29
Sustain Organizational Performance through Continuous Learning, Change and Realignment
MICHAEL BEER
We are living in a world in which the only constant is change. Companies must respond to rapid changes in markets and technology if they are to survive and prosper. Senior executives must, in turn, lead a process of change that develops employee dissatisfaction with the status quo and realigns the organization as a total system with new business realities.
Consider the case of Apple Computer (Beer and Gibbs, 1990). Founded by Steve Jobs and Steve Wozniak in a garage in Silicon Valley in 1977, the company was the first to develop and produce a personal computer. The Apple II, and its successor the Macintosh, led the industry in technology, design, and user friendliness. In 1980 the company had virtually 100% of the market. It had grown 100% a year and was among the fastest growing companies in the world. In 1990 its revenues reached $5.5 billion and employment reached 14,500. By 1997, however, the company’s market share was down to 3% and its revenues and number of employees were shrinking. It was also losing money and had lost the race to dominate the personal computer market to Dell, Compaq, and IBM.
Apple’s dominance in the computer market declined despite the fact that in 1983 John Scully, at the time President of PepsiCo, was brought in as Apple’s new CEO to enable the company to cope with new competitive realities. As we shall see throughout this chapter, Scully failed to lead an organizational learning and change process from which he and his top team could learn about barriers to organizational and leadership effectiveness. His task was to mobilize energy for change among senior executives by creating dissatisfaction with the status quo and then develop a new organization - structure, systems, people, processes, and culture - needed to compete in the volatile computer industry. Such changes would have enabled Apple to develop organizational capabilities and behaviors it did not possess. Though the company had talented and creative technical people it lacked several essential organizational capabilities associated with success in uncertain and rapidly changing environments (Lawrence and Lorsch, 1967; Kotter and Heskett, 1992; Lawler, 1997; Miles and Snow, 1978). They are: • Coordination between functions, businesses and geographic regions around businesses and/or customers is essential for speed of response to customer needs and a cost-effective operation. Apple’s individualistic culture and lack of cross-functional teams made coordination between marketing, sales and research and development difficult. Consequently, the company failed to recognize and respond to a rapidly growing business market that demanded new and lower cost products.
• Commitment to customer needs and an economically successful business is essential for any enterprise. Without that commitment employee’s interests are not aligned with the purpose of business. Apple’s people were committed to technical innovation not meeting customer needs in a changing market. This blinded them to the possibility that a less elegant and lower cost technical solution being introduced by competitors (low cost PCs with a DOS operating system) might succeed.
• Competence in the activities most critical to success, as well as in management and leadership, are essential. Some companies rely on selling or distribution for success. Others on merchandising. Still others may rely on technical skills in research and development, the capability that made Apple a success in its early years. But without effective leadership and management, firms like Apple cannot mobilize technical and functional competencies into a coordinated effort and results. That was certainly true of Apple Computer. As a result of its rapid growth Apple’s technically excellent people were promoted to key positions, but they lacked leadership and management skills to develop the coordination Apple desperately needed to succeed.
• Honest conversations that enable people at all levels to voice their views and concerns are essential in an uncertain and rapidly changing environment. They enable an airing of differences and lead to a resolution of conflicting views. This in turn ensures good decisions. For this trust and skills in dialog are needed. Top management must communicate to lower level its intended direction and lower levels must feel free to communicate to top management if they believe the direction is flawed or organizational barriers exist to successful implementation. At Apple lower level managers that saw the need for lower cost computers were ignored. Similarly, differences between key functions - at Apple research and development (R&D) and marketing - were never discussed in a way that would enable R&D to understand threats marketing perceived.
• Creativity and innovation in both technical and administrative matters are essential for a business to retain its competitive edge. Apple succeeded largely on the basis of its creativity and innovation in technology. But it lacked the capacity to innovate and change its approaches to organizing and managing people, something that was essential if it was going to succeed in a changing marketplace.
