, recalled
his amazement at how little the operation resembled a true business. “What sur-
prised me,” he said, “was that money was no object. Service was not a major
consideration.” What might be called the arrogance of technology permeated
NCO’s approach to the business. “We spent money on technology that really
didn’t matter,” continues Vieuxtemps, “not to the customer anyway. It was just
something that appealed to us. In fact, we didn’t think of internal clients as cus-
tomers at all. They were just other departments in the bank.”
72 Chapter 3

Vieuxtemps may have believed that the culture of NCO was fundamentally
flawed, but to many of his fellow managers, things were going quite nicely.
National Bank, after all, had eliminated the need for NCO to respond to market
forces. Think of the situation in which NCO found itself: Guaranteed customers
who would always cover the costs that the computer operation passed along,
assured profitability.
It’s little wonder that for most of NCO’s managers, effectiveness was not mea-
sured by organizational performance or client satisfaction. Their focus turned
inward instead. How can I build up my functional domain? Enhance my personal career?
“We were an organization of little empire builders,” Kapok observed. “The
more people you had working for you, the more likely you were to get promoted.
There were few performance measures, and almost no coordination of our
efforts.” The functional silos of the organization were so powerful, said Kapok,
that NCO’s own staff “didn’t quite consider ourselves working for the same
operation. If someone from one unit went to someone from another to ask for
help, they were considered a nuisance. We certainly never considered the impact
of any of this on our costs.”
NCO’s high spending, “customer—what customer?” attitude could only
lead to resentment on the part of client operations within the bank. That resent-
ment finally boiled over into open rebellion. The bank’s new chairman hired a
consulting firm to evaluate internal computer operations. The findings were as
disturbing as they were predictable. “They confirmed our worst fears,” recalled
an NCO manager. “We were moribund.”
Until the consulting report provided irrefutable evidence to the contrary,
computer operations managers felt they did an excellent job of providing these
services to the bank. “If you had asked us how we were doing,” admitted Gar
Finnvold, “we would have said, ‘We meet our customer service levels most of
the time. We are improving our unit costs year‐on‐year. And of course we’re add-
ing value.’ ” It was only later that Finnvold came to recognize that customers
held a view of NCO’s effectiveness that stood in diametric opposition to the
opinion of NCO’s managers. “Our customers were saying, ‘You’re too expensive.
Your damn system is always breaking down. And what added value?’ ”
At the time of the consulting report, computer operations were billing
approximately $240* million annually (within an overall annual information
technology expenditure of $1.5 billion), almost entirely to internal bank custom-
ers. Although NCO offered myriad services, including processing, project man-
agement, and technical support and consultancy, they pointed with pride to two
distinct competencies. The first was facilities management. “NCO can take the
responsibility for all or part of a company’s Information Technology require-
ment,” announced their official literature, “which can include every aspect from
providing the workforce and premises to the systems and services.” The second
vital core competency was disaster recovery. “NCO provides planning and
backup facilities for unforeseen crises or disasters such as fire and flood. Planning
and backup facilities can be provided either separately or together and can be
offered in either a ‘hot start’ or ‘cold start’ environment.”

*
Figures given in equivalent U.S. dollars.
Mutual Engagement and Shared Diagnosis 73

The Challenge
The bank’s new chairman quickly recognized that NCO customers and managers
held completely different views of value. He knew that his first task was to force
NCO managers to adopt the customer perspective. The way to do that, he rea-
soned, was to inject market forces into NCO’s protected, monopoly‐like world.
Using the consulting report as a driver, he first designated NCO as a profit
center. He made clear that NCO would be expected to pare costs severely. Within
a year, NCO dramatically downsized its workforce from 1,500 to 1,000. The chair-
man then called on Gar Finnvold to oversee more sweeping change, change that
would be governed by two new ground rules:
1. NCO could actively and aggressively market its services to external cus-
tomers.
2. In two years, all of the bank’s internal units would be allowed to purchase
computer services from outside vendors.
NCO, in other words, would have to become fully competitive in order to
survive.
Finnvold said he welcomed the challenge, particularly the notion of becom-
ing a true market competitor. “I had this gut feel that we should try to sell exter-
nal from day one,” he said. “If we didn’t, we’d never learn the lesson of what
being commercial is all about. It was the way out of our cocooned environment.”
He believed that there were external customers waiting to snatch up NCO’s ser-
vices. The facilities management business was expected to grow 50 percent annu-
ally worldwide. NCO planned on being part of that growth. “We thought we
really had things to sell and that we were the best,” said Finnvold.

Endnotes
1. Information on Hewlett‐Packard is from Peter Journal of Counseling and Development 71 (July–
Burrows, Backfire: Carly Fiorina’s High‐Stakes August 1993), pp. 642–650.
Battle for the Soul of Hewlett‐Packard (New York: 4. See, for example, Paul E. Lawrence and Jay
Wiley, 2003) and George Anders, Perfect Enough: Lorsch, Developing Organizations: Diagnosis and
Carly Fiorina and the Reinvention of Hewlett‐ Action (Reading, MA: Addison‐Wesley, 1969);
Packard (New York: Penguin Putnam, 2003). Jay R. Galbraith, Designing Complex Organizations
2. Hurd quoted in Laurie J. Flynn, “Hewlett Chief (Reading, MA: Addison‐Wesley, 1973); David A.
Has No Plans but Says All Is on the Exhibit,” Nadler and Michael L. Tushman, “A Diagnostic
New York Times, March 31, 2005, p. C11. In 2010, Model for Organizational Behavior,” in Edward
Hurd himself was asked to resign as the result E. Lawler and Lyman W. Porter, eds., Perspectives
of a sexual harassment probe. The board soon on Behavior in Organizations (New York: McGraw‐
hired Leo Apotheke to replace Hurd. Apotheke Hill, 1977); Michael B. McCaskey, “A Framework
had been CEO of SAP until he was asked to for Analyzing Work Groups,” in Leonard A.
resign by the German software giant’s board. Schlesinger, Robert G. Eccles, and John J.
3. Many of the concepts in this chapter are based on Gabarro, eds., Managing Behavior in Organizations:
Michael Beer and Bert Spector, “Organizational Text, Cases, Readings (New York: McGraw‐Hill,
Diagnosis: Its Role in Organizational Learning,” 1983), pp. 4–24.
74 Chapter 3

5. David A. Nadler, “Role of Models in Organi- A. Adler and Peter Adler, “Observation
zational Assessment,” in Edward E. Lawler III, Techniques,” in Norman Denzin and Yvonna S.
David A. Nadler, and Cortlandt Cammann, Lincoln, eds., Handbook of Qualitative Research
eds., Organizational Assessment: Perspectives on (Newbury Park, CA: Sage, 1994), pp. 377–392;
the Measurement of Organizational Behavior and James P. Spradley, Participant Observation (New
the Quality of Work Life (New York: Wiley, 1980), York: Holt, 1997).
pp. 125–126. 16. David A. Nadler, Feedback and Organization
6. Elizabeth Wolfe Morrison and Frances J. Milliken, Development: Using Data‐Based Methods
“Organizational Silence: A Barrier to Change (Reading, MA: Addison‐Wesley, 1977).
and Development in a Pluralistic World,” 17. Beer and Spector, “Organizational Diagnosis.”
Academy of Management Review 25 (October 2000), 18. Michael I. Harrison and Arie Shirom,
pp. 706–725; James R. Detert, Ethan R. Burris, Organizational Diagnosis and Assessment:
and David A. Harrison, “Debunking Four Myths Bridging Theory and Practice (Thousand Oaks,
about Employee Silence,” Harvard Business CA: Sage, 1999), p. 25.
Review (June 2010), p. 26. 19. Beer and Spector, “Organizational Diagnosis,”
7. Moskal, “Is Industry Ready for Adult p. 648.
Relations?” 20. See also Nadler, Feedback and Organization
8. Richard E. Walton, Interpersonal Peacemaking; Development.
Confrontations and Third‐party Consultation 21. The material on after‐action reviews comes from
(Reading, MA: Addision‐Wesley, 1969). Department of Army, A Leader’s Guide to After‐
9. Beer and Spector, “Organizational Diagnosis.” Action Reviews . (Training Circular 25‐20)
10. In a previous edition of the text, the source of (Washington, D.C.: Headquarters, Department
this questionnaire was misidentified. Thanks to of Army, September 1993); Lloyd Baird, John C.
Professor Preziosi for calling our attention to Henderson, and Stephanie Watts, “Learning
the error and allowing us to use the properly from Action: An Analysis of the Center for Army
attributed questionnaire. Lessons Learned (CALL),” Human Resource
11. Jack K. Fordyce and Raymond Weil, “Methods Management 36 (Winter 1997), pp. 385–395; Paul
for Finding Out What Is Going On,” in Wendell Wright, “Learn as You Go Through the After
L. French, Cecil H. Bell, Jr., and Robert A. Action Review,” Knowledge Management Review
Zawacki, eds., Organization Development: (March–April 1998), pp. 4–6; Lloyd Baird, Phil
Theory, Practice, and Research (Dallas, TX: Holland, and Sandra Deacon, “Imbedding More
Business Publications, Inc., 1978), p. 121. Learning into the Performance Fast Enough to
12. Andrew O. Manzini, Organizational Diagnosis: Make a Difference,” Organizational Dynamics
A Practical Approach to Company Problem Solving (Spring 1999), pp. 19–32; Marilyn J. Darling and
and Growth (New York: AMACOM, 1988), p. 39. Charles S. Parry, “After‐Action Reviews: Linking
13. Beer and Spector, “Organizational Diagnosis.” Reflection and Planning in a Learning Practice,”
14. E. E. Lawler, D. A. Naddler, C. Cammann, Reflections 3 (2001), pp. 64–72.
Organizational Assessment, pp. 337–343. 22. A Leader’s Guide to After‐Action Reviews, p. 1.
15. See, for example, Severyn Bruyn, The Human 23. Based on Wright, “Learn as You Go,” p. 4.
Perspective in Sociology: The Methodology of 24. All names are disguised. This case is based on
Participant Observation (Englewood Cliffs, NJ: the research conducted for Bert Spector, Taking
Prentice‐Hall, 1966); Robert Bogdan, Participant Charge and Letting Go: A Breakthrough Strategy
Observation in Organizational Settings (Syracuse, for Creating and Managing the Horizontal
NY: Syracuse University Press, 1972); Patricia Company (New York: Free Press, 1995).
CHAPTER

4 Organizational Redesign

D iagnosis exposes the current realities of organizational life, with particular attention to the
fit between patterns of employee behavior and the strategic requirements of the firm, to
discussion and analysis. Combined with mutual engagement, diagnosis provides both the
motivation for and target of change. Now, employees can engage in a process of organizational
redesign to help shape required new behaviors. Redesign provides a sense of direction for
the change effort.
This chapter will analyze the complexities of design choices made to support change
implementation. In particular, this chapter will:

• Define organizational design and differentiate between formal and informal design
elements
• Explore the main challenges posed by organizational redesign
• Appreciate the special design challenges faced by multinational companies
• Analyze the requirements for building collaboration in an organization
• Discuss the dynamics of changing the design of an organization in order to impact
patterns of behavior

First, we will look at the design challenges faced by the CEO of one of the world’s oldest
and largest humanitarian organizations. As you read this introductory case, ask yourself:
• Why was the original, decentralized design of CARE less effective in addressing 21st
century issues than it had been in CARE’s earlier years?
• What do you think the challenge will be in promoting collaboration across national units
of CARE?
• What steps might Dr. Helene Gayle take to promote the improvements she hopes for?

75
76 Chapter 4

DR. GAYLE BRINGS COLLABORATION TO CARE


CARE, one of the world’s leading nongovernmental organizations, was created
to provide aid to devastated European countries in the immediate aftermath of
World War II. When Dr. Helene Gayle became CEO in 2006—after working at
both the Center for Disease Control and the Bill and Melinda Gates Foundation—
the mission had changed considerably. Under the broadly stated mandate of
“Defending Dignity, Fighting Poverty,” CARE expanded its reach. The organiza-
tion described its new mission this way:

CARE is a leading humanitarian organization fighting global poverty.


We place special focus on working alongside poor women because,
equipped with the proper resources, women have the power to help
whole families and entire communities escape poverty. Women are at
the heart of CARE's community-based efforts to improve basic educa-
tion, prevent the spread of HIV, increase access to clean water and
sanitation, expand economic opportunity and protect natural
resources. CARE also delivers emergency aid to survivors of war and
natural disasters, and helps people rebuild their lives.1

Dr. Gayle believed, however, that CARE was better designed to serve its
past mission than its future opportunities.
The organization Dr. Gayle found when she became CEO was designed in
a way that maximized the autonomy of country offices: France, Germany, Italy,
and so forth. “The country officers raised most of their own funds and were used
to being on their own,” she explained, “having a lot of autonomy, and not think-
ing about the greater whole.”2 The managers in the organization were “comfort-
able” with that highly decentralized design, but Gayle believed the approach
undermined CARE’s effectiveness. Now, the organization had to learn how to
collaborate across national borders. “To do that,” she said, “we had to ask, ‘How
do we make the whole greater than the sum of its parts?’” The organizational
change would require both improved information sharing across country units
and more rigorous measurement of results to evaluate effectiveness.
One of CARE’s first efforts at cross-country collaboration involved a project
called Access Africa. That microfinance program (making small loans to encour-
age entrepreneurial efforts in poverty regions) was a 10-year investment commit-
ment targeting 39 sub-Saharan African countries with a combined population of
150 million. “In 10 years,” Gayle noted, “we’d like to be able to look back and say,
‘Wow, this is very different than if we had continued to function as separate coun-
Building a try units.’” Still, she could not deny the challenge of implementing this change.
Vocabulary of
Change
Organization design ORGANIZATIONAL REDESIGN
the arrangements,
both formal and In order to address the challenges of global poverty, Dr. Helene Gayle needed to
informal, that an encourage collaboration among formerly independent national units of CARE.
organization calls
upon in order to
To achieve that goal, she addressed organizational design. Organization design
shape employee refers to the arrangements, both formal and informal, that an organization calls
behavior. upon to help shape employee behavior (see Exhibit 4-1).
Organizational Redesign 77

EXHIBIT 4-1
Design Elements.
Formal • Compensation and measurement
• Reporting structures

Informal • Defining roles and responsibilities of employees


• Defining relationships within the organization and between
the organization and external stakeholders

Formal aspects of design include rewards and performance measurements


as well as the reporting relationships depicted on an organization chart. Informal
aspects of design relate to how people perform the required tasks of the organi-
zation and how they collaborate and work with others, both inside the organiza-
tion (within their own groups as well as across groups and functions) and outside
(with suppliers and customers, for instance). Informal design addresses ques-
tions of focus and coordination, of where decision-making authority will be
located, and the necessary balance between the requirement for flexibility and
the need for control.

Changing Informal Design First


Effective change implementation separates the two aspects of design, targeting
informal design before seeking to alter formal design.3

THEORY INTO PRACTICE

Effective change implementation starts with informal rather than formal


design changes.

That distinction between informal and formal designs can, at times, be con-
fusing. Job design is informal, although job descriptions are formal. Expecting
individuals to work collaboratively is informal, although paying them based on
joint outcomes is formal.
To appreciate the distinction between formal and informal design elements,
we can return to the case of ASDA from Chapter 1. Facing bankruptcy as the
result of poor strategic decisions made by its leadership team, the chain’s board
brought in a new CEO with the goal of revitalization. The CEO and his top team
elected to place their hopes for the revival of the chain in the hands of the 205
store managers, those responsible for making sure that the stores met the expec-
tations of their customers while increasing revenues.
In the earliest stages of ASDA’s transformation, store managers were asked
to spend more of their time and energies looking outside of the store—at their
customers and competitors—rather than inside. Stop being supervisors and start
being strategic leaders; that was the direction provided by the company. In order to
succeed, they would have to push more and more responsibility down to the
individual department managers.
78 Chapter 4

The roles and responsibilities of store managers changed dramatically.


However—and here is the point—nothing in the formal design system changed,
at least not at first. Job descriptions were not rewritten; pay systems were not
changed; reporting relationships were not altered; measurement systems
remained the same. Over time, those formal structures would all be altered, but
not in the early stages of the process.
At the beginning, nobody in the company knew exactly what the store
manager job would evolve into; they only knew it would be changed. Informal
redesign—new definitions of how the store manager job would be played out—
created a fluid, even experimental situation. Different roles were tried out as
transformation moved from one store to the next.
Informal design fits more effectively at the early stages of change precisely
because it is informal. No policies or procedures are altered. Nothing is written
in stone or committed to formal documents. Instead, informal design involves
experimentation, trying out new roles.
What will work? What will not work? Helene Gayle did not alter the orga-
nization chart at CARE. Reporting relationships remained unchanged. Instead,
she focused on informal redesign—redefining roles, responsibilities, and rela-
tionships—in order to create greater cross-border collaboration. At a later stage,
when new behaviors have been instilled, formal structures and systems can be
changed, if required, to reinforce and institutionalize those behaviors.

Piloting Redesign
Design choices represent an attempt by organizational leaders to address the chal-
lenges inherent in managing in dynamic environments. Shifting customer expecta-
tions, disruptive technologies, new competitors, and renewed strategies provide the
impetus for redesign. If all those elements remained the same, then the design that
worked effectively in the past would continue to prove useful in the future.
However, a truly static environment does not really exist. New competitors
enter and exit the marketplace. New technologies replace existing processes.
Customer expectations shift. Companies age; they expand and contract.
Building a
Vocabulary of
Strategies change. No design solution, no matter how useful it may be at any one
Change time, is impervious to the need for change.
Organizational Changing an organization’s design, a process known as organizational
redesign the process redesign, presents its own set of implementation challenges. Optimally, redesign
of changing an occurs in a systemic and strategic way: aligning multiple design elements with
organization’s
informal design in
the renewed strategy of the firm. Often, however, organizational leaders embark
response to shifting upon redesign in a much more haphazard, piecemeal manner.
dynamics in the
organization’s
environment. THEORY INTO PRACTICE

The most effective way to change organizational design is to be systemic and


strategic rather than piecemeal and haphazard.

Why is it that leaders often approach redesign in such a suboptimal way?


For one thing, comprehensive redesign can be intimidating. Write Michael Goold
Organizational Redesign 79

and Andrew Campbell, “It’s immensely complicated, involving an endless


stream of trade-offs and variables.”4 In addition, organizational redesign can be
divisive, often pitting individuals against each other and devolving into power
plays.5 Dr. Gayle admitted that country unit managers at CARE were “comfort-
able” with the current design. Organizational leaders may prefer to avoid the
potential for discomfort and confrontation inherent in comprehensive redesign.
Given the potential for discomfort, it is not surprising that executives
often stick with their existing designs long after shifting circumstances seem
to demand change. They may tinker, making marginal design change, while
leaving the core of the organization intact. The status quo had worked well for us
in the past, they may conclude. Why stir up all the potential conflicts in order to
change?6
In a dynamic environment, commitment to past design arrangements can
undermine organizational effectiveness. CARE’s broadened scope, for instance,
required greater collaboration across national boundaries. When a diagnostic
intervention reveals that existing design arrangements undermine performance,
organizational leaders may wish to avoid that potential trap and decide that the
negative performance consequences outweigh any perceived “advantage” of
conflict avoidance.
The requirement for strategic change poses what seems to be a dilemma.
Organizational redesign, to be effective, targets the entire organization. Targeting
an entire organization is difficult, however. In a large, complex company, it is
downright impossible. The way out of this apparent dilemma is through change
pilots. Note that Dr. Gayle did not target all of CARE’s activities for change.
Rather, she focused attention on a single—albeit a bold—project: Access Africa. Building a
Likewise, Duke University’s Children’s Hospital (Chapter 2) focused its initial Vocabulary of
transformation on a single unit: pediatric intensive care. Change
In both cases, leaders utilized change pilots: individual units or processes Change pilots small
that can provide the opportunity for change. They are, in essence, change labora- units or specific
processes that can be
tories: opportunities to try things out, experiment, and learn. targeted at the early
stage of change
implementation to
THEORY INTO PRACTICE experiment and
learn.
When implementing change, seek early “wins” through pilot projects.

Change pilots offer the opportunity to engage in systemic change within a


small, contained unit. In selecting a target for early pilots, organizational leaders
can consider the following characteristics:
• Select a self-contained unit with clear and measurable outcomes.
• Select a unit or process of strategic importance to the company.
• If the organization’s strategy is changing, select a unit that exemplifies the
desired future state.
• Most importantly, select a unit or process where success is most likely.
Early successes can build credibility and momentum, leading to more
widespread transformation.
80 Chapter 4

THEORY INTO PRACTICE

In selecting change pilots, select units where the change is most likely to be
successful.

An understanding of the key issues involved in informal design will help


focus the attention of leaders, so let us turn next to an analysis of those key infor-
mal design elements that will be addressed in a change process.

UNDERSTANDING DESIGN CHALLENGES


Although all organizations are unique in terms of purpose and strategic direc-
tion, they face some common design challenges:
• All organizations require some level of differentiated activities: focusing on
different tasks and customers and operating in different competitive envi-
ronments.
• At the same time, integrated activities will provide organizations with the
benefits of efficiency and the ability to move knowledge and resources
across and around their various activities and units.
• All organizations, regardless of their histories, strategies, and competitive
environments, rely on some type of control mechanisms to help shape em-
ployee behaviors. They need to deploy control mechanisms, however,
without losing requisite levels of creativity and innovative response from
the employees whose behaviors they are attempting to influence.
• All organizations must decide how and where to allocate decision-making
rights and responsibilities.
Before embarking on a change implementation effort, organizational leaders
need to appreciate these three challenges: the challenge of integration and differ-
entiation, of control and creativity, and of allocating decision-making rights.

The Challenge of Differentiation and Integration


To understand the challenge of differentiation and integration, we can turn to the
shifting strategic choices made by management at SAP America.7 SAP America
is a subsidiary of Germany-based SAP AG, producer of the integrated software
architecture that dominated the enterprise systems market.
The American division faced a number of organizational challenges. Its
U.S.-based strategy supported growth through highly autonomous regional
markets. Each region developed its own processes and procedures for selling
and supporting SAP software. SAP’s products, however, developed a reputation
in the marketplace for being expensive, complex, slow to install, and confusing
to maintain.
New SAP America president Jeremy Coote felt the need to focus on sup-
porting customers. In particular, he was convinced that SAP’s professional
consultants, whose job it was to help clients plan, install, and support the systems,
Organizational Redesign 81

needed to share knowledge and coordinate their efforts across the regional mar-
kets. Customer service, in his view, was not a regional challenge; it was national.
Here is where past design decisions—especially the heavy emphasis on
regional autonomy—provided a barrier. Regional autonomy offered flexibility in
response to local customers. At the same time, it hampered coordinated national
consulting support. SAP’s consultants from different regions failed to share
experiences and learning with each other. Consultants responded to the same
customer issues in the Northeast and Southwest, for instance, without communi-
cating with each other or sharing knowledge. It was like reinventing the wheel
when a customer problem arose in, say, St. Louis. Even though the same problem
had been dealt with effectively in Phoenix, that experience had remained local.
The St. Louis folks had to address the problem as if they, and the company, had
no experience with it.
In order to encourage sharing, Coote focused on his existing group of pro-
fessional consultants. After collecting performance data from the regions and
setting goals for the upcoming year, he worked with his newly hired national
manager of professional consulting to redefine responsibilities while defining
nationally agreed-upon consulting roles. SAP also involved consultants at an
early stage of all new product development and implementation plans.
SAP America made a strategic choice early in its U.S. operation: to empha-
size regional autonomy as a way of spurring rapid growth. The idea—an idea
that, the evidence indicates, was perfectly valid—allowed regional managers to
Building a
focus their resources and shape their responsiveness to match the particular Vocabulary of
needs of their regional customer base. Change
To pursue that strategy, SAP created a design high in differentiation, which Differentiation the
refers to the degree to which different functions, departments, and units in an degree to which
organization are allowed to develop their own approaches in response to their different functions,
departments, and
particular goals and unique competitive environments. units in an
organization are
allowed to develop
THEORY INTO PRACTICE
their own
approaches in
Use high differentiation to enable different functions, departments, and units response to their
in an organization to develop their own responses to their particular goals particular goals and
and unique competitive environments. unique competitive
environments.

Paul Lawrence and Jay Lorsch’s classic study, Organization and Environment
(1967), defined the dynamics and challenges of differentiation and integration.8
Highly differentiated designs, they found, become reinforced not just in terms of
distinctive processes and procedures, but also in terms of cognitive and emo-
tional orientation of employees. Comparing one highly differentiated unit to
another, they found that individuals within those units not only worked differ-
ently but also thought and behaved differently. Individuals who work in functions
such as manufacturing, engineering, marketing, and finance, for instance, think
differently about how to approach problems and evaluate potential solutions.
These differences should be embraced rather than avoided; they are part of what
helps an organization think and act in a creative way.
82 Chapter 4

EXHIBIT 4-2
Dimensions of
Goals A sales function may have the goal of increasing revenues,
Differentiation.
while a manufacturing function may have the goal of
reducing costs.
Time orientation A research department will likely have a long-term
orientation toward research and development, while a sales
function will want new products that it can sell by the end of
the quarter.
Interpersonal style Research scientists might believe that they can maximize
creativity and contribution by focusing all their individual
attention on their task, while manufacturing managers might
desire to create rich interpersonal relationships among key
individuals to maximize quality.
Formality An assembly operation is more likely to be governed by
tight rules and strict procedures, while a research and
development laboratory would find such rules stifling to
creativity.

Because of the particular and differing nature of the tasks, each unit devel-
ops its own way of working, of thinking, and of behaving. Exhibit 4-2 presents
the four distinct dimensions of differentiation. In complex organizations, differ-
entiation relates not just to functional distinctions but also to product and/or
geographic divisions. We saw that in SAP America, where consultants within
each region developed their own patterns of thinking and behaving in response
to local customers.
Differentiation is necessary, even helpful. It does raise its own challenges,
however. After all, the differentiated parts must also work together if the overall
organization is to perform at an exceptional level. Here’s one example. With
Christmas orders poured into a large retail toy business over the Internet, the
traditional functions of logistics, warehousing, and distribution strained to the
breaking point, causing a near disaster in customer relations. The manager of
the e-business unit was stunned that the rest of the organization was surprised.
“They acted as if they weren’t expecting a Christmas surge,” complained the
e-business managers, while “they”—the managers of the more traditional func-
tions—retorted, “It would have been helpful if they would have kept us in the
Building a
Vocabulary of
loop.”9 High levels of differentiation had not been matched with requisite inte-
Change gration.
Integration the Integration refers to the required level of coordination across differenti-
required level of ated functions, units, and divisions. Collaboration among differentiated units
coordination across must occur, conflicts must be resolved, and unity of effort must be achieved.
differentiated
functions, units, and
Within business units, differentiated functions can, and often do, fail to
divisions. achieve the required level of integration. The same is true for multiple divi-
sions in large corporations where poor coordination across business can
hamper efficiencies.
Organizational Redesign 83

Low High

Low differentiation In highly complex,


hampers an dynamic
High organization’s environments,
responsiveness to a effective firms
complex environment operate here
Integration

SAP America’s
Low consulting service
was operating here

Differentiation
EXHIBIT 4-3 The Challenge of Differentiation and Integration.

THEORY INTO PRACTICE

Use integration to enable the organization to achieve efficient operations


among different functions, departments, and units.

THEORY INTO PRACTICE

Levels of differentiation need to be matched by appropriate levels of integration.

Differentiation is a relatively easy achievement for organizational design:


Most people respond positively to autonomy. But how is integration achieved?
A number of possibilities present themselves:
• Cross-functional teams to achieve integration across differentiated func-
tions. The challenge becomes even greater for complex, multiunit corpora-
tions
• Global teams to help with cross-national coordination
• A strong sense of common purpose and direction combined with a unified
commitment to core values and business strategy
• Common, well-understood values applied across different business units Building a
Vocabulary of
The particular challenges presented by multinational organizations will be Change
explored later in this chapter. Control design
choices called upon
to shape employee
The Challenge of Control and Creativity behavior in
alignment with the
A second design challenge relates to the apparently paradoxical requirements for requirements of
control and creativity. Control refers to design elements called upon to establish outstanding
order, create predictability, and ensure efficiencies of operation. Traditional performance.
84 Chapter 4

controls rely on a number of design features: fixed job descriptions with strict
individual accountability; close, watchful supervision; a heavy emphasis on
rules, procedures, and hierarchically based differences of status and authority;
pay incentives tightly linked to performance; and information distributed on a
strict “need-to-know” basis.10
Traditional controls are especially congruent with a business strategy that
emphasizes predictability and standardization. Explicit rules and procedures
will be useful when shaping consistent behaviors among employees. Fast-food
chain McDonald’s has achieved great success by proscribing in careful detail vir-
tually every movement and action of its behind-the-counter employees. Stephen
Robbins notes that United Parcel Service (UPS) drivers also follow strictly delin-
eated procedures: “It’s also no accident that all UPS drivers walk to a customer’s
door at the brisk pace of 3 feet per second and knock first lest seconds be lost
searching for the doorbell.”11 When the core tasks of an organization are largely
routine and repetitive, traditional control designs may be more than adequate
for the task.
Building a
Traditional controls, on the other hand, may hamper an organization’s abil-
Vocabulary of ity to achieve high degrees of flexibility and creativity. But organizations seeking
Change to enhance creativity and flexibility among employees cannot ignore controls.
Organic controls an Instead, they can call on organic controls: controls that rely less on specific rules
approach to shaping and procedures and more on shared values, clarity of organizational strategy, a
employee behavior
that emphasizes
common understanding about risks to be avoided, attention to performance out-
shared values, a comes, and expectations of interactive and open dialogue.
common
understanding of
strategy, loosely
THEORY INTO PRACTICE
defined roles and
responsibilities, and Traditional controls can create predictability and standardization but can
overall undermine creativity, flexibility, and collaboration.
organizational
performance.
Sun Hydraulics is a Florida-based company that designs and manufactures
screw-in hydraulic cartridge valves and manifolds for industrial and mobile
markets. This may seem like an industry that would lend itself to traditional
controls: lots of rules and procedures. Instead, since its founding in 1970, Sun has
leaned heavily on organic controls. “Our workplace is as distinctive as our prod-
ucts,” the company proclaims on its web page, “and provides just as many
advantages. We have no job titles, no hierarchy, no formal job descriptions, orga-
nizational charts or departments. We have open offices, promoting open com-
munication. Each member of our technologically skilled, cross-trained workforce
is trusted to take the initiative and invent new ways to serve you better.”12
Sun’s reliance on organic rather than traditional controls provides it with
both “a motivated work force” and a company “always on the lookout for emerg-
ing market needs and creating innovative ways to fill them.”13
Companies that use organic controls expect employee behaviors to be
shaped by company strategy and objectives as well as widely shared perfor-
mance information. And it is not just small, hi-tech companies. A number of
companies in a wide range of industries—Google, Southwest Airlines,
Nordstrom, United Services Automotive Association, W.L. Gore, and Sun
Organizational Redesign 85

Hydraulics among them—have decided that greater reliance on organic controls


will increase the capability of employees at all organizational levels to serve cus-
tomers, improve their satisfaction with their work, and reduce employee turn-
over—all of which will lead directly to improved customer satisfaction and
enhanced competitiveness.

THEORY INTO PRACTICE

Organic controls, which are intended to increase employee flexibility and cre-
ativity, rely on shared values and clarity about overall strategy and perfor-
mance expectations.

The Challenge of Allocating Decision-Making Rights


At what level of the organization are decisions made about how to allocate
resources, what businesses to be in, when and how to enter new markets, or
what strategies to pursue? How about deciding what discount to give to a
favored customer, which supplier to use, or how to create work schedules in
order to meet a pressing order?
All of these decisions must be made somewhere in the organization.
However, because they represent different levels of decision making, they are Building a
likely to occur at different levels of the organization. Vocabulary of
Organizations have multiple points of decision making. The question of Change
who makes what decision is therefore a key design challenge. Decision-making Decision-making
rights the
rights involve what Nitin Nohria describes as “the rights to initiate, approve,
determination of
implement, and control various types of strategic or tactical decisions.”14 The who should make
ideal design, Nohria adds, is one that grants decision-making rights to those what decisions in
“who have the best information relevant to the decision.”15 organizations.
Just where does the “best information” reside? That is a judgment call for
organizational leaders to make. That call can be based on a combination of com-
pany values and strategic intent. When Robert McDermott became CEO of
United Services Automotive Association (an insurance company serving current
and past U.S. armed forces officers and their families), he decided on a strategy
that would convert customers into partners. That strategy would, he believed,
take full advantage of the nature of his customer base.
In order to implement his planned strategic renewal, McDermott placed
considerable discretionary decision-making rights in the hands of employees at
the lower end of the traditional hierarchy. Telephone receptionists, for instance,
had a great deal of liberty concerning how to deal with clients who phoned in
their claims. Granting decision-making rights to individuals who dealt directly
with customers, McDermott reasoned, would create a codependent bond with
customers and improve performance.
Pushing down operational decision making to employees with the “best
information” is intended to unleash motivation and creativity. At the same time,
McDermott recognized that allocating decision making to frontline employees
needed to occur within a controlled environment. The controls that McDermott
86 Chapter 4

designed were organic in nature, placing special emphasis on “the necessary


education and training base” to support that allocation.16 Clarity of purpose and
strategy, and of values and performance expectations can support the allocation
of decision-making rights to lower hierarchical levels.

THEORY INTO PRACTICE

Allowing frontline employees to make autonomous decisions is intended to


unleash motivation and creativity among those organizational members with
the “best information” to make decisions.

The Special Challenge of Multinational Organizations


When organizations move from operating in a single country to operating in
multiple countries, they face special challenges regarding the allocation of deci-
sion-making rights. There are benefits, for example, in allowing the general man-
agers of country operations high levels of autonomy. That way, they can respond
to the particular and unique challenges and opportunities faced within their
home country. These national managers possess greater understanding than do
corporate personnel of their own operational, customer, and national issues. As a
result, business units will be able to adapt in a speedy manner to shifts in their
marketplace. Such autonomy promotes what Jay Lorsch called “entrepreneurial
zeal” among country-based general managers.17
Too much autonomy, of course, comes with its own set of problems. For an
example, we can look at Airbus, which suffered a very public humiliation with
significant delays in the production of its A380 superjumbo jet. The double-deck,
wide-bodied plane was designed to be the largest passenger jet ever built, boast-
ing 50 percent more interior floor space than its nearest competitor. The goal of
Airbus was to break the dominance of Seattle-based Boeing over the jumbo jet
marketplace. Given the nature of that ambition, it would also be an intensely
complex engineering and building feat. This is where too much autonomy cre-
ated problems.
For the previous three decades, Airbus had divided itself into national
“centers of excellence” that encouraged depth and focus on specific aspects of
the aircraft manufacturing process. The avionics center was in France, cabin
design and installation occurred in Germany, wings were manufactured in the
United Kingdom, and tail sections were built in Spain. That system allowed for
both multinational participation and technological focus.
For the multibillion dollar A380 project, however, the focus on technological
excellence and national pride interfered with the company’s ability to deliver a well-
designed aircraft. “Rear-fuselage sections of the A380 built in Hamburg [Germany],”
the New York Times reported, “arrived in Toulouse [France] in 2004 without the requi-
site electric wiring for the planes’ in-flight entertainment system.”18 That hand-off
glitch proved to be just the beginning. The computer modeling software used
in Germany was incompatible with what was in use by the French center of
excellence.
Organizational Redesign 87

CEO Louis Gallois took a number of steps to enhance integration. He


banned the use of national symbols in all PowerPoint presentations and formed
transnational teams to redesign Airbus into an integrated organization. Finally,
the A380 made its maiden commercial flight. Even then, the number of planes
Airbus was able to deliver to commercial carriers fell far short of promises. In the
end, delays cost Airbus an estimated $65 billion in profits.

THEORY INTO PRACTICE

The challenge for multinational organizations is to allocate a high level of


autonomy to national units as a way of achieving marketplace responsiveness
while simultaneously making corporate-level decisions that allow the exploi-
tation of synergies across the divisions.
Building a
Vocabulary of
Working across country units allows the corporation to exploit opportuni- Change
ties for synergies—the advantages of efficiency and effectiveness conferred by Synergies the
the combined effect of interaction and collaboration among multiple units. For advantages of
that reason, corporate executives will expect to make some decisions that apply efficiency and
effectiveness
to all divisions. conferred by the
The challenge for executives of multinational corporations is to seek syner- combined effect of
gies across country divisions while maintaining an adequate level of divisional interaction and
autonomy. A number of integrative devices—planning and budgeting systems, collaboration among
regular interface meetings among divisional and corporate executives, task multiple units.
forces, and measurement and reward systems for divisional managers tied to
corporate performance—can be used to exploit synergies.19

BUILDING COMMITMENT
Design choices represent attempts by organizational leaders to align employee
behavior with renewed strategies and shifting realities. Helene Gayle needed to
design high levels of collaboration across national organizations in order to
address CARE’s ambitious Access Africa project. Gayle, like all organizational
leaders, seeks to increase effort, energy, creativity, and persistence among
Building a
employees. That level of commitment to the achievement of organizational goals Vocabulary of
is also determined, in large part, by informal design. Change
High employee commitment exists when employees sense a strong over- Employee commitment
lap between individual goals and the shared goals of the organization. Highly the internalized
desire of employees
committed employees find a sense of purpose within their organization’s mis-
to expend energy
sion and actively seek out opportunities to fulfill that mission.20 and discretionary
Organizations able to achieve high commitment can gain a great many per- effort on behalf of
formance advantages: the goals of the
organization.
• Highly committed employees are more likely to communicate with each
other and to act in a collaborative manner.
• Productivity, quality, and creativity are all positively associated with high
commitment.
88 Chapter 4

• Additionally, from the change perspective, highly committed employees


will be motivated to alter their own patterns of behavior based on the re-
quirements of outstanding performance.21
From the perspective of organizational performance, the advantages of
achieving high employee commitment are substantial.

