www.hbr.org Until now, change in business has been an either-or Cracking the Code of proposition: either quickly create economic value for Change shareholders or patiently develop an open, trusting corporate culture long term. by Michael Beer and Nitin Nohria But new research indicates that combining these “hard” and “soft” approaches can radically transform the way businesses change. Included with this full-text Harvard Business Review article: 1 Article Summary The Idea in Brief—the core idea The Idea in Practice—putting the idea to work 2 Cracking the Code of Change 10 Further Reading A list of related materials, with annotations to guide further exploration of the article’s ideas and applications Reprint R00301 Purchased by: Tanya Perry [email protected] on June 10, 2014 Cracking the Code of Change The Idea in Brief The Idea in Practice Here’s the brutal fact: 70% of all change The UK grocery chain, ASDA, teetered on bankruptcy in 1991. Here’s how CEO Archie Norman initiatives fail. Why? Managers flounder in combined change Theories E and O with spectacular results: a culture of trust and openness— an alphabet soup of change methods, and an eightfold increase in shareholder value. drowning in conflicting advice. Change Change How to Combine Examples from ASDA efforts exact a heavy toll—human and Dimension Theories E and O economic—as companies flail from one Goals Embrace the paradox Norman started his tenure by stating, “Our number change method to another. between economic one objective is to secure value for our shareholders” To effect successful change, first grasp the value and organiza- and “We need a culture built around common two basic theories of change: tional capability ideas...and listening, learning, and speed of response, from the stores upwards.” 1) Theory E change emphasizes economic value—as measured only by shareholder Leadership Set direction from the Norman unilaterally set a new pricing strategy and returns. This “hard” approach boosts returns top and engage peo- shifted power from headquarters to stores. His forth- through economic incentives, drastic lay- ple from below right “Tell Archie” program encouraged dialogue with offs, and restructuring. “Chainsaw Al” Dun- all employees. He hired warm, accessible Allan Leigh- lop’s firing 11,000 Scott Paper employees ton to complement his own Theory O leadership style and selling several businesses—tripling and strengthened emotional commitment to the shareholder value to $9 billion—is a stun- new ASDA. ning example. Focus Focus on both hard Norman set out to win both hearts and minds. He and soft sides of the boosted economic value through hard, structural 2) Theory O change—a “softer” ap- organization changes, e.g., removing top layers of hierarchy and proach—focuses on developing corporate freezing all wages. He paid equal attention to the soft culture and human capability, patiently side by spending 75% of his early months as HR direc- building trust and emotional commitment tor creating a more egalitarian and transparent orga- to the company through teamwork and nization—“a great place for everyone to work.” communication. Process Plan for spontaneity Norman encouraged experimentation, setting up Then, carefully and simultaneously balance three “risk-free” stores where employees could fail these very different approaches. It’s not without penalty. Managers experimented with store easy. Employees distrust leaders who alter- layout, product range, employee roles. A cross- nate between nurturing and cutthroat be- functional team redesigned ASDA’s entire retail orga- havior. But, done well, you’ll boost profits nization—and produced significant innovations. and productivity, and achieve sustainable Reward Use incentives to rein- ASDA applied Theory E incentives in an O-like way. It competitive advantage. System force rather than drive encouraged all employees to participate actively in change changing ASDA. And it rewarded their commitment with stock ownership and variable pay based on cor- porate and store performance. OPYRIGHT © 2001 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. OPYRIGHT © 2001 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. C page 1 Purchased by: Tanya Perry [email protected] on June 10, 2014 Until now, change in business has been an either-or proposition: either quickly create economic value for shareholders or patiently develop an open, trusting corporate culture long term. But new research indicates that combining these “hard” and “soft” approaches can radically transform the way businesses change. Cracking the Code of Change by Michael Beer and Nitin Nohria The new economy has ushered in great busi- about why companies should change, what ness opportunities—and great turmoil. Not they should try to accomplish, and how they since the Industrial Revolution have the stakes should do it. This proliferation of recommen- of dealing with change been so high. Most tra- dations often leads to muddle when