Leading organizational change is about defining a new strategic direction for the business and realigning its structure, management processes, systems, people skills, and culture so that needed organizational capabilities required to implement the new direction emerge. Of course, implementing the new direction typically also leads to redefinition of direction as the organization learns through the process of implementation what works and what doesn’t work. That is why the behaviors above, particularly open communication and creativity, are so essential to the capacity of the organization to adapt and renew itself. The effectiveness of an effort to lead change should be judged by the extent to which it develops the five Cs - the organizational capabilities listed above - and the extent to which it develops the capacity of the organization to renew itself in the future.
The story of Apple illustrates the tendency of all organizations to stop learning and changing in the face of success. Why does this happen to organizations? What are the essential principles of organizational change that leaders in John Scully’s position should follow if they are to overcome the natural tendency of organizations to maintain the status quo.
This section presents basic facts managers must understand about organizational behavior and change if they are to succeed in the difficult task of leading change. They explain why organizations resist change and what is needed to change them (Beer, Eisenstat, and Spector, 1990; Katz and Kahn, 1978; Pfeffer, 1997; Schein, 1990).
Organizations are complex open systems
A variety of organizational facets - structure, human resource policies, management processes, values and skills of people, and the leadership behavior of top management - conspire to produce an organization’s distinctive pattern of behavior. These facets are interdependent and are continuously engaged in a process of mutual adaptation to achieve “fit” or congruence with the organization’s chosen strategy (Lawrence and Lorsch, 1967). By an open system we mean that the organization is subject to influence by the external environment, largely through the influence of markets, society and/or the larger corporate organization (if the organization is a subunit of a larger corporation).
Figure 29.1 illustrates the key dimensions that must fit together - be aligned - for an organization to be effective. It suggests that organizational behavior is shaped by four forces - the organization’s environment and the emergent strategic task the organization must manage to succeed, the organization’s design, the people selected and promoted, and the behavior of leaders and their top team. Organizations naturally evolve toward an equilibrium state in which these elements fit tightly. In the short term, fit leads to organizational effectiveness. The organization has developed certain behaviors required for its success and has developed leadership behavior, structures, and systems to cause these behaviors consistently. When the environment changes and places new demands on the organization, leaders must realign the organization to fit new circumstances.
Implicit in this formulation is a contingency perspective. It holds that the best way to organize and manage people depends on the nature of the situation and strategy (Lawrence and Lorsch, 1967; Miles and Snow, 1978). We know for example that the optimal structure of an organization depends on the nature of the environment and strategy ( Miles and Snow, 1978; Nadler and Tushman, 1988). At the same time there is growing evidence that sustainable advantage depends on organizing and managing people around a set of values and principles including the use of teams, collaboration, symbolic egalitarianism, training and development for employees, and open communication (Pfeffer, 1998; Beer, 2009). The five Cs listed above reflect these findings. The implication is that the change process itself must be aligned with these principles if they are to become embedded in the organization.
FIGURE 29.1 Organizational alignment model
Culture is defined as the assumptions, beliefs, values, and resultant behavior leaders invent or discover to solve problems in the external and internal environment. It is what these leaders teach new members as the correct way of perceiving, thinking, and acting to solve problems (Schein, 1985). The tendency of managers to attract, select, and promote people based on how similar they are to those already in the organization increases the strength of the culture (Schneider, 1994). Under the leadership of its founder Steve Jobs, Apple Computer attracted, selected, and promoted employees who were individualistic and committed to elegant technology. This created a strong culture that demanded conformity to these values of and eschewed more pragmatic business considerations.
That companies develop a persistent culture and have difficulty in adapting is evident in the low survival rate of companies (Miller, 1990; Foster and Kaplan, 2001). A substantial number of the Fortune 500 companies 20 years ago - Gulf Oil, Digital Equipment, International Harvester, Scott Paper, US Steel, and Westinghouse - no longer exist.