THEORY INTO PRACTICE

High employee commitment can improve organizational performance by


enhancing productivity, creativity, collaboration, and the willingness to
change.

In recent years, a number of companies in widely diverse industries—


manufacturing and assembly (Lincoln Electric, for example), food service (Stake
n Shake, for example), retailing (Costco, for example), transportation (Southwest
Airlines, for example), and software (SAS, for example)—have made design
choices intended to increase employee commitment. In each case, the purpose is
similar: improved productivity, increased quality, and greater flexibility and
adaptation.
Organizations seeking to change to a high commitment approach have
followed many paths, differing from company to company and industry to
industry. However, some generalized approaches that can be adopted in the
organizational redesign stage of change implementation include:
• Clarify organizational goals, strategy, and values
• Allow employees greater access to managers
• Create teams
• Share performance information widely
• Rely on organic rather than traditional controls
• Offer employees opportunities for individual development
Note that these changes are all informal, leaving the formal organization sys-
tems and structures untouched for the time being. These informal design mecha-
nisms intended to build employee commitment are summarized in Exhibit 4-4.
Perhaps most fundamental to designing for high employee commitment is
the manner in which work is performed. Organizational leaders seeking to
engage in redesign as a way of building high commitment will benefit from a
basic understanding of the options available for job design.
Building a
Vocabulary of Rethinking Job Design Choices
Change
Job design the amount Step 2 of change implementation raises the question of how individuals perform
of task identity, the jobs to which they have been assigned. That question is addressed through
variety, significance, job design, which refers to organizational expectations for how tasks will be
autonomy, and
feedback built into
performed in order to meet both individual task requirements and the overall
the performance of performance requirements of the organization. At first glance, it may seem there
a job. are as many answers to that question as there are jobs in an organization. A closer
Organizational Redesign 89

EXHIBIT 4-4
Informal Design
Clarity of Employees at all levels and in all units are provided with an Elements for
organizational goals understanding of the goals and values of the organization as Building High
well as its strategic choices. Commitment.
Influence A variety of formal (elected board of representatives) and
mechanisms informal (open doors and accessible managers) mechanisms
enable wide participation in the dialogue and decision
making of the organization.
Teamwork Teams designated to perform interdependent tasks.
Shared information Employees kept informed about how the organization is
performing, including the dissemination of data such as
financial performance, costs, profitability, information on
competitors, and feedback from customers.
Organic controls Control exerted through peer pressure, organizational
culture, and expectations of outstanding performance
reinforced through performance feedback.
Individual Employees provided an opportunity through a combination of
developmental mechanisms—job mobility, task variety, facilitative supervision,
opportunities and formal training—to develop competencies consistent
with their own needs and those of the organization.

examination, however, reveals a set of underlying principles that shape job


design choices and impact the commitment, adaptability, and performance of
jobholders.
In search of high commitment, managers ask: how might they think about
designing jobs in order to enhance their potential to evoke initiative and motiva-
tion? Richard Hackman and Greg Oldham offered a job characteristic model to sug-
gest alternative job design options meant to enhance motivation and initiative.22
All jobs, they said, regardless of specific organizational levels or assigned
responsibilities, can be understood as having the same core dimensions. By
enhancing or enriching work on any or all of those dimensions, jobs will become
more motivational. Exhibit 4-5 presents the five universal job dimensions as
well as sample actions managers can take to enrich work and increase employee
commitment.

THEORY INTO PRACTICE

By enriching jobs along any or all of five characteristics—skill variety, task


identity, task significance, autonomy, and feedback—organizations can
increase the motivation and commitment of employees performing those tasks.

Managers seeking to change job design as a way of enhancing employee


commitment have something of a road map. Take skill variety as an example.
Instead of having an employee perform a single job over and over again, the
90 Chapter 4

EXHIBIT 4-5
Using Job
Job Dimension Description Enrichment Action
Enrichment to
Increase Skill variety The degree to which job requires Enlarging task requirements
Commitment. a variety of different activities in to involve multiple and
carrying out the work, involving varied skills.
the use of a number of different
skills and talents
Task identity The degree to which the job Combining individuals into
requires completion of a “whole” a team with shared
and identifiable piece of work; responsibility for the final
that is, doing job from beginning product.
to end with a tangible outcome.
Task significance The degree to which the Communicating regularly
performance of the task has a and clearly how individual
substantial impact on outcomes and group effort
that are deemed to be important contributes to overall
to employees, to the organization, performance of the
and/or to society as a whole. company.
Autonomy The degree to which the job Allowing individuals or
provides substantial discretion to groups to schedule work
the individual in scheduling work and assign specific tasks
and determining procedures for consistent with achieving
carrying it out. performance goal.
Feedback The degree to which carrying out Communicating frequently
work activities required by the job concerning progress toward
results in the individual acquiring work goals.
direct and clear information about
the effectiveness of his or her
performance.

skills required of that worker in the performance of his job could be enlarged.
A machine worker, for instance, might be asked to meet with suppliers or
customers. By adding some measure of discretion to that employee’s
scheduling—say, providing that employee with a monthly production schedule
but allowing the individual to make decisions concerning daily and weekly pro-
duction schedules—managers could also enhance autonomy.
Providing regular information about the quality of work and the progress
being made toward achieving the goal adds greater feedback. Communicating
regularly to that employee about how her effort contributes both to the overall
product or service being offered by the company and how that product or ser-
vice helps advance the strategic purpose of the business enhances task identity
and significance. The job characteristics model offered a systematic way of rede-
signing jobs in order to build employee commitment and achieve outstanding
performance for the organization.
Organizational Redesign 91

BUILDING COLLABORATION
As we saw in the opening case of this chapter, Dr. Helene Gayle sought to build
collaboration at CARE so as to “make the whole greater than the sum of its
parts.” In his study of collaboration in business organizations, Morten T. Hansen
notes how collaboration helped Apple leverage its capabilities to overcome Sony
and gain dominance in the MP3 portable music players market.23
Sony had all but invented the portable music market with its Walkman, a
devise originally built to meet Sony Chairman Akio Morita’s passion for opera.
Introduced to the public in 1979, the Walkman allowed the listener to play audio-
tapes (and later, CDs) using headphones. The devices were portable and easy to
use. They held only one tape or CD at a time, of course, and required the owner
to purchase the music independently of the listening device, with Sony captur-
ing none of that revenue (except for music on the record labels owned by Sony).
In the late 1990s, several companies launched commercial versions of MP3
players with their own hard drives, eliminating the need to purchase separate
tapes or CDs. Now, for the first time, music could be loaded directly on the lis-
tening devise. The MP3 market remained relatively unsettled until 2001, when
Apple launched its revolutionary iPod. Coupled with iTunes, Apple quickly
dominated not just the device market but also music sales and distribution,
thereby capturing a much larger portion of the total revenues.
As revolutionary as it might have seemed, the iPod itself contained very
little in the way of innovative technology. What made the iPod remarkable was
not its components. Rather, the iPod represented a “design triumph.”24 And that
triumph came about because of collaboration. What was especially vital was that
Apple promoted a seamless interaction between its hardware and software units,
as well as between its iTunes and industrial design units. After all, one of the fac-
Building a
tors that made the iPod so attractive was the ease of interacting with iTunes as a Vocabulary of
way of purchasing and downloading music from the Internet onto the player. Change
Collaboration involves willing cooperation among individuals and Collaboration a
groups with a common goal. Helene Gayle’s notion that CARE needed collabo- process of willing
cooperation among
ration across national units to make the whole greater than the sum of its parts
individuals and
lies behind an organization’s desire to promote collaboration. It was collabora- groups with a
tion among hardware and software units in particular that helped Apple common goal.
triumph in the portable music business. But why couldn’t Sony respond effec-
tively to Apple? It was, says Hansen, the inability of the company to collaborate
effectively.
Although still committed to its Walkman portable music player, Sony
mounted a response to the iPod in 2003. Under the guidance of Howard Stringer
and Phillip Wiser, head of Sony’s U.S. operations and chief technology officer for
Sony U.S., respectively, Sony attempted to take advantage of its considerable
assets.25 In terms of overall revenue, Sony was 10 times bigger than Apple. All
the pieces seemed to be in place. The Walkman division could develop its own
hard drive machine. In addition, Sony’s various business units—VAIO personal
computers, Sony Music, and Sony Electronics—could pull together to produce
an iPod rival “in nine months” promised Wiser. Even the name of the product,
the Connect, suggested Stringer and Wiser’s faith that collaboration across
Sony’s business units could help the company respond to Apple.
92 Chapter 4

In nine months, the Connect was launched, but it was a commercial flop.
Stringer blamed the failure on the inability of the various Sony units to collabo-
rate. “It’s impossible to communicate with everyone,” Stringer said, “when you
have so many silos.” Listen to this description provided by Morten Hansen:

Each division had its own ideas about what to do. The PC and the
Walkman groups introduced their own competing music players, and
three other groups— Sony Music in Japan, Sony Music in the United
States, and Sony Electronics in the United States—had their own
music portals or download services. Stringer, who had no authority
over Japanese operations, complained, to no avail, that the Connect
software being developed in Japan was hard to use. Whereas the U.S.
team wanted a hard disk for the music player, the Japanese team went
with the arcane MiniDisc. And whereas the U.S. group pushed for
using the MP3 format—the de facto U.S. standard—the Japanese PC
division chose a proprietary standard called ATRAC.26

In 2007, Sony announced its intention to withdraw the Connect from the
market. And in 2010, nine years after the introduction of the iPod, Sony discon-
tinued Japanese manufacture of its once iconic Walkman.
Building a
Vocabulary of There are, as the iPod story suggests, compelling reasons for a business to
Change build collaboration and integration across divisions. To promote collaboration,
Team an companies frequently turn to teams. Teams, which are interdependent groups with
interdependent shared responsibility for an outcome, come in many forms: product development
group of individuals
teams, project management teams, customer service teams, and process innovation
with shared
responsibility for an teams. A summary of the main team prototypes is presented in Exhibit 4-6.
outcome.

THEORY INTO PRACTICE

Collaboration will require effective teamwork across units and functions of an


organization.

EXHIBIT 4-6
Team Types. Work team By sharing responsibilities, developing multiple skills, and
performing varied tasks, motivation and quality are enhanced.
Product Through concurrent rather than sequential development
development activities, speed to market and innovation are enhanced while
team costs associated with rework are diminished.
Problem-solving By bringing together individuals from multiple functions, problem
team associated with handoffs and cross-functional interactions can be
creatively addressed.
Project The multiple functions and tasks of the value chain are linked
management in order to enhance quality, coordination, and customer
team responsiveness.
Organizational Redesign 93

Cross-Functional Teams
Traditional organizations are often made up of a collection of freestanding func-
tional silos. Activities such as market research, design, engineering, manufactur-
ing, quality checking, distribution, and sales all take place within discrete
Building a
domains. Although those functional units provide required differentiation, orga- Vocabulary of
nizations also need to achieve integration across functions in order to be effective. Change
Cross-functional teams, which are teams that span multiple organizational Cross-functional teams
functions, provide a way of achieving that integration. Cross-functional teams teams made up of
representatives from
address the difficulty of highly differentiated functions have in pulling together
multiple
into seamless, well-integrated processes. By creating cross-functional teams, organization
organizations seek to eliminate handoff problems that produce waste, high cost, functions typically
quality problems, and sluggish response time. The teams are intended to create a intended to achieve
seamless, interconnected web of activities.27 required
coordination along a
chain of interrelated
THEORY INTO PRACTICE activities and
processes.
Use cross-functional teams to help create seamless, well-integrated processes.

Creating Teamwork
The first requirement of effective teamwork is that team members transcend the
individual or functional agendas each member brings to the effort and create a
shared purpose. Team members agree both on what their goal is and why that goal
is important.
Creating shared purpose can be a slow and difficult process. Individuals
who have spent much of their professional lives within a function or unit adopt,
often unconsciously, a particular lens through which they view all organiza-
tional problems. When they become members of a cross-functional team, their
agenda—at least initially—is to optimize the interests of their own function or
unit, often at the cost of others. Effective teamwork starts with the need to create
a central purpose focused on companywide goals and equally accepted by all
members.

THEORY INTO PRACTICE

Don’t just place employees on teams and expect the performance benefits of
teamwork; organizations need to create the context required for teamwork.

Effective teamwork is unlikely to flow from a group of individuals who


do not feel equally and jointly accountable for an agreed-upon outcome.
Therefore, effective teams develop shared responsibility. On effective teams,
members evolve beyond seeing themselves as individuals with narrowly
defined and measured outcomes. Instead, they take full responsibility for and
joint ownership over every aspect, every contribution, every input, and every
outcome of the team’s task.
94 Chapter 4

THEORY INTO PRACTICE

When members of a team feel equally responsible for the outcome of their
efforts, teamwork is enhanced.

THEORY INTO PRACTICE

At least in the early stages of change, organizations need to make sure teams
are buffered from traditional hierarchical power and are allowed to work
across functions.

THEORY INTO PRACTICE

In order to encourage teamwork, organizations can take care to ensure that


team members have the appropriate skills to perform the task effectively.

Effective teamwork also requires that team members possess a set of behav-
ioral competencies, including critical thinking, brainstorming, problem solving,
nondefensive communications, process facilitation, and conflict management.
Many employees lack those skills. They have, after all, spent the better part of
their lives learning how to work, think, and act as individuals. If an organization
intends on enabling teams to operate effectively, then they have to provide indi-
viduals with the required competencies of teamwork.
Not surprisingly, as companies evolve toward reliance on teamwork, they
increasingly require training for these required skills. Much of that training
focuses on providing employees with multiple skills to enable them to under-
stand all parts of the organization so they can operate more effectively in a cross-
functional environment.28 Training in specific teamwork skills also becomes
vital. One of the most striking findings of a recent international study of high-
performing companies (rated by profits, productivity, and quality of output) was
that 100 percent of the high performers had trained their employees in problem-
solving techniques compared to less than 20 percent of the low performers.29
Ultimately, no matter how successful an organization might be in creating
teams, the success of teamwork depends on a culture and a context within the
larger organization that supports coordinated efforts: recruiting and developing
individuals with teamwork competencies; holding team members jointly account-
able for joint efforts; removing barriers to effective cross-functional coordination.
All of these actions help create a context in which teams—and, more impor-
tantly, teamwork—are simply part of the way of operating. Most important of all,
teamwork in the operations of the organization relies on teamwork at the top of
the organization.

THEORY INTO PRACTICE

Teams succeed or fail in organizations based not just on the efforts of team
members but on the overall design and context of the organization, which
must support and reinforce joint efforts.
Organizational Redesign 95

Conclusion
Organizational design refers to the ways an orga- also encompasses how an organization seeks to
nization defines roles that employees enact and build employee commitment and coordination.
relationships among employees both within their Both elements of design—formal and
own functions, units, and divisions as well as informal—need to be addressed in a change
across those boundaries. No matter how well implementation process. It is useful, however,
designed an organization may be at any one to separate the two sequentially: addressing
time, a dynamic competitive environment is informal design challenges first and formal
likely to demand that the design be reconsidered. design challenges later. Effective change imple-
Poor coordination, high levels of dysfunc- mentation requires experimentation and learn-
tional conflict, slow decision making, and low ing. No leader knows precisely what solutions
responsiveness to shifts in the external environ- will be needed. Even if she did, the impositions
ment are all symptomatic of an organization of solutions from above would engender resis-
whose design has outlived its functionality. tance.
When a diagnostic intervention reveals that When design changes are informal,
these types of issues hinder the implementation employees at multiple levels and from numer-
of an organization’s strategy or the achievement ous units and divisions can try things out. Ideas
of outstanding performance, leaders will need on how to approach the challenges posed of dif-
to consider addressing the redesign challenge as ferentiation and integration, the tension between
the next sequential step in the change process. control and creativity, and the allocation of deci-
That does not mean, however, that all sion-making rights can be tested: maintained if
design issues need to be addressed at an early they succeed, discarded otherwise. As experi-
stage of change implementation. Organizational mentation and learning unfold, employees can
design has two interrelated but separate compo- seek to “refreeze” (Lewin’s term—see Chapter 2)
nents. Formal aspects of design relate mainly to desired behaviors by calling on more formal
reporting relationships as depicted on the “offi- design mechanisms.
cial” organization chart and systems such as The next step in the change implementa-
pay and performance measurement. Informal tion process involves addressing an organiza-
elements of design relate to how an organiza- tion’s human resource policies and practices,
tion meets the challenges of differentiation and both as a way of helping to develop required
integration, of controls and creativity, and of new behaviors and of reinforcing those behav-
decision-making allocation. Informal design iors among the organization’s employees.

Discussion Questions
1. Why do organizations find it so difficult to against commitment and the potential benefits to
address the requirements of differentiation and be achieved through high commitment.
integration simultaneously? 4. Some people have argued that there is far too
2. What are the advantages and disadvantages of much emphasis on “teamwork” in today’s busi-
allowing for high levels of autonomy within divi- ness world and that the danger is that individual
sions of multidivisional organizations? What are creativity and initiative is being sacrificed. Do
some effective means of coordinating efforts you agree or disagree? Explain.
among divisions? 5. The chapter argues that change efforts should
3. Why is it so difficult to achieve high levels of address informal design before addressing formal
employee commitment within today’s business design. Do you agree with that theory? Explain
organizations? List the factors that are working your thinking.
96 Chapter 4

Case Discussion
Read “Transferring Innovation across National Borders” Europe and Japan to adopt the new product?
and prepare answers to the following questions: Explain your prediction.
1. What triggered the new product strategy at 3. What changes might MB make in its design in
Minnesota Biolabs (MB)? order to better promote the transfer of new prod-
2. What prediction would you make for the success ucts across national borders?
of getting the country general managers in

TRANSFERRING INNOVATION ACROSS NATIONAL


BOUNDARIES
Imagine entering a hospital for treatment of a medical condition only to come
down with a far more serious, perhaps even life-threatening disease caused by
that very treatment.30 That, unfortunately, is an increasingly common experience
in hospitals located in the United States and elsewhere. The culprit is often an
infection transferred to the patient through a tainted “injectable”: that is, a needle,
an IV drip, and so forth. This is known as a sepsis infection: an overwhelming
infection of the blood stream resulting from toxin-producing bacteria (endotoxins).
National health regulatory agencies seek to limit such negative outcomes by
requiring that products intended for injection be tested.

Minnesota Biolabs
Traditionally, tests for sepsis infection were performed on live animals—rabbits,
for the most part—lead to the animal’s death. Minnesota Biolabs (MB) was one
of the companies that supplied rabbits to the producers of injectable devices.
Headquartered in suburban Minneapolis, MB served customers—mainly phar-
maceuticals but also university and private laboratories—in over 20 countries.
Europe was divided into three MB national units, MB-France, MB-Germany, and
MB-United Kingdom. A fourth country unit, MB-Japan, served Asian markets.
Each of those four units—France, Germany, the United Kingdom, and
Japan—was managed by a country general manager. That general manager was
typically left alone to operate his or her unit autonomously. Corporate headquar-
ters set annual growth goals for the units and measured their profit and loss. As
long as the units performed according to those goals, the managers were paid a
bonus and mostly left alone. Strategies, product decisions, and acquisitions were
determined by corporate executives in the States and communicated to these
country managers.
MB’s CEO frequently said that he liked this approach to management
because it delineated clear lines of authority and responsibility. Country manag-
ers also preferred this autonomy. They were allowed, they believed, to decide on
local strategies that best served their customers while maintaining good relation-
ships with the national regulatory agencies to which they needed to respond.
MB’s exceptional history of sustained, profitable growth reinforced the belief of
managers that this was a well-designed organization.
Organizational Redesign 97

The Search for an Alternative Test


In the early years of the 21st century, MB began to look for an alternative method
of testing for sepsis infection in injectable products. As animal rights became
increasingly important,MB sought a methodology that would leave the animals
alive. Because most of MB’s growth over its history had come from acquiring
other businesses and integrating their products into the company’s offering, that
is what MB executives sought to do now.
An opportunity arose when a small, Rhode Island-based company received
government approval for a test known as Sepsis Detection Test (SDT). Instead of
conducting tests in live rabbits, SDT used blood extracted from horseshoe crabs
for the tests. After extraction, the crabs were returned to the ocean where they
were able to regenerate lost blood. MB purchased the company, and horseshoe
crab-based testing quickly became the standard for the United States. In addition
to leaving test animals alive, SDT was both less costly and more profitable for
MB than the previous rabbit tests.
After several years of rapid growth in its home market, MB executives
urged country general managers in Europe and Japan to move from rabbit-based
tests to SDT. At the annual strategy meeting in Minneapolis, corporate execu-
tives presented the business case for SDT and urged the country general manag-
ers of MB-France, MB-German, MB-United Kingdom, and MB-Japan to switch
over their product line. The country general managers agreed to move forward
as quickly as possible.

Endnotes
1. Quoted on the CARE website: CARE.org © A. Garvin, SAP America (Boston, MA: Harvard
Cooperative for Assistance and Relief Business School Publishing, 1996).
Everywhere, Inc. (CARE). 8. Paul R. Lawrence and Jay W. Lorsch, Organi-
2. Quoted in Rasika Welankiwar, “Conversation,” zation and Environment: Managing Differentiation
Harvard Business Review (Apr. 2009), p. 22. and Integration (Boston, MA: Harvard Graduate
3. Michael Beer, Russell A. Eisenstat, and Bert School of Business Administration Division of
Spector, The Critical Path to Corporate Renewal Research, 1967).
(Boston, MA: Harvard Business School Press, 9. These quotes come from a consulting engage-
1990). ment by the author.
4. Michael Goold and Andrew Campbell, “Do 10. Richard E. Walton, “From Control to Com-
You Have a Well-Designed Organization?” mitment in the Workplace,” Harvard Business
Harvard Business Review (Mar. 2002), p. 5. Review (Mar.–Apr. 1985), pp. 5–12.
5. Ibid. 11. Stephen P. Robbins, Essentials of Organizational
6. Danny Miller has documented the tendency of Behavior (Upper Saddle River, NJ: Prentice-Hall,
once-successful companies to avoid design 2005), p. A-3.
change. See The Icarus Paradox: How Exceptional 12. www. sunhydraulics.com.
Companies Bring About Their Own Downfall 13. Ibid.
(New York: Harper Business, 1990). 14. Nitin Nohria, Note on Organization Structure
7. Information on SAP America is from “ASAP’s a (Boston, MA: Harvard Case Services, 1991), p. 2.
Wrap,” Managing Automation (February 1998); 15. Ibid., p. 3.
Colleen Frye, “SAP Soothes Implementation 16. McDermott is quoted in Thomas Teal, “Service
Worries,” Software Magazine (1997); and David Comes First: An Interview with USAA’s Robert
98 Chapter 4

F. McDermott,” Harvard Business Review 24. Erik Sherman, “Inside the Apple iPod Design
(Sept.–Oct. 1991), p. 119. Triumph,” Electronics Design Chain, accessed
17. Jay W. Lorsch, Note on Organization Design Oct. 27, 2010.
(Boston, MA: Harvard Business School 25. This account from Hansen, Collaboration, is based
Publishing, 1975), p. 15. in large measure on the Wall Street Journal report-
18. Nicola Clark, “Turnaround Effort Is Challenging ing of Phred Dvorak. See particularly “Out of
at Airbus, a Stew of European Cultures,” New Tune: At Sony, Rivalries were Encouraged, Then
York Times (May 18, 2007), p. C1. Came the iPod” (June 29, 2005), p. A1.
19. Jay W. Lorsch and Stephen A. Allen III, 26. Hansen, Collaboration, p. 8.
Managing Diversity and Interdependence: An 27. The notion that coordination across functions,
Organizational Study of Multidivisional Firms units, and divisions lies at the core of organiza-
(Boston, MA: Harvard University Graduate tional effectiveness has received a great deal of
School of Business Administration Division of attention in recent years. See, for instance,
Research, 1973), pp. 53–79. Edwad E. Lawler, III, “Substitutes for Hierarchy,”
20. Daniel Goleman, Working with Emotional Intelligence Organizational Dynamics 17 (1988), pp. 5–15;
(New York: Bantam Books, 1998), p. 118. Christopher A. Bartlett and Sumantra Gloshal,
21. Robert M. Marsh and Hiroshi Mannari, Managing Across Borders: The Transnational
“Organizational Commitment and Turnover: A Solution (Boston, MA: Harvard Business School
Prediction Study,” Administrative Science Press, 1989); D. Keith Denton, Horizontal
Quarterly 22 (Mar. 1977), pp. 57–72; Walton, Management: Beyond Total Customer Satisfaction
“From Control to Commitment in the (New York: Lexington Books. 1991); John A.
Workplace”; Gary J. Blau and Kimberly B. Boal, Byrne, “The Horizontal Corporation,” Business
“Conceptualizing How Job Involvement and Week (Dec. 20, 1993), pp. 76–81; Jay R. Galbraith,
Organizational Commitment Affect Turnover Competing with Flexible Lateral Organizations
and Absenteeism,” Academy of Management (Reading, MA: Addison-Wesley, 1994).
Review 12 (1987), pp. 288–300; Stephen L. Fink, 28. David Nadler, “Ten Years After: Learning
High Commitment Workplaces (New York: About Total Quality Management.” A paper
Quorum Books, 1992); Mark A. Huselid, “The delivered at the Total Quality Management
Impact of Human Resource Management conference sponsored by the Management
Practices on Turnover, Productivity, and Centre Europe, Brussels, Oct. 1993.
Corporate Financial Performance,” Academy of 29. International Quality Study, Best Practices Report:
Management Journal 38 (1995), pp. 635–661; An Analysis of Management Practices That Impact
Julian Gould-Williams, “The Effects of ‘High Performance (Cleveland, OH: American Quality
Commitment’ HRM Practices on Employee Foundation and Ernst & Young, 1992).
Attitude: The Views of Public Sector Workers,” 30. This case study is adopted from the research
Public Administration 82 (2004), pp. 63–81. conducted by the author and his colleagues
22. J. Richard Hackman and Greg R. Oldham, Work under a grant from the National Science
Redesign (Reading, MA: Addison-Wesley, 1980). Foundation. See Bert Spector, Henry W. Lane,
23. Morten T. Hansen, Collaboration: How Leaders and Dennis Shaughnessy, “Developing
Avoid Traps, Create Unity, and Reap Big Results Innovation Transfer Capacity in a Cross-
(Boston, MA: Harvard Business School Press, National Firm,” Journal of Applied Behavioral
2009). Science 45 (June 2009), pp. 261–279.
CHAPTER

5 People Alignment

T he need to implement behavioral change in response to a new strategy places new


demands on employees. Redesigned roles, responsibilities, and relationships may require
the following: formerly individualistic employees become team players; formerly internally
focused employees become responsive to customers; formerly functionally oriented
employees become collaborative with people from other functions; formerly technically
oriented employees adopt a general management perspective; formerly autocratic managers
become facilitators and coaches; and formerly parochial employees become global. Each and
every one of these changes calls for new skills to support those behaviors.
This chapter looks at two steps of effective change implementation, both focused on
people. People alignment involves two distinct and sequential steps. First, in Step 2, the
organization seeks to help develop in employees the necessary skills and competencies.
Then, in Step 3, the company engages in people change in order to meet its strategic
requirements. Step 2 involves training and developing current employees; Step 3 involves
attracting new employees and, potentially, removing and replacing existing ones.
Both steps deal with people alignment. They are treated as separate steps, however, to
make a key point about sequencing. Step 2—help—involves informal changes and processes.
It proceeds to Step 3—people change—which deals with formal human resource systems. In
particular, this chapter will:
• Define people alignment and its role in implementing strategic renewal and
organizational change
• Understand how to match selection and recruitment with the shifting requirements of
behavioral change
• Analyze how an organization can help employees gain the new skills required of the
change effort
• Present the particular choices available to organizations as they seek align employee
competencies with the requirements of the organization as part of their change effort
• Analyze the role of removal and replacement in implementing change

99
100 Chapter 5

First, we will look at an attempt by a national electronics retail chain to


expand its market, and to align its people with that strategy. As you read this
introductory case, ask yourself:
• What triggered the drive for change at Best Buy?
• In what ways did Best Buy need to align its people with the goal of
expanding its market?
• What steps did Julie Gilbert take and how effective were they?

EXPANDING THE MARKET FOR BEST BUY


Julie Gilbert, senior vice president at Best Buy, recognized an opportunity.1
Women were showing a growing interest in shopping for electronics. That shift
was due in part to the introduction of entertainment systems and flat screen tele-
visions that attracted the attention of women shoppers. According to the
Consumer Electronics Association, women now influenced 57 percent of the
$140 billion annual electronics purchases made in the United States.
Best Buy stores were often seen as unappealing, even hostile, to women.
Noted one female shopper, “I avoid Best Buy like the plague. I find it difficult to
get the attention of an employee, and then they seem to be somewhat terse. They
rarely have offered options or helpful advice. If I really need something from
there and I can’t find it elsewhere, I send my husband.” Other women reported a
preference for shopping on the Internet for electronics.
Given Best Buy’s origins, its appeal to male shoppers was hardly surpris-
ing. The company began in St. Paul, Minnesota in 1966 and catered to young
male consumers. As the business expanded, that focus remained unchanged.
“Our stores used to have one primary customer in mind,” agreed current CEO
Brad Anderson. “That was the young, techno‐savvy male.”
It was Julie Gilbert who noticed both the problem and the opportunity. In
2005, she calculated that of the $90 billion annual purchases in the U.S. market
influenced by women, Best Buy accounted for $10 billion. Not bad, she thought,
but Best Buy could do much better. Gilbert also knew that return and exchange
rates were 60 percent lower on purchases when couples were involved in a pur-
chase than when they were made by men alone. Furthermore, couples tended to
buy higher end (and higher margin) products than did men when shopping
alone. Gilbert saw an opportunity to expand Best Buy’s market dominance by
claiming a larger share of women‐influenced purchases.
But how?
Some of the changes were relatively simple. “We were a boy’s toy store de-
signed for boys by boys,” noted Gilbert. Stores were to be retooled. Out went the
loud music and stacks of electronic components. Personal shopping assistants
were added, living rooms were set up to display home entertainment systems,
and aisles were widened to accommodate children and baby strollers. Although
it would take time and money to implement these changes in the chain’s 700 plus
stores, there was little resistance to the ideas.
The more difficult challenges involved people alignment. The first step re-
quired identifying new behaviors for the sales people, known in the company as
People Alignment 101

“blue shirts”: greeting and making eye contact with women shoppers, asking her
about her favorite movies, demonstrating those movies on systems. But simply
identifying helpful new behaviors would be insufficient. Gilbert felt that for Best
Buy to take full advantage of this under served market, the company would
have to place more women employees on the store floors and more women in
executive positions.
Blue shirts had typically been recruited from the electronics departments of
rival chains such as Wal‐Mart and Target. Now, Gilbert began looking at a broader
spectrum of retail outlets including Victoria’s Secret (women’s lingerie) and
Origins (make‐up). “We’re working with the Girl Scouts, with private female col-
leges, and others to recruit amazing women so we can delight our women custom-
ers,” said Gilbert. The goal was for 50 percent of Best Buy’s workforce to be women,
with a disproportionate number working in the home theater departments.
Gilbert’s 50 percent goal applied to more than just the Blue Shirts. Aiming
to change the role of women in the entire organization, she focused on the man-
agement and executive level as well. She created and led “WoLF” packs, for
Women’s Leadership Forum. Women from all levels of the organization came
together to share ideas and generate innovations designed to expand the cus-
tomer base. The WoLF packs also made it easier for Best Buy to recruit and retain
women employees. When Gilbert left Best Buy in 2009 to promote WoLF pacts in
other organizations (through a private consulting firm, WOLF Means Business),
Best Buy had grown its women’s influenced purchases by 30 percent.

PEOPLE ALIGNMENT AND CHANGE


Best Buy had identified a new product marketing strategy:
• New products—increasing emphasis on high‐end home entertainment sys-
tems rather than components.
• New market—increasing emphasis on women shoppers.
Julie Gilbert’s initial insight was that Best Buy would need to change the behav-
iors of its Blue Shirt employees. Greetings, eye contact, and demonstrating sys-
tems for women would all be required behaviors.
Identifying new behaviors required of a strategic renewal is one thing; de-
veloping those behaviors among current employees is another. Best Buy was
fully staffed with employees, overwhelmingly male, recruited and trained to
implement the company’s past strategy: selling components to tech‐savvy male
customers. And they had been remarkably successful. But the new strategy re-
Building a
quired change, and Gilbert knew there was no “before” and “after” switch. She Vocabulary of
looked to make sweeping changes in the firm’s human resource practices. Change
People alignment involves assuring that the skills and behaviors of em- People alignment
ployees within the organization will enable the effective implementation of the organizational efforts
organization’s strategy. Effective change requires alignment between employees— taken to match the
skills and behaviors
the selection, training, evaluation, promotion, even removal of employees—and of employees within
the shifting strategic goals of the organization. the organization
In seeking people alignment, leaders can select a “make” or “buy” ap- with the business’
proach. Make implies developing the needed new set of competencies and strategy.
102 Chapter 5

EXHIBIT 5-1
Make/Buy Options Option Steps Advantages Disadvantages
for Changing
Human Resources. Make Training Takes advantage of May be slow. Not all
Altered incentives existing knowledge/ current employees
skill base willing or able
Buy Recruitment Can quickly add May undercut morale/
selection required knowledge/ commitment of existing
skills employees

behaviors in current employees. Making assumes that employees are both


capable of and motivated to acquire and utilize new skills and engage in new
behaviors.
Not all employees can or will make that shift, of course. Additionally, the
time required may be too long. Leaders, therefore, will also have to consider a
buy approach. Buy involves injecting the organization with new employees who
possess the desired set of competencies.
The choice between making and buying (summarized in Exhibit 5‐1) is not
either/or. Best Buy’s change effort involved both. Getting the make/buy mix
“right” means doing them both appropriately and in the appropriate sequence.
That matter of sequencing will be addressed later in the chapter.

THEORY INTO PRACTICE

In order to develop required human resource competencies, organizational


leaders need to align the selection, training, development, and removal of em-
ployees with the behavioral requirements of the desired change.

HELP
When organizations seek to redefine their strategy—Best Buy altering its product—
market mix, for instance—they face the requirement of developing new compe-
tencies among their employees. Thus, once the required new behaviors and their
supporting competencies are defined in Step 1, effective change implementation
seeks to help employees gain the new competencies and skills. That is why train-
ing and development provides the key intervention in Step 2.

Training
Quite a lot of training occurs in organizations. U.S. companies alone spend more
than $60 billion a year on training, plus another $180 billion on informal day‐to‐
day instruction. Not all of that training, of course, is designed to be a part of stra-
tegic renewal and change. Training is often called upon to teach basic literacy,
update technical skills, as well as to develop management skills in individuals
People Alignment 103

EXHIBIT 5-2
The Two
This component: Focuses on: By:
Components of
Knowledge Developing understanding Classrooms, lectures, Training for Change.
development within employees of new strategy discussion groups,
and requirements for change etc.
Skill development Developing capability within Role‐playing,
employees to enact required new experimentation,
behaviors real‐time feedback,
etc.

leaving functional areas and assuming management responsibilities. In these


cases, training programs are intended to improve individual performance within
current organizational arrangements rather than changing the organization.
To be part of a change effort, training programs need to contain two compo-
nents, as summarized in Exhibit 5‐2. The first is a knowledge component: an aware-
ness of the forces demanding strategic renewal and change and the options
available to the organization in response to those forces. What are the relevant
changes in the external environment? What are the design choices available to the
organization? And what are the strengths and weaknesses of those choices?
Understanding both the reasons for abandoning the status quo and the options
available to the organization in the future helps motivate employees to change.

THEORY INTO PRACTICE

Training can help convey to employees how their competitive environment is


changing and why their own behaviors need to be altered.

The second component of training involves skill development. As the organi-


zation moves toward greater collaboration and teamwork, for example, people
will have to acquire a set of skills associated with teamwork: effective communi-
cations, conflict management, trust building, norm setting, diversity awareness,
negotiations, and so on.2 Traditional training approaches such as classrooms, lec-
tures, and discussion groups are more effective at achieving the knowledge com-
ponent than at skill development.

THEORY INTO PRACTICE Building a


Vocabulary of
Training can, under the right circumstances, help employees gain new behav- Change
Experiential training
ioral competencies. training programs
that focus on
behaviors and
As a way of impacting behavior, organizations can supplement traditional typically include
knowledge‐based training with experiential training. Traditional training pro- role‐playing and
grams emphasize the delivery of knowledge from the instructor to the learner. feedback.
104 Chapter 5

Experiential learning, on the other hand, focuses on behaviors while allowing


participants to try out the new behaviors required of the change effort.
Companies attempting to promote teamwork and collaboration, for in-
stance, can engage employees in experiential training. Trained facilitators are
made available to provide real‐time feedback to participants and to model the
very behaviors the organization is now seeking. Experiential learning occurs in a
protected environment, allowing participants to experiment with new behaviors.
The problem with experiential learning is that new behaviors acquired in a
Building a
training program often disappear quickly once the participants return to their
Vocabulary of jobs. That phenomenon is known as training fade‐out. The extent to which the
Change learning gained from a training opportunity is transferred back into the work
Training fade‐out the environment is impacted by three factors:
failure of behaviors
learned as part of a 1. Supervisory/managerial support—Does the employee’s supervisor/man-
training exercise to ager endorse, encourage, provide feedback, and reward new behaviors, or
transfer to on‐the‐job does that supervisor/manager discourage or oppose the application of
experience or
behaviors that
new skills and behaviors?
disappear over time. 2. Peer support—Do the employee’s peers support the application of new
skills and behaviors, inquire about that learning, provide feedback, and en-
courage, or do they ignore, discourage, and even attempt to prevent the
application of new skills and behaviors?
3. Work conditions—Does the employee have the opportunity to use new
skills and behaviors when back on the job, or are new skills and behaviors
overtly or covertly discouraged by time pressures, inadequate resources,
and/or unchanged responsibilities?3
An organizational context that encourages, even demands, the use of new be-
haviors will lead to greater peer and supervisory support and help to prevent
fade‐out. Most importantly, to avoid the fade‐out problem, participants need to
understand and believe that the competencies transferred as part of the training
process are useful in order to enact behaviors required of the new strategy.