change is ditional organizations have accepted, in the- attempted. The result is that most change ef- ory at least, that they must either change or forts exert a heavy toll, both human and eco- die. And even Internet companies such as nomic. To improve the odds of success, and to eBay, Amazon.com, and America Online rec- reduce the human carnage, it is imperative ognize that they need to manage the changes that executives understand the nature and pro- associated with rapid entrepreneurial growth. cess of corporate change much better. But Despite some individual successes, however, even that is not enough. Leaders need to crack change remains difficult to pull off, and few the code of change. companies manage the process as well as they For more than 40 years now, we’ve been would like. Most of their initiatives—install- studying the nature of corporate change. And ing new technology, downsizing, restructur- although every business’s change initiative is ing, or trying to change corporate culture— unique, our research suggests there are two ar- have had low success rates. The brutal fact is chetypes, or theories, of change. These arche- that about 70% of all change initiatives fail. types are based on very different and often un- In our experience, the reason for most of conscious assumptions by senior executives— those failures is that in their rush to change and the consultants and academics who advise their organizations, managers end up immers- them—about why and how changes should be ing themselves in an alphabet soup of initia- made. Theory E is change based on economic tives. They lose focus and become mesmerized value. Theory O is change based on organiza- by all the advice available in print and on-line tional capability. Both are valid models; each OPYRIGHT © 2000 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. OPYRIGHT © 2000 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. C harvard business review • may–june 2000 page 2 Purchased by: Tanya Perry [email protected] on June 10, 2014 Cracking the Code of Change theory of change achieves some of manage- however, that there is a way to resolve the ten- ment’s goals, either explicitly or implicitly. But sion so that businesses can satisfy their share- each theory also has its costs—often unex- holders while building viable institutions. pected ones. Companies that effectively combine hard and Theory E change strategies are the ones that soft approaches to change can reap big payoffs make all the headlines. In this “hard” approach in profitability and productivity. Those compa- to change, shareholder value is the only legiti- nies are more likely to achieve a sustainable mate measure of corporate success. Change competitive advantage. They can also reduce usually involves heavy use of economic incen- the anxiety that grips whole societies in the tives, drastic layoffs, downsizing, and restruc- face of corporate restructuring. turing. E change strategies are more common In this article, we will explore how one com- than O change strategies among companies in pany successfully resolved the tensions be- the United States, where financial markets tween E and O strategies. But before we do push corporate boards for rapid turnarounds. that, we need to look at just how different the For instance, when William A. Anders was two theories are. brought in as CEO of General Dynamics in 1991, his goal was to maximize economic A Tale of Two Theories value—however painful the remedies might To understand how sharply theories E and O be. Over the next three years, Anders reduced differ, we can compare them along several the workforce by 71,000 people—44,000 key dimensions of corporate change: goals, through the divestiture of seven businesses and leadership, focus, process, reward system, 27,000 through layoffs and attrition. Anders and use of consultants. (For a side-by-side employed common E strategies. comparison, see the exhibit “Comparing The- Managers who subscribe to Theory O be- ories of Change.”) We’ll look at two compa- lieve that if they were to focus exclusively on nies in similar businesses that adopted al- the price of their stock, they might harm most pure forms of each archetype. Scott their organizations. In this “soft” approach Paper successfully used Theory E to enhance to change, the goal is to develop corporate shareholder value, while Champion Interna- culture and human capability through indi- tional used Theory O to achieve a complete vidual and organizational learning—the pro- cultural transformation that increased its cess of changing, obtaining feedback, reflect- productivity and employee commitment. But ing, and making further changes. U.S. as we will soon observe, both paper produc- companies that adopt O strategies, as ers also discovered the limitations of sticking Hewlett-Packard did when its performance with only one theory of change. Let’s com- flagged in the 1980s, typically have strong, pare the two companies’ initiatives.