Organizations vary in the strength of their culture, however. Moreover, subcultures typically exist in various parts and subunits of the organization. Organization change involves confronting the persistent pattern of behavior that is blocking the organization from higher performance, diagnosing its consequences, and identifying the underlying assumptions and values that have created it. That process must go on at the corporate level as well as in multiple businesses and operating units, each with a different strategic task and subculture.
Organizational behavior is resistant to change
Fundamental organizational change calls into question existing patterns of management - the authority, decision rights, and values of existing managers and departments. When a changing environment threatens an organization’s capacity to survive, top management is challenged to redefine how it will compete. It must define new objectives and a new strategic task. It should not be surprising that making these changes is painful. Key members of the organization will experience psychological and sometimes material losses (Beer, 1991). Their power and status may diminish. Past relationships may be disrupted. New skills may be required threatening employees’ sense of competence and self-esteem as well as their careers and job security. The perception of these potential losses leads to resistance. For example, research and development - the technical function at Apple computer - stood to lose some of its influence in designing products if Apple were to compete more aggressively in selling personal computers to the business market. Consequently, careers, self-esteem, and the very sense of identity and meaning technical people derived from work were also threatened.
All human beings employ emotional and cognitive processes to defend themselves against threat (Argyris and Schon, 1996). Moreover, people make sense of past behavior by forming beliefs that rationalize them and by escalating commitment to them. These common human characteristics prevent managers from learning that their actual behavior - their theory in action - is inconsistent with their stated aspiration - their espoused theory. These human characteristics cause organizational policies, management practices, and leadership behavior and style to persist in the face of new realities unless skills and norms of inquiry and constructive conflict resolution are developed (Argyris and Schon, 1996). All attempts to change organizations must overcome defensiveness of individuals and groups, cause learning to occur, or result in the replacement of individuals not capable of learning. Effective change efforts attempt to maximize the amount of learning and minimize the need for replacement. This enables the organization to retain the wealth of company-specific knowledge about customers, products, and technology and retain commitment that is otherwise lost when key people are replaced.
Substantial evidence exists that many efforts to change organizations do not succeed in making a fundamental transformation in organizational culture (Beer et al., 1990; Schaffer, 1988; Hall, Rosenthal, and Wade, 1993). They produce only superficial change due to the fact that underlying assumptions and beliefs about the business and how it should be managed are not confronted. These change efforts are characterized by wave after wave of programs - education and training initiatives for all employees, continuous changes in structure, the development of mission and value statements, or initiatives such as re-engineering and total quality management.
Consider a large industrial enterprise whose financial performance lagged the industry. Management felt that the cause was the ineffectiveness of its managers. With the help of a new senior human resource, executives hired from a company known for its best human resource practices launched a four week management education program in an effort to change the company. The program’s faculty was world class and the content highly relevant including a module on competition and strategy, organizational effectiveness, leadership, and interpersonal skills. The last module of the program involved participants working on analyzing and making recommendations to top management about an important corporate problem. Participants were so enthusiastic about the potential of the program for changing the company that they asked top management to go through the program. They were certain that if the company was to adopt the ways of thinking and doing embedded in the program the corporation would regain its competitive edge. Top management agreed to go through the program. Despite the enthusiasm of all parties involved in the program (faculty, students, and top management) three years later top management and managers who went through the program indicated in interviews and surveys that very little change had occurred in the company’s pattern of management.
John Scully’s efforts to change Apple Computer also suffered from programmatic change, thereby delaying a dialog about the real underlying problems. During a five-year period, Scully changed the organization’s structure four times but coordination between marketing, sales, and R&D and communication between top management and lower levels did not improve, nor did Apple’s performance live up to expectations.
Programs fail because the top management team has delegated the task for change to a staff group or consultants. In this way, they avoid the difficult task of confronting the underlying causes of the problems faced by the firm. These are often connected to their own and other managers’ assumptions and beliefs about the nature of the business and the best means for organizing and managing people. It is far easier for a CEO to obtain agreement from key people to a program or initiative than it is to breach defenses that block learning about deeper underlying problems. These require leadership - the hard work of confronting problems and developing commitment to change and making difficult decisions about people who will not or cannot change. It should come as no surprise that the capacity to confront conflict has been found to be associated with a firm’s ability to succeed in highly uncertain and turbulent environments where the rate of change has to be rapid and continuous (Lawrence and Lorsch, 1967).