THEORY INTO PRACTICE

Watch out for fade-out—whatever is learned in training opportunity can lose


its impact over time.

Feedback
One of the most important opportunities for developing new competencies and
skills among existing employees arises from a simple but powerful mechanism:
feedback. The challenge in using feedback in order to develop new competencies
is twofold:
1. To make sure that the feedback is offered in a way to maximize its impact
on behaviors.
2. To make sure that the feedback moves employees toward new behaviors
rather than reinforcing old behaviors.
People Alignment 105

Organizations can, under the right circumstances, use the traditional tools of
performance feedback and appraisal to help support change implementation.
In a change implementation process, expectations and definitions of out-
standing performance are in flux. It becomes valuable, then, for employees to
evaluate the performance of employees for four reasons:
1. It allows an assessment of the current state of the firm’s human asset.
2. It helps identify the gap between what skills and organization currently
possess and what gaps need to be filled.
3. It identifies poor performers and potential future leaders.
4. It identifies needed development and training efforts.
From the data generated by the performance evaluation process, organizations
can construct developmental tools—training, career pathing, mentoring, etc.—as
well as guide future recruitment and selection.
Individual employees also gain value from performance feedback. An as-
sessment of their effectiveness can offer employees invaluable answers to a num-
ber of questions:
• How is my effort being perceived and received by the organization?
• What is my future with the company?
• What gaps do I need to address between my efforts and the organization’s
expectations?
• What set of experiences do I need to construct for myself in order to ad-
vance my own aspirations?
The desired goal of the process is alignment between the future needs of the or-
ganization and the desires and motivations of employees.
Much of the feedback on performance occurs informally. Informal feedback
can occur in both obvious and obscure ways. Regular, real‐time feedback discus-
sions between superiors and subordinates or among peers can occur spontane-
ously and/or as part of the culture of the organization which creates expectations
Building a
that evaluation and performance dialogue will occur regularly and routinely. Vocabulary of
Organizations typically seek to supplement such informal feedback with a Change
more formal approach to evaluation: the performance appraisal. Although firms Performance appraisal
implement performance appraisals quite differently, there are some generaliza- a formal, regularly
tions that can be made. Performance appraisals tend to: scheduled
mechanism designed
• Be regularly scheduled events, occurring annually, semi annually, or even to provide
quarterly employees with
performance
• Be individual, one‐on‐one sessions between a supervisor and a subordinate feedback, typically
• Be guided by a form designed by the organization’s human resource de- resulting in a
partment performance rating.
• Involve some sort of grading system, covering both specific performance
elements and an overall evaluation of effectiveness
• Be designed for both administrative purposes—documentation of poor
performance, distribution of performance‐based rewards, etc.—and devel-
opmental purposes
Formal evaluation such as performance appraisal often fail to enhance desired
behavior. Extensive research has demonstrated that both appraisers and appraisees
106 Chapter 5

are highly dissatisfied with their performance appraisal experience.4 Appraisers fear
that, except in the case of a “superior” performance rating, they will be doing more
harm than good, leaving the employee demoralized, demotivated, even alienated.
Apparently, those fears are justified. Managers often report that subordi-
nate performance actually deteriorates as a result of conducting a performance
appraisal, and indicate that the only reason they conduct such interviews is to
comply with company mandates. Employees report greater uncertainty after the
performance appraisal than before. Most likely, that confusion results from a
mismatch between the informal feedback described earlier and the formal feed-
back offered as part of the performance appraisal.
When performance appraisals become exercises in compliance, as they ap-
parently do with great regularity, they are unlikely to generate commitment on
the part of employees to increased effectiveness.
Employee commitment is also impacted by issues of validity and accuracy.
Is the performance appraisal actually assessing what it claims to be assessing,
and is it doing so accurately? Employees often leave an interview doubting
whether either validity or accuracy has been achieved. Empirical evidence sug-
gests that their suspicion is well founded. Supervisory ratings are regularly and
significantly distorted by subjectivity, personal bias, deliberate distortion, and
unintended but common rating errors.5
To increase employees’ perceptions that the feedback they are receiving
from the appraisal process is valid—and thus increasing their commitment to
Building a
Vocabulary of
enhancing their own high performance behaviors—organizations have tried a
Change number of innovations.
360° feedback One—the 360° feedback—attempts to expand the data and bring multiple
performance points of view into the effectiveness appraisal process. Peers, subordinates, and
feedback gathered even customers are invited to contribute data on an employee’s effectiveness re-
from peers,
subordinates,
lating to both dimensions: task performance and behavioral patterns consistent
supervisors, and with the organization’s culture.
customers. Approximately 90 percent of Fortune 500 companies use some form of 360°
feedback for purposes of employment evaluation, development of needed com-
petencies, or both.6 The effectiveness of 360° feedback will be enhanced if the
organization’s culture emphasizes openness and learning, deemphasizes strict
power distinctions based on hierarchy, and places a high value on customer
responsiveness.
Another innovation relies heavily on self‐appraisal, where the appraisal dis-
cussion is based on the subordinate’s view of himself or herself. When employ-
ees perceive themselves to be active participants in the appraisal process, they
are more likely to alter their behavior in ways desired by the organization.7 Both
self‐appraisal and 360° performance appraisals represent attempts by organiza-
tions to increase employee acceptance of the feedback, thus leading to improved
behavior and performance.

THEORY INTO PRACTICE

Self‐appraisal and data from multiple sources can help increase the validity
and effectiveness of performance feedback.
People Alignment 107

Top Management Development


Concentrating on the development of new competencies at lower and middle
levels of the organization is a necessary component of effective change imple-
mentation; it is not, however, sufficient. Effective change will also demand new
behaviors from executives at the top of the organization.

THEORY INTO PRACTICE

Behavioral change requires attention to the behavioral pattern of those at the


top of the organization as well as lower level employees.

Greater coordination, higher levels of innovation, speedier response to a


dynamic marketplace—all these outcomes are associated with the behaviors and
interactions of top managers. Both behavioral and cognitive training interven-
tions are useful in developing new skills among executives, but Richard Boyatzis
has suggested that on‐the‐job experience is far more effective in developing re-
quired competencies.8
At the CEO level, corporate boards often pursue a “buy” rather than
“make” strategy in search of change. Insiders, especially those who have stayed
with the company long enough to rise to the top, are products of the culture that
have been targeted for change. A change in business fortunes requires a change
in top leadership, which means, in turn, injecting the top of the organization
with “new blood.”9 Outsiders such as Meg Whitman at eBay and Archie Norman
at ASDA have been effective at implementing significant and successful change.
Experience suggests, however, that outsiders are not a requirement for out‐
of‐the‐box thinking and organizational change. Three longtime insiders who rose
to the top of their organizations—Vineet Nayar at HCL, Judy McGrath at MTV
Networks Group, and Sam Palmisano at IBM—demonstrated that understanding
the existing culture and connecting to the founding mission of the company en-
abled them to transform business strategies and organizational performance.
No organization can rely entirely on outsiders, of course. To meet the challenge
of developing internal leaders capable of transforming their organization, compa-
nies can systematically manage the careers and experiences of executives. Those ex- Building a
periences can provide individuals with the opportunity to learn new knowledge, Vocabulary of
Change
attitudes, and behavior within the unique and special environment of the firm. Succession planning a
Within organizations, career experiences are typically managed through a formal process in
succession planning process in which top executives regularly review all man- which top executives
agers at or above a certain hierarchical level, looking at both performance and regularly review all
potential, and devise developmental plans for their most promising individuals. managers at or above
a certain hierarchical
The implementation of succession planning is often flawed by inade- level, looking at both
quate—even nonexistent—follow‐up. Said one executive of her company’s performance and
succession planning system, “Our procedures are as good as any… The only potential, and devise
problem is that people don’t pay any attention to them.”10 developmental plans
Lack of follow‐up is not the only limitation. Succession planning can pay a for their most
promising
great deal of attention to so‐called fast‐trackers, while ignoring the potential of individuals.
others. The problem here is twofold. First, it is possible that those identified as
108 Chapter 5

EXHIBIT 5-3
Practices for
Developing Structural and Delayering, increased span of control, matrix, or horizontal
Executives Capable design changes structures—all of these work to develop generalists far
of Adaptation and earlier in their careers and place a greater premium on
Leading Change. interpersonal competencies.
Explicit international Assigning managers to work in a non native culture for a
movement significant period of time develops cross-cultural
awareness and skills that can be vital in a culturally diverse
environment.
Career mazes Explicit lateral movements replace rapid upward functional
mobility with a far broader set of experiences. Functional
blinders are removed, general management skills are
enhanced, and commitment to the organization as a
whole is enlarged.
Slower velocity So-called fast-track managers often fail to stay in one
to allow greater position long enough to deal with the consequences of
learning their actions (and the reactions of employees).
Learning about and dealing with the consequence of
actions requires greater length of tenure in a position.

non‐fast‐trackers have been held back less by their lack of potential than by con-
textual constraints imposed by the organization. Second, fast‐trackers may be
individuals who possess skills more associated with past successes than the
future demands of change.11

THEORY INTO PRACTICE

Companies can manage the careers of executives in order to create a continu-


ous stream of leaders from inside the organization capable of overseeing and
leading effective change.

Career development can also help develop executives capable of adapta-


tion and change. Effective change requires individuals who have learned,
through a set of on‐the‐job activities, to be flexible and adaptive. Exhibit 5‐3
offers a number of career development practices that can help organizations
develop managers capable of moving out of their comfort zones, taking risks,
and leading change.

PEOPLE CHANGE
In his study of companies that moved from “good” to “great”—companies such
as Walgreens and Kimberly‐Clark—Jim Collins noted that these successful trans-
formations were built on getting “the right people on the bus”—that is, attract-
ing, selecting, and retaining individuals whose skills and behavioral patterns
People Alignment 109

aligned with the transformed requirement of outstanding performance—and


getting “the wrong people off the bus.”12
The challenge of getting the right people on the bus and the wrong people
off the bus lies at the core of Step 3. At this stage of implementation, leaders will
have to ask and answer two key questions:
1. What does the organization mean by the “right” and “wrong” employee?
2. What are the most effective ways to manage this stage of the change
process?
Let’s start with the question of identifying and selecting the “right” employee in
a situation of change.

THEORY INTO PRACTICE

People alignment––getting the right people on the bus and the wrong people
off the bus—is a key to effective change implementation.

Selecting the “Right” Employees


Individuals are attracted to organizations for a number of reasons: money, to be
sure, as well as location, opportunity for advancement, prestige, and so on. There
is also an attraction that derives from a perception of personal alignment.
Potential employees may believe that the “personality” of an organization—its
goals, structures, ways of working, and so on—matches well with their own.
Conversely, they may feel that there is too much of a discrepancy between them
and the organization.13
“We’re looking for personality,” noted a recruiter for Disney World (known
in the company as a “director of casting”). “We can train for skills.”14 Undoubtedly,
organizations, especially those with strong corporate cultures such as Disney,
take on personalities shaped by a combination of values and goals. Individuals,
of course, have their own personalities with personal values and goals. During
the joining‐up process, individuals tend to seek out and organizations tend to
select for a match between organizational values and individual personalities.
Individuals attracted to Disney, for instance, are likely to be quite different from
people interested in working for General Electric.

THEORY INTO PRACTICE

Employees attracted to and selected by the organization in an earlier phase


are not necessarily the right employees for the newly defined strategies and
goals of the changing organization.

The idea of attracting the right employees is important to any organization.


When an organization is attempting to implement change, the matter becomes
even more complex. The personality of the organization is changing. Individuals
110 Chapter 5

attracted to and selected by the organization in an earlier phase are not necessar-
ily the right employees for the newly defined strategies and goals of the chang-
ing organization. In redefining the personality of their organizations, change
leaders are, in essence, overturning the sense of personal alignment that existed
in the past. They are changing what they are looking for in the “right” employee.
But what, exactly, is meant by the right employee? It is useful to introduce
the concept of fit. The right employee means an employee who fits certain needs
or requirements. Even that explanation does not tell us enough, because the
question still remains: what needs or requirements? The requirements may be
technical, behavioral, attitudinal, or some combination of all the three.

CRITERIA FOR SELECTION To help clarify the choices an organization faces in the
selection process, it is useful to approach fit in two ways. The first involves fit
Building a
Vocabulary of with a specific job, and the second involves fit with the larger organizational cul-
Change ture and values.
Person‐task fit Person‐task fit is the most common approach taken to hiring employees.
screening and The organization has specific tasks that need to be done, so it hires individuals
selecting individual
with the skills required of those tasks. Need an electrical engineer? Hire the most
employees based on
their ability to skilled electrical engineer available (keeping costs in mind, of course).
perform certain tasks To help ensure that the organization hires people with the requisite skills,
and fulfill specific human resource specialists work in a structured way to define the key knowl-
jobs. edge, skills, and abilities required in the performance of core organizational
tasks. Individuals are sought, and often tested, to determine their competency
levels to perform. The best‐qualified individuals are then selected to fill the orga-
Building a
Vocabulary of
nization’s job vacancies.
Change The second approach to selection involves what can be thought of as
Person‐organization fit person‐organization fit. Unlike the person‐task approach, person‐organization
screening and fit looks beyond the specific skill demands of a task, focusing instead of the val-
selecting employees ues of an individual. Now, the organization asks: how do the values of potential
based on congruence
between patterns of
hires fit with the values we are trying to promote?
organizational Person‐organization fit looks beyond specific jobs to the desired future
values and patterns state of the organization. What are the mind‐set, the personality, and the compe-
of individual values. tencies that the organization seeks through its change? What newly defined
roles, responsibilities, and relationships are sought? Most importantly at this
stage, what new competencies—both technical how‐to competencies and inter-
personal (creative problem solving, decision making, collaboration, communica-
tion, and so on) competencies—are required of this desired future state?

THEORY INTO PRACTICE

Talent is important but fit with where the organization is headed is vital.

Determining who fits with the organization is a complex, even tricky busi-
ness. Supervisors often make decisions about which employees fit or do not fit,
implicitly, perhaps even subconsciously, based on the goal of reproducing them-
selves. Instead of asking whether the employee behaves in ways consistent with
People Alignment 111

the values and culture of the organization, the supervisor may ask whether the
employee thinks and acts like the evaluating supervisor.
When supervisors seek—consciously or otherwise—to clone themselves,
the effect can be damaging both to employees and to the organization. Employees
may rightly wonder just how valid supervisory decisions are. Additionally, if
organizations become homogeneous, they are in danger of weakening both di-
versity and creativity.15
That approach can be particularly harmful in periods of change. The super-
visors’ past successes may be the result of behaviors that no longer fit with the
desired future state of the company. Additionally, the reproduction phenomenon
risks eliminating diversity and promoting conformity within the organization.
When change efforts are designed to enhance creativity and innovation, actions
that drive out diversity, however inadvertently, will be detrimental. Finally,
employees themselves may experience replacement less as a valid measure of
ability to adopt new behaviors and more as a self‐serving device that enhances
supervisors’ views of themselves.
An explicit and shared understanding of the new behaviors required of
strategic renewal and outstanding performance can help to overcome the dan-
gers of selective perception and reproduction. That understanding is developed
in the diagnostic and redesign phase of transformation. Once the requirements
have been made explicit, managers are better able to make valid assumptions
about whether individuals are displaying the required behaviors. Simultaneously,
employees are more likely to accept the validity of those decisions.

SCREENING FOR FIT Particularly when an organization is attempting to imple-


ment change, there is an urgent need to attract employees whose behavior exem-
plifies the desired future state rather than the organization as it had been in the
past, even if that past had been successful. But just how can organizations screen
for person‐organization fit?
Microsoft prides itself in screening potential hires for intelligence and creativity
as much as—if not more than—depth of technical expertise. Even “technical” inter-
views for potential software developers focus more on “thought processes, problem‐
solving abilities, and work habits than on specific knowledge or experience.” How
many times does the average person use the word “the” in a day? an interviewer might ask.
The manner in which the individual organizes his thought processes and attacks the
problem is the key, not providing any technically “right” answer.16
Microsoft considers creative problem solving to be a cornerstone of the
company’s culture and uses the screening process to find individuals who will fit
with that desired culture.
Paying attention to the selection of new employees is a key to change im-
plementation. Attracting and hiring employees who already possess both the
motivation and competencies to enact the new culture will enhance the effective-
ness of the desired change.
This is not to say that all issues of person–organization fit must be resolved
in the selection process. Behaviorally focused training can help, while removing
employees who cannot or will not adopt new behavioral patterns may be neces-
sary. Getting it as right as possible in the selection phase certainly will reduce
112 Chapter 5

both the cost and time associated with training and minimize the difficulties—
both emotional and financial—associated with removal and replacement.

THEORY INTO PRACTICE

Selecting the “right” employees—that is, employees who possess the values
and competencies required of the change—will reduce time, cost, and other
revenues required in later developmental interventions.
Building a
Vocabulary of
Change
Standardized tests
SELECTION TECHNIQUES Companies can use any number of techniques to screen
self‐administered for the “right” employee, starting with standardized tests which are typically
and quantifiable self‐administered and quantifiable. These tests assess any number of attributes,
tests used as part of ranging from general intelligence and mental ability to mechanical aptitude and
a screening, technical and industry‐based knowledge.
selection, or
assessment process.
When strategic renewal requires an alteration in the culture of the company,
the most obvious standardized instruments to call upon involve personality and
psychological tests. These tests offer insight into whether an individual is open
or defensive, extroverted or introverted, individualistic or team‐oriented, easy-
going or reserved, suspicious or trusting, and so forth.
Using standardized tests in the screening process offers some obvious ad-
vantages to a company in transition. The tests are relatively easy to administer
and score. Quantifiable results are simple to compare. Most importantly, there is
validity to the tests as predictors of on‐the‐job success as long as multiple tests
are used in combination.
Standardized tests are not without flaws. Opportunity for abuse and mis-
use of data are significant. Additionally, their use tends to produce a less diverse
workforce in terms of race.17 Differences in early cultural experiences and unfa-
miliarity with test‐taking techniques on the part of applicants, especially when
combined with unintended biases in the formulation of test questions, can pro-
Building a duce undesired outcomes.18 Minority job seekers often express deep suspicion of
Vocabulary of these tests and their use. Organizations desirous of seeking greater diversity
Change
Behaviorally anchored
within their workforce may find standardized tests working against that goal.
interviews potential There are alternatives to standardized tests. Behaviorally anchored inter-
hires are asked to views ask potential hires to recount specific examples from their past experience
recount specific to illustrate how they have responded to challenges and opportunities:
examples from their
past experience to • Give me an example of a work‐related problem that you had to deal with,
illustrate how they and how you responded.
have responded to • Talk about a recent group experience you had at work and the role that you
challenges and
opportunities.
played.
When a group of employees participates in the interview, each asking questions
and rating responses, the validity of the assessment increases. The goal is to in-
crease the likelihood of achieving fit between new hires and the behavioral goals
of the change without driving out diversity. Exhibit 5‐4 offers examples of behav-
iorally anchored interview questions.
People Alignment 113

EXHIBIT 5-4
Behaviorally
• Describe a time when you were placed on an ineffective work team and how you dealt
Anchored Interview
with it. Questions.
• Tell me about a specific employee with whom you had difficulty managing and how
you dealt with it.
• Describe how you handled going into a new work situation.
• Describe how you went about learning what was going on in a unit to which you
were just moved.
• Tell me about a change process you were involved in and what role you played.
• Tell me about the best performing team you ever worked on and what your contri-
bution was.

A selection process keen on exploring fit between a potential hire and the Building a
Vocabulary of
new behavioral demands might go beyond asking potential hires to recount past Change
actions. A technique known as behavioral simulation asks applicants to demon- Behavioral simulation
strate behaviors. An illustration of behavioral simulation in screening occurred at potential hires are
Cummins Engine Company’s Jamestown, New York, plant. asked to
Collaboration and teamwork were among the core values of plant manage- demonstrate
behaviors, usually in
ment as they sought to create high employee commitment. As the diesel‐engine a structured role‐
plant grew beyond its original start‐up levels, the management team realized play exercise with
that they would have to pay close attention to person‐organization fit in the re- external observers.
cruitment and selection process. The plant’s high wage structure assured an
abundant supply of applicants, but not just any employee would do. The man-
agement team focused the selection process on behaviors that matched the
plant’s culture and values.
Human resource specialists performed the initial screening. Soon, shop floor
workers—team members in the parlance of the plant—entered the process. Teams
did their own hiring in order to ensure fit with their particular orientation and set
of expectations. In addition to conducting interviews, team members observed
applicants in role‐play situations—typically, team exercises (see Exhibit 5‐5 for a

EXHIBIT 5-5
Components
A group of individuals are assigned a complex problem to solve.
of Behavioral
• Solving the problem requires multiple skills. Stimulation.
• The problem’s solution is such that effective performance can be rated
objectively.
Individuals are placed in teams and asked to solve the problem jointly.
• A facilitator is on hand to offer behavioral observations.
• The joint problem‐solving phase may be videotaped to allow participants to
observe their behaviors.
A trained facilitator leads the team through a discussion of behaviors.
The solutions of the teams are measured, providing an effectiveness metric for each group.
Team members engage in a further discussion of behaviors based on their performance.
114 Chapter 5

EXHIBIT 5-6
Techniques
Mechanism Description Strengths Weaknesses
for Person-
Organization Paper‐and‐ Standardized, • Easy to administer • Produce
Fit Screening. pencil tests quantifiable, and score homogeneous
self‐administered • Inexpensive to use workforce
instruments on large scales • May be
• Simple to compare resisted/
• Valid job success resented by
predictors when applicants
used in combination
with other
mechanisms
Behaviorally Applicants • Can focus on • Deal with
anchored recount specific specific behaviors recounted
interviews examples of past • Valid supplement rather than
experiences to other screening actual
mechanisms behaviors
• Validity increases • Can be slow
when multiple and expensive
interviewers score to administer
results
Behavioral Applicants • Focus on actual • Can be slow
simulation engage in rather than and expensive
role‐playing recounted behaviors to administer
exercise while
observed by
screeners

description of a typical behavioral simulation). After conducting this kind of in-


formal assessment, team members worked together to select future colleagues.
The techniques for person‐organization fit screening (summarized in
Exhibit 5‐6) focus on personality and interpersonal behavior. Screening cannot
ignore technical skills, although it is useful to remember that many technical
skills can be learned relatively quickly. Interpersonal skills are often more dif-
ficult to develop. Organizations would do well to screen for traits that are
both critical to performance success and the most difficult to develop. Attitude,
values, and cultural fit are attributes that are difficult to develop within the
context of organizational life yet vital to the sustained outstanding perfor-
mance of a company.19
Patagonia, an outdoor clothing and gear company, bases its personnel se-
lection decisions more on who the applicants are than on what specific skills
they possess. “This is a unique culture, extremely unique,” said founder/owner
Yvon Chouinard. “Not everyone fits in here.” That is why the company places
its greatest effort into looking for creative and committed “dirt bags,” its term
for outdoor types. “I’ve found that rather than bring in businessmen and teach
People Alignment 115

them to be dirt bags,” Chouinard observed, “it’s easier to teach dirt bags to do
business.”20
Learning business skills, Chouinard insisted, is far easier than learning
how to be a true dirt bag. Hiring individuals with the desired personality traits
and behavioral competencies and then teaching required skills (rather than hir-
ing for skills and attempting to teach personality and behavior) is far more likely
to be successful.

THEORY INTO PRACTICE

It is often easier to teach new skills than to develop new values.

Removal and Replacement


In support of strategic renewal and change, a company may attempt to im-
prove its mix of competencies rapidly by increasing the outflow of personnel
through early retirement programs and/or layoffs. Early retirement increases
the percentage of recently hired employees who may bring with them new
skills, new values, or both. At the same time, personnel reductions allow for a
rapid lowering of payroll costs, which will, it is hoped, improve profitability in
the short term.
Although a workforce reduction approach (turnaround) may be popular, it
has not been terribly effective in helping an organization transform itself into an
outstanding performer. Given the short‐term severance costs of large‐scale re-
ductions (a cost that is considerably higher in Europe than in the United States),
the savings in compensation to the organization and subsequent impact on the
bottom line are often minor.

THEORY INTO PRACTICE

Don’t count on workforce reductions and employee layoffs to produce the


competencies required to support strategic renewal and sustain outstanding
performance.
Building a
Vocabulary of
Layoffs represent large‐scale interventions designed mainly to improve Change
short‐term financial performance. Removal and replacement is a more specific, Removal and
targeted people alignment tool. Removal and replacement deals with individu- replacement a change
als who cannot or will not develop new competencies and behaviors. tool that targets
individuals who
Although well‐designed training programs can indeed be helpful in cannot or will not
supporting new patterns of behavior, success will not be universal. Not all em- adopt behaviors
ployees, after all, are capable of developing the new skills or enacting the new required for the
behaviors. Others might simply prefer not to alter their past behaviors. redesigned
organization.

IMPLEMENTING REMOVAL AND REPLACEMENT When ASDA, a large U.K.‐based


grocery store chain, sought to transform its failing business in the 1990s (see
116 Chapter 5

Chapter 1), removal and replacement became a vital part of the effort. A cross‐
functional renewal team started ASDA’s store‐based change by designing a new
set of roles and responsibilities for store employees at all levels. Team members
realized that the targeted new behaviors would require store managers who
were both willing and able to support the desired new culture.
After selecting three stores to pilot the “new” ASDA—a store culture fo-
cused on value, offering customer responsiveness, with high levels of autonomy
for individual department managers and strategic planning on behalf of store
managers—the renewal team called on the corporate human resources depart-
ment to evaluate current managers. In the terms Collins used, the team wanted
to make sure they had “the right people on the bus” within the targeted stores.
That review revealed that much of the challenge of change would focus on get-
ting “the wrong people off the bus.”
A sense of urgency required that the early change build on a store manage-
ment team that displayed the potential for being able to make the required
changes. Within the first three stores, about 40 percent of the existing managers
were removed and replaced. Some were fired, others moved to other stores not
immediately targeted for change. The renewal team brought in managers to the
selected pilot stores who had been identified by the human resources staff as
more likely to be effective in the new environment.
Removal and replacement does not necessarily involve firing individu-
als. When the general manager of Rubbermaid’s Commercial Products divi-
sion decided to redesign his operation around cross‐functional business teams,
it became clear that many employees were uncomfortable with the new
approach. The vice president of marketing used a sports analogy to character-
ize the differences among employees in their reactions to the requirement for
teamwork:

When we first formed the business teams, we had a lot of tennis play-
ers and golfers on the team, not team players. They had good func-
tional expertise, but because they weren’t team players we were
getting into trouble. They didn’t try to understand how and what
they were doing on their piece of the product was affecting other
functions.21

Having the wrong people on the bus at Rubbermaid Commercial Products


hurt team performance. A member of the upper‐management operating team
responsible for creating and supporting the various business teams in the divi-
sion acknowledged the requirement to engage removal and replacement as a
human resource development tool:

When we have seen teams fail, the majority of the time, it was not due
to lack of technical expertise. It was because there was a person on the
team who was not a team player. We, as an operating team, have to
recognize this, and insure that non–team players are relocated from
the business team to another position which best complements their
personality.22
People Alignment 117

Individuals who could not make the change were replaced and then carefully
located in positions where their behaviors would not block or slow down the
sought‐after change to a team‐based operation.
There will be situations in which replacement and removal is not an im-
mediate option to change leaders. Collins described the change at a medical
school where the institution of tenure—essentially, guaranteed employment
for professors—constrained the actions of the school’s academic director.
Because he could not remove tenured professors, the director of academic
medicine waited for openings to hire “the right people.” By doing so, he creat-
ed “an environment where the wrong people felt increasingly uncomfortable
and eventually retired or decided to go elsewhere.”23 When leaders are clear
about the behavioral implications of the desired new strategy, and employees
are clear that behavioral change is required, individuals may elect to remove
themselves.

GETTING THE SEQUENCE RIGHT: FAIR PROCESS


The change implementation model presented in Exhibit 2‐6 separates sequen-
tially the Help (Step 2) interventions from People Change (Step 3). In that se-
quence, organizations offer employees training in the new required skills and
behaviors (Step 2) before decisions are made about moving employees (Step 3).
That sequence—first Help and then People Change—raises an interesting
question. Why invest in training an employee if, in the very next step of the se-
Building a
quence, the organization may have to remove the same employee? The answer Vocabulary of
lies in the concept of fair process. Change
Fair process is a widely shared perception that decisions are being made Fair process a widely
based on valid criteria. Perceptions of unfair process lead to declining morale, shared perception
increased turnover, and deteriorating commitment. Conversely, perceptions of that decisions are
being made on the
fair process lead to higher levels of individual motivation and commitment to basis of valid
the organization and its changing goals.24 criteria.
W. Chan Kim and Renée Mauborgne suggest that a fair process derives
from three factors:
1. Engagement —involving individuals in decisions that impact them, both
at the front end (collecting valid data) and the back end (allowing individu-
als to refute ideas and assumptions).
2. Explanation —making transparent the thinking that underlies decisions.
3. Expectation clarity —making clear the criteria that have been and will be
used for decision making.25
Employee commitment will remain high even if employees disagree with the
decision, Kim and Mauborgne conclude, “If they believe that the process the
manager used to make the decision was fair.”26
In terms of Step 3 people change decisions, fair process is, in large part, a
function of validity. Are people change decisions based on selective perception
or on the requirements of the new strategy?
Perceptions of fairness can also be impacted by the degree to which an or-
ganization provides employees with due process and appeal mechanisms. What
118 Chapter 5

avenues are available to employees who believe that they have been treated by
people change decisions such as evaluation, promotion, or even firing?
Union contracts typically offer grievance and appeal avenues with union
officials advocating for members. In nonunion settings, employers may provide
their own grievance and appeal mechanisms—panels of managers and employ-
ees; trained fact finders, mediators, or arbitrators—that can either make sugges-
tions or overturn decisions if they find an employee has been treated unfairly.

THEORY INTO PRACTICE

Unless people change decisions are viewed by employees as being fair in


process, valid in content, and appropriate in sequence, the decisions can un-
dermine commitment to change implementation.

Finally, perceptions of fairness will be based on the timing of people changes.


Perceived fairness will be enhanced by a sequence of actions that has already
been included:
• A shared diagnosis that has surfaced the relationship between past behav-
ioral patterns and current performance shortcomings
• A redesign process that has identified new patterns of behavior required
for sustained outstanding performance
• Training and development has offered current employees an opportunity
to gain and demonstrate required new behaviors
At this stage, individuals who cannot or will not make the required changes have
been identified. People change decisions—promotion, removal and replace-
ment—can be seen as conforming to the imperatives of outstanding performance
rather than to the selective perception of individual supervisors.

Conclusion
Transformational change demands new behav- In the redesign stage (Step 1), employees
iors from employees. Patterns of behavior that create a behavioral model for how the business
have sustained a company in the past will need will respond to those shifts in order to achieve
to be altered in response to the dynamics of the and maintain outstanding performance. At this
competitive environment. The diagnostic stage stage, leaders face a new challenge. Employees
of change has surfaced a misfit between cur- who have succeeded in the past may not pos-
rent behaviors and competitive realities. Global sess the skills required to excel in the future.
customers, for example, may be expecting Companies may do an assessment to analyze
greater coordination between a company’s var- “old” and “new” patterns of behavior and iden-
ious units, local customers may be expecting tify the gap that exists within their current
greater employee responsiveness to their spe- human resource.
cific and special needs, and increasing compe- Now is the time in the change implemen-
tition may be demanding faster innovation and tation process for leaders to turn their attention
greater speed to market with new products to people alignment. Organizations first seek to
and offerings. help (Step 2) employees acquire the necessary
People Alignment 119

competencies and skills. Then, in Step 3, change implementation looks at ways to


change the people in the organization. When Step 3 involves removal and re-
placement, those decisions are viewed by employees as being both fair and valid,
those decisions will support the change effort.
Now at the final stage (Step 4), organizational leaders can seek to reinforce
behavioral patterns. For that purpose, they turn to new structures and systems.
That will be the subject of Chapter 6.

Discussion Questions
1. What are the important differences between Step 2 4. The author sees removal and replacement as a
(Help) and Step 3 (People Change)? key element of aligning people with the require-
2. What are the main differences between hiring for ment of a new strategy. Do you agree or disagree?
task and hiring for organizational fit? When is Why?
each one most appropriate?
3. What specific recommendations would you make to
an organization seeking to avoid training fade‐out?

Case Discussion
Read “‘Employee First, Customer Second’: Vineet Nayar 2. Do you see potential problems implementing
Transforms HCL Technologies,” and prepare answers to Nayar ’s people alignment initiatives within
the following questions: India?
1. Explain how—or if—Vineet Nayar’s new strategy 3. Are Nayar’s ideas about people alignment trans-
for the company and his approach to people ferable to other industries and other countries?
alignment reinforce each other.

“EMPLOYEE FIRST, CUSTOMER SECOND”: VINEET NAYAR


TRANSFORMS HCL TECHNOLOGIES
Headquartered in Noida, a suburb of New Delhi, HCL Technologies competed
in India’s hyperdynamic information technology (IT) sector.27 Founded in 1976,
HCL defined itself as “one of India’s original IT garage startups.” For its first 25
years, HCL found success offering IT hardware. However, as the global IT indus-
try shifted from hardware to software and to offering infrastructure services,
HCL proved to be less than nimble.
In April 2005, the company looked within and promoted Vineet Nayar to
the position of president. Nayar immediately set his goal for HCL: transforma-
tional change within the company in order to position HCL as a global leader in
transformational outsourcing services “working with clients in areas that impact
and redefine the core of their business.”
120 Chapter 5

Strategic Renewal
Strategic renewal at HCL would involve, Nayar announced, a movement away
from “small time engagements” and toward high value‐added integrated service
consulting and outsourcing. In order to turn that vision into reality, Nayar would
oversee transformational change at his $1.5 billion, 46,600‐employee company.
(HCL had operations in 11 countries including the United States, France, Germany,
China, and Japan, with 96 percent of its employees worldwide being Indians.)
His first strategic goal was to pay a great deal more attention to internal
operating efficiencies than HCL had in the past, while simultaneously emphasiz-
ing innovative offerings. Nayar would, he promised, “put our house in order by
rejuvenating employees and improving operating efficiencies.”
From his past management experience, Nayar (who had spent seven years
as an HCL engineer before taking the assignment of running an internally devel-
oped start‐up company) had come to believe that employees rather than leaders
would be the source of improvement and innovation.
India’s traditional hierarchical culture led executives to take a “dictatorial”
approach to management. Studies of national culture have found that India ranks
high on two dimensions: power distance and long‐term orientation. High‐power
distance suggests greater acceptance of hierarchical authority and a greater capacity
to follow than lead. A high score on the long‐term orientation index suggests a pref-
erence for thrift, perseverance, and predictability. If HCL was to compete success-
fully against larger Indian competitors such as Infosys, Nayar wanted to “invert the
pyramid,” he said, explaining his meaning in blunt terms. For most companies, “it’s
the employee who sucks up to the boss.” Nayar’s goal for HCL was to create a cul-
ture where “as much as possible, [we] get the manager to suck up to the employee.”

Rejuvenating Employees
Three months after assuming the president’s position, Nayar announced two
initiatives designed to rejuvenate employees and unleash their creative poten-
tial. Both initiatives, he also admitted, were intended to be “shocks” to the sys-
tem and signal a shaking up of the old culture.

“Employee First, Customer Second”


In July 2005, Nayar introduced his “Employee First, Customer Second” initiative
in order to “invert the pyramid.” That initiative, explained Dilip Kumar
Srivastava, head of corporate human resources, had four strategic objectives:
1. To provide a unique employee environment
2. To drive an inverted organizational structure
3. To create transparency and accountability in the organization
4. To encourage a value‐driven culture
Added Nayar, “I wanted value focused employees that were willing and able to
drive an innovative, sophisticated experience for customers. From the start,
though, I was clear: Employee First was not about free lunch, free buses, and
subsidies. It was about setting clear priorities, investing in employees’ develop-
ment, and unleashing their potential to produce bottom‐line results.”
People Alignment 121

360° Performance Evaluations


Along with announcing the Employee First, Customer Second philosophy, Nayar
introduced 360° performance evaluations. Initially, the evaluations were per-
formed on Nayar and his top 20 managers. That was not the shock however;
rather, it was Nayar’s directive that the results of that evaluation be posted on-
line for any employee to see.
Executives report to feelings of unease at the airing of those results. Said R.
Srikrishna, head of the U.S. infrastructure services division, “There was this
whole picture of me that [emerged] as a heavy taskmaster. It was very unsettling
the first time.”
For Nayar, the publication of 360° results signaled that HCL was serious
about his Employee First philosophy. Nayar expanded the system so that em-
ployees can see the results for their managers as well as their peers. Nayar
assured them that the ratings would not be used to determine bonuses or promo-
tions. Instead, they would allow the individuals to work with the company’s
human resources department to create developmental programs for them.
Nayar appreciated that the idea of posting results would be shocking, at
first, to employees. He referred to this as disruptive thinking. “When I put my
360° evaluation in the Intranet within my first 90 days of taking charge at HCL
Technologies, it showed that the CEO was willing to put his neck on the line. It is
a simple gesture that galvanizes others into thinking on similar lines. We [India]
claim to be the world’s largest democracy, but while running our businesses we
are dictatorial toward our employees.”