Given the natural tendency of all management to defend the past and resist change, it has been observed that change does not seem to occur unless a sense of urgency exists among the organization’s leaders (Kotter, 1997, 2008). This does not typically occur unless they become highly dissatisfied with the status quo (Beer, 1991). Dissatisfaction with the status quo arises naturally as a result of problems that threaten the firm’s performance and even survival. Financial losses, a long and protracted decline in stock price, shrinking market share, loss of a major customer, high employee turnover, or a union strike are all forces that can bring management to a realization that change is needed. The more severe the crisis the higher the dissatisfaction with the status quo and the more energy will be released to take action. And it takes enormous amounts of human energy to confront entrenched assumptions and practices.
Severe problems may not be enough, however. As we saw in the case of Apple Computer, management was able to ignore dramatic changes in their markets and a shrinking market share. The missing ingredient was leadership (Beer, 1991; Kotter, 1997). John Scully was unable to mobilize the commitment to change of key people, particularly his top team. He lacked the courage to engage people in a dialog about historic assumptions, practices, and norms of behavior. Change leaders, it has been found, possess the capacity to confront difficult issues. Indeed, companies that succeed in transforming themselves appear to do so as a result of changes in their top team ( Virany, Tushman, and Romanelli, 1992). Leaders, typically new leaders, develop a top management team that is like minded about the need for and the direction of change (Beer and Eisenstat, 1996). A united and effective top team results in improvements in coordination and thereby consistent action across all parts of the organization. Without this, lower level employees perceive an inconsistency between the new direction espoused by top management and their actual behavior. This raises doubts about top management’s commitment and makes it unlikely that commitment to change at lower levels will develop.
Consistency between means and ends
There is great variation in the consistency between change ends and means chosen by leaders. To the extent that means contradict the values and practices leaders intend to embed in the future organizational state, people question management’s true commitment to the values and practices they espouse. Trust between leaders and lower level people declines. Lowered trust makes it more difficult for leaders to engage people and mobilize commitment to change.
Leaders who intend to develop high performance organizations characterized by the behavior and practices discussed above (good coordination and teamwork, high creativity, open communication, high commitment, and good interpersonal and leadership skills) are not successful unless they involve people in the change process (Beer et al., 1990). Contradictions between words and deeds are inevitable, of course, in any complex organizational change process. But a strong bias towards involvement appears to be necessary. Just as importantly, management’s willingness and skills in encouraging lower levels to raise issues of inconsistency between their (management’s) words and their actions builds the trust and partnership with lower levels that high performance organizations typically embody.
The dynamics of organizational behavior and change discussed above translate into seven steps a general manager must take to lead change in his or her organization. These steps assume that the leader is dissatisfied with the status quo and feels that change is needed to cope with new competitive realities. Effective leaders are always on the lookout for a discontinuity in the organization’s environment, says Andrew Grove, CEO of Intel. His book, Only the Paranoid Survive (Grove, 1996), captures well the need for constant vigilance.
Unfortunately, incumbent top managers are often slow to recognize the need for change and/or are too timid in confronting managers and workers below them with the need for change. Under these circumstances change cannot take place until the leader is replaced. The price of not being vigilant can be seen in statistics for Fortune 500 CEO tenure. Average CEO tenure in 2008 is 3.2 years versus 10.5 years in 1990. Leaders who are not dissatisfied with the status quo are removed by boards of directors so significant organizational change can occur. Even new managers, however, can fail to manage change if they do not understand and/or are unskillful in leading change. As a new CEO John Scully had nine years to change Apple Computer. He failed because he did not take the steps outlined below.
1. Mobilize energy for change
Energy for change must be mobilized in the top management team as well as in key managers at lower levels. It is mobilized by creating dissatisfaction with the status quo as was noted above. The following three actions can mobilize energy for change (Beer, 1991).
• Demanding improved perfor mance and behavior - Leaders can energize organizational members by articulating demanding goals and standards for behavior. When Jack Welch took over General Electric in the early 1980s he told all business unit managers that they had to get their business units to be number 1 or 2 in their industries or the business would be sold. Stan Mahalik, Executive Vice President for Manufacturing at Goodyear Tire and Rubber, energized his 100 plant managers around the world to change their operations by demanding that unless their tires met certain quality standards they would become scrap. This energized them to search for new technology and management approaches. Percy Barnevik, CEO of ABB, articulated new performance goals and behavioral standards at a worldwide meeting of the top 500 executives in the company within weeks after a merger that formed the new company. With regard to behavior, taking action even if it is wrong, he said, is better than not taking action at all.
• Exposing the top team and employees to feedback - A general manager who is dissatisfied with the status quo has come by this view through awareness of low quality, high cost, poor profits, dissatisfied customers, or unhappy shareholders. Exposing managers and workers to this information through presentations as well as direct experience is a powerful way to unleash energy for change. When Louis Gerstner took over IBM after it had fallen on hard times in the early 1990s he asked all top executives to visit at least one customer a month. These visits gave them new insights into what was happening in the industry and how IBM needed to respond. Likewise, staff groups in corporations have been energized to become more effective when they have been exposed to feedback from line organizations they serve. Manufacturing plant managers faced with a resistant workforce and union have taken workers and union leaders on trips to see customers, displayed competitive products in the lobby of the building, and informed employees about the plant’s financial performance through presentations and display of information on bulletin boards.
• Exposing employees to model organizations - Exposing managers and lower levels to radically different practices in other companies or within the same company can unleash energy. This has been referred to as benchmarking best practice. A visit to an innovative team-based manufacturing plant unleashed energy in managers, workers, and union leaders to transform Navigation Products, their business unit, to a similar model of management, one that promised to improve coordination across functions, build trust, and improve communication (Beer et al., 1990). In the early 1980s the automobile companies sent managers by the hundreds to Japan to learn about manufacturing methods that gave Japanese manufacturers a significant edge in quality, though in this instance what they learned failed to be translated into change rapidly enough given the state of the automobile industry in 2008.
2. Develop a new compelling direction - strategy and values
Feedback and information is not enough. A new direction must be developed. To develop this direction, change leaders orchestrate a series of discussions in their management team to develop an understanding of what this information means for change in the company’s direction. Exactly how successful is the organization being in its product or service offering? Why is it not successful? How committed are people? How effective is the organization? What is the implication for the future survival and success of the organization? What should be the new objectives and strategy? What should be the guiding values of the organization? What are the implied priorities? Discussing these questions in the light of the feedback and data to which managers have been exposed can lead to a new understanding and sense of urgency.
Jerry Simpson, general manager of Navigation Products, held a series of meetings with his top team that led them to defining new and ambitious goals for the business and a new direction (Beer et al., 1990). A study of 25 business units undergoing change found that units that had changed the most were more likely than lagging units to have established a clear and broadly understood link between business problems and the need for change (Beer et al., 1990). Making the link is what makes the new direction compelling to members of the organization. It is quite important for leaders to involve the whole top team in the formulation of the new objectives and strategy. And, it is important for that top team to involve other key managers in discussing and critiquing their new strategy. This builds the commitment needed to implement the new direction.
Moreover, the general manager or CEO can use the work of developing a new direction to develop their top team’s effectiveness. Research shows that effective strategy formulation and implementation depends on top team effectiveness (Eisenhardt, 1989; Beer and Eisenstat, 2000). Team effectiveness is developed through encouraging new behavior, coaching, and if needed replacement of those key executives who do not play a constructive role in the team and/or do not become committed to the new direction.