Additional People Alignment Initiatives


Some additional initiatives started by Nayar include the following:
• HCL’s training program was renamed “Talent Transformation and
Intrapreneurship Development.” “We did not just want to have swanky
off‐site development programs, then have employees return to work and
go back to status quo,” explained Anand Pillai, who headed the program.
Instead, HCL rotated employees through multiple projects and jobs and
then helped them “understand the work of their operation at both the tacti-
cal and strategic level.”
• HCL abandoned performance‐based bonuses and adopted, instead, what
was called “trust pay.” Aimed most especially at junior engineers, pay
would be fixed at the beginning of the year. That represented a dramatic
break from the industry standard of having variable pay account for up to
30 percent of total compensation. “It increased our cost base,” admitted
Nayar, but the idea was, we’d pay you fully, but we trusted that you would
deliver. It was intended to reduce transaction volume and increase trust.”

Further Challenges
By 2007, Nayar could point to some impressive improvements. Under his leader-
ship, HCL has achieved the highest level of organic growth—defined as growth
achieved through internal development rather than by acquisitions and
122 Chapter 5

mergers—among India’s IT sector. Employee retention had been a particular


problem for HCL. In 2005, the company’s attrition rate—the percentage of total
employees who leave a company in a year—was 20.4 percent, among the highest
in the industry. In 2007, that figure dropped to 17.2 percent (still higher than
many competitors). At the same time, competition remained unrelenting and
was becoming more global. IBM announced plans to invest $6 billion in India in
the upcoming three years, up from $2 billion in the previous three years.

Endnotes
1. I first became aware of this story from reading Human Resource Management (Homewood, IL:
Ronald Heifetz, Alexander Grashow, and Irwin, 1991); Donald J. Campbell, Kathleen M.
Marty Linsky, “Leadership in a (Permanent) Campbell, and Ho‐Beng Chia, “Merit Pay,
Crisis,” Harvard Business Review (July—Aug. Performance Appraisal, and Individual
2009), pp. 62–69. Additional material comes Motivation: An Analysis and Alternative,”
from “Best Buy Gets in Touch with its Feminine Human Resource Management 37 (Summer 1998),
Side,” USA Today (Dec. 20, 2006); Jackie Crosby, pp. 131–146.
“Women’s Warrior at Best Buy,” Star Tribune 6. Tracy Maylett and Juan Riboldi, “Using 360°
(Dec. 18, 2007); Bala Chakravarthy and Peter Feedback to Predict Performance,” Training and
Lorrange, “Continuous Renewal and How Best Development (Sept. 2007), pp. 48–52.
Buy Did It,” Strategy and Leadership 35 (2007), 7. M. M. Greller, “Subordinate Participation and
pp. 4–11. Reactions to the Appraisal Interview,” Journal
2. George Bohlander and Kathy McCarty, “How of Applied Psychology 6 (1975), pp. 544–549;
to Get the Most from Team Training,” National R. J. Burke, W. Weitzel, and T. Weir,
Productivity Review (Autumn 1996), pp. 25–35. “Characteristics of Effective Employee
3. Raymond A. Noe, Employee Training and Performance Review and Development
Development (Boston, MA: McGraw‐Hill Irwin, Interviews: Replication and Extension,”
2002), pp. 150–175. These conclusions were Personnel Psychology 31 (1978), pp. 903–919;
confirmed empirically in Dian L. Seyler, Charles C. Manz and Henry P. Sims, Jr., “Self‐
Elwood F. Holton III, Reid A. Bates, Michael F. Management as a Substitute for Leadership: A
Burnett, and Manuel A. S. Carvalho, “Factors Social Learning Perspective,” Academy of
Affecting Motivation to Transfer Training,” Management Review (1980), pp. 361–367; R. L.
International Journal of Training and Development Dipboye and R. de Pontbriand, “Correlates of
2 (1998), pp. 2–16. Employee Reactions to Performance Appraisal
4. This research is reviewed in Herbert M. Meyer, and Appraisal Systems,” Journal of Applied
“A Solution to the Performance Appraisal Psychology (1981), pp. 248–251; J. M. Ivancevich
Feedback Enigma,” Academy of Management and J. T. McMahon, “The Effects of Goal
Executive 5 (1991), pp. 68–76. Setting, External Feedback, and Self‐Generated
5. Gary P. Latham and Kenneth N. Wexley, Feedback on Outcome Variables: A Field
Increasing Productivity Through Performance Experiment,” Academy of Management Journal
Appraisal (Reading, MA: Addison‐Wesley, (1982), pp. 359–372; D. M. Herold, R. C. Liden,
1981); David B. Balkin and Luis Gomez‐Mejia, and M. L. Leatherwood, “Using Multiple
New Perspectives on Compensation (Englewood Attributes to Assess Sources of Performance
Cliffs, NJ: PrenticeHall, 1987); C. Longenecker, Feedback,” Academy of Management Journal
H. Sims, and D. Gioia, “Behind the Mask: The (1987), pp. 826–835.
Politics of Employee Appraisal,” Academy of 8. Richard E. Boyatzis, The Competent Manager: A
Management Executive 1 (1987), pp. 183–191; Model for Effective Performance (New York:
George T. Milkovich and John W. Bourdeau, Wiley, 1992); Richard E. Boyatzis, Scott S.
People Alignment 123

Cowen, David A. Kold, and associates , Organizations: A Test of Homogeneity of


Innovation in Professional Education: Steps on a Personality Hypothesis,” Journal of Applied
Journey from Teaching to Learning (San Francisco, Psychology 83 (June 1998), pp. 462–470.
CA: Jossey‐Bass, 1995). 16. Quotes from Christopher A. Bartlett and Meg
9. Research has demonstrated that lagging orga- Wozny, Microsoft: Competing on Talent (Boston,
nizational performance is one of the key rea- MA: Harvard Business School Publishing,
sons for turning to outside leadership. See 2000), p. 2.
Donald C. Hambrick and Phyllis A. Mason, 17. Neal Schmitt, “Employee Selection: How
“Upper Echelons: The Organization As a Simulations Change the Picture for Minority
Reflection of Top Managers,” Academy of Groups,” Cornell Hotel and Restaurant
Management Review 9 (1984), pp. 193–206; Administration Quarterly 44 (Feb. 2003), pp. 25–33.
Rajeswararao Chaganti and Rakesh Sambharya, 18. William C. Byham, “Recruitment, Screening,
“Strategic Orientation and Characteristics of and Selection,” in William R. Tracey, ed.,
Upper Management,” Strategic Management Human Resources Management and Development
Journal 8 (1987), pp. 393–401; James P. Guthrie Handbook (New York: AMACOM, 1994),
and Judy D. Olian, “Does Context Affect p. 197.
Staffing Decisions? The Case of General 19. Donald Bowen, Gerald E. Ledford, Jr., and
Managers,” Personnel Psychology 44 (1991), pp. B. Nathan, “Hiring for the Organization, Not
263–292. the Job,” Academy of Management Executive 5
10. Quoted in Douglas T. Hall, “Dilemmas in (1991), pp. 35–51; Randy W. Boxx and Randall
Linking Succession Planning to Individual Odom, “Organizational Values and Value
Learning,” Human Resource Management 25 Congruency and their Impact on Satisfaction,
(Summer 1986), p. 237. Commitment, and Cohesion,” Public Personnel
11. Anil K. Gupta, “Matching Managers to Management 20 (1991), pp. 195–205; Jennifer
Strategies: Point and Counterpoint,” Human Chatman, “Matching People and Organizations:
Resource Management 25 (Summer 1986), pp. Selection and Socialization in Public Accounting
215–234. Firms,” Administrative Science Quarterly 36
12. Jim Collins, Good to Great: Why Some Companies (1991), pp. 459–484; Charles A. O’Reilly, Jennifer
Make the Leap and Others Don’t (New York: Chatman, and David F. Caldwell, “People and
Harper Business, 2001). Organizational Culture: A Profile Comparison
13. The notion of “personality fit” between indi- Approach to Assessing Person‐Organization
viduals and organizations is explored in Fit,” Academy of Management Journal 34 (1991),
Benjamin Schneider, Harold W. Goldstein, and pp. 487–516; Elizabeth F. Cabrera and Jaime
D. Brent Smith, “The ASA Framework: An Bonache, “An Expert HR System for Aligning
Update,” Personnel Psychology 48 (1995), p. 749. Organizational Culture and Strategy,” Human
14. Disney recruiter quoted in Ronald Henkoff, Resource Planning 22 (1999), pp. 51–60.
“Finding, Training, and Keeping the Best 20. Chouinard quoted in Edward O. Wells, “Lost in
Service Workers,” Fortune (Oct. 3, 1994), p. 114. Patagonia,” Inc. (Aug. 1992), p. 54.
For research on personalities and the attrac- 21. Teresa Amabile and Dean Whitney, Business
tion/selection process, see Chris Argyris, Teams at Rubbermaid Inc. (Boston, MA: Harvard
“Some Problems in Conceptualizing Business School Publishing, 1997), p. 14.
Organizational Climate: A Case Study of a 22. Ibid.
Bank,” Administrative Science Quarterly 2 (1957), 23. Collins, Good to Great, p. 41.
pp. 501–520; Benjamin Schneider, “The People 24. The topic of fair process—and the related sub-
Make the Place,” Personnel Psychology 40 (1987), ject, organizational justice—has received a
pp. 437–454; Benjamin Schneider, Harold W. great deal of attention of late. See, for example,
Goldstein, and D. Brent Smith, “The ASA Kees Van Den Bos, Henk Wilke, Lind E. Allen,
Framework: An Update,” Personnel Psychology and Riël Vermunt, “Evaluating Outcomes by
48 (1995), pp. 747–773. Means of the Fair Process Effect: Evidence for
15. Benjamin Schneider, D. Brent Smith, Sylvester Different Processes in Fairness and Satisfaction
Taylor, and John Flannor, “Personality and Judgments,” Journal of Personality and Social
124 Chapter 5

Psychology 74 (June 1998), pp. 1493–1503; Kees Employees Ready for a Challenge,” Business
Van Den Bos, “Assimilation and Contrast in India Intelligence (June 21, 2006), p. 8; Linda A.
Organizational Justice: The Role of Primed Hill, Farun Khanna, and Emily A. Stecker, HCL
Mindsets in the Psychology of the Fair Process Technologies (A‐B) Abridged (Boston, MA:
Effect,” Organizational Behavior and Human Harvard Business School Publishing, 2007);
Decision Processes 89 (Sept. 2002), pp. 866–881; “Hungry Tiger, Dancing Elephant,” The
W. Chan Kim and Renée Mauborgne, “Fair Economist (Apr. 7, 2007), pp. 67–69; “Vineet
Process: Managing in the Knowledge Nayar’s Inverted Pyramid,” CNN Money (July
Economy,” Harvard Business Review 81 (Jan. 12, 2007); “How Vineet Nayar Transformed HCL
2003), pp. 127–136; Kwok Leung, Kwok‐Kit Tech,” Rediff India Abroad: India as It Happens
Tong, and Lind E. Allan, “Realpolitik Versus (Nov. 7, 2007); Jena McGregor, “The Employee Is
Fair Process: Moderating Effects of Group Always Right,” Business Week (Nov. 19, 2007),
Identification on Acceptance of Political pp. 80–82; Peter Cappelli, Harbir Singh, Jitendra
Decisions,” Journal of Personality and Social V. Singh, and Michael Useem, “Leadership
Psychology 92 (Mar. 2007), pp. 476–489. Lessons from India,” Harvard Business Review
25. Kim and Mauborgne, “Fair Process,” p. 132. 88 (Mar. 2010), pp. 90–97; Vineet Nayar, “A
26. Ibid., p. 127. Maverick CEO Explains How He Persuaded His
27. This case is based on information from the fol- Team to Leap into the Future,” Harvard Business
lowing sources: www.hcltech.com; “Wanted: Review 88 (June 2010), pp. 110–113.
CHAPTER

6 Reinforcing New Behaviors

A s we have seen, effective change implementation proceeds in a logical sequence of


interventions. A dynamic competitive environment triggers the requirement for change.
Diagnosis sets the stage for effective change implementation by surfacing any
misalignment that may exist between patterns of internal behavior and a desired new strategy.
In Step 1, redesign considers alternative patterns of behavior that will help the organization
create and sustain outstanding performance. Out of the diagnostic process comes a shared
understanding of the roles and responsibilities that employees must enact and the
relationships that employees must create both among themselves and with key external
stakeholders.
In Step 2, training and development helps employees acquire the required new skills and
behaviors.
In Step 3, people change decisions ensure that the organization has employees with the
needed competencies and behaviors.
Now, at Step 4, organizational leaders reinforce the new behaviors through what might be
thought of as the “hardwiring” of the organization: structures, systems, and technologies. This
chapter will explore the choices available in terms of hardwiring and analyze the importance of
placing structural, system, and technology changes at the back end of a change process
rather than leading with those interventions.
In particular, this chapter will:
• Identify the major structural choices faced by organizational leaders and the behavioral
implications of those choices
• Consider the role of compensation in shaping desired behaviors
• Analyze the role of information technology (IT) in impacting employee behaviors

125
126 Chapter 6

Before doing so, we will examine an attempt by a large national retail chain
to restructure in order to revive their market during a recession. As you read this
short case, ask yourself:
• How would you evaluate Macy’s response to the recession?
• Is it really feasible to do both turnaround (layoffs) and transformation
(restructuring) simultaneously?
• What and whose behaviors is Macy’s attempting to change?

LOCALIZING A RETAIL GIANT CHAIN


Macy’s is the largest division of the retail giant Macy’s Inc. (which also operates
macys.com, Bloomingdale’s, and bloomingdales.com). The department store
chain sells clothing and accessories for men, women, and children, as well as a
wide assortment of home furnishings. The chain operates in 45 states and, until
the 2009 construction of Shinsegae Centum City in Busan, South Korea, boasted
the largest single department store in the world (in New York City).
In the 1990s, the department store industry in the United States experienced
considerable restructuring. Federated Department Stores purchased the Macy’s
chain and soon consolidated many of the other brands it had recently acquired—
Jordon Marsh, Filene’s, Rich’s, Marshall Field’s, Famous‐Barr among them—under
the Macy’s banner. In 2007, Federated itself changed its corporate name to Macy’s.*
Like other retailers, Macy’s executives understood that while all of these
consolidations offered many advantages associated with the economies of scale
and scope, they also tended to deprive the stores of local focus or flavor.†
Decisions about what merchandise to carry and how to market and display that
merchandise were made in corporate headquarters. Macy’s relied on sophisti-
cated market research, of course. But still, each store tended to resemble every
other one. They had all become more or less generic.
The recession of 2008 led to cost cutting—4 percent of Macy’s jobs were
eliminated—but Macy's executives also wanted to increase revenues. Their strat-
egy for doing that, labeled My Macy’s, would move away from the cookie‐cutter
image of the chain by emphasizing local appeal and regional differentiation. The
company experimented with six stores, allowing local managers greater say over
what merchandise to carry and how to market it. Product mix could vary by
region. Even the same products could be packaged and marketed according to
local tastes. Decisions would now be made by local managers. This was an
advantage over corporate market research, explained CEO Terry Lundgren. “It is
much more accurate to have people living in the marketplace tell you, ‘This is
who is shopping in my store.’”
With the success of these half‐dozen pilots, Lundgren decided to roll out
My Macy’s to the chain’s 800‐plus stores. To do that, he knew that he would have

*So, Macy’s is the name of both the corporate umbrella and its largest single business unit. This case
focuses on the Macy’s business unit.

Economies of scale allow an organization to become more efficient by increasing the number of
times it performs a single activity, while economies of scope allow a company to gain efficiencies by
performing more than one activity with spare capacity.
Reinforcing New Behaviors 127

to change the company’s highly centralized structure. The businesses would


now be subdivided into 69 “geographic districts” (approximately 12 stores per
district). Results proved promising, helping Macy’s recover from the recession.
“We see the power in the local input from our experience over the past year,”
said vice chairman Tom Cody. “We know that the critical piece comes from the
intelligence of the local market.”

SELECTING THE APPROPRIATE ORGANIZATIONAL FOCUS


Macy’s new strategy called for regional differentiation, while its formal structure
made such differentiation difficult, if not impossible. So, in order to achieve that
strategy, Macy’s changed its structure. After running six pilots, the company
moved to a focus on regional markets.
In all organizations, the activities of employees need to be focused on two
separate issues:
1. The functional or technical activities required to achieve the desired out-
comes of the organization.
2. Responsiveness to the external marketplace (customers, suppliers, com-
petitors, regulators, and so on) in which the organization has elected to
compete.
No organization can select one focus to the exclusion of the other; the focus of
employees must be simultaneous. Nonetheless, organizational leaders may
choose to emphasize one over the other, and that emphasis is likely to change
over time in response to the dynamism of the competitive environment and the
strategic choices of the organization. It is therefore important that leaders under-
stand the impact that various structural choices will have on the focus of
employees and, consequently, on their behavior. Organization structure is a
mechanism for helping to achieve the desired focus. Therefore, when a new
strategy calls for a new focus, it is likely that the structure of the organization
will need to change.
Building a
Choices of Organizational Structure Vocabulary of
Change
Organizational structure refers to the formal manner in which employees are Organizational
subdivided into units and divisions as a way of focusing their efforts on the structure the formal
required tasks of the company. manner in which
employees are
Structures impact behaviors by defining the context for work. The change subdivided into
implementation question, therefore, becomes two fold: units and divisions
as a way of focusing
1. What structures to use? efforts on the
2. How and when do we change structures? required activities of
the company.
Let’s examine the what question first: what are the structural options available to
leaders?
A quick look at an organizational chart reveals the choices that leaders
have made concerning structure. A chart may show, for instance, functional units
such as manufacturing, marketing, and engineering. Another chart might
128 Chapter 6

include product‐oriented divisions, such as Macy’s regional divisions. Far more


complex charts might find lines of responsibility crisscrossing both horizontally
and vertically, linking functions with product lines and perhaps even geographic
regions.
Although structure is often thought of in terms of boxes and lines—who
holds what title and who reports to whom—the key question is really one of
focus

THEORY INTO PRACTICE

Organization structure is more than just boxes and lines; it is a way to focus
the activities of employees.

FOCUS ON FUNCTIONAL EXCELLENCE In their earliest founding stages, organiza-


tions typically exist in a prestructural state. When Open Markets, Inc. (OMI), a
software tools and development business started, for instance, 12 employees
shared office space in a Cambridge, Massachusetts, basement. They had no job
titles but only the most general definition of individual responsibilities. The tasks
that needed to be accomplished were simply shared.1
At some point, as organizations evolve, leaders adopted a more formal
structure to add greater order, stability, and focus. “As we’ve grown,” noted an
OMI employee, “some people feel it is difficult not knowing who your boss is,
who will evaluate your performance, where to go for help. As we get larger, we
need a little more structure.”2 At OMI, employees naturally assumed responsi-
bilities for the various functional activities of their organization: software devel-
opment, of course, but also marketing, sales, vendor relationships, finance, and
administration.

THEORY INTO PRACTICE

As organizations move beyond the small, start‐up stage, they are likely to
adopt a simple functional structure: people with similar skills performing
related activities are placed in functional departments.

Over time, as an organization continues to grow, individuals with like‐


Building a
Vocabulary of
minded interests, inclinations, and competencies find a home among one or
Change another of these functional activities. In doing so, an organization can change by
Functional structure a adopting a functional structure: a structure meant to focus activities on the func-
formal design choice tional or technical tasks of the organization. Exhibit 6‐1 depicts a prototypical
that groups people functional organization chart for an Internet portal provider.
together in units
based on common
By changing to a functional structure, organizations seek to bring discipline
tasks and specialized and efficiency to an operation. Functional structures help the organization
skills. achieve efficiencies of operation and standardization of offerings. Functionally
structured organizations are in a position to fine‐tune the product and service
offerings, making sure the customer, “gets the most for the least.”3
Reinforcing New Behaviors 129

EXHIBIT 6-1
Chief Functional
Executive Organizational
Officer Chart.

President

Chief
Business Brand
Financial Sales Engineering Surfing Production
Development Marketing
Officer

THEORY INTO PRACTICE

Use functional structures to shape the development of technical skills and


expert knowledge on the part of employees.

No matter how functionally oriented an organization might be, there must


also be some simultaneous capacity to respond to the marketplace. Functional
structures attempt to achieve that responsiveness through a well‐ordered sequen-
tial process.
In a functionally structured manufacturing firm, for example, we can fol-
low the sequence:
1. Ideas from the marketplace enter the organization through the marketing
department.
2. Engineers translate those ideas into designs.
3. Production transforms designs from concept to reality.
4. Products are delivered to customers via the sales department.
5. The financial department attends to such matters as profit margin and
return on investment.
It is the responsibility of the general manager who sits atop the functional
structure—sometimes a CEO, a senior vice president, or a managing director—to
assure that the appropriate level of coordination among these sequential func-
tional activities is achieved.
Because leaders call upon structures to focus employee behaviors, it is
important to ask: Just what kind of employee behaviors can functional structures
be expected to reinforce?
Let’s start with the rigorous development of in‐depth technical expertise.
This development is enhanced by a functional career path that typically moves
employees upward through a specific department. The organization hires indi-
viduals who enter at a low level of a function, then move vertically upward
130 Chapter 6

through that function as performance warrants. The organization gains from


functional career path by developing and retaining their employees’ expertise
and knowledge. The individual gains clear career expectations, speedy upward
mobility, and rapid salary escalation. Organizations whose success depends
heavily on the depth of their technical competencies—accounting firms, hospi-
tals, law partnerships, and universities, for instance—typically adhere to this
functional pattern.
Organizational leaders may find that by moving to functional structures
they inadvertently prompt behavioral patterns that can prove problematic. If an
organization seeks enhanced innovation and speedier responsiveness to the
marketplace, leaders may find a functional structure to be limiting and inhibit-
ing. By focusing employees on achieving efficiencies and incremental improve-
ments in existing products and services, functional structures may render
employees less likely to be able to respond quickly with new and innovative
offerings.
Much of the behavioral problem inherent in functional structures relates
to low levels of coordination among employees, especially employees across
different functional units. Functionally trained and developed individuals may
find coordinated efforts with individuals from other departments to be diffi-
cult. Over time, insulated units tend to develop their own ways of thinking,
unique patterns of working, speaking, conceptualizing time, and even defining
effectiveness.4
In functional structures, employees have little opportunity to develop the
competencies required of working together across departmental boundaries. At
its worst, a kind of “us against them” mentality can evolve as employees battle
each other across functions rather than uniting against common (external) com-
petitors. The skills of the general manager may not be sufficient to overcome
these structural barriers and achieve the required coordination.

THEORY INTO PRACTICE

Organizations seeking to create seamless coordination across functions may


find that the silos erected through functional structures get in the way.

Organizational change efforts may seek to deal with the challenges raised
by a functional structure. The particular challenge is to enhance marketplace
responsiveness. One of the most common ways of achieving that focus is to
adopt a divisional structure.
Building a
FOCUS ON MARKETPLACE RESPONSIVENESS As organizations grow in both size
Vocabulary of
Change and complexity, they often seek greater external focus. Most typically, they turn
Divisional structure a to a divisional structure as a way of reinforcing behaviors that respond to the
formal design choice marketplace.
that groups people All activities associated with a particular product or families of products
together in units
are brought together in a divisional unit. A general manager, often a senior vice
based on common
products, services, or president, divisional president, or managing director, sits atop each unit. That
customers. structure is depicted in Exhibit 6‐2 for a prototypical software developer.
Reinforcing New Behaviors 131

EXHIBIT 6-2
Chief Divisional
Executive Organization Chart.
Officer

President

Chief
Enterprise Commerce Financial
Financial Publishing Retail
Products Products Services
Officer

Another divisional option is to adopt a geographically focused structure.


To reinforce geographic responsiveness, a fast‐food chain, which is essentially a
single‐product operation, can create separate geographic divisions. McDonald’s
non‐U.S. operations are subdivided into four regions: Asia/Pacific/Middle
East/Africa, Canada, Europe, and Latin America. The company does so because
executives believe that important differences exist in these multiple regions—in
customer tastes and expectations, in supplier relationships, in government regu-
lations, and in financial and labor markets—that require a differentiated
response.
As we saw in the case of Macy’s, regional structures may also be called
upon to bring greater focus on local markets even within the same country.
Differences in taste, style, and customer preferences do exist across regions. By
creating 69 geographic districts, Macy’s enhanced local autonomy which allowed
for local responsiveness. The districts were not entirely autonomous, however,
with corporate headquarters in Cincinnati still providing some centralized
support functions.

THEORY INTO PRACTICE

Divisional structures enhance coordinated focus on the marketplace but make


integration across highly autonomous divisional units difficult to achieve.

The object of the divisional structure, whether it is based on products, cus-


tomer groups, or geographic locations, is to reinforce a market focus. Product
divisions pay close attention to the expectations and needs of customers for their
particular offerings, while geographic divisions can attend to the special require-
ments and habits of the customers in their regions.
It is precisely that focused attention on the external marketplace that, it is
hoped, allows companies organized divisionally to meet the challenge of coordi-
nation faced by functionally structured companies. By concentrating on a clearly
defined and understood market segment, divisions seek to win by offering new
products and services. Rapid responsiveness to shifting market realities is the goal.
132 Chapter 6

Changing from a functional to a divisional structure is not cost‐free.


Functional organizations seek the economies of scale; divisional organizations
can be thought of as doing the opposite. In pure form, each functional activity is
repeated in each division.
Adopting a divisional structure is meant to shape market‐focused behav-
iors. It is not, in and of itself, any guarantee of true responsiveness. Remember,
each product division is a self‐contained functional organization. The problems
often associated with functional organizations—internal focus, poor coordina-
tion, sluggish response time—can accrue over time in a product division. In mul-
tidivisional organizations, problems of coordination may arise across and
between divisions. In order to respond to such problems, organizational leaders
may now seek a kind of collaborative balance between functional and product
divisions.

THEORY INTO PRACTICE

Functional silos can exist within divisional structures.

Building a DUAL FOCUS Leaders opt for a functional structure in order to emphasize effi-
Vocabulary of
Change
ciencies and depth of technical know‐how and experience. A shift to divisional
Matrix structure a structures helps reinforce external focus on the marketplace. However, many
formal design choice organizations cannot make an either/or choice between internal and external
that groups people focus. As the external environment becomes increasingly complex, organization-
by both function and al leaders need to consider increasing the complexity of their internal structures.
product or product
and geographical
One choice available to organizations is the matrix structure. Exhibit 6‐3
region. depicts one type of matrix structure. In that organization, both divisional and
functional structures exist in an overlapping fashion, allowing for dual focus.

EXHIBIT 6-3
Matrix Chief Executive
Organizational Officer
Chart.

Product Product Product


Line A Line B Line C

Marketing

R&D

Production

Procurement

Finance
Reinforcing New Behaviors 133

The requirement for dual focus might also arise from geographic demands.
ABB built a geographic matrix through three regional groupings—Europe/
Middle East/Africa, the Americas, and Asia—while simultaneously seeking seg-
ment focus through power, transmission and distribution, and industry and
building systems divisions. Strategic focus again lies at the heart of the organiza-
tion’s challenge. While functional and product divisions prioritize their focus,
matrix structures seek dual focus, attempting to move both quickly and efficiently.

THEORY INTO PRACTICE

Organizations can move to a matrix structure to help support dual focus—on


technical expertise and marketplace responsiveness.

The most striking—and for many people the most troubling—feature of the
matrix is the lack of a single reporting relationship. Consider the matrix structure
depicted in Exhibit 6‐3. Assume you are a market analyst housed in product line
C. Who is your boss: the manager of product line C or the head of marketing? The
answer, of course, is: both. In order to achieve the desired complexity of focus,
you will be reporting to and expected to be responsive to both simultaneously.
The notion of dual reporting relationships violates one of people’s most
deeply held assumptions about the desirability of a clear and unified chain of
command in organizations. By breaking that clear chain of command, matrix
structures require employees to deal with competing, even conflicting directions
from multiple bosses. Ambiguity, tension, even conflict—these are all likely out-
comes of a matrix. That likelihood undoubtedly accounts for the high failure
rate—perhaps as high as 70 percent—reported by organizations who have
attempted to implement a matrix.5
Despite their obvious complexities and ambiguities, when matrix organiza-
tions reflect the complexities and ambiguities in their external environment, they can
enable greater responsiveness. Because most organizations “have to do business
with multiple customers, multiple partners, multiple suppliers, and compete against
multiple rivals can multiple areas of the world,” writes Jay Galbraith, they will need
a structure that allows them to deal with multiple constituencies.6 In order to respond
to multiple constituencies, IBM currently maintains not two but three overlapping
structures: products (hardware, software, and business solutions), customer groups
(large corporations, governments, health care facilities, etc.), and geographic regions.

THEORY INTO PRACTICE

Matrix structures will be most effective in organizations that can manage


ambiguity, tension, and conflict well.

Despite the difficulties inherent in managing a matrix, it is often necessary


in order to compete effectively in today’s highly fragmented competitive envi-
ronment. Organizations that are able to make a matrix function effectively will
enjoy a great competitive advantage.
134 Chapter 6

Building a FOCUS ON THE SUPPLY CHAIN The advent of sophisticated information technol-
Vocabulary of ogy and the geographic dispersion of technological excellence and knowledge
Change
Supply Chain
have encouraged organizations to focus on their supply chain. Organizations
activities called upon develop competitive advantage and create shareholder wealth through an inter-
by the organization dependent sequence of activities known as the supply chain.
to produce and The supply chain can be defined as “the separate activities, functions, and
delivery products business processes that are performed in designing, producing, marketing, deliv-
and services to the
custormer.
ering, and supporting a product or service.” 7 Horizontally linked structures
focus employees on the interrelated activities of the supply chain.
Horizontally linked structures usually supplement rather than replace
Building a existing functional or product structure in an organization. Dell Computers, a
Vocabulary of pioneer in supply chain linkages, relies on what founder Michael Dell calls “vir-
Change
tual integration.” Dell focuses its attention on “how we can coordinate our
Horizontally linked
structure a formal activities to create the most value for customers.”8 Companies as varied as Zara,
design choice that Wal‐Mart, Southwest Airlines, and Shouldice Hospital call upon horizontally
groups people along linked structures to coordinate supply chain activities in order to provide cus-
the supply chain tomers with a unique experience and their companies with a unique competi-
activities and
tive advantage.
processes that
produce, market, Zara, a fashion chain owned by Spain‐based Inditex (which also owns and
deliver, and service operates Pull & Bear, Massimo, and Dutti, among other retail formats), has suc-
the firm’s offerings. ceeded by organizing activities around its supply chain. Starting with a clearly
stated strategy—a focus on the ever‐changing tastes of trendy young shoppers—
Zara created raw material and design teams that could deliver their newly
designed products into Zara retail stores within 3 to 15 days.9 An organization
chart for Zara is presented in Exhibit 6‐4.
More traditionally structured apparel companies, where activities in the
supply chain are separate and unlinked, often take up to a year to move from
design to sale. Given the dynamic tastes of the rather fickle consumer base for
fashion, slowness often leads to unused inventory, price‐slashing sales, and waste.

EXHIBIT 6-4
Horizontally Linked Chief Executive
Structure at Zara.

Ware- Cutting
Designing Packaging
housing & Sewing

Value-Chain Team

Value-Chain Team

Value-Chain Team
Reinforcing New Behaviors 135

THEORY INTO PRACTICE

Organizations can use cross‐functional teams to achieve linkages across the


various and interdependent activities of their supply chain.

Organizations that have pioneered horizontally linked structures typically


started with a clear strategic focus on their supply chain. It has been far more dif-
ficult for older, traditionally organized companies to respond. Delta’s effort to
create its own low‐cost airline, Song, to compete with Southwest Airlines fell flat.
Marks & Spencer tried and failed to compete with Zara for the young, fashion‐
trendy customer. Kmart has repeatedly slashed prices to compete with Wal‐Mart
while undermining its own profitability.
The difficulty seems to lie not in any formal structural change but in the
organizational context that supports and reinforces the structure. Long‐standing
functional arrangements have cemented patterns of employee behavior that
remain unchanged despite efforts to create horizontally linked activities.
No structure, whether it is horizontally linked, matrixed, or divided into
divisions or functions can, in and of itself, provide an organization with distinc-
tive competitive advantage for the simple reason that structures are not and
cannot be distinctive.

The Role of Structural Intervention in Implementing Change


When Lou Gerstner took the reins of an ailing IBM, he made a strategic decision:
derive competitive advantage from the size and scope of his global operation.10
Rejecting suggestions that he spin IBM off into a number of smaller companies,
he sought instead to create an integrated global organization.
Gerstner’s initial challenge in pursuit of that strategy was to integrate
IBM’s overseas operations with the base of the company. What was often
known within IBM as a “religion of decentralization” had led to highly autono-
mous country general managers who reported to powerful regional executives.
The head of IBM France, say, ran what amounted to a largely independent
operation.
IBM’s decentralized structure worked wonders for the company. Country
managers could focus on their own regions and grow the business based on local
responsiveness. But if local responsiveness was the benefit of decentralized
structures, the cost was low collaboration. Employees in non‐U.S. operations had
come to think of themselves as working in and for their own home country com-
pany. I work for IBM France, not IBM. Little connection existed between the
country‐based operations and the corporate entity.
IBM customers provided the trigger for change. Global customers such as
American Express complained about interacting with what seemed like differ-
ent mini‐IBMs in each country rather than one IBM with a global presence. Give
us one face for IBM globally, they said, not many faces for each IBM national
operation.
Gerstner agreed that the lack of global interaction posed a problem: “Each
country had its own independent system. In Europe alone we had 142 different
financial systems.” The status quo simply did not allow for the seamless global
136 Chapter 6

responsiveness that Gerstner’s new strategy and IBM’s global customers


demanded. “Customer data could not be tracked across the company. Employees
belonged to their geography first, while IBM took a distant second place.” This,
Gerstner believed, had to change and change fast if his strategy of global integra-
tion was to succeed.
As a former employee at the global consulting firm McKinsey & Company,
Gerstner had experienced what he believed to have been an effective approach to
globalization. Customer‐focused global teams transcended national borders,
allowing seamless responsiveness to global customers. To help IBM achieve that
same global seamlessness, Gerstner turned to Ned Lautenbach, head of non‐U.S.
sales. Gerstner and Lautenbach would pursue their strategy with a globally
focused, customer‐centered organization.
Gerstner announced a new structure. Twelve customer groups (such as
banking, government, and insurance) and one small and medium‐sized company
group would take over all IBM accounts, including responsibility for budgets
and personnel. The restructuring reassigned most employees in non‐U.S. opera-
tions to a specific group; they would now report to the global leaders of their
industry group rather than to their country general managers.
The response from country general managers was overwhelmingly nega-
tive. It will never work and You will destroy the company were statements that
expressed their resistance. Some country general managers responded by simply
ignoring the new structure. One regional executive unilaterally decided to block
all communications between Gerstner and the field.
It took three years of what Gerstner called a “painful and sometimes tumul-
tuous process” before the new global strategy could be driven into IBM’s multi-
national structure. “Regional heads clung to the old system,” reflects Gerstner,
“sometimes out of mutiny, but more often out of tradition.” Only after “massive”
shifts in resources, systems, and processes—not to mention the removal and
replacement of numerous country managers who could not or would not make
the transition—did the new structure take hold.
The fierce resistance that greeted Gerstner ’s attempt to realign IBM’s
global structure with its new strategy was, in part, a predictable response to
his calling on the restructuring lever too early in the change process. After
articulating a strategic focus and creating a supportive context, leaders can
call upon structural interventions to reinforce new patterns of employee
behavior. Organizations seeking greater customer responsiveness may move
from a functional to a divisional function. If the firm’s supply chain is failing
to deliver competitive advantage, then the company may adopt a horizontally
linked structure.
Just because structural interventions are useful in shaping employee behav-
ior does not mean that changing structure is an effective opening tool for change.
Effective change implementation, in fact, calls upon structural intervention not
to drive change but to reinforce new patterns of behavior that have been created
through earlier‐stage interventions.
Returning to Lewin’s theory of change (Chapter 2), adopting a new struc-
ture is part of the refreezing stage, not the unfreezing stage. For that reason,
structural changes are most effective when used in Step 4.
Reinforcing New Behaviors 137

THEORY INTO PRACTICE

Think of structural change in terms of Lewin’s refreezing, not in terms of


unfreezing.