3. Identify organizational barriers to implementing the new direction
Often the resistance to change is at the highest levels of the company (Miller, 1990; Finkelstein, 2003). Hierarchy insulates top management teams from the effects of their behavior and policies. Exposing top management to feedback about what employees perceive as barriers to implementing a new strategy further creates dissatisfaction and identifies what changes in organization and behavior are needed to implement the new strategy. John Scully began his belated and ultimately unsuccessful effort to change Apple Computer after an attitude survey showed strong negative sentiments in the company about the lack of strategic clarity and problems with top management’s leadership.
Eisenstat and I (Beer and Eisenstat, 2000) asked top teams, as part of a planned effort to develop an organization capable of strategy implementation, to appoint a taskforce of eight of their best employees. Taskforce members interviewed organizational members one or two levels below the top about barriers to strategy implementation. The taskforce then fed back its findings to top teams using a carefully crafted process that enabled the taskforce to be honest and management to be non-defensive (Beer and Eisenstat, 2004). Six barriers were consistently identified across many organizations and, not surprisingly, they obverse the principles for an aligned organization and the change principles discussed in this chapter. The barriers were:• Unclear strategy and conflicting priorities;
• An ineffective top team;
• A general manager who was either too autocratic or too laissez-faire (not confronting problems);
• Poor coordination;
• Poor vertical communication;
• Inadequate leadership and management and its development at lower levels.
Because these barriers were known to everyone but were not discussible we called them the “silent killers.” Like hypertension, they can cause an organizational heart attack - organizational failures in implementing strategy. Until a commitment is developed by top teams to overcome the fundamental management problems represented by the silent killers it is unlikely that a new strategic direction can be implemented or the organization aligned with that strategy. Many change initiatives fail because underlying management problems are not confronted and overcome. Change leaders should, therefore, make an effort to collect data about barriers perceived by lower levels so plans for change can incorporate their voice about leadership and organizational problems. Efforts to change organizations without this step lead to cynicism and low commitment. Of course, this requires top managers to be open to learning about their own role in the organization’s performance problems. If this does not happen, as it often does not, a new general manager or CEO will be appointed when the silent killers and their consequences begin to affect performance in a significant way.
4. Develop a vision of how the business will be organized for success
Having heard the voice of lower level employees regarding barriers to achieving the new strategic direction, the top team must work together to fashion a vision of the organization’s future state (see Chapter 20, this volume). They will have to envision how the elements in the organizational model presented in Figure 29.1 will need to change to enable a change in organizational behavior. The following questions will have to be answered:• How should the organization be redesigned to ensure the appropriate coordination between value creating activities that must work together to implement the strategic task defined in step 2 above? Redesign of the organization will include changes in structure, systems, and planning process. These changes are intended to change roles, responsibilities, and relationships so that the new strategy can be implemented. For example, business, customer or product and project teams may be created; change from a decentralized divisional structure to a matrix structure may be necessary; the number of hierarchical layers may be reduced; the size and role of corporate staff may change.
• How will the top team’s own leadership behavior change to enable the new organization to function effectively? These changes may include modification in the CEO’s style and/or changes in the frequency and focus of top management meetings and work. For example, the CEO of Becton Dickinson received feedback from an employee taskforce that he too closely supervised the corporate strategic planning process and that there were too many meetings. He responded by delegating more responsibility to his sector presidents and changing the focus and content of his top team’s management work (Beer and Williamson, 1991).
• What changes in people’s skills will be needed to ensure that the new organization works effectively? Changes in human resource policies and practices will be needed to ensure that the right people with the right skills occupy the new roles designated by the reorganization.
5. Communicate and involve people in implementation
The new organizational vision has to be communicated to the whole organization. People in the organization should be told why a new strategy is needed and how the new organizational arrangements will help shape new behavior and better performance. Articulating the links between new competitive realities and the new organization will enable people to commit to the changes.
Consider what Don Rogers, the general manager of the Electronic Products, a Division at Allentown Materials Corporation, did in this regard (Beer, 1998a). Rogers’ top team had just decided to implement cross-functional new product development teams to enhance product development success, a strategic imperative for them to compete in their industry. Rogers and his whole top team visited 13 locations over a two-month period to communicate with every salaried employee how the new organization would work and why they were adopting it. The why included telling all employees about competitive problems that led to change and organizational barriers that had been uncovered through a survey and diagnosis of the division, including problems people perceived in Rogers’ own leadership. Communication was two-way. After Rogers and his team presented their change plan, employees met in small groups to discuss what they heard. They then assembled to raise questions and challenge management. A dialog between top and bottom is essential for top management to learn about potential problems they will encounter in implementation so that they can make changes in their action plans accordingly. And that dialog must be continuous and ongoing for change to succeed.
6. Support behavior change
After the new organization is implemented, employees, particularly those whose roles and responsibilities have been most impacted by the organizational changes, will need support to develop needed skills and attitudes. This is often done through consultants who coach individuals and teams. It can also be done through training and education programs. In the Electronic Products division mentioned above, consultants sat in on all team meetings for the first six months and coached the teams and their leaders in how to work in these new unfamiliar arrangements. Moreover, consultants brought together key managers in pairs of departments whose relationships were blocking coordination and facilitated a discussion that led to improvements. The purpose was to change behavior and skills within teams, thereby increasing the probability of their success.
7. Monitor progress and make further changes
Organizational change is an action learning process. As the new organizational arrangements are enacted, much is learned about how to modify structure, systems, policies and practices, and behavior to achieve intended results. Top and lower level managers discover how to carry out their new roles and responsibilities and gain insights into how their own styles and skills need to be changed. Those who cannot adapt decide to leave on their own or are asked to leave. As time goes on the organization begins to function more effectively and this is translated into better performance. Because the business environment and strategy are constantly changing, survival requires organizations to recycle these seven steps periodically so that the organization can be realigned with new realities.
A large organization is typically made up of many interdependent subunits, each a business unit, and regional and country organizations or operating units such as manufacturing plants, stores, and offices. Leading the organization through the seven steps discussed above is the responsibility of unit leaders at every level. Corporate-wide change requires top management to play two roles (Beer, 1980; Ghoshal and Bartlett, 2000). They must lead a change process within the top management unit. This process would define how the corporate whole will coordinate the activities of the corporation’s many subunits to achieve the wider purpose of the corporation. But that is not enough. Corporate leaders must also orchestrate a process which encourages leaders in each of the corporation’s subunits to lead their own seven step learning and organizational alignment process (Beer and Eisenstat, 1996). Innovations in organizing and managing will occur from such a process and it is top management’s role to orchestrate the diffusion of managerial innovations in leading units through conferences, visits to leading edge units and, most importantly, through the transfer of successful leaders from leading edge to lagging units (Beer et al., 1990).
Where should corporate-wide change start? Sometimes subunit change comes about naturally at the periphery, in businesses units, manufacturing facilities, or stores far from headquarters. Often these are subunits offering quite different products or services from the parent. It is in these units that managers are faced with different competitive demands and/or have the freedom to innovate and lead change. Under these circumstances changes are only adopted by other organizational subunits if top management actively works to move the innovations and the managers who led them to other parts of the large company (Beer et al., 1990; Walton, 1987).
Clearly, corporate-wide change will occur much more quickly if top management has conviction that change is needed. Top management’s role is to encourage, even demand, that managers of independent business units, manufacturing plants, retail stores, or country organizations (in global companies) lead change in their units (Beer et al., 1990; Ghoshal and Bartlett, 2000). Jack Welch who led General Electric through a major transformation in the 1980s and 1990s required key managers to employ a process that required leaders to listen to key people about barriers to effectiveness, to assess their root causes and realign it for greater effectiveness (Ulrich, Kerr, and Ashkenas, 2002). Top management’s role is not to drive change through corporate staff and consultant-led programs. As discussed earlier these will fail to mobilize energy and leadership at the unit level needed for change to succeed. Moreover, corporate programs prevent top management from discovering who of their subunit managers are able to lead the seven step organizational learning and change process, an indicator of their leadership potential.