To understand the power of appropriate sequencing of interventions in


impacting effective implementation, let’s look at IBM. That company’s highly
decentralized divisional structure allowed responsiveness to multiple national
markets served by this giant corporation. Global customers such as American
Express now demanded greater coordination across national boundaries. We’re a
global company, customers were telling IBM. We expect you to be a global supplier.
We don’t want to be dealing with multiple national mini‐IBMs with little capacity to
provide consistent and seamless service.
Gerstner’s new strategy for IBM counted on taking advantage of the com-
pany’s depth and scope. He drove that renewed strategy by creating a global
matrix structure: customer‐based groups laid over a geographically divisional-
ized organization.
Gerstner’s reasoning seemed solid: global responsiveness could be coor-
dinated by global customer‐group executives. That was the approach that
Gerstner had experienced at McKinsey. It worked well there, so why not at IBM
as well?
The problem Gerstner ran into had far less to do with the efficacy of the
idea than the implementation process he called upon to introduce that idea. The
structural change occurred early in the process of transforming IBM. Gerstner
had failed to unfreeze attitudes by creating dissatisfaction with the status quo.
Used to a high level of autonomy, country managers resisted. That resistance
grew, in part, from their own habits, competencies, and preferences. It also grew
from the process used to introduce change.
The country managers themselves had not been part of the diagnosis that
led to the change, nor had the country and industry group managers worked col-
laboratively to develop well‐defined roles, responsibilities, and relationships
among the two groups; nor had IBM provided training on how to enact these
new, complex roles. In essence, Gerstner jumped from a diagnosis formulated by
a handful of corporate executives—mainly him and Ned Lautenbach—to a new
structure.
Faced with fierce resistance on the part of country managers, he removed
and replaced a number of them. Despite all his formal authority and the power
of his vision for a truly global IBM, it took three years of what Gerstner himself
called pain and tumult before the desired new behaviors began to take hold in
the organization.
This is not to say that pain and tumult can be avoided entirely in imple-
mentation. The point, rather, is that the approach of using structural change as a
driver rather than a reinforcer helps create heightened levels of resistance, some
of which might have been avoided.
Structural change typically unfolds as a top‐down intervention. It is the
task of leadership, after all, to design the architecture of the organization in order
to enable outstanding performance. However, if structural change takes place
138 Chapter 6

late in the change process, restructuring will not be experienced as a unilateral


imposition from above.
Remember the old adage: People don’t resist change; they resist being
changed. If structural change occurs early in the process, it will be experienced
by employees as being changed. If new structures are used to reinforce new
behaviors, employees are more likely to support the change.

THEORY INTO PRACTICE

When structural change occurs early in a change process, employees can be


confused by its purpose, unsure of what new competencies are being required,
and unwilling—or unable—to make appropriate alterations in behavioral
patterns.

USING INCENTIVES TO SUPPORT NEW BEHAVIORS


Compensation represents one of the strongest, perhaps most immediate tools
that can be called upon to change patterns of employee behavior. Do we need a
more performance‐driven culture? Let’s place employees on a pay‐for‐perfor-
mance incentive. Need to attract young, highly skilled employees to our start‐up
business? Let’s dangle huge stock offerings. Having trouble implementing activ-
ity chain process teams? Let’s try team‐based performance bonuses.
Organizations expend a huge amount of resources on pay—time, energy,
not to mention money (anywhere from 40 percent to 70 percent of sales reve-
nues). What value are they gaining in return for that expenditure? How success-
ful are monetary incentives in shaping and altering employee behaviors?
The answer may seem obvious: Of course money can shape and alter behav-
iors. The real question, however, relates to long‐term effectiveness. What role can
compensation play in efforts to implement organizational change? To answer
that question, we need to understand both the nature of pay’s impact on behav-
ior as well as the choices available to organizational leaders.

Focusing Pay on Performance


Building a
Vocabulary of
As the competitive business environment increasingly pressures organizations
Change to achieve ever‐improving performance, companies have rushed to adopt some
Pay for performance sort of pay‐for‐performance plan. Pay for performance devotes at least some
pay that is tied to portion of an individual’s pay (ranging anywhere from 3 percent to multiples of
performance in the 100 percent) to measurable performance outcomes.
form of either a
merit raise to base
Pay for performance can take one of the two forms: merit pay, which raises
pay or an incentive base salary based on performance, and incentive bonuses, which offer regular but
bonus that does not onetime payouts on the basis of performance. Bonuses do not alter base salary.
increase base pay. They are considered onetime payments because they are not guaranteed.
Substandard performance in the following year can reduce or eliminate the bonus.
Virtually every organization in the United States claims to have some kind
of a merit pay system already in place. Incentive bonuses have become more
Reinforcing New Behaviors 139

popular over the past two decades. As a percentage of total payroll costs, bonus-
es rose from 4 percent in 1991 to 9 percent in 2000.11
Most organizations select a mix of performance pay in order to shape
employee behavior. GE, for example, calls for a blend of different bonuses to
motivate executives, as indicated in the following company statement:
• Salary and Bonus—We pay salaries that are designed to attract and retain su-
perior leaders, and we pay annual bonuses to reward exceptional performance.
• Stock Options and Stock Appreciation Rights—We award these to provide
incentives for superior long‐term performance and to retain top executives
because the awards are fortified if the executive leaves before they become
fully exercisable five years after grant.
• Restricted Stock Units (RSUs)—We grant RSUs to more closely align execu-
tives’ interests with investors’ long‐term interests, to retain top executives
because the awards are paid out only to executives who remain with the
company for extended periods.
• Long‐Term Performance Awards—We use these to provide a strong incentive
for achieving specific performance measurements over multiyear periods.12
Organizations seek a mix of rewards in order to help ensure alignment
between employee behaviors and their strategic goals.
One question to be raised in introducing or redesigning a pay‐for‐perfor-
mance plan relates to level of aggregation: at what level of outcome should a
pay‐for‐performance incentive be targeted—the individual, the group or team,
or the organization? Pay for individual performance dominates the design of
compensation in the United States. Exhibit 6‐5 summarizes the various forms of
individual pay‐for‐performance plans.

THEORY INTO PRACTICE

Individual incentives will be most effective in shaping behavior when the


individual controls the outcomes being measured and rewarded, when the
outcomes are tied to improved performance, when the evaluation of an
employee’s contribution is perceived as being valid, and when the difference
between rewards for high and low performance is significant.

EXHIBIT 6-5
Forms of Individual
Piece rate Employee earns all or part of a wage based on number of units Pay‐for‐Performance
produced Plans.
Commission Salesperson earns all or part of a wage based on number of
units sold
Merit pay Employee earns raise to base wage based on performance
evaluation
Bonus Employee earns extra payment based on performance
140 Chapter 6

Although individual pay‐for‐performance incentives seem to hold great


potential for shaping behavior, a number of challenges constrict that potential
impact. The first question that can be raised about a pay‐for‐performance plan
relates to the degree to which individuals have control over the outcomes that are
being measured and rewarded. Without a significant and clear relationship
between individual effort and outcome, a pay‐for‐performance incentive can
drain the system of its full behavioral impact.
A second question relates to whether the incentive system has targeted
appropriate measures of performance on which to base the reward. Failure to
include all outcomes that are important for outstanding performance can lead to
dysfunctional consequences. The more effectively the system impacts behavior,
in fact, the more likely it will be that singling out one aspect of performance for
measurement will give that aspect disproportionate attention.
For an individual pay‐for‐performance plan to impact behavior, the pay
increment tied to outstanding performance must be perceived as being signifi-
cant. To have a behavioral impact, the additional reward for that behavior should
be 10 percent to 20 percent higher than the reward received absent the behavior.
Raises, however, often amount to a relatively small amount of total compensa-
tion, making their potential to impact behavior weak. The “significance range”
can be reduced considerably—down to 3 percent to 5 percent—if raises are
accompanied by public recognition and praise.13 Concerns over secrecy and con-
fidentiality, however, often blunt an organization’s willingness and ability to
accompany merit raises with public acknowledgment.
Finally, in order to be effective, pay for performance must be based on valid
judgments about individual performance. Distortions often creep into the evalua-
tion process, leading participants to question the validity of resulting assess-
ments. That lack of trust in the evaluation process presents itself as one of the key
reasons. U.S. employees report high levels of dissatisfaction with the implemen-
tation of their companies’ pay‐for‐performance plans. Less than one‐third of sur-
veyed U.S. employees believe a direct link exists between pay and performance,
despite company claims of a merit pay plan.14
Despite the numerous questions that can be raised about the limitations
of individual pay‐for‐performance incentives (summarized in Exhibit 6‐6),
such plans are nonetheless becoming more popular. Although there is evi-
dence that managers in non‐U.S. countries are far more skeptical of the posi-
tive arguments U.S. managers make concerning the performance benefits of
discretionary bonuses, such bonuses are becoming increasingly popular
around the world.15
Team‐based pay‐for‐performance plans are becoming more popular in
direct relationship to the rising reliance on team effort. Among performance
incentives aimed at nonexecutive employees, in fact, team‐based plans have
become the most popular.16 Under such a plan, teams can share a performance
bonus equally or allocate to individual members based on an evaluation of their
contribution. Team‐based bonuses enhance team performance, although the
effect is relatively weak.17 A caveat is in order, however. Team‐level bonuses can
hurt collaboration among and between teams.
Reinforcing New Behaviors 141

EXHIBIT 6-6
Factors That May
Performance appraisals are inherently subjective, with supervisors evaluating Undermine
subordinates according to their own preconceived biases Effectiveness of
Emphasize individual rather than group goals that may lead to dysfunction conflict in Individual Pay-for-
Performance Plans.
the organization
Based on Luis
Encourage a short‐term orientation (the performance period being evaluated) at the
R. Gomez‐Mejia,
expense of long‐term goals
David B. Balkin, and
Merit pay raises become an annuity on which employees continue to draw regardless Robert L. Cardy,
of future performance Managing Human
Resources
The often lengthy time lag between actual performance and reward undermines (Englewood Cliffs,
perceived connection between the two NJ: Prentice‐Hall,
1995), p. 404 and
Many jobs cannot be individually isolated and precisely measured without taking into Edward E. Lawler
account complex interdependencies III, “Pay Strategy:
New Thinking for
Pay differentials between performance levels tend to be relatively small and therefore
the New
of questionable behavioral value
Millennium,”
Actual payout of program often determined by organizational factors beyond the Compensation and
control of individual employees and only indirectly related to actual performance Benefits Review 32
(January–February
2000), pp. 7–12.

THEORY INTO PRACTICE

Organizations call upon team‐based performance bonuses to enhance the effec-


tiveness of teams, but the bonus may undermine collaboration between teams.

Because strategic renewal focuses on organizational performance, organiza-


tion‐level incentives often supplement or replace individual bonuses. Traditionally,
organizations have offered organization‐wide incentive bonuses only to execu-
tives and upper management on the assumption that their actions are more
closely tied to overall organizational performance than employees at lower lev-
els. However, some organizations have adopted a different perspective. Part of
Archie Norman’s strategic renewal at Asda was to offer an organization‐level
performance bonus to all employees, encouraging everyone to keep focused on
the same measures of overall effectiveness.18

THEORY INTO PRACTICE

Bonuses based on the overall performance of the organization make a sym-


bolic statement recognizing the shared purpose and responsibility of all
employees and organizational units.

Stock options are intended to tie the total compensation package of indi-
viduals to the performance of their organization.19 The goal, as articulated by the
board of directors of eBay, is to “align the interests of directors and executives
142 Chapter 6

with the interests of stockholders.”20 Favorable tax laws have made these plans
more popular in the United States than elsewhere, although a number of multina-
tional firms—PepsiCo, Bristol‐Myers Squibb, DuPont, and Merck among them—
have offered stock options to virtually all of their employees worldwide.21
The actual effectiveness of these various organization‐level performance
bonuses is unclear. Some sort of incentive tied to organization‐level performance
is a frequent characteristic of high‐performance companies.22 What is less certain
is whether the organization‐level performance bonus results in or from outstand-
ing performance. The cause‐and‐effect relationship between specific behaviors
and organizational outcomes may be far too vague, especially in large organiza-
tions, to create a powerful incentive on the part of individual employees.
Undoubtedly, the degree to which organization‐wide bonuses are accom-
panied by communication and feedback on firm performance, as well as the
empowerment of employees to impact performance, will enhance the plan’s
motivational impact. Tying all employees’ pay packages in some significant way
to the same organizational‐level outcomes may help in both a symbolic and real
way to communicate a mutuality of interests and concerns.
Building a
Vocabulary of Intrinsic and Extrinsic Rewards
Change
Extrinsic reward Incentive pay, regardless of the specific design, is an extrinsic reward: a reward
rewards (pay, external to the individual and provided by the organization. Money is the most
promotion, praise,
obvious and prevalent example of an extrinsic reward. Motivational theory tells
and so forth)
provided by the us that extrinsic rewards, although powerful, may not be terribly effective in
organization to driving long‐term behavioral change.
employees.

THEORY INTO PRACTICE

By relying heavily on extrinsic rewards to shape employee behavior, organi-


zations risk driving out the intrinsic rewards that might be associated with the
work; as a result curiosity, creativity, and problem‐solving behaviors may be
lessened.

Commitment to adopt new behaviors comes from within individuals. If the


Building a
Vocabulary of goal of change is to create motivation—as internalized desire on the part of
Change employees—to adopt new behaviors, then organizational leaders need to con-
Intrinsic reward sider intrinsic rewards as well. An intrinsic reward is a positive outcome natu-
rewards (feelings rally associated with a behavior.
of pride, satisfaction,
Intrinsic rewards—a sense of accomplishment, learning, and growth, for
and self‐esteem)
that accrue to the example—are provided in a constant and ongoing way as individuals interact
individual based on with their environments. Intrinsic rewards, according to Edward Deci, motivate
the performance of a exploration, play, curiosity, and puzzle solving.23 For that reason, intrinsic rewards
task. can be more helpful in building commitment to new behaviors, especially when
the desired new behaviors are based on creativity and problem‐solving activities.
No organization can rely solely on either extrinsic or intrinsic rewards to
support new patterns of behavior. The challenge is that the two approaches to
shaping behavior do not easily coexist. Overreliance on extrinsic rewards, pay in
Reinforcing New Behaviors 143

particular, can actually dampen internal motivation.24 Employees may, and often
do, find themselves behaving in a certain way because of the money attached to
the behavior rather than an internalized desire to undertake the behavior. And
the more attractive the reward is to that employee, the more likely it is to drive
out internal motivation.
Not all extrinsic rewards work against internal motivation and creativity.
Praise, which is an extrinsic reward, can enhance motivation by helping indi-
viduals feel competent and self‐determining. Even pay can be used in ways that
do not drive out motivation: when pay is used to attract individuals to an organi-
zation, it does not have a negative impact on motivation.
Rewards such as bonuses that are not tied a priori to specific outcomes but
are presented after the fact in recognition of particularly creative effort are likely
to lead to higher creativity in the future. The creativity benefit of such after‐the‐
fact bonuses is enhanced when those bonuses are coupled with constructive
feedback and tied to creative outcomes rather than any particular or specific
methodology for achieving those outcomes.25 Even so, intrinsic rewards are the
primary factors contributing to creativity; extrinsic rewards more typically
encourage routine behavior.

THEORY INTO PRACTICE

Bonuses provided “after the fact”—without being announced or promised


beforehand—can be used to reinforce desired new behaviors.

The opportunity as well as the challenge for a manager is to provide motiva-


tion that is, in essence, internal to employees. Design decisions that allow employ-
ees to participate in decision making enhance the developmental opportunities of
work, thus providing a key intrinsic motivation. Providing employees with
autonomy and performance feedback enhances employees’ sense of self‐efficacy
Building a
and ego satisfaction. In these cases, the organization is creating an environment Vocabulary of
where employees are more likely to find intrinsic motivation in their work. Change
Pay equity is also vital to the achievement of intrinsic motivation. Only Pay equity a
employees who believe that their pay level is fair and equitable—compared perception by
to peers both inside and outside the organization, to subordinates, and to employees that their
pay is fair and
superiors—will be intrinsically motivated by the desire to learn, to develop, and equitable in
to grow.26 Job evaluation plans endeavor to create a sense of internal equity, and relationship to
regular salary surveys can help achieve external equity. Just as importantly, orga- others: peers inside
nizations that provide employees with regular and candid feedback about per- the organization and
formance and contribution can help ensure congruence between pay levels and out as well as
subordinates and
perceptions of fairness. superiors in the
hierarchy.

THEORY INTO PRACTICE

Organizations will not be able to call on intrinsic motivation unless employees


feel that they are being paid equitably.
144 Chapter 6

Sequencing the Introduction of Incentives


The temptation to introduce a new incentive plan early in change implementa-
tion is powerful but potentially harmful. Some brief examples of unintended
consequences include:
• A community bank introduces a sales bonus designed to encourage
more aggressive revenue generation on the part of employees. Customer service
representatives now ignore the complaints of, and even occasionally hang up on
customers once those customers have expressed a lack of interest in purchasing
additional bank services or product offerings.
• After introducing a new executive bonus based on divisional perfor-
mance, an organization finds its executives withdrawing shared resources from
other divisions in order to maximize their own performance.
• A Silicon Valley–based software developer, which had relied heavily on
stock options to attract employees, reels when its stock price drops sharply; high
turnover deteriorates performance, which leads to even lower stock prices and
leaves management with little to offer new employees by way of attraction.
• A plant manager halts a team‐based incentive plan because of increasing
rivalry among teams.
• A school system finds its “Teacher of the Year” bonus award designed to
enhance performance instead leads to dissension and distrust among its formerly
collegial faculty.
When applied early, new pay incentives can either fail to alter long‐standing pat-
terns of behavior or, even more troubling, change patterns of behavior in an
unintended, even unwelcome way.
In the above examples, new incentives were put into place before a thor-
ough diagnosis of the existent patterns of behavior in the organization; before a
carefully, strategically guided, and participative effort was made to redesign
roles, responsibilities, and relationships among employees; and before human
resource development worked to imbue the organization with required new
competencies. Management turned to incentives as a quick fix: an intervention
that would immediately shape employee behavior. That is exactly what they did,
of course, but not in a desired way.

THEORY INTO PRACTICE

Introducing new incentives early in a change implementation process risks


negative consequences.

When it comes to integrating new incentives into change implementation,


leaders face two types of choices: what and when.
What choices relate to decisions concerning the design of their incentives:
• At what level of performance will incentives be set?
• How large will potential incentive earnings be in relationship to base
salary?
Reinforcing New Behaviors 145

• To what extent will the incentives emphasize short‐term or long‐term


performance or some blend of the two?
• How far up and down the hierarchy will incentives be offered?
The goal of the what questions is to make design choices that reinforce the behav-
iors sought of the strategic renewal and organizational change.
The when question relates to when incentives will be introduced in a
sequence of transformational interventions. Michael Beer has suggested that pay
changes be thought of as a “lag” intervention: one that follows other interven-
tions and is not called upon to drive new behaviors.27 Failure to diagnose and
redesign first increases the likelihood that the new incentives will misfire, leading
to unintended and perhaps negative consequences.

TECHNOLOGY AND BEHAVIOR CHANGE


Most employees, whether in high‐ or low‐tech companies, in manufacturing or
services, or in small or large organizations, have experienced the impact of new
Building a
technology. Advances in computers and connectivity, in particular, have revolu- Vocabulary of
tionized the use of information. Change
Technology refers not just to the actual hardware but also to the processes Technology the
and interactions of human behavior required to convert raw material into fin- processes,
mechanics, and
ished offerings, to turn raw data into actionable information that can guide
interactions of
behaviors. Although the technology itself may be stunningly innovative, the use human behavior
to which that technology is put does not always alter patterns of employee required to convert
behavior; it may simply automate existing patterns of behavior. raw material into
finished offerings.
Making a Choice
Richard Walton articulated what he referred to as the choice inherent in the intro-
duction of new technology into a work setting.28 One of the most fundamental
choices managers face when introducing new technology, he noted, is whether to
apply that technology in a way that merely automates existing processes or in a
manner that transforms those processes.29
Using new technology to automate existing processes essentially leaves the
status quo in place. I used to get information through paper memos, a manager in an
automated workplace might say. Now I get the same information over our network.
Or, When it comes to introducing and supporting new products, those guys in Japan
never got on board before we had SAP, and they still don’t know even though we now have
SAP. One company—a state‐run mass transit operation—forbid employees from
sending e‐mails, regardless of their contents, to anyone in other departments or
functions without going through their boss. Functional silos remained intact.

THEORY INTO PRACTICE

When introducing new technology, organizational leaders face a choice: to


use that technology to automate existing processes or to use new technology to
support transformed behaviors.
146 Chapter 6

The second option for introducing new technology is one that applies tech-
nology in such a way that supports transformed behaviors and alters the required
skills. Some executives resist the transforming strategy for fear of losing control
and disrupting required discipline. “There has been a fear of letting it out of our
hands,” said one corporate vice president in reflecting a widespread resistance to
the use of IT to share performance data up and down the company. “That is why
information is so carefully guarded … Traditionally, we have thought that such
data can only be managed by certain people with certain accountabilities and, I
hesitate to say, endowed with certain skills or capabilities.”30 But other leaders,
including the chief of staff of the U.S. Army, see the transforming strategy as a
way of supporting the end of “business as usual” and the institutionalization of
new behaviors.

Sequencing New Technology in Change Implementation


No one questions that new technology can have a powerful, transformative
impact on the manner in which work is conducted, becoming a vital contributor
to outstanding performance. However, as with other “hardwiring” interven-
tions, organizational leaders must deal not just with the what question—what
new technologies can we call on—but the how and when questions as well. How
will the new technologies be introduced and when will they be added to the
mix? Effective change implementation calls on new technology to enable and
reinforce new behaviors.

THEORY INTO PRACTICE

New technologies can be introduced as a way to support desired behavioral


changes.

Conclusion
Leaders find interventions designed to alter the both at IBM.) Any change, when imposed from
hardwiring of their organization—structures, above, risks energizing resistance from the very
systems, and technologies—especially appeal- employees whose behavior needs to change.
ing. That appeal flows from the well‐reasoned The impact of incentive and technology
theory that structure and systems impact changes coming too early in the implementation
behavior. Because behavior must be altered as process runs an even greater risk. Leaders run
part of the change effort, the thinking goes, why the risk not just of failing to alter long‐term
not call upon new structures and systems early patterns of behavior but of altering patterns of
in the implementation effort to drive that behavior in an unintended, even unwelcome
change? way. That risk is enhanced when implementa-
Time and time again, such interventions tion starts from an inadequate and noninclusive
end up in disappointment. Instead of encourag- diagnosis or from inadequate training to ensure
ing new behaviors, structural change can provoke employees are capable of exercising the new
resistance, even sabotage. (Lou Gerstner ran into behaviors.
Reinforcing New Behaviors 147

When formal structures are changed in Desired patterns of new behavior are now rec-
Step 4 of the implementation process, they are ognized and supported, and become built into
experienced as reinforcers of new behaviors. the new hardwiring of the organization.

Discussion Questions
1. In comparing the efforts at Macy’s and IBM, how organization change? Can you think of examples
do you explain the differences in the way manag- when it would be useful to create new incentives
ers reacted to the organizational changes? early in a transformation process?
2. It has been said that, given the growing complex- 4. Can you think of examples from your own expe-
ity and dynamism of the world of business, all rience—at work or in the classroom—where the
organizations will have to adopt some type of a manner in which your performance was being
matrix structure. Do you agree or disagree with measured and rewarded worked against the goals
that argument? Explain. you were trying to achieve?
3. What is it about incentive systems that makes them
so attractive to leaders attempting to implement

Case Discussion
Read “Making the Problem Worse,” and prepare answers General Hospital solve the problem of medication
to the following questions: mistakes?
1. What went wrong? How can you explain how the 3. How might you have gone about solving the
technology actually led to more rather than fewer problem at Springfield General? To what extent, if
mistakes? any, would new technology have been helpful?
2. What theories of change implementation would
have helped the administrators at the Springfield

MAKING THE PROBLEM WORSE


It’s likely that many people simply skipped the morning newspaper on
Thanksgiving 2010. Had they scanned the front page, however, they may have
noted a headline: “Hospitals Make No Headway in Curbing Errors, Study
Shows.” The article did not make encouraging reading. After 10 years of efforts
designed to reduce hospital errors, a study found “that harm to patients was
common and that the number of incidents did not decrease over time.”31 To help
understand this matter, we can look at one hospital that made an effort to avoid
mistakes, and, in doing so, made matters worse.

Springfield General
The chief administrators at the Springfield General Hospital (a disguised name),
a large urban teaching hospital, were determined to use technology to solve a
nagging and disturbing problem: medication mistakes.32
The Problem Prescribing errors, confusion over drugs with similar names,
inadequate attention to the synergistic effects of multiple drugs and patient
148 Chapter 6

allergies—those and other related errors that are lumped together under the
label “adverse drug event”—kill or harm more than 770,000 patients annually
in U.S. hospitals. In added health care costs alone, adverse drug events add sev-
eral hundred billion dollars a year. And the most common type of error—the
simplest to understand and, seemingly, to correct—is “handwriting identifica-
tion”: poor or illegible handwriting by the prescribing physician.
The Solution Administrators at Springfield General called upon a comput-
erized physician order entry (CPOE) system to solve the problem. CPOE worked
to ensure safety and accuracy by the following steps:
• All physician prescriptions for medicine and treatment would be entered
into the hospital’s IT network.
• Those computer entries would be available to all hospital staff, including
both treatment and pharmacy staff.
• The system would catch all prescription errors: incorrect dosages, duplicate
requisitions, patient allergies, and even adverse impact statements of mul-
tiple medications being prescribed to a patient.
• The system would also display the patient’s complete medical history as
well as the latest clinical guidelines for treatment.
Ample evidence existed that CPOE can and has been used to reduce both
errors and costs.
The Results Surprisingly, the results at Springfield General were stunningly
disappointing. Not only did the CPOE system not eliminate errors, it actually
increased adverse drug events.
A subsequent study identified a number of problems:
• Incorrect Dosage Information—“House staff often rely on CPOE displays
to determine minimal effective or usual doses. The dosages listed in the
CPOE display, however, are based on the pharmacy’s warehousing and
purchasing decisions, not clinical guidelines. For example, if usual dosages
are 20 or 30 mg, the pharmacy might stock only 10‐mg doses, so 10‐mg
units are displayed on the CPOE screen. Consequently, some house staff
order 10‐mg doses as the usual or ‘minimally effective’ dose.”
• Discontinuation Failures—“Ordering new or modifying existing medica-
tions is usually a separate process from canceling (discontinuing) an exist-
ing medication … medication‐canceling ambiguities are exacerbated by the
computer interface and multiple‐screen displays of medications … viewing
one patient’s medications may require 20 screens.”
• Patient Confusion—“It is easy to select the wrong patient file because
names and drugs are close together, the font is small, and, most critical
here, patients’ names do not appear on all screens. Different CPOE com-
puter screens offer differing colors and typefaces for the same information,
enhancing misinterpretation as physicians switch among screens. Patients’
names are grouped alphabetically rather than by house staff teams or
rooms. Thus, similar names (combined with small fonts, hectic worksta-
tions, and interruptions) are easily confused.”
How could this have happened?
Reinforcing New Behaviors 149

Endnotes
1. Janis L. Gogan and Lynda M. Applegate, Open and Benefits Review 30 (July–Aug. 1998),
Market, Inc.: Managing In a Turbulent Environment pp. 72–73.
(Boston, MA: Harvard Business School 15. Compensation and Benefits Review 29 (Mar.–Apr.
Publishing, 1996). 1997), p. 7; Compensation and Benefits Review 29
2. Ibid., p. 13. (Nov.–Dec. 1997), p. 18. The Hewitt Associates
3. Quoted from Raymond E. Miles and Charles C. survey results are reported in Kenan S. Abosch,
Snow, Fit, Failure, and the Hall of Fame: How “Variable Pay: Do We Have the Basics in
Companies Succeed and Fail (New York: Free Press, Place?” Compensation and Benefits Review 30
1994), p. 14. (July–Aug. 1998), pp. 12–22. A comparison of
4. Paul R. Lawrence and Jay W. Lorsch, Organization executive attitudes toward bonuses in the
and Environment: Managing Differentiation and United States, France, and the Netherlands can
Integration (Boston, MA: Harvard Graduate be found in Johannes M. Pennings, “Executive
School of Business Administration Division of R e w a rd S y s t e m s : A C ro s s ‐ N a t i o n a l
Research, 1967). Comparison,” Journal of Management Studies 30
5. Jay R. Galbraith, Competing with Flexible Lateral (Mar. 1993), pp. 261–273.
Organizations (Reading, MA: Addison‐Wesley, 16. Compensation and Benefits Review 29 (Nov.– Dec.
1994), pp. 101–102. 1997), p. 18.
6. Ibid., p. 13. 17. This was the conclusion of a study of cross‐
7. Arthur A. Thompson, Jr., and A. J. Strickland III, functional process teams in the U.S. electronics
Strategic Management: Concepts and Cases, 13th manufacturing industry. See Ann Majchrzak
edn (Boston, MA: McGraw‐Hill Irwin, 2003), and Qianwei Wang, “Breaking the Functional
p. 129. Mind‐Set in Functional Organizations,” Harvard
8. Dell is quoted in Joan Magretta, “The Power of Business Review (Sept.–Oct. 1996), pp. 93–99.
Virtual Integration: An Interview with Dell 18. The percentage and amount differed based on
Computer’s Michael Dell,” Harvard Business hierarchical level.
Review (Mar.–Apr. 1998), p. 75. 19. For a good summary of the many stock option
9. Ludo Van der Heyden, Marks & Spencer and plans available, see David G. Strege, “Employee
Zara: Process Competition in the Textile Apparel Strategies for Stock Based Compensation,”
Industry (France: INSEAD, 2002). Compensation and Benefits Review 31 (Nov.–Dec.
10. Based on Louis V. Gerstner, Jr., Who Says 1999), pp. 41–54.
Elephants Can’t Dance? Inside IBM’s Historic 20. “Stock Ownership Guidelines for Directors and
Turnaround (New York: Harper Business, 2002), Executive Officers,” eBay Investor Relations.
pp. 86–87. 21. Calvin Reynolds, “Global Compensation and
11. Michelle Conlin and Peter Coy, “The Wild Benefits in Transition,” Compensation and
New Work Force,” Business Week (Dec. 6, 1999), Benefits Review 32 (Jan.–Feb. 2000), p. 29.
pp. 39–41. 22. Jeffrey Pfeffer, The Human Equation: Building
12. Quoted in V. G. Narayanan and Lisa Brem, Profits by Putting People First (Boston, MA:
Executive Compensation at General Electric Harvard Business School Press, 1998),
(Boston, MA: Harvard Business School pp. 80–85.
Publishing, 2004), p. 8. 23. Edward L. Deci, “The Hidden Costs of
13. Thomas B. Wilson, Innovative Reward Systems Rewards,” Organizational Dynamics 4 (Winter
for the Changing Workplace (New York: McGraw‐ 1976), p. 62.
Hill, 1993), p. 49. 24. Edward L. Deci, “Effects of Externally
14. Peter V. LeBlanc and Paul W. Mulvey, Mediated Rewards on Intrinsic Motivation,”
“How American Workers See the Rewards of Journal of Personality and Social Psychology 18
Work,” Compensation and Benefits Review (1971), pp. 105–115, and “Intrinsic Motivation,
30 (Jan.–Feb. 1998), pp. 24–28; Jamie Hale Extrinsic Reinforcement, and Equity,” Journal
and George Bailey, “Seven Dimensions of Personality and Social Psychology 22 (1972),
of Successful Reward Plans,” Compensation pp. 113–120.
150 Chapter 6

25. Teresa M. Amabile, Creativity in Context 28. Richard E. Walton, “Social Choice in the
(Boulder, CO: Westview Press, 1996). Development of Advanced Information
26. This is a conclusion based on equity theory. See Technology,” Human Relations 35 (1982), pp.
George C. Homans, The Human Group (New 1073–1083.
York: Harcourt, Brace, 1950); Leonard R. Sayles, 29. Shoshona Zuboff, In the Age of the Smart
Behavior of Industrial Work Groups: Prediction and Machine: The Future of Work and Power (New
Control (New York: Wiley, 1958); Elliott Jacques, York: Basic Books, 1984).
Equitable Payment (New York: Wiley, 1961); 30. Quoted in Zuboff, In the Age of the Smart
George C. Homans, Social Behavior: Its Elementary Machine, p. 239.
Forms (New York: Harcourt, Brace, 1961); 31. Denise Grady, “Hospitals Make No Headway
J. Stacy Adams, “Toward an Understanding of in Curbing Errors, Study Shows,” New York
Inequity,” Journal of Abnormal and Social Times (Nov. 25, 2010), p. A1.
Psychology 67 (1963), pp. 422–436; J. Stacy 32. This case study is based on research published
Adams, “Inequity in Social Exchange,” in in Ross Koppel, Joshua P. Metlay, Abigail
Leonard Berkowitz, ed., Advances in Experimental Cohen, Brian Abaluck, A. Russell Localio,
Social Psychology, Vol. 2 (New York: Academic Stephen E. Kimmel, and Brian L. Storm, “Role
Press, 1965). of Computerized Physician Order Entry
27. Tom Ehrendfeld, Maggie Coil, Donald Berwick, Systems in Facilitating Medication Errors,”
Tom Nyberg, and Michael Beer, “The Case of Journal of the American Medical Association 293
the Unpopular Pay Plan,” Harvard Business (2005), pp. 1197–1203. The hospital is not iden-
Review 70 (Jan.–Feb. 1992), p. 22. tified in the article.
CHAPTER

7 Leading Change

At every stage of transformational change, from initial diagnosis to formal design changes,
leaders intervene to oversee and orchestrate implementation. This reliance on the effective
orchestration by leaders in a change process applies not just to top executives but also to
leaders throughout the organization. Implementation depends not just on oversight and
orchestration by individual leaders. Effective change demands the coordinated efforts of
multiple leaders.
Although the role of leaders in implementation underlies much of what has been
addressed earlier, this chapter will offer more focused attention on that leadership role. In
particular, the chapter will:
• Define effective leadership
• Explore the difficulty of enacting effective leadership
• Delineate the tasks associated with leading change
• Analyze the requirements for developing future leaders in an organization
First, we will examine the efforts of the chief executive officer (CEO) of Cisco Systems to
promote collaboration across the organization. As you read this introductory case, ask
yourself:
• What triggered the demand for collaboration at Cisco?
• What steps has John Chambers taken to promote and sustain collaboration?
• Can a CEO be successful in promoting collaboration if, like Chambers, he or she demands
that executives collaborate and then removes those who cannot and will not make the
change?

COLLABORATION AND LEADERSHIP AT CISCO SYSTEMS


“I believe that only those companies that build collaboration into their DNA by tapping into
the collective expertise of their employees—instead of just a few select leaders at the top—will
succeed … This sounds easy, but it is incredibly complex.”1

151
152 Chapter 7

That is what John Chambers, CEO of Cisco Systems, told an interviewer in


2008. A year later, he was even more adamant that collaboration, teamwork, and a
supportive technology would be the hallmarks of the company’s future. “If they’re
not collaborative,” he said, speaking of potential future employees, “if they aren’t
naturally inclined toward collaboration and teamwork, if they are uncomfortable
with using technology to make that happen both within Cisco and in their own life,
they’re probably not going to fit in here.” And yet, as Chambers was the first to
admit, he was not always so comfortable with teamwork and collaboration himself.
Cisco, widely recognized as “the Internet behemoth,” designs, manufac-
tures, and sells Internet‐protocol networking and other byproducts related to the
communications and IT industry, and provides services associated with those
products and their use. Founded in 1984 by a Stanford‐based husband‐and‐wife
team (seeking a way to connect the computer systems in their two departments),
Cisco grew so rapidly that, at the height of the Internet bubble (2000), its market
value made it the third most valuable company in the world (behind Microsoft
and GE). Chambers became CEO in 1995 and helped drive that growth. When
the bubble burst in 2001, Cisco experienced what Chambers called “a near death
experience.” Layoffs and cutbacks helped Cisco survive, but Chambers was
determined to do more: Cisco would thrive by understanding market trends and
responding earlier than its competitors, or even its customers.
Chambers came to believe that the only way to stay ahead of the markets
was by “tapping into the collective expertise of all our employees.” That meant
building cross‐functional collaboration and teamwork throughout the entire
organization. An elaborate network of councils and boards brought together
“groups of people with relevant expertise” who could “work together to make
and execute key decisions supported by networked Web 2.0 technologies.” All
well and good, but Chambers also realized that neither he nor his top executives
were quite prepared to make the transition themselves. “I’m a command‐and‐
control person,” Chambers admitted. “I like to be able to say turn right, and we
truly have 67,000 people turn right.” His top executives were the same.
At first, Chambers found that his top executives did not much like the pro-
cess of collaboration and would have “opted out” if allowed. “But I didn’t give
them a choice in the matter,” he noted, “I forced people to work with others they
didn’t get along with.” He also tied executive bonuses to collaborative efforts
and let about 20% of his management team go. “It’s not that they weren’t suc-
cessful working on their own or that they weren’t good people,” he explained.
“They just couldn’t collaborate effectively.”

UNDERSTANDING LEADERSHIP
Building a Cisco CEO, John Chambers was committed to building collaboration as a way of
Vocabulary of keeping his company agile and responsive to a rapidly shifting competitive and
Change technological environment. In demanding collaboration within his top team,
Leadership actions aligning rewards with desired new behaviors, and removing and replacing those
that mobilize
adaptive behavior
who could not or would not make the transition, he was exercising leadership.
within an Leadership can be understood as a set of activities or behaviors that mobilize
organization. adaptive behavior on the part of members of the organization.2
Leading Change 153

THEORY INTO PRACTICE

Think of leadership as an intervention into the organization designed to


impact the behaviors of others.

Thinking of leadership as an intervention designed to mobilize adaptive


behaviors focuses attention away from the particular individuals who reside at
the head of an organizational hierarchy. Instead of examining the traits or per-
sonalities of individual leaders, leadership involves actions and behaviors. The
effectiveness of leadership will be judged not by personalities and traits but by
the impact those actions and behaviors exert on the change process.

THEORY INTO PRACTICE

Effective leadership can be exercised at all levels of an organization.

Effective leadership can be found in three separate but interrelated notions.


First, effective leadership shapes the behaviors of others in the organization. No
matter how talented an individual may be or what personal traits that individ-
ual may possess, she alone will be unable to create and sustain outstanding
performance. How employees react in response to the actions of leaders will
determine the effectiveness of leadership. No individual is an effective leader
unless and until employees behave in effective ways. When an organization is
attempting transformational change, the behavior of leaders is meant to impact
changes in the behavior of others.

THEORY INTO PRACTICE

Effective leadership shapes the behaviors of employees.

Second, the term mobilize implies that the mechanism used to help shape
behavior will be internalized motivation. Leader actions that result in compliant
reactions on the part of employees—following orders and adhering to rules in
order to achieve extrinsic rewards and/or to avoid negative consequences—fail
that definition of effectiveness. Mobilizing employees involves creating an inter-
nalized commitment to achieving the new goals of the organization. Leadership
behavior that creates dependency or alienation on the part of employees under-
mines mobilization; by definition, then, it is ineffective.3
Building a
The third aspect of effective leadership—mobilizing adaptive behavior— Vocabulary of
suggests that not all behaviors resulting from the actions of leaders are equally Change
desirable. The distinction is between leadership and the exercise of power. Formal leader a
Formal leaders may exert a powerful influence over followers without exercis- designated
ing effective leadership. Powerful individuals can induce followers to take individual who is
granted authority,
actions that may be harmful to the organization (for example, Richard Fudd at usually based on
Lehman Brothers) and, ultimately, to themselves. As powerful and influential as hierarchical position,
these individuals are, they are not exercising effective leadership. Leadership is in an organization.
154 Chapter 7

effective when employee behavior is shaped in a way that supports the long‐
term best interests of employees and the organization.4

THEORY INTO PRACTICE

The exercise of power is not the same as leadership.

THE TASKS OF LEADERSHIP


Leaders often attempt to impose change on their organization. The results are
often disappointing and frustrating. Effective leadership is not about impos-
ing new directions and demanding new behaviors. Instead, effective leaders
energize an organization for change, build commitment to new directions,
and then put into place a process that will translate such commitment into
action.5

THEORY INTO PRACTICE

Strong, demanding leaders don’t always succeed at leading change.

Although all organizations and circumstances differ, it is possible to sug-


gest there are five core tasks that lie at the heart of effective leadership. Those
tasks, summarized in Exhibit 7‐1, place greater emphasis on what the leader does
rather than who the leader is.

Building a Develop and Communicate Purpose


Vocabulary of
Change Leadership starts by identifying and articulating organizational purpose.
Organizational Organizational purpose is something broader than strategy. Worldwide Pants, a
purpose a clearly television production company founded by late‐night host David Letterman, has
articulated and well‐ a clear purpose: whatever makes Dave laugh.6
defined ambition for
the organization.
Purpose involves a “clearly articulated, well‐defined ambition” for the
organization, an ambition that engenders “strong, enduring emotional attach-
ments” among employees and remains constant over time.7 By articulating a clear

EXHIBIT 7-1
Core Tasks of
Change Leadership. Develop and articulate clear and consistent sense of purpose and direction for the
organization
Establish demanding performance expectations
Enable upward communication
Forge an emotional bond between employees and the organization
Develop future change leaders
Leading Change 155

and consistent purpose, leaders enhance the effectiveness of change implemen-


tation in a number of ways:
• A common sense of direction and goals allows decentralized decision making
and greater autonomy over enacting that purpose.
• Autonomy places decision‐making authority in the hands of employees who
are best able to respond, and respond quickly, to a dynamic environment.
• Additionally, common purpose enhances the ability of an organization to
achieve required levels of coordination and teamwork.
• Leaders at operational levels can formulate strategy to help advance that
purpose and then change the strategy in response to or anticipation of a
dynamic environment.
Organizational purpose provides a steady framework that helps shape strategic
responsiveness (summarized in Exhibit 7‐2).

THEORY INTO PRACTICE

A widespread and common understanding of organizational purpose allows


employees to exercise greater autonomy in moving the change effort in its
desired direction.

Establish Demanding Performance Goals


In his study of the most effective U.S. leaders who have led their companies from
“good to great,” Jim Collins observed a trait they all had in common. The most
effective leaders shared a “ferocious desire” to achieve outstanding performance
for their companies. They were, says Collins, “fanatically driven, infected with
an incurable need to produce results.”8 Effective change efforts are firmly rooted
in that focused drive to achieve outstanding performance.9

THEORY INTO PRACTICE

Effective change efforts are built on a drive to achieve outstanding performance.

EXHIBIT 7-2
Shared Purpose
Supports Common sense of direction and goals allows employees at Helps Change
decentralized multiple levels to make decisions that further overall purpose Implementation.
decision making of organization
Supports enhanced Employees at all levels understand purpose and goals and can
autonomy respond quickly and effectively to dynamic environment
Supports Employees working toward a common goal better able to
coordination coordinate their efforts
156 Chapter 7

Building a Jack Welch talked about stretch goals as a way of keeping employees
Vocabulary of focused on outstanding performance during a transformation. During his tenure
Change
Stretch goals clearly
as head of General Electric (GE), Welch’s emphasis was largely on financial goals.
articulated and Welch’s successor, Jeff Immelt, refocused expectations to emphasize innovation
challenging and customer responsiveness as GE’s new stretch targets.
performance Establishing demanding performance goals supports change by focusing
expectations. employee motivation and commitment on the goal of achieving outstanding
performance.10 It is that interconnection between achieving outstanding perfor-
mance and employee commitment to change that makes this a core task of change
leadership. It is the conviction that, given high performance goals—coupled with
the requisite levels of autonomy and resources—employees will adopt the behav-
iors required to meet those goals.

Enable Upward Communication


As we saw in Chapter 5, Vineet Nayar, CEO of HCL, believed the only way to
spur innovation within his company was to “invert the pyramid.” That image
conveyed his sense that traditional hierarchical structures placed barriers
between employees and managers. New ideas need to come from the front lines
of the organization, and Nayar worked to ensure that there was an open flow of
communications from those levels to the management.
Building a
Vocabulary of Effective leaders communicate downward to make sure employees at all
Change levels understand in a clear and consistent way the purpose and direction of the
Upward firm. But effective organizations need upward communication as well. The sim-
communication the ple fact is that employees further down the organizational hierarchy are well
flow of information
positioned to know things vital to the organization. Employees possess “local
from lower to higher
hierarchical levels in knowledge” about customers, competitors, and how the products and services
an organization. of the organization meet the shifting needs of the marketplace that need to be
communicated upward in an organization.
Through their everyday interaction with customers, suppliers, and peers,
employees develop experience‐based, deep knowledge.11 If that knowledge is
not allowed to impact decision making in a direct and immediate way, organiza-
tions can find themselves in trouble. Employees can communicate upwardly
both the need for change and the degree to which management’s response is
addressing that need. That is why a vital task of effective leadership is to enable
upward communication.

THEORY INTO PRACTICE

Effective leadership involves listening, engaging, and learning as well as


communicating.

Knowledge possessed by employees at lower hierarchical levels puts


them in an excellent position to understand the degree to which the change
goals articulated and pursued by upper management are both being imple-
mented and achieving the desired results. In Chapter 1, we saw that the top
management team that ran ASDA, the U.K. grocery chain, learned the hard
Leading Change 157

way that not enabling upward communication can lead to difficulties during a
change process.

THEORY INTO PRACTICE

Particularly in situations of strategic renewal and change, formal leaders need


to learn about how their effects are proceeding through a process of mutual
engagement with employees at all organizational levels.

ASDA’s leaders formulated a new strategy for the chain, previously known
as a discount store for working‐class customers. They would move upmarket to
capture highly profitable wealthy shoppers. As they directed that new strategy
from above, however, store managers experienced a troubling reality: Old, loyal
customers were discarded without being replenished from this new, desired
niche. Upper management failed to create mechanisms to allow store managers
to communicate upwardly that the chain’s strategy was seriously flawed. Top
management never learned—at least until the company faced bankruptcy—that
their new strategy was not working.
To help ensure that knowledge lodged at lower hierarchical levels is cap-
tured, discussed, and acted upon, leaders can enable upward communication by
three steps:
1. Top executives can acknowledge, both to themselves and to the organiza-
tion, that they do not know everything that needs to be known about the organi-
zation and its competitive environment. That acknowledgment needs to include
the explicit recognition that they need to learn from lower‐level employees.
2. Executives can create channels for information to flow upward in an
uncluttered and unfiltered way. These channels often take the form of direct
contact and communication between upper management and lower‐level
employees. Taken by themselves, such tactics—management‐by‐walking‐
around, internal comment, and suggestion cards, “graffiti walls” where employ-
ees’ comments are posted—may seem superficial and programmatic. They can
and do become real when upper management seriously seeks and values such
input.
3. Executives can also push decision‐making authority down to lower levels,
allowing employees to exert authority and take responsibility for the organiza-
tional–environmental interface.
For change implementation to stay on track, knowledge of whether inter-
ventions are working must be communicated upward and shared in a timely
and candid way with top management.

THEORY INTO PRACTICE

Effective leaders take specific steps to ensure that communications move both
upward and downward.
158 Chapter 7

Forge an Emotional Bond Between Employees


and the Organization
Organizations consist of individuals who possess skills, competencies, and
knowledge. Their connection to the organization is, in part, instrumental. They
exchange those skills, competencies, and knowledge for the rewards provided by
Building a
Vocabulary of the organization. To transform an organization from a collection of individuals
Change (even highly talented individuals) into a coordinated, interdependent unit
Emotional bond a requires a bond that transcends instrumentality. A deeper emotional bond pro-
relationship between vides a robust source of support for change when a company enters a transforma-
individuals and their
tional period.12 One of the key tasks of change leadership, therefore, is to forge
organizations based
on a deeply felt just such an emotional and personal attachment between employee and employer.
commitment to the Organizational leaders can use their position to personify an emotional
organization’s attachment among employees. Herb Kelleher, Southwest Airline’s CEO for
purpose and goals. nearly three decades of profitability, helped create and sustain a bond that
employees came to refer to explicitly as “love” (Love Field in Dallas, after all,
served as Southwest’s hub airport).13 He involved himself in virtually every
aspect of the business, from handing out onboard peanuts to dropping in on
maintenance workers at 3 am in Southwest hangars with coffee and doughnuts.
That involvement had both a symbolic and operational aspect to it: providing
employees with direct access to a CEO with whom they were on a first‐name
basis while simultaneously offering employees an up‐close‐and‐personal oppor-
tunity to see and experience Kelleher as the human embodiment of the company’s
values and principles.

THEORY INTO PRACTICE

If employees are committed to their organization emotionally as well as


instrumentally, they are more likely to engage in required behavioral changes.

An emotional bond encourages employees to coordinate their efforts, com-


municate more honestly and freely, take the risks required of creativity, and
manage conflicts in ways that benefit the organization. By locating a sense of
purpose and meaning within the organization’s mission and goals, employees
are ready and willing to make sacrifices on behalf of the organization, to act in
ways that are informed by the organization’s core values and renewed strate-
gies, and to alter behaviors in ways that enhance the company’s performance.
The instrumental exchange of effort for reward cannot be overlooked in
any organization. The drive to acquire—that is, the desire of individuals to boost
their share of scarce resources—is fundamental to human nature. But it is not the
only fundamental human drive. People also have a need to bond, to form net-
works, to be part of mutually reinforcing relationships.14
Leaders who fail to create the opportunity for emotional bonding will find
it difficult to generate high levels of commitment to change. “It’s hard to get
excited about 15 percent return on equity,” said a manager in a transforming
organization.15 Outstanding financial performance is a necessary, even appealing
Leading Change 159

aim of change, but there needs to be more. Emotional bonds are much more than
niceties of a pleasant business environment; they support outstanding perfor-
mance and create a work context open to change.

Develop Future Leaders


Companies that retain market domination over long periods tend to develop
leaders internally.16 Paying attention to the development of leadership assures a
strong pipeline of individuals capable of supporting transformation, both now
and in the future. Jack Welch spent more of his time at the helm of GE on senior
executive development than any other matter. GE, in fact, became so good at
developing leaders that it was a major—probably the major—supplier of CEOs
to other Fortune 100 companies.
Some have argued that leadership is an inherent trait; that leads are “born,
not made.” Consultant Ron Morris observes, “Did you not pretty much know
who the ‘leader’ of your Cub Scout pack was way back in 1955? He was the guy
leading, was he not?” Nobody teaches leaders how to lead. While individuals
may learn confidence and resourcefulness, “leadership is an art, and therefore it
simply cannot be taught.”17 However, most observers accept the argument that
leadership can be developed. “The truth is that leaders are made, not born,”
says consultant John Baldoni. “Leadership is developed by learning and refin-
ing a set of skills—skills that anyone, including you and me, can learn and
develop.”18

THEORY INTO PRACTICE

Given a combination of experience, training, and circumstances, a wide array


of individuals can be effective leaders.

Failure to address the requirement for effective leadership can prove disas-
trous. Paul Lawrence and Davis Dyer documented how the U.S. steel industry
suffered from inadequate development of leaders.19 Whether it was U.S. Steel,
Bethlehem Steel, or the other companies that dominated the industry for decades,
leadership development followed a common pattern. Future executives typically
entered their organizations at a low level, worked their way up through a single
function, then assumed top positions without the requisite skills to exercise effec-
tive leadership. Inadequate, poorly developed leadership drained the capacity of
those companies to respond to the tide of global competition in the 1980s and
1990s. Nonadaptiveness in an organization or even an industry can be traced in
no small part to the manner in which leaders are developed.

THEORY INTO PRACTICE

Inadequate attention to leadership development can hurt a company, even an


industry.
160 Chapter 7

EXHIBIT 7-3
Organizational
Barriers to Effective Practice Barrier
Leadership Rapid upward Prevents individuals from having to live with
Development.
mobility consequences of their actions and learning from their
Based on John P. successes and failures.
Kotter, The
Leadership Factor Movement within Individuals never gain knowledge of total organization,
(New York: Free a single function particularly of how subunits fit together.
Press, 1988). Short‐term performance Individuals get better at tactical and operational
pressures management than at long‐term strategic and visionary
leadership.
Recruitment for specific Internal employee pool is thin on individuals with real
technical skills leadership potential.

With narrowly focused functional managers rather than broadly based


leaders, organizations become nonresponsive. It is virtually impossible to mobi-
lize adaptive behavior on the part of others when the individuals who sit atop the
hierarchy are themselves engaging in nonadaptive behavior. The lack of time,
resources, and attention paid to the development of future leaders can ultimately
undermine a company’s ability to maintain outstanding performance. Rapid
upward mobility is only one of the traditional development practices that can
undermine the development of individuals capable of effective leadership (sum-
marized in Exhibit 7‐3).

THEORY INTO PRACTICE

Rapid upward movement of personnel through the hierarchy can work to hurt
an organization’s ability to develop effective leadership.

In order to learn how to lead change effectively, John Kotter suggests future
leaders experience a number of situations:
• Work through coalitions rather than relying on hierarchical authority.
• Formulate visions and strategies rather than planning and managing
budgets.
• Communicate purpose and build commitment rather than issuing reports
and creating policies.
• Think in long‐term time horizons rather than immediate results.
• Work with an organization’s culture and not its formal structures.20
Approaching leadership development in a strategic manner while under-
standing that effective leaders can be “made” through experience, feedback,
assessment, and training will provide a source of future leadership and support
change.
Leading Change 161

BEYOND INDIVIDUAL LEADERSHIP


The exercise of leadership is not limited to any one individual in an organiza-
tion. Given the realities of today’s business environment, the notion that any one
individual can change an entire organization is inadequate. An increasingly
dynamic competitive environment, especially when coupled with the growing
complexity of organizations themselves, requires that for transformational
change implementation to be effective, leadership must be exercised by many
people on multiple organizational levels.
Reliance on one person to be the leader of change might actually undermine
the effectiveness of a change effort. Think of the following potential consequences
of overreliance on an individual leader:
• High levels of dependency can displace individual and group initiative.
• That dependency, in turn, can slow decision making.
• Providing the candid feedback required of effective transformation can
become a risky, to‐be‐avoided venture.
• A dominant leader, particularly one who sees the exercise of leadership on
the part of others as a direct threat, might be unable to build the sense of
teamwork and shared responsibility required to sustain a coordinated
change effort.
Dominant individual leaders can create an internal dynamic that builds
dependency while stifling initiative, innovation, teamwork, and change.
Instead of being centralized within an individual, change leadership can be
exercised both vertically and horizontally in the organization. Vertically means
that organizations allow and encourage leadership to be exerted up and down
the formal hierarchy. Horizontally means that leadership is exercised across the
organization, in multiple divisions and units. Changing an organization—at
multiple levels and across numerous units—is a challenge that requires distrib-
uted rather than individual leadership. Dominant individual leaders may
allow—even inadvertently encourage—others to back away from the exercise
of change leadership.

THEORY INTO PRACTICE

Dominating individual leaders can actually hurt an organization’s ability to


change.

Moving from individual to shared leadership is desirable, but it is not


easily achieved. The attitudes, decision‐making style, and skill sets of top
executives can all reinforce individual rather than shared leadership. Start
with attitudes. Top executives often conceive their roles in independent rather
than inter dependent terms, leading them away from the sense of shared
responsibility so vital to teamwork. Especially when an organization has
grown largely through acquisition, top executives can conceive their roles as
highly autonomous individuals, resenting efforts to “impose” on them a sense
of collective responsibility.
162 Chapter 7

The management style of the chief executive can also influence the behaviors
of other organizational leaders. The key variable here is the degree to which the
chief executive insists on a tight hold over the reins of decision making. Shared
leadership requires decentralized decision making. In a highly centralized situa-
tion, the chief executive controls the decision making, while other top executives
engage in what is essentially political behavior aimed at preserving one’s own
position, turf, and power. Responsiveness to a highly dynamic environment
requires that multiple leaders be involved in decision making, particularly around
the question of how the organization’s purpose and strategy are to be implemented.
Finally, top managers often have a difficult time engaging in disagreement
and debate among gthemselves over important strategic issues.21 Executives often
carry with them an assumption concerning disagreement and debate that also
works against the desire to enhance employee influence. That view can be stated
quite simply: Consensus is good, argument is bad. In what has been labeled the
“unity view” of organizations,22 managers often believe that diversity of opinions,
debate, and conflict are best avoided.

The Challenge of “Walking the Talk”


Reflecting on his experience reversing the lagging fortunes of Nissan Motors,
Carlos Ghosn talked about the importance of aligning leaders’ actions with
words. “Top management is highly visible,” he noted. “What we think, what we
say, and what we do must be the same.” Discrepancies between words and
actions, he warned, could “spell disaster.”23 A discrepancy between words and
actions can undermine change implementation by spreading suspicion and dis-
trust among employees.
Ghosn addressed the requirement for leaders to align what they say with
what they do.
Effective change implementation requires high levels of commitment
among employees, a strong sense of shared purpose and partnership, and a cli-
mate of trust that supports candid communication, open inquiry, and joint prob-
lem solving.
During his first two years as president of Johnsonville Sausage, Ralph
Stayer’s effort focused on the behaviors of his direct reports. He hoped to instill
a heightened sense of confidence, autonomy, initiative, and creativity among his
top executives. Frustrated by his inability to achieve those goals, Stayer initially
blamed them: They were simply not rising to the challenge. It took Stayer two
years to understand that the failure was his, not theirs—that is, his behaviors
were inconsistent with his stated objectives:

I didn’t really want them [his direct reports] to make independent


decisions. I wanted them to make the decisions I would have made.
Deep down, I was still in love with my own control. I was just making
people guess what I wanted instead of telling them.24

It was not until he aligned his actions with his goals and allowed real decision
making on the part of his top executives that he was able to shape a real problem‐
solving team.
Leading Change 163

Conclusion
It is often said in organizations that if you are the organization enhances the internalized
not leading change, you are not leading. That motivation so critical in a change effort, which,
expression captures the central role of leader- in turn, helps energize learning and adaptation.
ship to a change effort. Developing future leaders and creating effective
The intervention of leaders is critical in teamwork at the top will greatly enhance an
determining the effectiveness of an organization’s organization’s ability to adapt, change, and
change implementation. In order to mobilize maintain outstanding performance.
adaptive behavior on the part of organizational Just as a leader cannot run an organiza-
members, leaders engage in six core tasks, start- tion on her own, no individual leader can
ing with the articulation of a sense of purpose and change an organization. Effective change lead-
direction for the organization coupled with ership requires collaborative partnership
demanding performance goals. Employees can among those individuals who hold positions of
then adapt to changing circumstances by finding formal authority and employees at other orga-
new and innovative ways of meeting the perfor- nizational levels who can participate in the pro-
mance expectations while aligned with the com- cess of leading change. Entering into such a
pany’s purpose and direction. partnership involves formal leaders ceding
Communication channels, especially their unilateral control and allowing for a kind
upward communication, support new behav- of shared authority in which multiple parties
iors and help ensure that leaders will learn from participate. The goal, of course, is to enhance
employees at all levels about the effectiveness of the likelihood that change will produce results
their efforts. Building employee commitment to that benefit the organization as a whole.

Discussion Questions
1. What leadership steps did John Chambers take to 4. Why is a strong emotional bond with the com-
ensure that Cisco remained flexible and adaptive? pany especially important in times of change?
2. It is said that if you are not leading change, you What specific steps can leaders take to create such
are not leading. Do you agree or disagree with a bond?
that statement? Explain. 5. Do you agree that traditional approaches to lead-
3. Why is upward communication so difficult to ership development can hurt a company’s effort
achieve in organizations? Explain the barriers to develop effective change leaders? Explain.
that exist and how leaders might overcome them.

Case Discussion
Read “Leading Change—Carlos Ghosn at Renault and 3. What are the beliefs and values of Ghosn con-
Nissan,” and prepare answers to the following questions: cerning leadership and change? Show how those
1. What are the strengths and weaknesses of Carlos beliefs and values have been enacted at his vari-
Ghosn’s approach to change leadership at Nissan? ous leadership positions.
To what extent has he succeeded in mobilizing 4. Has Ghosn “walked the talk” on his leadership
adaptive behavior on the part of employees? style, that is, aligned his actions with his words?
2. Using the core tasks of leadership (Exhibit 8‐1),
evaluate Ghosn’s change leadership at Nissan.
164 Chapter 7

LEADING CHANGE—CARLOS GHOSN AT RENAULT


AND NISSAN
“There is no business executive in the world I would rather see at the helm
of Renault. Carlos has a golden touch. First at Michelin, then at Nissan—
everywhere he has been he has turned disaster into success. He is very
strong, very forceful, and very positive.”
“Look, I cannot deny his past successes. But really, what has he done?
He has relied almost exclusively on slash‐and‐burn techniques to cut costs
and return these companies to profitability. But how long can that last? He
has not brought any new ideas to the running of business: just cut costs. He
is now returning to a profitable Renault. I’m unsure of what he can do now.”
“I think you both are missing the point. Ghosn’s past has been im-
pressive, no doubt about it. But why is he trying to run two companies at
the same time? Does he believe too much his own press? The way it is now,
he cannot focus properly on either Nissan or Renault.”

Three French executives offering contrasting reflections on Carlos Ghosn upon


his return to Renault in April 2005.
Whatever qualms some executives may have felt about Carlos Ghosn (name
is pronounced to rhyme with “phone”), senior management at France‐based
Renault harbored no such misgivings.25 In April 2005, chairman Louis Schweitzer
announced that Ghosn would return to Paris to assume control of Renault. Over
the past five and a half years, Ghosn had engineered a remarkable turnaround at
Nissan Motors, headquartered in the Ginza district of Tokyo. He had moved from
Paris to Japan as part of the 1999 Renault–Nissan alliance. Ghosn’s return to Paris,
however, would not remove him from oversight of Nissan. He vowed to serve as
a dual CEO—leading both Renault and Nissan, dividing his time evenly between
the two.
Ghosn’s career involved a number of remarkable leadership opportunities:
Michelin Brazil, Michelin North America, Renault, Nissan, and now the Renault–
Nissan alliance. But no story is more dramatic or exemplary of his approach to
change management than his tenure at Nissan.

Nissan Motor Company


As part of a 74‐firm Japanese zaibatsu—a powerful, interconnected industrial
combination that included Hitachi, Nippon Mining, and Nissan Chemical—
Nissan leveraged its considerable assets into becoming Japan’s number two
automaker (behind Toyota).26 Nissan began exporting their Datsun cars to the
United States in 1958 and 17 years later became the top‐selling import in the U.S.
market. Their sporty Datsun 240Z, known as the Z car, gained an especially loyal
following based on its reputation as “the ultimate thrill machine, an unbeatable
combination of rakish lines, raw horsepower and affordability that young
Japanese and American guys found impossible to resist.”
A number of management missteps kicked off a debilitating and long‐lasting
decline starting in the 1980s. Executives changed the company’s brand name in
Leading Change 165

the United States from the popular Datsun to the completely unfamiliar Nissan.
Additionally, they allowed their popular Z car to drift and decline with little infu-
sion of innovative technology. Less obvious but even more troubling was Nissan’s
inability to find flexibility in its relationship with suppliers. Their cost of parts
ranged from 15 percent to 20 percent above domestic competitors. Aggressive
competition from Honda in the United States forced Nissan to take a $1,000 dis-
count on their cars.
Sales declined, but costs did not. Despite several announced restructuring
plans, Nissan executives achieved little real improvement. “Powerful trade
unions, a societal taboo against layoffs and institutional inertia stalled any real
changes.” After the company borrowed money from the government‐owned
Japan Development Bank to stay afloat, executives decided to court potential
partners. Talks with both DaimlerChrysler and Ford proved fruitless. France‐
based Renault agreed to an alliance. As a precondition of the alliance, Nissan
executives agreed that Renault’s second‐in‐command, Carlos Ghosn, would
come to Japan as COO under CEO Yoshikazu Hanawa. The agreement was
announced on April 15, 1999—and the Ghosn era at Nissan began.

Carlos Ghosn
Ghosn was born in Brazil in 1952 to a French mother and Lebanese father. He
moved to Lebanon at the age of six to attend a French Jesuit school. He received
his college education in Paris, first at the Ecole Polytechnique and then at the
Ecole des Mines de Paris. Representatives from Michelin, a privately held French
tire company, approached Ghosn in March 1978 while he was still a student.
They were looking for French‐educated engineers who could speak Portuguese
(Ghosn’s first language) to help them build a market in Brazil. Ghosn accepted
their offer and worked his way through several manufacturing positions in
France, South America, and the United States before joining Renault.

Ghosn at Renault
In October 1996, Ghosn joined Renault when CEO Louis Schweitzer offered him
the number two position (with potential succession to the top position). Ghosn
had already developed a philosophy of change leadership at Michelin based on
three premises:
• Assume nothing (find answers within the company).
• Work fast.
• Earn trust and respect with strong results.
At Renault, his formal assignment was to run engineering, manufacturing,
and purchasing. However, Ghosn’s main responsibility was to cut costs.

Renault Ghosn’s early analysis of Renault’s problems led him to conclude that
the company culture emphasized narrow, functionally based thinking at the
expense of a larger strategic view:

The company was organized into completely separate departments, like


silos. The heads of the departments often turned them into baronies or fief-
doms. This was an enormous problem, because I felt the road to recovery
166 Chapter 7

lay in implementing cross‐functionality. And advocating cross‐functionality


is tantamount to challenging certain practices that belong to certain
functions. But I believed that cross‐functionality was fundamental to our
success … We had to break down some high walls and reorganize the com-
pany so that everyone worked together.

Relying on cross‐functional teams, Ghosn came up with a plan to reduce costs by


$4 billion in three years.
His plan, which included closing Renault’s plant in Vilvoorde, Belgium,
with its 3,500 jobs, earned him the lasting nickname: “le cost killer.” Ghosn
claimed to have no problem with his reputation:

Businesses have always tried to reduce costs … I don’t see how one can
manage a business without keeping one eye glued to expenses. It’s a fantasy
to think otherwise. … There have been very few successful extravagant cap-
tains of industry.

Renault returned to profitability in 1997.


Within the company, Ghosn earned a reputation as a tough, demanding
boss who set “brutally high standards.” At the same time, executives considered
him a consensus builder with a “knack for getting straight to the heart of tough
problems and … an ability to motivate others by setting ambitious but realistic
targets.” Ghosn avoided personal confrontation. “To my knowledge,” he said,
reflecting on his entry into the Renault executive suite, “there were no personal
conflicts, because by definition I’m not a confrontational man. I try to manage
pressure where I find it. I don’t make scenes or attack people. I’m firm, but not
confrontational.”

Renault–Nissan Alliance Throughout the 1990s, Renault sought a partnership


with another carmaker in order to expand its market reach. Early attempts had
been disastrous. The company proved unable to close a potential deal for Volvo.
Their purchase of U.S.‐based AMC cost Renault billions of dollars before selling
that unit off to Chrysler. Schweitzer and Ghosn, however, remained convinced
that the company needed a partner to help it break out of the confining European
market (85 percent of all company sales were in Europe) and seek robust sales in
Asia and North America.
After Nissan’s merger talks with DaimlerChrysler fell through, Ghosn pur-
sued serious negotiations with the Japanese carmaker. As the companies engaged
in talks, a difference in style and culture—Renault’s highly legalistic style clashed
with Nissan’s preference for broad‐based discussion—threatened to undermine
potential agreement. Ghosn proposed cross‐company teams to look at all oppor-
tunities for synergistic effort, creating 11 teams of members from similar jobs in
the two companies. Once the companies approved the alliance, these teams
allowed Ghosn to have a head start on what needed to be done at Nissan.
The 1999 alliance called for Renault to acquire a 36.8‐percent stake in
Nissan. “We are not merging,” noted Renault’s CEO Louis Schweitzer, “we are
creating a binational company.” At the time, Nissan had $19.9 billion in debt and
Leading Change 167

losses of $250 million for the year. The company had posted losses seven out of
the previous eight years. Their domestic market share had sunk from 34 percent
in 1974 to under 19 percent in 1999, their global market share from 7 percent to
under 5 percent.

Ghosn at Nissan
Upon his arrival in Japan, Ghosn announced that his goal was not to advance the
interests of Renault but rather “to do everything in my power to bring Nissan
back to profitability at the earliest date possible and revive it as a highly attrac-
tive company.” He realized the delicate position in which he found himself:

In corporate turnarounds, particularly those related to mergers or alli-


ances, success is not simply a matter of making fundamental changes to a
company’s organization and operations. You also have to protect the
company’s identity and the self‐esteem of its people. Those two goals—
making changes and safeguarding identity—can easily come into conflict;
pursuing them both entails a difficult and sometimes precarious balanc-
ing act. That was particularly true in this case. I was, after all, an out-
sider—non‐Nissan, non‐Japanese—and was initially met with skepticism
by the company’s managers and employees. I knew that if I tried to dic-
tate changes from above, the effort would backfire, undermining morale
and productivity. But if I was too passive, the company would simply
continue its downward spiral.

The challenge, he said, was to save the business without losing the company.
While he was not the first Westerner to take the reins of a Japanese auto
company (an American had led Mazda after Ford purchased the company), the
local press still wondered how a Westerner would fit in and be able to adjust.
Ghosn held no such concerns:

By focusing on specific business objectives, people don’t have time to worry


about cultural differences or politicking (which is obviously a very danger-
ous thing in an alliance or merger). This focus on results instead of politics
gives you a much greater opportunity to create a success in an alliance or
merger if the turnaround works. Realistically, though, it can jeopardize the
whole merger or alliance if it doesn’t work.

He believed that by focusing on performance, he could bypass concerns for cul-


tural differences.
By inclination, Ghosn avoided making sweeping changes in the makeup of
his executive committee. He said he would make personnel changes only after
giving people a “reasonable time” to change. “I do it, but only when necessary. I
consider it a waste. It is more of a challenge to me to change people from within.
It is more long‐lasting and beneficial—more powerful—to change people than to
change persons.” Within two years of his arrival, however, Ghosn did remove a
number of key executives for failure to meet performance targets. Accountability,
he repeated over and over, must start at the top.
168 Chapter 7

Ghosn insisted on consistency between the stated beliefs of top executives


and their actions:

Top management is highly visible. What we think, what we say, and what
we do must be the same. We have to be impeccable in ensuring that our
words correspond to our actions. If there are discrepancies between what
we profess and how we behave, that will spell disaster. Included in this is
our accountability. We must be committed to the responsibilities we’ve
agreed to. When we don’t deliver, we have to face the consequences. The
Japanese culture is a very proud culture. Our workers and managers want
to succeed. For that matter, so do the unions inside Nissan. They want to be
proud of their company and their management. They need management to
manage. And good management involves accountability.

Leaders, in his view, must do what they say and say what they do.

Early Diagnosis
Between April and late June 1999, Ghosn toured Nissan plants, subsidiaries, and
dealerships in Japan, the United States, Europe, and Taiwan. He had learned
from his experience at Michelin to start change without any preconceived ideas:

This is extremely important in management. You must start with a clean


sheet of paper because the worst thing that you can have is prefabricated
solutions … you have to start with a zero base of thinking, cleaning every-
thing out of your mind.

Performance numbers told him a great deal about Nissan but not the under-
lying causes of their problems. “You have to go out in the field to see what’s going
on.” Ghosn engaged in a process he called “deep listening,” speaking to over
5,000 people:

I asked people what they thought was going right, what they thought was
going wrong, and what they would suggest to make things better. I was
trying to arrive at an analysis that wouldn’t be static but would identify
what we could do to improve the company’s performance. It was a period
of intensive, active listening. I took notes. I accumulated documents that
contained very precise assessments of the different situations we had to
deal with, and I drew up my own personal summaries of what I learned. In
the course of those three months, I must have met more than a thousand
people.

Ghosn’s diagnostic tour built a good deal of hope and high expectations.
Almost immediately, Ghosn announced three changes based on decisions
he had arrived at on his own:
1. The “official language” of Nissan would become English and all top mana-
gement meetings would be held in English. Executives who did not learn
English immediately would have to leave the company.
Leading Change 169

2. The Japanese press would be invited to attend Nissan shareholder meet-


ings as a way of making Nissan’s current problems and future plans trans-
parent to the public.
3. The position of regional president for Europe and North America was
replaced with four cross‐functional management teams.
By early July, Ghosn reached some conclusions about Nissan. Perhaps the
most surprising was the lack of urgency among Nissan executives: “For a com-
pany that has been losing money for seven years out of eight, there is not enough
of a sense of urgency. People should be banging their heads on the walls every-
where.” Increasing a sense of urgency was on his mind when he announced his
diagnosis to the press and, more importantly, to employees within the company.
In an “all‐hands” presentation carried across the company via closed‐circuit tele-
vision, Ghosn listed strengths and weaknesses:
The fact that he spoke directly to employees was especially important to
Ghosn:

Now, it’s impossible to resurrect a failing company without first diagnosing


its problems and then making sure everyone in the enterprise knows the
results of your diagnosis. If there’s a reticence about sharing the results,
there can be no shared sense of urgency … You have to identify the problem
and circulate your diagnosis. When we pointed out in public that some of
Nissan’s products were not all that attractive, we got a lot of criticism … But
it was this very statement, the frank admission that some of the products in
our line weren’t appealing, that allowed us to straighten things out, even if
what we said may have had a short‐term negative effect.

Ghosn was enacting what he considered to be his primary role: “The only
power that a CEO has is to motivate. The rest is nonsense.”
Cross‐Functional Teams
To enrich his diagnosis and specify action plans, Ghosn returned to cross‐
functional teams:

In my experience, executives in a company rarely reach across boundaries.


Typically, engineers prefer solving problems with other engineers, sales-
people like to work with fellow salespeople, and Americans feel more
comfortable with other Americans. The trouble is that people working in
functional or regional teams tend not to ask themselves as many hard
questions as they should. By contrast, working together in cross‐functional
teams helps managers to think in new ways and challenge existing prac-
tices. The teams also provide a mechanism for explaining the necessity for
change and for projecting difficult messages across the entire company.

Ghosn pulled together nine cross‐functional teams to examine all aspects of


the business operation: from business development to manufacturing and logis-
tics to supplier relationships to organizational structure. Each had ten members,
all from middle management. Teams could also create subteams to help them
170 Chapter 7

collect data. In total, the effort involved about 500 people. Ghosn gave the teams
three months to review the company’s operations and make recommendations.
Only three explicit rules governed the activities of the teams. First: “Nothing
is off limits to discuss and explore. Teams are not to be hindered by traditions or
avoid sensitive corporate issues.” Second: “Teams had no decision‐making
power. That was left in the hands of the executive committee.” And third: “Only
one issue is non negotiable: the return to profit.”
Ghosn was tough and demanding on team members. When the purchasing
team, for example, came back with a plan to reduce costs by 10 percent over
three years, Ghosn’s response devastated them. “Ghosn rejected our recommen-
dations outright,” recalled a team member. “He told us they were not aggressive
enough. He told us to come back with recommendations that will yield 20 per-
cent savings over the next three years.” Far from being discouraged, the group
went back to work. After what was recalled as “a wrenching two weeks of hard
work and tough negotiations,” the group met Ghosn’s expectations with recom-
mendations that, in retrospect, seemed obvious.
“Mr. Ghosn is always challenging us to make higher commitments and tar-
gets,” said an executive. “We [constantly] talk about challenge and stretch.” Added
another executive, “I have never worked for anyone who is so demanding.”

Nissan Revival Plan


With the recommendations from the nine cross‐functional teams Ghosn and
the executive committee pulled together what became known as the Nissan
Revival Plan (NRP). In October 1999, Ghosn announced that plan to the press,
to the employees, and to the public. He started his presentation by saying, “The
key facts and figures about Nissan point to a reality: Nissan is in bad shape.”
The highlights of his action plan included:
• Reduce operating costs by $10 billion.
• Cut the number of parts and material suppliers in half.
• Create new product investment and rollout, including launch of 22 new
models by 2002—capital investment increased from 3.5 percent in 1999 to
5.5 percent in 2002.
• Reduce global head count by 21,000.
• Reduce number of vehicle assembly plants in Japan from seven to four.
• Reduce number of manufacturing platforms in Japan from 24 to 15.
“The combination of growth and cost reduction will allow Nissan to
achieve a consolidated operating profit of 4.5 percent or more of sales by FY
2002.” Revival would depend on more than cost cutting, he emphasized. “While
cost cutting will be the most dramatic and visible part of the plan, we cannot
save our way to success.”
In the question‐and‐answer period that followed his presentation, a
reporter asked if Ghosn was prepared to take responsibility for the company’s
performance. If Nissan is not profitable in 2000, Ghosn responded, he and the
entire executive committee would resign. Committee members had made that
agreement privately but had not expected Ghosn to make it public. In hindsight,
Ghosn thought it was an important statement. “To say Nissan will be profitable
Leading Change 171

or I’ll quit … this struck a chord. [Fellow] executive committee members were
obviously surprised when they heard of my remark.”
The NRP contained several significant departures from traditional
Japanese approaches to management. Nissan’s relationship with suppliers, for
example, represented the keiretsu system that linked large manufacturers, like
Nissan, to its suppliers often through cross held stock. “The keiretsu was like a
big family,” noted a reporter. “In the 1980s it was considered one of the key
components of the success of Japanese manufacturing, as the cozy relation-
ships ensured that manufacturers were delivered high quality parts, manufac-
tured to specification, as they were needed.” With suppliers now placing
Nissan at a considerable cost disadvantage, Ghosn targeted the system. The
number of suppliers would be cut in half, and they would be expected to cut
costs by 20 percent by 2003.
Additionally, all purchasing would be centralized. Said Ghosn, “Purchasing
represents 60 percent of our total costs, or a minimum of 58 percent of our net
sales. Today, Nissan buys parts and materials on a regional basis, or even in cer-
tain areas on a country basis. This will stop immediately.” From that point
onward, purchasing would be centralized and globalized.
Traditional human resource policies would also be changed. Said Ghosn:

Like other Japanese companies, Nissan paid and promoted its employees
based on their tenure and age. The longer employees stuck around, the
more power and money they received, regardless of their actual perfor-
mance. Inevitably, that practice bred a certain degree of complacency, which
undermined Nissan’s competitiveness.

Nissan’s seniority system would be abandoned, along with their approach


to pay:

In the traditional Japanese compensation system, managers receive no


share options, and hardly any incentives are built into the manager’s pay
packet … We changed all that. High performers today can expect cash
incentives that amount to more than a third of the annual pay packages, on
top of which employees receive company stock options.

The revival plan sent shock waves not just through the company but
through the entire nation. Japan’s stock market reacted by dropping Nissan’s
price a full 20 percent. Ghosn was not alarmed:

To be able to make changes, it is necessary to do some hard things. If you


do those things, it does not mean that you do not value people. In my
opinion, the reverse is true. People who do not tell the truth do not respect
people. My concept of respect for people starts with telling the truth and
establishing the facts of a situation.

Telling the truth and establishing the facts of a situation—those were to be


the hallmarks of Ghosn’s approach.
172 Chapter 7

Results and More Plans


Nissan achieved the results promised in the NRP a full year ahead of time. Ghosn
became president of Nissan in 2000 and CEO in 2001. At that time, he announced
a new plan, named NISSAN 180:

Through NRP we transformed a struggling company into a good company;


through NISSAN 180, we will transform a good company into a great com-
pany. The achievement of NISSAN 180 will rely on four pillars: more reve-
nue, less costs, more quality and speed and a maximized alliance with
Renault.

Once again, Nissan made good on its promises. “The story of Nissan’s
revival is now complete.”

Moving Up
In April 2005, Ghosn officially returned to France to run Renault, announcing
that he would continue to oversee Nissan. “I won’t be a part‐timer, but one CEO
with two hats.” Forty percent of his time, he said, would be spent in Japan (with
Toshiyuku Shiga serving as Nissan COO), 40 percent in France, and the rest glob-
ally. In fact, Ghosn played a third role as well. The alliance board of directors—
the body designated to oversee the strategy of the alliance as well as any and all
activities undertaken jointly by Renault and Nissan*—had been headed jointly
by the CEOs of Renault and Nissan, as well as five senior executives from each.
With Ghosn now serving in both CEO roles, he became, in essence, the chairman
of the joint board.
“It is very flattering,” said Ghosn of his emergence as a kind of global
superstar, “but at the same time you know that you are as good as your last quar-
ter results or your last six‐month results or your last year results. I know very
well the rules. As long as you perform, you are good. Your management is as
good as your performance.”

Rough Seas at Renault


As he had done at Nissan, Ghosn set ambitious plans for Renault, emphasizing
the introduction of 26 new models by 2009. As the market awaited the arrival of
the redesigned compact Megane and other models, Renault sales slipped, while
competitors Fiat and Volkswagen grew. Profits at Nissan declined for three
straight quarters, and the Renault stock price took a beating. After selling off
one‐and‐a‐half million Renault shares, a fund manager expressed a concern.
“The near term looks weak,” he said, “and we remain concerned that Carlos
Ghosn is still running both Renault and Nissan.” Ghosn, however, reassured
employees, customers, and the market. “My record,” he said simply, “is to do
what I said I was going to do.”

*Joint activities included shared purchasing, shared research on fuel cell technology, shared factories
in Mexico and Brazil, and shared car platforms.
Leading Change 173

Endnotes
1. John Chambers quoted in “The HBR Interview: (Feb. 1996), pp. 122–149; Jon R. Katzenbach and
John Chambers,” Harvard Business Review (Nov. Jason A. Santamaria, “Firing Up the Front
2008), p. 77. Information used for this case Line,” Harvard Business Review (May–June
comes from that interview, as well as Matt 1999), pp. 107–117.
Richtel, “A Cheerleader for a Company in a 13. Information on Southwest Airlines is from Jody
Midlife Funk,” New York Times (June 23, 2002), Hoffier, The Southwest Airlines Way (New York:
and Adam Bryant, “In a Near‐Death Experience, McGraw‐Hill, 2003), and James L. Heskett,
a Corporate Rite of Passage,” New York Times Southwest Airlines 2002: An Industry Under Siege
(Aug. 2, 2009). (Boston, MA: Harvard Business School Publish-
2. This definition of leadership as mobilizing ing, 2003).
adaptive behavior is offered by Ronald A. 14. Paul R. Lawrence and Nitin Nohria, Driven:
Heifetz, Leadership Without Easy Answers How Human Nature Shapes Organizations (San
(Cambridge, MA: Belknap Press, 1994). Francisco, CA: Jossey‐Bass, 2001).
3. Ibid., p. 20. 15. Quoted in Beer, Eisenstat, and Spector, The
4. John P. Kotter, The Leadership Factor (New York: Critical Path to Corporate Renewal, p. 85.
Free Press, 1988), p. 17. 16. James C. Collins and Jerry I. Porras, Built to
5. See Bert Spector, “From Bogged Down to Fired Last: Successful Habits of Visionary Companies
Up: Inspiring Organizational Change,” Sloan (New York: Harper Business, 1994).
Management Review 30 (Summer 1989), pp. 17. Ron Morris, “Great Leaders Are Born; Great
29–34. Managers Are Made,” Techyvent Pittsburg,
6. Jacques Steinberg, “They Know All the Stupid (Nov. 7, 2005).
Sitcom Writer Tricks,” New York Times (Sept. 11, 18. John Baldoni quoted at www.johnbaldoni.com.
2005), sec. 2, p. 90. 19. Paul R. Lawrence and Davis Dyer, Renewing
7. Christopher A. Bartlett and Sumantra Ghoshal, American Industry (New York: Free Press, 1983).
“Changing the Role of Top Management: 20. John Kotter, Leading Change (Boston, MA:
Beyond Strategy to Purpose,” Harvard Business Harvard Business School Press, 1996).
Review (Nov.–Dec. 1994), p. 82. 21. See Kathleen M. Eisenhardt, Jean L. Kahwajy,
8. Jim Collins, Good to Great: Why Some Companies and L. J. Bourgeois III, “How Top Management
Make the Leap . . . and Others Don’t (New York: Teams Can Have a Good Fight,” Harvard
Harper Business, 2001), p. 30. Emphasis in the Business Review (July–Aug. 1997), pp. 77–86.
original. 22. Gibson Burrell and Gareth Morgan, Sociological
9. See Michael Beer, Russell A. Eisenstat, and Bert Paradigms and Organizational Analysis (London:
Spector, The Critical Path to Corporate Renewal Heinemann, 1979).
(Boston, MA: Harvard Business School Press, 23. Victoria Emerson, “An Interview with Carlos
1990). Ghosn,” Journal of World Business 36 (Spring
10. Edwin A. Locke and Gary P. Latham, Goal 2001), p. 9.
Setting: A Motivational Technique That Works! 24. Ralph Stayer, “How I Learned to Let My
(Englewood Cliffs, NJ: Prentice‐Hall, 1984). Workers Lead,” Harvard Business Review (Nov.–
11. Dvora Yanow, “Translating Local Knowledge at Dec. 1990), p. 66.
Organizational Peripheries,” British Journal of 25. This case is based on the following publica-
Management 15 (2004), pp. 9–25. tions: Michael A. Cusumano, The Japanese
12. Roderick D. Iverson and Parimal Roy, “A Casual Automobile Industry: Technology and Management
Model of Behavioral Commitment: Evidence at Nissan and Toyota (Cambridge, MA: Council
from a Study of Australian Blue‐Collar on East Asian Studies, 1985); Emily Thornton,
Employees,” Journal of Management 20 (1994), “Remaking Nissan,” Business Week, (Nov. 15,
pp. 15–41; Roderick D. Iverson, “Employee 1999), p. 70; Stephane Farhi, “Ghosn Sees Fast
Acceptance of Organizational Change: The Role Start at Nissan,” Automotive News 73 (Apr. 5,
of Organizational Commitment,” International 1999), p. 1; S. Strom, “In a Change, Nissan
Journal of Human Resource Management 7 Opens Annual Meeting to Press,” New York
174 Chapter 7

Times (June 26, 1999), p. C2; Chester Dawson, (New York: HarperCollins, 2003); Brian
“The Zen of Nissan,” Business Week, (July 22, Bremmer, “Nissan’s Boss,” Business Week (Oct.
2002), p. 142; Carlos Ghosn, “Saving the 4, 2004), p. 50; Carlos Ghosn and Philippe Ries,
Business Without Losing the Company,” Shift: Inside Nissan’s Historical Revival (New
Harvard Business Review (Jan. 2002), Michael York: Currency, 2005); “Nissan Reports Record
Yoshino and Masako Egawa, Nissan Motor Co., Results for FY04,” Japan’s Corporate News (May
Ltd., 2002 (Boston, MA: Harvard Business 25, 2005), p. 1 ( www.japancorp.net/Article.
School Publishing, 2002); Michael Yoshino and Asp?Art ID=9931) James Brooke, “Nissan’s Mr.
Perry L. Fagan, The Renault‐Nissan Alliance Fix‐It Is the Talk of Detroit,” New York Times
(Boston, MA: Harvard Business School (Nov. 19, 2005), p. C4; Laurence Frost,
Publishing, 2002); David Furlonger, “Back from “Renault’s Chief Losing Support as Share Price
the Brink of Failure,” Financial Mail (June 28, Drops,” International Herald Tribune (Sept. 8–9,
2002), p. 102; Carlos Ghosn, speech at INSEAD 2007), p. 13.
Global Leader Series, September 24, 2002; Tim 26. For background on Nissan, see Michael A.
Larimer, “Japan, Nissan and the Ghosn Cusumano, The Japanese Automobile Industry:
Revolution,” Chazen Web Journal of International Technology and Management at Nissan and Toyota
Business (Spring 2003), p. 5; David Magee, (Cambridge, MA: Council on East Asian
Turnaround: How Carlos Ghosn Rescued Nissan Studies, 1985).
CHAPTER

8 Going Green

In recent years, there has been a virtual stampede of executives proclaiming their desire to
“go green”; that is, to reduce or eliminate the negative impact of their business activities on
society and the planet. For some, this proclamation amounts to little more than a public
relations gimmick. Others, though, are genuinely committed to meeting the needs of their
shareholders, customers, employees, host communities, and even the larger global
community. These executives are looking at the processes their companies use to develop,
manufacture, distribute, and perhaps even recycle their own products. They are seeking to
develop products and services in ways that are compatible with what is being called
“sustainability.” For these businesses, there are many technical questions: how to reduce
waste, produce more efficiently, and so forth. They also face another, perhaps less obvious
challenge. Going green is about more than new tools and techniques; it also involves
organizational transformation.
We are not focusing here on companies founded on positive values concerning the social
responsibility of business and the need to be a steward of a just and healthy planet. Patagonia,
Ben & Jerry’s, Newman’s Own, and the Body Shop are examples of companies in which the
founders embedded values of social responsibility into the company’s culture. These types of
companies, however, are not the focus of this chapter.
Instead, the chapter looks at companies that were founded on a different set of
assumptions and values. These companies viewed regulations concerning the environment
and the treatment of employees from a compliance perspective. Rules were to be either
followed, or occasionally even circumvented.
When a company with one strategy and set of values decides to “go green,” it will need
to engage in a change effort.* And it is a change that is transformational in nature. The chapter
will focus on the organizational transformation involved in going green. In particular, the
chapter will:
• Present the key concepts of sustainability and the triple bottom line
• Examine going green as an organizational transformation

*In this chapter, “going green” and “sustainability” will be used interchangeably.

175
176 Chapter 8

• Articulate the steps that are part of that particular transformation process
• Delineate the role of leadership in creating and maintaining a green culture
within an organization
Before doing so, we will examine an attempt by a large athletic shoe
company to go green. As you read this introductory case, ask yourself:
• What was the trigger event for Nike?
• What steps did Nike take to transform itself?
• How successful has Nike been in its effort to go green?

NIKE JUST DOES IT


In Newsweek’s 2010 ranking of the most “green” companies in the United States,
Nike sat at number 10 overall, topping the list of all consumer products compa-
nies.† As impressive as that achievement may seem, what made it all the more
remarkable was that almost 20 years earlier, Nike was being held up as the
“poster child” for corporate irresponsibility in a global economy.1 A 1992 exposé
in Harper’s Magazine cited Nike as an example of the dark side of globalization.
Nike prospered by shutting U.S. factories and exporting work to Indonesia,
China, Malaysia, and other “Third World” countries. Nike had even abandoned
the factories in South Korea when the government recognized the right of work-
ers to form unions and strike.
At first, company executives reacted defensively. “We believe that we look
after the interests of our workers,” said a Nike spokesman. “There’s a growing
body of documentation that indicates that Nike workers earn superior wages
and manufacture product under superior conditions.” When that response failed
to quell the storm, executives sought to be reassuring. “We have uncovered these
issues clearly before anyone else, and we have moved fairly expeditiously to cor-
rect them.”
Denial, however, took the company only so far.
Over time, a new, more proactive approach emerged. Nike would recon-
sider its corporate practices. The company now committed itself to fair labor
practices, zero waste and toxins, a closed‐loop system that reused all products,
and “sustainable growth and productivity.” An internal audit demonstrated that
annual footwear production generated $700 million in waste. By 2020, the com-
pany pledged, all that would be eliminated.
It was “very difficult to really grasp and understand what we were attempt-
ing,” noted Darcy Winslow, general manager of Nike’s Women’s Fitness divi-
sion, “much less get buy‐in on it.” Early efforts to promote the so‐called triple
bottom line (“people/planet/profits”) failed to garner much enthusiasm on the
part of either employees or top management. Nike’s founder and board chair-
man Phil Knight seemed genuinely interested in improving the brand’s image,
but the language of sustainability was alien within Nike’s highly competitive,
performance‐driven culture. Discussions with supply chain partners (both


Newsweek looks at environmental impact, green corporate policies, and the company’s reputation
among corporate social responsibility experts.
Going Green 177

suppliers on one end of the supply chain and manufacturers on the other‡) were
earnest but perfunctory. The company’s small Corporate Social Responsibility
(CSR) function had little clout with line managers. The whole effort was seen as
somewhat peripheral to the business of designing and selling athletic shoes
around the world.
That approach began to change in 2002. Said Winslow, “We started to create
an overarching strategy of what it meant to be a more sustainable company.” All
goals were now translated into dollars and cents impact. In 2009, the CSR depart-
ment became the Sustainable Business and Innovation (SBI) department. That
name change embedded the sustainability effort more explicitly in the compa-
ny’s drive for innovative products. In a company statement, Nike said,
“Sustainable Business and Innovation is an integral part of how we can use the
power of our brand, the energy and passion of our people, and the scale of our
business to create meaningful change.” The company announced its Considered
Design process for new product development, requiring that issues such as recy-
cling and waste not be after‐thoughts to product design. Rather, they were to be
taken into consideration at the very earliest stages of new product development.
The move from CSR to Sustainable Business and Innovation was more than
just a name change. The vice president of SBI was placed on Nike’s strategic
leadership team in order to participate in decision making concerning mid‐ and
long‐term plans. The department’s staff was housed within product and
geographic groups, reporting matrix‐style to both line managers and the vice
president.
Other organizational changes intended to fuel Nike’s sustainability effort
included:
• The creation of internal audit teams to track labor practices and waste in
facilities around the world.
• Active lobbying by company representatives to influence labor standards
and regulations in the countries where manufacturing activities were oc-
curring.
• Changing the incentive offered to supply chain partners away from cost
savings, placing heavier emphasis on local labor conditions.
• Reengineering inventory control systems in order to avoid last minute
rushes which encouraged supply chain partners to circumvent Nike’s sus-
tainability standards.
Products began to emerge that were designed at the outset—the Trash Talker, for
instance, made entirely with recycled materials (trash)—to be eco‐friendly. The
company opened shoe recycling centers, using the material not only for its own
shoes but also to be donated to schools and communities for use in building
tracks.
To be sure, Nike possessed some advantages in its change to green. For one,
the founder and chairman remained committed and actively involved. Then too,
Nike’s customer base tended to be young, active, and affluent: aware of social


Nike outsourced all manufacturing and assembly; the company mainly performed design and
marketing.
178 Chapter 8

issues and willing to pay for green products. Celebrity product sponsors, most
notably Michael Jordan, were excited to have their names associated with sus-
tainability efforts. And Nike’s “Just Do It” corporate slogan captured a company
commitment to remaining a market leader.

MOVING TOWARD THE SUSTAINABLE CORPORATION


Building a Although many definitions of sustainability or going green exist, one of the most
Vocabulary of widely accepted involves organizations taking voluntary steps to meet the needs
Change
of the present generation without compromising the needs of future generations.2
Sustainability
voluntary actions The inclusion of the term “voluntary” is important. Going green is not the same
taken by as compliance: actions of an organization designed to meet requirements imposed
organizations by law.
designed to meet the
needs of the present
generation without THEORY INTO PRACTICE
compromising the
needs of future Corporate sustainability involves voluntary efforts on the part of organizations.
generations.

Building a The issue of business organizations going green is one that is mired in sig-
Vocabulary of nificant controversy. To start with, what is the proper role of business in our
Change society? Do businesses have a stewardship role over the planet or should the
Compliance actions of
an organization
focus of corporate activity be solely on enhancing profitability? Some of the key
designed to meet points of that debate, which has been going on for decades, are summarized in
requirements Exhibit 8‐1. Even when businesses accept a degree of responsibility, questions
imposed by law. can be raised such as: what is the nature of that responsibility, and how should
it best be enacted?

EXHIBIT 8-1
Is This a Proper
It may surprise you to know that debates about the social obligations of businesses go
Role for Business?
back decades. The first dean of the Harvard Business School, Wallace Donham, insisted
that business executives had a responsibility not just to their enterprise but to the
society in which their businesses operated. In a 1927 speech, he argued that the
“development, strengthening, and multiplication of socially‐minded” executives was
“the central problem of business.” In the aftermath of World War II, Harvard
readjusted its curriculum in order to help business students develop “an integrated
social and economic philosophy.”3
There have been equally spirited augments against the notion that business
has a larger social and environmental responsibility. Harvard Business School professor
Theodore Levitt suggested that the dubious notion of a larger responsibility for business
detracted attention from the main job of corporations. “The business of business is
profits”; anything else was a dilution of effort. American business leaders would stand
“a much better chance of surviving if there is no nonsense about its goals—that is, if
long‐run profit maximization is the one dominant objective in practice as well as
theory.” Nobel Prize winning economist Milton Freedman added his voice in a famous
1970 article titled, “The Social Responsibility of Business Is to Increase Profits.”4
Going Green 179

THEORY INTO PRACTICE

There is still much that is controversial about going green.

Although the debate has been ongoing for years, the most recent pressure
for businesses to look at their impact on the environment can be traced to 1984,
when an India‐based subsidiary of Union Carbide experienced an environ-
mental, social, and economic disaster. A chemical leak from its plant in Bhopal
resulted in thousands of deaths and the devastation of the community. What
was widely considered to be the worst industrial catastrophe in history sparked
a succession of international organizations—led by the United Nations—to
look at an appropriate balance between the economic requirement for develop-
ment and growth, societal needs for human dignity and rights, and environ-
mental needs for sustainability.5 Very quickly, the role of business institutions
attracted attention both as contributors to the “problem” (placing financial
returns above concerns for people and the planet) and for their potential to
lead the way to a solution.

THEORY INTO PRACTICE

The Bhopal chemical leak of 1984 proved to be a major trigger event in look-
ing at the social and ecological responsibilities of companies.

Another turning point occurred in 1993 when Paul Hawken, cofounder of


Smith & Hawken’s, a garden supply company, published The Ecology of Commerce.
“Quite simply,” Hawken wrote, “our business practices are destroying life on
earth.”6 Business had been handed a “blank check” to ignore its social responsi-
bilities, he insisted. But business was also uniquely positioned to implement
Building a
solutions. To forge a path forward, business could find a “third way” between Vocabulary of
promoting growth and enhancing the planet. Change
That attention led to the identification of the triple bottom line in which Triple bottom line an
social, ecological, and economic dimensions are all taken into equal account. The approach to defining
performance that
idea of the triple bottom line is that corporations do not have to choose among
takes into account
these outcomes. It is a win‐win‐win in which each of the three—people, planet, social, economic,
profits—can gain by working together. and ecological
Like much else in the field of sustainability, the notion of a triple bottom dimensions and
line attracts controversy. Some critics suggest that, although the approach is assumes that the
three are mutually
sound in principle,—that is, the ability of corporations to balance people, planet,
reinforcing.
and profits—it is unlikely to occur in practice. At the end of the day, profits will
always trump people and the planet.7

THEORY INTO PRACTICE

Although there is a great deal of controversy about the triple bottom line, it is
an important step toward aligning business with sustainability concerns.
180 Chapter 8

Others suggest that the basic approach is fundamentally, even fatally


flawed. Profitability is far easier to measure than the other two components, and
the concept of good “people” outcomes is vague and open to a wide variety of
ideological rather than scientific interpretations.8 For those reasons, it is difficult
to assess if a company is complying with its people bottom line.9
Many companies begin their path to sustainability by focusing on “low‐
hanging fruit”: relatively easy ways of reducing energy consumption and waste
as ways of saving money. Other companies aim at complying with ever more
stringent environmental laws or reducing their liability for environmental
damage.10 There is also a phenomenon of companies simply relabeling products
Building a
Vocabulary of and services as “green.” For instance, a bank that was moving toward online
Change services tagged the effort “Eco‐banking.” A railway freight company promoted
Greenwashing public its service as energy saving compared to trucking. This so‐called greenwashing
relations efforts refers to a public relations effort to claim environmental virtue for actions the
aimed to claim
company was already taking.
environmental virtue
without making any
substantive THEORY INTO PRACTICE
organizational
change.
“Greenwashing” is a public relations effort that does not involve organiza-
tional transformation.

A 2009 report on business and sustainability issued by the Boston


Consulting Group, together with the MIT Sloan Management Review, found that
most executives believe sustainability is now and will continue to be important
to their business.11 However, a significantly smaller number are actively pursu-
ing sustainability initiatives. The companies were driven by three factors:
1. Government regulations
2. Consumer preferences
3. Employee interest
Government legislation was more significant for U.S.‐based companies, while
consumer preferences were more of a driving factor in Europe.

THEORY INTO PRACTICE

Government regulations are the main motivation for going green in the
United States; in Europe, the major factor is customer preferences.

Simon Zadek has suggested that organizations travel through five stages of
responsiveness to issues of sustainability:12
• Defensive stage: company denies claims that they are responsibility for
negative outcomes.
• Compliance stage: company accepts responsibility and costs of following
rules and legislation as “the cost of doing business.”
• Managerial stage: company integrates sustainability objectives into the
management goals at multiple levels of the organization.
Going Green 181

• Strategic stage: sustainability issues become fully integrated into a compa-


ny’s business strategy.
• Civil stage: company representatives promote wider efforts on behalf of
sustainability.
Of course, most companies have not yet evolved to the managerial stage, let
alone the civil stage.

THEORY INTO PRACTICE

When it comes to going green, most organizations follow a predictable path,


starting with denial and compliance before becoming managerial, strategic,
and civil.

The Performance Advantage of Sustainability


The 2007 Boston Consulting Group/Sloan Management Review report surveyed
executives concerning the expected benefits from sustainability efforts.13 Leading
the list, by a huge margin, was improved company/brand image, with cost sav-
ings, competitive advantage, employee satisfaction, and innovation as other per-
ceived benefits.
One of the most frequently mentioned performance advantages of going
green is the impetus it provides for innovation. Interface founder Ray Anderson
said his company’s commitment to sustainablility offered “an incredible foun-
tainhead of inspiration.”14 An excellent example of such innovation can be seen
at Bloomberg, a company that provides investors with financial data. Bloomberg
leveraged its internal ecological commitment, BGreen, into a new product: pro-
viding environmental, social, and governance (ESG) performance investment
analysis tools to socially responsible investors.15 Exhibit 8‐2 summarizes the per-
formance advantages of going green.

EXHIBIT 8-2
Performance
Advantage Gained: By: Advantages of
Lowered cost of operating Elimination of waste Going Green.

Reduced exposure to risk Inoculating against future law suits


Increased innovation Impetus for new products/services
Improved recruitment Enhanced image of green company makes it
more attractive to potential employees
Enhanced employee motivation Creates sense of excitement and purpose for
employees
Market differentiation Appealing to sustainability‐conscious consumers
182 Chapter 8

THEORY INTO PRACTICE

In addition to cost savings and image building, going green offers “an incred-
ible fountainhead for innovation.”

Although sustainability can and does result in improved performance, the


relationship between investment in green innovation and payoffs is not a simple
straight line up. As Dean Schroeder and Alan Robinson have demonstrated with
their “Green Payback Curve,” the bottom‐line impact of green investment goes
through predictable stages:16
• Phase 1: Early efforts target “low‐hanging fruit” and result in “quick and
certain” financial payback.
• Phase 2: At this point, projects target areas of investment in which financial
returns are in the future.
• Phase 3: Investments made in Phase 2 now sharply improve financial
performance.
Interface’s Ray Anderson was confident in the business case for sustainability:

Costs are down, so it’s saving money. Products are better, which
means the top line is better. People are motivated and galvanized,
which means employees’ morale and engagement is up. And the
goodwill of the marketplace is astonishing. I don’t know what else
provides this kind of business case: costs are down, products are bet-
ter, people are motivated, and customers are receptive—and we’re
winning market share.17

“Any notion that companies need to make a tradeoff between financial and
environmental performance was simply a false choice,” insisted Anderson. There
is no trade-off.

THE PROCESS OF CHANGING TO GREEN


In Chapter 1, we saw how organizational change is typically initiated in response
to a trigger event; a shift in the environment that creates a need for altered strate-
gies and new patterns of employee behavior. For Nike, it was the adverse public-
ity associated with Nike’s labor practices that prompted CEO Phil Knight to put
the company on a different path. Such trigger events can be dramatic in nature—
Brazilian oil giant Petrobras suffered through three major disasters within a year
of each other, including an oil rig explosion that killed 11 employees, before seek-
ing to enhance its safety and maintenance performance—or subtle. Let’s take the
case of Ray Anderson, CEO of Interface.
Ray Anderson started Interface Flooring Systems, headquartered in
Georgia, in 1973.18 Interface’s main product was carpet tiles, a high‐end offering
aimed at commercial customers that generated over $1 billion in global sales by
the late 1990s. Carpeting was mainly made of nylon, a highly durable but also
nonrecyclable product that ended up in landfills and takes 20,000 years to
Going Green 183

degrade. Interface followed standard industry practice, recycling no more than


4 percent of its production. The company grew to become the world’s leading
commercial provider.
The turning point for Anderson and Interface came at the confluence of
two seemingly minor events. In the mid‐1990s, Interface’s research department
invited Anderson to deliver a talk to a global meeting of employees focused on
the company’s environmental efforts. That invitation was prompted by que-
ries from customers—what was Interface doing for the environment?—that
grew out of the cultural–political climate of the decade. Anderson was reluc-
tant to attend such a meeting. After all, his only vision for an environmentally
responsible company was quite simple: “obey the law, comply, comply, com-
ply.” Certainly, the notion that his company or any other could be harming the
environment while complying with environmental regulations never crossed
his mind.
At the same time, and purely by coincidence, Anderson was reading Paul
Hawken’s Ecology of Commerce. “It changed my life,” said Anderson. “It hit me
right between the eyes. It was an epiphany.” Anderson was inspired to begin a
transformation, which he referred to in his typically understated manner, as a
midcourse correction. “I’m dedicating the rest of my life to creating a company
that can grow and prosper without doing harm to the earth.”
Of course, not all potential trigger events actually trigger any significant
change. Nike’s Phil Knight could have attempted to paper over charges of labor
abuse with public relations efforts, and Ray Anderson could have continued
with his compliance‐based vision of environmental responsibility. Much depends
on company leadership. Jack Welch, for instance, fought community and gov-
ernment attempts to have General Electric (GE) contribute to the cleanup of the
Hudson River. His successor, Jeffrey Immelt, on the other hand, launched
“Ecoimagination” designed to commit GE to developing “tomorrow’s solutions
such as solar energy, hybrid locomotives, fuel cells, lower emission aircraft
engines, lighter and stronger durable materials, efficient lighting, and water
purification technology.”
Once the trigger event motivates a reevaluation of values, goals, and strate-
gies, companies seeking to go green undergo a transformation that follows a set
of sequential interventions:

• Set the vision


• Diagnose the status quo
• Alter first informal and then formal design elements.

Ultimately, the leadership of the organization will need to bear the responsibility
for setting a green culture in which sustainability becomes interwoven into the
fabric of the organization.

Set the Vision


For existing organizations, going green represents a new direction: not just a new
strategy but a new way of thinking about strategy. Not surprisingly, then, it
seems quite helpful for organizational leaders to set the path and define the
184 Chapter 8

territory. In that regard, going green starts when top leadership offers a vision
about what is meant by going green:

THEORY INTO PRACTICE

Going green starts with a visionary statement from top leadership.

• When Jan Stenberg, then CEO of Scandinavian Airlines (SAS), committed


his company to be an early mover in addressing environmental concerns
related to airplane emissions, he explained: “A sound environmental pro-
file is profitable. But it is more than that. It is our contribution to a sustain-
able society and to future generations.19
• In 2002, Jeff Immelt, CEO of GE, launched the company’s ecoimagination cam-
paign in order to achieve his goal of building a “great and good” company.20
• Interface’s Ray Anderson made clear that his commitment to sustainability
was not just about pollution. His vision of sustainability involved “taking
nothing from the earth that is not rapidly and naturally renewable, and
doing no harm to the biosphere.”
• The leadership team at Subaru’s automobile plant in Lafayette, Indiana set
as their goal “zero‐landfill” in the production of 1,000 cars per day.21
The vision sets a consistent strategy that helps avoid the complaint of one execu-
tive that, when it came to sustainability, his company had “too many unaligned
programs and messages.”
The power of the vision to motivate, unify, and excite, comes not just from
its boldness but also from its alignment with the strategy of the company itself.
Compare Coca Cola pledging donations to the Boys and Girls Clubs of America
to Nike’s effort to recycle athletic shoes and donating them to schools and com-
munities to be used as the material for tracks.22 Michael Porter and Mark Kramer
differentiate between “generic” social issues and issues that are more directly
related to the activities of a company or the social environment in which the
company operates. Take the issue of HIV/AIDs. That may be a generic issue to a
large American retailer but a strategic issue to pharmaceutical company thinking
about investing in the development of a treatment or a South African‐based min-
ing company whose employees are directly affected.23
Green visions have three characteristics in common:
1. They articulate some specific territory in which the organization can con-
tribute to sustainable development.
2. They state a belief that going green and performing well is mutually rein-
forcing rather than mutually exclusive.
3. They vow a commitment to a long‐term social responsibility that tran-
scends the performance of the company.
Typically, Porter and Kramer conclude, “the more closely tied a social issue is to
a company’s business, the greater the opportunity to leverage the firm’s
resources—and benefit society.”24
Going Green 185

THEORY INTO PRACTICE

To be effective, green visions embed and connect the firm’s commitment to


sustainability with its business mission; that way, going green is seen as stra-
tegic, not peripheral.

Diagnose the Current Situation


In 2005, Wal‐Mart’s image as a “good neighbor” was slowly but significantly
eroding in the public mind.25 Sure, the company delivered on its promise of
everyday low prices, thereby saving consumers money. But a question was
raised: at what costs? A popular documentary movie, The High Cost of Low Price,
suggested the social costs of Wal‐Mart’s labor practices—low wages, dependence
on part‐time workers and even illegal immigrants, lack of health care—passed
on the true labor costs to society.26 Wal‐Mart’s image was damaged, and custom-
ers were noticing and responding.
Although Wal‐Mart had reacted defensively to such attacks in the past,
CEO Lee Scott now considered a new approach. He would address in a positive
way Wal‐Mart’s impact on the environment with particular attention to “energy,
waste, and products.” A team of executives and high potential employees were
brought together to recommend targets and steps. That team did not work on its
own, however. In addition to hiring consultants, the team worked with
Conservation International and Environmental Defense, and relied on data sup-
plied by the Union of Concerned Scientists.
Kicking off sustainability efforts with diagnosis helps focus employees on
what needs to change. Because sustainability involves a larger commitment to
the community in which the organization exists, diagnostic efforts will need to
focus not just on the company but also on the other businesses in the supply
chain. The employee team at Wal‐Mart learned how little impact the company
could have without addressing its supply chain. Said one member: “If we had
focused on just our own operations, we would have limited ourselves to 10 per-
cent of our effect on the environment and, quite frankly, eliminated 90 percent of
the opportunity that’s out there.”27

THEORY INTO PRACTICE

Early diagnostic efforts will need to include not just the company itself, but
also its supply chain partners.

Supply chain partners are the companies that provide services, goods, or
raw materials that are needed to design, produce, market, deliver, and support a
company’s offer. In the case of McDonald’s, for instance, supply chain partners
provide meat, buns, potatoes, and other key ingredients of the product. In order
to promote sustainability across its supply chain, McDonald’s created the Supply
Chain Working Group in 2006.28 The mission was to create a sustainable supply
186 Chapter 8

chain “that profitably yields high quality, safe products without supply interrup-
tion while creating a net benefit for employees, their communities, biodiversity,
and the environment.”29 The group developed a set of social/economic, environ-
mental, and animal welfare guidelines intended to drive the effort.
Once the diagnosis identifies areas of opportunity, the organization can
address its own systems, altering informal design first before moving to formal
design.

Alter Informal Design Elements


In the introductory case, we saw Nike make an implementation mistake that is
often committed in change efforts. The company made a formal design change
too early in the process. In response to the CEO’s call to refurbish the company’s
image, Nike created a new department structure: the CSR function. The office
had little real impact. The commitment to sustainability had not yet been embed-
ded in Nike’s strategy. Going green represented not a business reality but a cor-
porate nicety. No wonder line managers treated the office’s commitment to social
responsibility as a peripheral matter.
Organizational design, as defined in Chapter 4, refers to the arrangements,
both formal and informal, that an organization calls upon to help shape employee
behavior. In effective change implementation, informal redesign—altering roles,
responsibilities, and relationships—proceeds formal change. Formal design
changes—measurements, structures, pay, and so forth—follow later in the
sequence of interventions in order to reinforce and institutionalizes new behaviors.
Going green requires new patterns of employee behavior. Perhaps the most
significant change is that going green is inherently a collaborative effort.30 That
collaboration is both horizontal (cross‐functional) and vertical (cross‐hierarchical
levels). Horizontal collaboration occurs within the organization when employees
from different functions and units combine their efforts. It also occurs when
employees collocate with supply chain partners.

THEORY INTO PRACTICE

Informal design changes associated with going green start with building high
levels of collaboration.

Remember Nike’s Considered Design process? The idea of considering


sustainability at the earliest possible stage of product development has become
increasingly common the past several years.31 Considered Design requires that
organizations abandon their traditional silos and functional boundaries. Instead
of the traditional step‐by‐step sequential approach to product design, all par-
ticipants in the product—from raw material suppliers to design engineers, manu-
facturers, logistical experts, and market professionals—come together at the
outset of a process at work together to develop, produce, merchandise, deliver,
and recycle green products.
Collaboration will also need to occur vertically, that is, across hierarchical
boundaries. Companies that have moved toward sustainability find that many
Going Green 187

of the most important innovations come not from top executives but from front‐
line employees. Bloomberg’s BGreen initiative—an effort started in 2007 to
reduce the company’s carbon blueprint—grew out of an employee suggestion.32
Interface’s Ray Anderson acknowledged that the very basis of his company’s
green mission has been empowered employees. Mission Zero, he said, “empow-
ered our people to dare to risk, working in teams, and challenging everything
that we were doing. In other words, challenge the status quo.33

Alter Formal Design Elements


Formal resign can be used to reinforce and institutionalize new behaviors. In the
case of Nike, we saw a number of formal design changes:
• Placing the head of the newly created SBI department on the company’s
strategic leadership team and staff members within the different business
lines.
• Altering incentives offered to supply chain partners to align with company
goals focused on improving local labor conditions.
• Reengineering inventory systems in order to eliminate last-minute rushes
and the potential abuses in standards that such rushes might produce.
One of the most significant formal design changes that occur in the process of
going green involves the manner in which the firm measures performance. That
change has both an internal and external aspect to it.

INTERNAL MEASUREMENT Amanco, a leading Latin American building solu-


tions company, is part of the Grupo Nueva holding company. At the group’s urg-
ing, Amanco management committed the business unit to the triple bottom line,
specifically:
1. Create economic stability in the long run.
2. Generate value through a system of CSR.
3. Generate value through environmental management.34
One of the questions that faced Amanco was about measurement. There were, in Building a
fact, two aspects of that question. First, what outcomes do we measure? And Vocabulary of
second, how do we ensure that we are achieving satisfactory results on environ- Change
mental, social, and economic performance? To help provide an answer, Amanco Balanced scorecard
turned to the balanced scorecard. (BSC) a tool for
measuring multiple
The premise for the balanced scorecard (BSC) is that financial returns need outcomes—financial
to be understood as one among several vital outcome measures (Exhibit 8-3). performance,
Financial measures of performance, wrote Robert Kaplan and David Norton, “are customer
lag indicators that report on the outcomes from past actions. Exclusive reliance on satisfaction, internal
financial indicators could promote behavior that sacrifices long‐term value cre- process excellence,
and employee
ation for short‐term performance.”35 learning and
The scorecard balances financial measures with three additional metrics: growth—and the
connection of those
1. Customer—To achieve our vision, how should we appear to our customers? outcomes to the
2. Internal Business Processes—To satisfy our shareholders and customers, vision and strategy
what business processes must we excel at? of the organization.
188 Chapter 8

EXHIBIT 8-3
Financial
Balanced Scorecard.
“To succeed

Objectives

Initiatives
Measures
financially, how

Targets
should we
appear to our
shareholders?”

Customer Internal Business


“To achieve our Processes
Objectives

Objectives
Initiatives

Initiatives
Measures
“To satisfy our

Measures
vision, how Vision
Targets

Targets
should we shareholders
appear to our and and customers,
customers?” Strategy what business
processes must
we excel at?”

Learning and
Growth

Objectives

Initiatives
“To achieve our

Measures
Targets
vision, how will
we sustain our
ability to
change and
improve?”

Source: http://www.balancedscorecard.org/basics/bsc1.html

3. Learning and Growth—To achieve our vision, how will we sustain our
ability to change and improve?36
By focusing on multiple outcomes—customers, internal processes, and learning—
the BSC can help managers escape the exclusive focus on a single outcome—
mostly financial—and help ensure that their change interventions are having the
intended results on the other key activities of their firm.

THEORY INTO PRACTICE

BSC is a tool for measuring the effectiveness of change efforts on multiple


dimensions.

At the core of the BSC lies a clearly stated and widely understood vision
and strategy for the organization. The vision and strategy determined in the
earlier phases of change can now be used to drive all performance measures,
financial measures included. Each perspective can be evaluated only in terms of
objectives, measures, targets, and initiatives when that vision and strategy are
clear and widely shared.
Going Green 189

A growing number of companies, including Electricité de France, LVMH, Building a


and Lusotur, S.A., have called on the BSC to help them integrate sustainability Vocabulary of
Change
objectives with their strategy.37 In these cases, green metrics—specific objec- Green metrics specific
tive measurements of social and environmental impact—are built into the objective
scorecard. Wal‐Mart, PepsiCo, and P&G also require their supplies to use a measurements of a
sustainability BSC in order to be approved by the corporation for use by their firm’s social and
business units. In other cases, investment firms insist that potential clients environmental
impact.
provide them with a sustainability BSC in order to be rated as a socially
responsible investment.

THEORY INTO PRACTICE

A sustainability balanced scorecard can help an organization measure its per-


formance on the triple bottom line.

There is no standard approach either to how companies utilize the BSC in


going green or in what outcomes they measure.38 Some companies place sustain-
ability within the “internal business processes” domain. Others place sustain-
ability “key success factors” and “key performance indicators” in all four dimen-
sions. Still others add a fifth dimension to the traditional BSC, focusing on social
and environmental indicators that link to the other four perspectives. The appro-
priate choice is based on the specific challenges facing each company.
The choice of outcomes to be measured will also be based on the compa-
ny’s strategy, its industry, and its social environment. Exhibit 8‐4 presents the
green metrics that are used by carpet tile manufacturer Interface.
Whatever the specific choices, sustainability BSC needs to meet two criteria
to be effective:
1. It should be specific to the business unit utilizing the tool rather than genetic.
2. It should reflect the overall strategy of the firm so it is not seen as a mere
add‐on that can be ignored or slighted in difficult financial times.

EXHIBIT 8-4
Examples of
Environmental Sustainability
Interface 2004
Cumulative avoided costs from waste elimination activities since 1995 Measures of
Sustainability.39
Decrease in total energy consumption required to manufacture carpet since 1996 per m 2
Percentage of total energy consumption from renewable sources
Social Sustainability
Employee volunteer hours in community activities
Percentage of women in management positions

Source: Wendy Stubbs and Chris Cocklin, “An Ecological Modernist Interpretation of Sustainability:
The Case of Interface, Inc.,” Business Strategy and the Environment 17 (2008), p. 519.
190 Chapter 8

The goal, of course, is to integrate sustainability into the overall management of


the firm.
• Waste discharged per vehicle
• Electricity needed to make each vehicle
• Packaging material reused

EXTERNAL MEASUREMENT Given the increasing public interest in sustainability,


it is not surprising that a number of external organizations have devised rank-
ings of companies’ social and environmental impact. The Dow Jones Sustainability
Index, the FTSE4Good Index, and Newsweek magazine all offer ratings that are
available to the companies and the public. External ratings are useful to organi-
zations for three reasons:
1. They provide board members, executives, and employees with a perspec-
tive on the company’s performance relative to others in the same industry.
2. They can be used as outcomes for the firm’s sustainability BSC.
3. They provide information to concerned consumers and investors.
The ratings are not without problems, however. There can be significant differ-
ences across rating systems as to the criteria used and the relative weight
assigned to each criterion. Additionally, they often rely on data supplied by the
companies themselves.40

SHAPING A GREEN CULTURE


Building a Sustainability efforts grow out of a value system or culture in an organization.
Vocabulary of Organizational culture refers to the common and shared values that help shape
Change
Organizational culture
employee behavior and are typically passed down from current to future
the common and employees. Culture serves as the glue that binds an organization or, in the words
shared values and of Terrence Deal and Allan Kennedy, “the way we do things around here.”41
assumptions that Marcel van Marrewijk and Marco Wewe have suggested that a sustainability cul-
help shape employee ture is built over multiple levels. At its most committed, a sustainability culture
behavior and are
typically passed
accepts that sustainability on a worldwide scale is required and that sustainabil-
down from current ity should be fully integrated and embedded in every aspect of the organization.42
to future employees. See Exhibit 8‐5 for a summary of that cultural evolution.

THEORY INTO PRACTICE

Organizational culture can help embed a green mindset and shape employee
behaviors.

Founders—think of Yvon Chounard of Patagonia, Ben Cohen and Jerry


Greenfield of Ben & Jerry’s, Paul Newman and A.E. Hotchner of Newman’s
Own, and Anita Roddick of the Body Shop—are the ones responsible for the
original establishment of a culture. Once founders exit the company, it is the
organizational leaders who have responsibility for shaping the culture. It is their
decisions and actions that resonate throughout the company. Leaders can
Going Green 191

EXHIBIT 8-5
An Evolving
Culture of Compliance Culture of Commitment Sustainability
Culture.43
Ambition level No ambition for Sustainability fully integrated and
sustainability but embedded into every aspect of
awareness of need to organization aimed at contributing to
comply quality and continuation of all societies
Motivation Take on sustainability Belief that everyone in the
merely in order to improve organization has a universal
reputation firm responsibility to both current and
future generations
Criteria for How will it affect my How will it affect the overall well‐
decision making personal reputation and being of the planet?
that of the firm?

examine four sets of behaviors that Edgar Schein says help create and embed
culture in an organization.44
1. Leaders make choices about what to pay attention to, what to measure, control,
and reward. What sustainability outcomes will the company measure and re-
ward? If all the significant rewards flow to economic outcomes, it will be impos-
sible to maintain a green culture.
2. Leaders react to critical incidents and crises. Whether it is Phil Knight
responding to the drubbing Nike took in the press in the early 1990s or Ray
Anderson responding to a speaking engagement just after reading Paul
Hawken’s book, the reaction of the leaders set the pace and direction for the
company.
3. Leaders call upon the “observed criteria” to allocate scarce resources.45 A
CEO who extols the virtue of going green but slices budgets in order to meet
short‐term financial goals sends a signal about what the company values. The
same can be said of a managing director who refuses to cut training budgets dur-
ing a downturn emphasizes the extent to which the company values human
resources. Making tough choices about resource allocation helps shape the val-
ues and resulting culture of an organization.
4. Leaders choose to emphasize certain criteria in their recruitment, selection,
and promotion of employees and future leaders. Going green requires new skill sets,
both technical and interpersonal, that can be considered in hiring and promoting
employees.
Top executives are the most visible embodiment of their organization’s culture.
Their behaviors are apparent to both external stakeholders—customers,
suppliers, labor markets, and the host community—and to employees. What
leaders say matters; what leaders do matters even more. Key choices and deci-
sions, more than speeches and documents posted on walls, embed values and
spread culture.
192 Chapter 8

THEORY INTO PRACTICE

The values and behaviors of leaders shape an organization’s culture.

The question of developing leaders capable of moving their organizations


toward sustainability has received a great deal of attention recently.46 Perhaps an
outstanding “green” leader such as Ray Anderson is simply an outstanding
leader, sharing the same characteristics and displaying the same behaviors.
However, there are a number of particular characteristics that can be associated
with outstanding “green” leadership:
1. The ability to see and work at a high level of understanding. Outstanding
green leaders are capable and motivated to look beyond their individual organi-
Building a zation and understanding the interdependence between organizational perfor-
Vocabulary of
Change
mance and broader social, economic, and scientific issues.
Sustainability mindset 2. The development of a sustainability mindset. Green leaders will have a
a positive openness positive openness to the complexities and opportunities of aligning people, prof-
to the complexities
its, and the planet.
and opportunities of
aligning people, 3. The ability to engage in holistic thinking. Because effective sustainability
profits, and the efforts call for collaboration across an entire company, green leaders understand
planet. and acknowledge the degree to which all functions and units must coordinate
their efforts.
4. The ability to engage in collaboration outside of the organization. Green
Building a leaders will need to engage in shared dialogue with a wide variety of external
Vocabulary of stakeholders: advocacy groups, scientific panels, and university experts as well
Change
as shareholders.
Espoused values the
set of values called Ultimately, effective green leaders will need to align espoused and enacted val-
upon by individuals
ues. Espoused values are the values called upon by individuals to explain or
to explain or justify
their course of action justify their course of action or pattern of behavior. Enacted values are the values
or pattern of that are implicit in that course of action or pattern of behavior.47 The triple bot-
behavior. tom line calls for attention to people and the planet as well as profits, and effec-
tive green leaders behave in ways that are consistent with the goals they are
Building a proposing to their organization.
Vocabulary of Like any excellent leaders, green leaders ultimately will need to have the
Change capacity to learn. Learning is the process by which individuals receive data from
Enacted values the set the external environment, analyze that data, and adjust their thinking and behav-
of values that are
implicit in that
iors accordingly. Green leaders will need to learn from their own experience and
course of action or the experience of others. That learning consists not just of gathering knowledge,
pattern of behavior. but also of applying insights into future actions.

Conclusion
Organizations often approach the challenge of distribution, and recycling more effective and
going green from a technological perspective. less wasteful. But a full commitment to going
There is certainly merit to employing innovative green requires a broader perspective. Leaders
technology to make processes of production, set a vision and mold the culture. The sequential
Going Green 193

steps of effective transformation lead the orga- across boundaries to include supply chain part-
nization through diagnoses, redesign, and new ners and external interest groups. By treating
informal and formal systems. Human resources the challenge of going green as a transforma-
will be impacted in terms of the skills required to tional challenge, organizations will be better
make green efforts effective. Finally, collaboration positioned to meet the goals of the triple bottom
will be vital—both within the organization and line.

Discussion Questions
1. Where do you stand on the various debates and agree? How does sustainability support inno-
controversies surrounding going green? Is pro- vation?
tecting the plant a business responsibility or does 3. The chapter argues that collaboration is the main
it distract from their main purpose? Can every behavioral change that needs to accompany going
organizations really have a triple bottom line or green. Do you agree? Explain.
will financial performance always outweigh other 4. Are excellent green leaders the same as excellent
outcomes? leaders or are important additional skills
2. It is said that going green is now the main needed?
source of innovation within companies. Do you

Case Discussion
Read “Changing to Green at an Oil Company (?)” and 2. How would you evaluate Petrobras’ sustainabil-
prepare answers to the following questions: ity effort? What have they done well and or not so
1. What triggered Gabrielli’s commitment to going well in the transformation?
green at Petrobras? 3. Do you agree with Gabrielli’s assessment of the
success of green policies at Petrobras? Explain.

GOING GREEN AT AN OIL COMPANY(?)


For many people, the notion of environmental sustainability does not fit well—if
at all—with a giant oil company. This is an industry, it would seem, that thrives
on the ever‐increasing consumption of fossil fuels, not to mention environmental
catastrophes such as oil spills. José Sergio Gabrielli de Azevedo, CEO of Brazil‐
based oil giant Petrobras since 2005, says he is determined to change that image.48
Gabrielli describes his personal politics as progressive and leftist, pointing to
his 1970 arrest by the Brazilian army as he was protesting his country’s then mili-
tary dictatorship. After receiving a PhD in economics and joining the faculty of the
London School of Economics, Gabrielli joined Petrobras in 2003 as Chief Financial
Officer. His fast rise to the top was helped by his close personal and political ties
with Brazil’s ruling Workers’ Party.

A State Company
Petrobras was founded by the government in 1953 under the nationalist slogan,
“The petroleum is ours!” Petrobras held a monopoly until 1997, when the
194 Chapter 8

government gave up its complete ownership (although it still controls a majority


of voting stock) and allowed for competition. Since then, the company has com-
piled a troubling history of disasters. In January 2000, a poorly maintained pipe-
line spilled oil into Guanabara Bay for two hours before the leak was detected.
Six months later, a Petrobras refinery spewed millions of gallons of oil into two
nearby rivers. A BBC news report referred to “an embarrassing level of incompe-
tence” on the part of Petrobras managers. Then, less than a year later, a Petrobras
drilling platform—the world’s largest at the time—blew up, killing 11 employees
and dumping 300,000 gallons of oil into the water.
Gabrielli saw that troubled history as a business problem to be solved as
well as an environmental threat to be addressed. “From a purely financial per-
spective,” he said, “environmental mismanagement was just bad business. From
an investor relations perspective, ignoring the growing demand for transparency
and sustainability was also bad business.”49 Plus, added Gabrielli, his personal
values and political beliefs led him to move Petrobras into a position of environ-
mental leadership.

Gabrielli Acts
In pursuit of his goal, Gabrielli took a number of steps:
• Increasing the budget of the company’s health, safety, and environment
programs
• Using the enormous market clout of Petrobras (which was the largest com-
pany in Latin America) to demand that all of its suppliers comply with best
standards for environmental management
• Personally touring sites to check compliance with company standards
• Moving Petrobras’ new refineries away from gasoline and toward biofuels
• Joining the Dow Jones Sustainability Index in order to invite external mon-
itoring of and reporting on Petrobras’ efforts
• Endorsing (and sitting on the board of) the United Nations Global Compact
• Personally blogging and tweeting in order to make the case for Petrobras’
efforts directly to the public.
As evidence that these activities were changing the culture and operations of
Petrobras, Gabrielli pointed to two facts:
• The company had gone eight years without a “major” environmental
accident.
• The private consulting firm, Management and Excellence, ranked Petrobras
as number one among the world’s oil and gas companies for promoting
sustainability.
Petrobras’ 5‐Year Strategic Plan, announced in 2010, called for additional
investment in refining capacity. The company’s goal was to make Brazil fuel
independent by 2014. That independence, it was hoped, would be supplied by
Petrobras’ 2008 discovery of a major oil reserve coming from a vast deep water
off‐shore region known as the subsalt. Later that same year, however, the Gulf of
Mexico oil spill—a British Petroleum rig exploded, killing 11 workers and pour-
ing nearly 185 million gallons of oil into the Gulf—raised questions about the
viability and the costs of future deep water drilling.
Going Green 195

How Green Is Petrobras?


In 2010, Newsweek conducted an audit of the top ranking “green” companies in
the world.50 The highest ranking companies—IBM, Hewlett‐Packard, Novartis,
and Panasonic among them—received an overall score in the 90s. The highest
ranking oil and gas company, French‐based Total, received a score of 65.
Petrobras’ score was 48, placing it sixth in the list of oil and gas companies and
84th overall in the top 100 companies. In fact, five of the bottom ten on that list
were oil and gas companies.

Endnotes
1. Information on Nike is from Jeffrey Ballinger, Profits,” New York Times Magazine (Sept. 13,
“The New Free‐Trade Heel,” Harper's Magazine 1970).
(Aug. 1992), pp. 46–47; Simon Zadek, “The 5. This history is traced in John Elkington.
Path to Corporate Responsibility,” Harvard “Towards the Sustainable Corpporation: Win‐
Business Review (Dec. 2004), pp. 125–132; Win‐Win Business Strategiues for Siustanable
Stanley Holmes, “Nike Goes for the Green,” Development,” California Management Review
Business Week (Sept. 25, 2006); Reena Jana and 36 (Winter 1994), pp. 90–100. Elkington is either
Burt Helm, “Nike Goes Green, Very Quietly,” the original source of the term “triple bottom
Business Week (June 22, 2009), p. 56; Maurice line” or certainly the popularizer of the con-
Berns, Andrew Townend, Zayna Khayat, Balu cept. See Elkington, Cannibals with Forks: The
Balagopal, Martin Reeves, Michael Hopkins, Triple Bottom Line of 21st Century Business
and Nina Kruchwitz, The Business of (London: Capstone, 1997).
Sustainability: Imperatives, Advantages, and 6. Paul Hawken, The Ecology of Commerce (New
Actions (New York: Boston Consulting Group, York: Harper Business, 1993), p. 3.
2009); Marc J. Epstein, Adriana Rejc Buhovac, 7. Some scientists argue that the Triple Bottom
and Kristi Yuthas, “Why Nike Kicks Butt in Line is inherently delusional and nonsustain-
Sustainability,” Organizational Dynamics 39 able in that it assumes that growth and ecologi-
(2010), pp. 353–356. The Newsweek rankings can cal concerns can be reconciled. Robinson’s
be found at newsweek.com/feature/2010/ “Squaring the Circle” has an excellent, brief
green‐rankings. overview of this and other definitional debates.
2. Susan Albers Mohrman and Christopher G. 8. See Andrew Manikas and Michael Godfrey,
Worley, “The Organizational Sustainability “Enabling Triple Bottom Line Compliance via
Journey: Introduction to the Special Issue,” Principle‐Agent Incentive Mechanisms,” Global
Organizational Dynamics 39 (2009), p. 289. Journal of Business Research 5 (2011), pp. 105–114.
3. Wallace B. Donham, “The Emerging Profession I have written elsewhere about the extent to
of Business,” Harvard Business Review 5 (July which the definition of a “good” and “just”
1927), p. 401; Wallace B. Donham, “The Social society is deeply ideological. That is a matter
Significance of Business,” Harvard Business far beyond the scope of this text. However, any-
Review 5 (July 1927), p. 406; Jeffrey L. one interested in pursuing the topic can look at
Cruikshank, A Delicate Experiment: The Harvard Bert Spector, “‘Business Responsibilities in a
Business School, 1908–1945 (Boston, MA: Divided World’: The Cold War Roots of the
Harvard Business School Press, 1987). Corporate Social Responsibility Movement,”
4. Theodore Levitt, “The Dangers of Social Enterprise and Society 9 (2008), pp. 314–336.
Responsibility,” Harvard Business Review 36 9. To review the Triple Bottom Line debate, you
(Sept.–Oct. 1958), p. 52; Milton Freidman, “The can go to Wayne Norman and Chris
Social Responsibility of Business Is to Increase MacDonald, “Getting to the Bottom of the
196 Chapter 8

‘Triple Bottom Line,’” Business Ethics Quarterly 21. Anderson quoted in “The Green 50: The
14 (2004), pp. 243–262, and Moses L. Pava, “A Industrialist,” Inc. Magazine 28 (Nov. 2006),
Response to ‘Getting to the Bottom of the Triple p. 80. Information on Subaru is from Dean M.
Bottom Line,” Business Ethics Quarterly 17 Schroeder and Alan G. Robinson, “Green Is
(2007), pp. 105–110. Free: Creating Sustainable Competitive
10. See Minda Zellin, “The Greening of Corporate Advantage Through Green Excellence,”
America,” Management Review 79 (June 1990), Organizational Dynamics 39 (2010), pp. 345–352.
pp. 10–18, and Harvey Meyer, “The Greening 22. This point is made in Mirvis et al., “Vision,
of Corporate America,” Journal of Business Mission, Values: Guideposts to Sustainability.”
Strategy 21 (Jan./Feb. 2000), pp. 38–43. The quotes concerning unaligned programs as
11. Berns et al., The Business of Sustainability. well as the Coke example are from that article.
12. Zadek, “The Path to Corporate Responsibility.” 23. Michael E. Porter and Mark R. Kramer,
13. Berns, et al., The Business of Sustainability. “Strategy and Society,” Harvard Business Review
14. Quoted in Jennifer Robinson, “The Business of 12 (Dec. 2006), pp. 78–92. The issue of the South
Sustainability,” Gallup Management Journal African mining company and AIDs is directly
Online (Oct. 3, 2009). addressed in Margie Sutherland and Verity
15. Christopher Marquis, Daniel Beunza, Fabrizio Hawarden, Goedehoop: When Social Issues Become
Ferraro, and Bobbi Thomason, Driving Strategic (Ontario: Ivey Publishing, 2008). The
Sustainability at Bloomberg L.L. (Boston, MA: Porter and Kramer quote is from p. 88.
Harvard Business School Publishing, 2010). See 24. Michael E. Porter and Mark R. Kramer,
also Ram Nidumolu, C. K. Prahalad, and M. R. “Strategy and Society,” Harvard Business Review
Rangaswami, “Why Sustainability Is Now the 12 (Dec. 2006), pp. 78–92. The issue of the South
Key Driver of Innovation,” Harvard Business African mining company and AIDs is directly
Review 87 (Sept. 2009), pp. 56–64. addressed in Margie Sutherland and Verity
16. Schroeder and Robinson, “Green Is Free,” pp. Hawarden, Goedehoop: When Social Issues Become
348–349. Strategic (Ontario: Ivey Publishing, 2008). The
17. Quoted in Jennifer Robinson, “The Business of Porter and Kramer quote is from p. 88.
Sustainability,” Gallup Management Journal 25. Information in Wal‐Mart is from Erica L.
Online (Oct. 3, 2009). Plambeck, “The Greening of Wal‐Mart’s Supply
18. For background on Interface, see “The Green Chain,” Supply Chain Management Review 11
50: The Industrialist,” Inc. Magazine 28 (Nov. (July–Aug. 2007), pp. 18–25, and Erica L.
2006), pp. 80–81; Tom Andel, “Interface’s Green Plambeck and Lyn Denend, Wal‐Mart’s
Epiphany,” Logistics Management 46 (June 2007), Sustainability Strategy (Stanford, CA: Stanford
pp. 36–37; Lauren Hilgers, “Interface Sets the Graduate School of Business, 2008).
Pace for Going Green,” Plastics News 20 (Oct. 6, 26. Walmart: The High Cost of Low Price (2004).
2008), p. 23; Wendy Stubbs and Chris Cocklin, Written and directed by Robert Greenwald.
“An Ecological Modernist Interpretation of DVD. Weades Moines Video, 2004.
Sustainability: The Case of Interface Inc.,” 27. Plambeck and Denend, Wal‐Mart’s Sustainability
Business Strategy and the Environment 17 (2008), Strategy, p. 4.
pp. 512–523; Bruce C. Posner, “One CEO’s Trip 28. Information on McDonald’s comes from Ray A.
from Dismissive to Convinced,” MIT Sloan Goldberg and Jessica Droste Yagan, McDonald’s
Management Review 51 (Fall 2009), pp. 47–51; Corpporation: Managing a Sustainable Supply
Kristy J. O’Hara, “About Face,” Smart Business Chain (Boston, MA: Harvard Business School
Atlanta (Jan. 2009), pp. 1518. Publishing, 2007).
19. Quoted in Jennifer Lynes, Scandinavian Airlines: 29. Ibid., p. 1.
The Green Engine Decision (Ontario: Ivey 30. Hillary Bradbury‐Huang, “Sustainability by
Publishing, 2009), p. 3. Collaboration: The SEER Case,” Organizational
20. Philip Mirvis, Bradley Googins, and Sylvia Dynamics 39 (2010), pp. 335–344.
Kinnicutt, “Vision, Mission, Values: Guideposts 31. Per‐Anders Enkvist and Hela Vanthourmout,
to Sustainability,” Organizational Dynamics 39 “How Companies Think About Climate
(2010), pp. 316–324. Immelt is quoted from pp. Change: A McKinsey Global Survey,” McKinsey
317–318. Quarterly (Feb. 2008); Marc J. Epstein, Adriana
Going Green 197

Rejc Buhovac, and Kristi Yuthas, “Implement- 40. For a discussion of the problems inherent in the
ing Sustainability: The Role of Leadership and rating systems, see Aaron Chatterji and David
Organizational Culture,” Strategic Finance 91 Levine, “Breaking Down the Walls of Codes:
(Apr. 2010), pp. 41–47; Rosa Maria Dangelico Evaluating Non‐Financial Performance
and Devashish Pujari, “Mainstreaming Green Measurement,” California Management Review
Product Innovation: Why and How Compa- 48 (Winter 2008), pp. 29–51.
nies Integrate Environmental Sustainabil- 41. Terrence E. Deal and Allan A. Kennedy,
ity,” Journal of Business Ethics 95 (2010), Corporate Cultures: The Rites and Rituals of
pp. 471–486. Corporate Life (Reading, MA: Addison‐Wesley,
32. Marquis, et al., Driving Sustainability at 1982), p. 4.
Bloomberg L.L. 42. Marrevijk and Were, “Multiple Levels of
33. Quoted in Jennifer Robinson, “The Business of Corporate Sustainability,” p. 113.
Sustainability,” Gallup Management Journal 43. This chart is based on a more detailed elabora-
Online (Oct. 3, 2009). tion in Marrevijk and Were, “Multiple Levels of
34. Robert S. Kaplan and Ricardo Reisen De Pinho, Corporate Sustainability,” p. 113.
Amanco: Developing the Sustainability Scorecard 44. Ibid., pp. 97–99.
(Boston, MA: Harvard Business School 45. Ibid., p. 98.
Publishing, 2008), p. 5. 46. Laura Quinn and Maxine Dalton, “Leading for
35. Robert S. Kaplan and David P. Norton, Sustainability: Implementing the Tasks of
“Transforming the Balanced Scorecard from Leadership,” Corporate Governance 9 (2009), pp.
Performance Measurement to Strategic 21–38; Patricia Hind, Andrew Wilson, and Gilbert
Management: Part I,” Accounting Horizons 15 Lenssen, “Developing Leaders for Sustainable
(Mar. 2001), p. 87. Business,” Corporate Governance 9 (2009), pp.
36. Robert S. Kaplan and David P. Norton, “Using 7–20; Nada K. Kalabadse, Andrew P. Kalabadse,
the Balanced Scorecard as a Strategic and Linda Lee‐Davies, “CSR Leaders Road
Management System,” Harvard Business Review Map,” Corporate Governance 9 (2009), pp. 50–57;
(Jan.–Feb. 1996), p. 3. Anthony Middlebrooks, Lauren Miltenberger,
37. See Frank Figge, Tobias Hahn, Stefan Schalteg- James Tweedy, Grant Newman, and Joanna
ger, and Marcus Wagner, “The Sustainability Follman, “Developing a Sustainability Ethic in
Balanced Scorecard—Linking Sustainability Leaders,” Journal of Leadership Studies 3 (Nov.
Management to Business Strategy,” Business 2009), pp. 31–43; Derek E. Crews, “Strategies for
Strategy and the Environment 11 (2002), pp. 269– Implementing Sustainability: Five Leadership
284; Idalina Dias‐Sardinha, Lucas Reijinders, Challenges,” SAM Advanced Management Journal
and Paula Antunes, “Developing Sustainabil- 75 (Spring 2010), pp. 15–21.
ity Balanced Scorecards for Environmental 47. Chris Argyris and Donald A. Schön,
Services: A Study of Three Large Portuguese Organizational Learning II: Theory, Method, Practice
Companies,” Environmental Quality Manage- (Reading, MA: Addison‐Wesley, 1996), p. 13.
ment (Summer 2007), pp. 13–34; W.‐H. Tsia, 48. Information on Petrobras is from John Barham,
W.‐C. Chou, and W. Hsu, “The Sustainability “Brazil’s Big Oil Man,” Latin Finance, October
Balanced Scorecard as a Framework for 2005, pp. 18–20; “An Interview with José Sergio
Selecting Socially Responsible Investment: Gabrielli de Azevedo,” Oil and Gas Investor
An Effective MCDM Model,” Journal of the (Oct. 2008), p. B4; José Sergio Gabrielli de
Organizational Research Society 60 (2009), Azevedo, “The Greening of Petrobras,” Harvard
pp. 1396–1410. Business Review (Mar. 2009), pp. 43–47; Peter
38. Marc J. Epstein and Priscilla S. Wisner, “Using Haldis, “Future Petrobras Refineries Will
a Balanced Scorecard to Implement Sustainabil- Produce Biofuels, Diesel, Not Gasoline,”
ity,” Environmental Quality Management (Winter Ethanol and Biodiesel News (June 9, 2009); Geri
2001), pp. 1–10. Smith, “Petrobras Brandishes Its Corporate
39. Based on Wendy Stubbs and Chris Cocklin, “An Blog,” Business Week (Aug. 31, 2009).
Ecological Modernist Interpretation of 49. Gabrielli, “The Greening of Petrobras,” p. 44.
Sustainability: The Case of Interface, Inc.,” Business 50. The Newsweek rankings can be found at news-
Strategy and the Environment 17 (2008), p. 519. week.com/feature/2010/green‐rankings.
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INDEX
A Dell Computers, 134 HCL Technologies, 119–122
ABB, 133 DeWolfe, Chris, 5 Help, 41, 44
After‐action reviews, 74 Diagnoses, 41, 51–70 Hewlett Packard, 51–52
Agile development, 6, 47–48 Diagnostic framework, 54–56, 61 Horizontally‐linked structure,
Airbus, 86–87 Diagnostic interviews, 64–65 134–135
Amazon, 4 Dialogue, 51, 65–66 Hurd, Mark, 52
Anderson, Tom, 5 Differentiation and integration, 80–83
Anderson, Ray, 181–182, 184 Discontinuous change, 5 I
Apple, 2, 4, 9, 91–92 Disney, 5–6, 109 IBM, 4, 135–137
Archer Daniels Midland, 14 Dissatisfaction with the status quo, Immelt, Jeffrey, 183, 184
ASDA, 16–21, 77–78, 115–116, 156–157 27, 28 Incentives, 138–145
Divisional structure, 130–132 Inditex, 134
B Donham, Wallace, 178
Dow Jones Sustainability Index, 190
Informal design elements, 77
Innovation, 96–97
Balanced scorecard, 6, 187–189
Duke University’s Children’s Hospital, Interface Flooring, 182–183
Baldoni, John, 159
25–26, 41, 44, 78–79 Intrinsic rewards, 142–143
Beer, Michael, 145
DuPont, 142 Implementation traps, 45–46
Behavioral observation, 65
Dyer, Davis, 159 Isabella, Lynn, 14
Behavioral simulations, 113
Behaviorally‐anchored interviews,
112–113
E J
Elop, Stephen, 3 Job design, 88–90
Best Buy, 100–101, 102
Emotional bond, 158 Johnsonville Sausage, 162
Bloomberg, 181, 187
Employee commitment, 87–90
Borders, 4
Bristol‐Myers Squibb, 142
Employee participation, 10–14 K
Espoused/enacted values, 192 Kaplan, Robert, 187
Extrinsic rewards, 142–143 Kelleher, Herb, 158
C Kim, W. Chan, 117
Campbell, Andrew, 79 F Knight, Phil, 176, 182, 183
CARE, 79, 87, 91 Facebook, 4, 5 Kramer, Mark, 184
Chambers, John, 152 Fair process, 117–118
Change implementation, 3, 26–45, Federal Bureau of Investigation (FBI), L
135–138, 144–145, 146 55 Lawrence, Paul, 81, 159
Change pilots, 79 Feedback, 67–68, 106 Leadership, 152–163, 191–192
Chouinard, Yvon, 114–115 Fiorina, Carleton, 51–52 Leadership development, 159–160
Cisco, 151–152 Formal design elements, 99 Lean, 6
Coca Cola, 184 Freedman, Milton, 178 Learning, 53
Coetese, Leon, 10 FTSE4Good Index, 190 Letterman, David, 154
Collaboration, 91–94, 113, 151–152, Fudd, Richard, 153 Levitt, Theodore, 178
186–187 Functional structure, 128–130 Lewin, Kurt, 26–30, 41
Collins, Jim, 43, 116, 155 LG, 2
Communication, 156–157 G Lincoln Electric, 88
Compliance, 178, 191 Gabrielli, José, 193–195 Lorsch, Jay, 86
Computerized physician order entry, Galbraith, Jay, 133 Louison, Mark, 2
148 Gallois, Louis, 87
Considered design, 6, 186 Gayle, Helene, 76, 77, 79, 87, 91 M
Consultant, 60 General Electric, 9, 109, 139, 156, 183 Macy’s, 126–127, 131
Control and creativity, 83 Gerstner, Lou, 135–137 Marrewijk, Marcel, 190
Controls, 84 Ghosn, Carlos, 14, 28, 162, 164–172 Matrix structure, 132–133
Coote, Jeremy, 80 Gilbert, Julie, 100–101 Mauborgne, Renée, 117
Corporate social responsibility, 177 Global change management, 14–15 McDermott, Robert, 85
Costco, 88 Google, 9–10 McDonald’s, 84, 185
Culture, 58–59, 190–191 Goold, Michael, 78 Meliones, Jon, 25–26, 42, 44
Merck, 142
D H Microsoft, 3, 111
Data collection, 61–65 Hackman, J. Richard, 89 Morris, Ron, 159
Deal, Terrence, 190 Hansen, Morton T., 91–92 Motivation, 8
Decentralization, 58 Harrison, Michael, 67 Motorola, 2
Decision‐making rights, 85–86 Hawken, Paul, 179, 183 Mulcahy, Anne, 14

199
200 Index

Multinational companies, 86–87, 96–97, Petrobras, 193–195 Sun Hydraulics, 84


135–137 Porter, Michael, 184 Supply chain, 134, 185
Mueller, Robert, 55 Power equalization steps, 59, 60 Sustainability, 175–192
Murdoch, Rupert, 5 Preziosi, Robert, 62–63 Synergies, 87
Mutual engagement, 44–45, 56–60 Process‐driven change, 34–35,
MySpace, 5 39, 42 T
Psychic distance, 15 Task alignment, 38–39, 40
N Psychological safety, 59 Teams, 83, 92–94, 134
Nadler, David, 55 Techniques/tools, 6
Nayar, Vineet, 119–122, 156 Q Technology, 145–146, 147
Netflix, 4 Questionnaires, 62–63 Third‐party facilitation, 65
Newsweek index, 190 Three faces of change, 5–7
Nike, 176–178, 182, 186, 187 R Total quality management, 6
Nissan, 14, 28, 162, 164–172 Redesign, 41–43, 76–97 Training, 102–103
Nohria, Nitin, 85 Reinforcing, 26, 44, 125–148 Transformation, 7–10
Nokia, 2–3, 14 Removal and replacement, 115–117 Trigger events, 14, 41, 182
Nordstrom, 84 Renault, 4 Triple bottom line, 179
Norman, Archie, 16–21 Research In Motion, 2 Turnaround, 5–6
Norms, 27 Resistance, 10–13
Norton, David, 187 Robbins, Stephen, 84 U
Robinson, Alan, 182 Union Carbide, 179
O Rubbermaid, 116–117 United Parcel Services, 84
Oldham, Greg, 89 USAA, 193
Open Markets, Inc., 128 S
Open systems, 32–33 Samsung, 2 V
Organizational capabilities, 4 SAP, 80–81 Value chain integration, 38
Organizational context, 9 SAS, 88
Organizational development (OD), Scandinavian Airlines, 184 W
30–34, 40 Schroeder, Dean, 182 Walmart, 134, 185
Organizational purpose, 154–155 Selection, 109–117 Walton, Richard, 145
Organizational silence, 57–59 Shirom, Arie, 67 Welch, Jack, 156, 159, 183
Organizational structure, 127–138 Shouldice Hospital, 134 Wewe, Marco, 190
Sony, 91–92 W.L. Gore, 84
P Southwest Airlines, 88, 134, 158 Woertz, Patricia, 14
Pandora, 4 Stakeholders, 33 Worldwide Pants, 154
Patagonia, 114–115, 191 Standardized tests, 112
Pay‐for‐performance, 151–154 Stayer, Ralph, 162 X
People alignment, 43–44, 99–122 Stake n Shake, 88 Xerox, 14
People change, 41, 43–44, 108–117 Stenberg, Jan, 184
PepsiCo, 142 Strategic renewal, 3–4, 19 Z
Performance appraisal, 105–106 Stretch goals, 156 Zadek, Simon, 180
Person‐task/person‐organization fit, Subaru, 190 Zara, 134
119 Succession planning, 107 Zuckerberg, Mark, 5

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