I will first summarize briefly the case of Apple Computer used throughout this chapter to illustrate an unsuccessful effort to lead change. I then review two successful change efforts.
Apple Computer: a case of failure
John Scully did not restore Apple to its former dominant market position. He was unable to develop sufficient dissatisfaction with the status quo to produce the energy needed for change. He never created a top team capable of agreeing on Apple’s new strategic direction. As late as 1988, he appointed to a key top management position an executive whose strategic vision was diametrically opposite to the one that Apple had to take to cope with new competitive realities. His inclination to avoid conflict prevented him from confronting key strategic and organizational issues. And he never led a change process that enabled his top team to discover and discuss the silent killers that blocked them from realigning their organization with their intention to succeed in selling Apple’s offering to the business market, one quite different from the education market where they had been successful. Consequently, shareholders, customers, and employees failed to derive the value (stock price, lower cost products, and career opportunities, respectively) that a successful enterprise would otherwise have yielded. Apple’s success in the late 1990s to the present under the leadership of CEO Steve Jobs represents a new strategic era enabled by a “new” CEO (Jobs was actually Apple’s founder and first CEO but was replaced by Scully). After Scully’s departure, Jobs articulated a new strategy and successfully aligned the organization with it.
Hewlett Packard’s Santa Rosa Systems Division (HP/SRSD): successful unit level change
The Hewlett Packard Santa Rosa Systems Division is a case of successful change at the business unit level but failure by HP’s top management to spread innovation to other units (Beer and Rogers, 1997). In 1992, HP/SRSD was formed to manage and grow a new measurement systems business for HP. By 1994, the division was experiencing many problems and its performance did not meet top management’s expectations. There were numerous reasons for this. The division had organized itself and was being managed in a manner similar to HP’s traditional test and measurement divisions. Yet the systems business was significantly different, particularly with respect to the need to customize systems. The mismatch between the traditional approach to organizing and managing and the demands of a very different business environment and strategy created many tensions between functions and between the top team and the remainder of the organization.
Data collected by a taskforce of the division’s best employees revealed that the six silent killers described above were blocking organizational effectiveness. Employees perceived the general manager’s style was laissez faire. He was not engaging his top team in a discussion of conflicting strategies and priorities perceived by lower levels. Consequently, coordination between several functions essential for successful execution of two interdependent strategies was not occurring. Section managers who had been assigned to lead cross-functional teams were ineffective in gaining consensus in their teams in part because they lacked experience and skills needed to lead teams and in part because they lacked formal authority. And, while everyone in the division knew of these problems and complained about them to each other in private conversations, they did not give voice to their frustrations to the top team. The division manager and his staff were also aware of tensions and knew the division was failing but without feedback from lower levels they did not quite understand the urgency for change that lower level managers felt.
With the encouragement of his human resource executive, the division manager hired an external consultant, who, using a process called the Strategic Fitness Process (Beer and Eisenstat, 2004), helped the top team go through the seven step change process. This enabled these issues to be surfaced for discussion and diagnosis. As a result the top team identified their own ineffectiveness as a team, the general manager’s style, and the ineffectiveness of cross-functional teams in coordinating functional departments as the root cause of poor performance. In that same meeting they agreed to reorganize the division as a matrix structure in order to facilitate coordination, defined new roles for key people and teams in the new structure, and defined a new role for the top team, one that would fit the new structure, and created new ground rules for how the top team should operate and how decisions would be made.
Data collected a year later by the same taskforce and an employee survey showed significant improvement, though some issues persisted. Sales had tripled and profits went up 250%. While the division’s management attributed some of the improvements in the division’s performance to an upturn in the market they served, they felt that they would not have been able to take advantage of market demand without the changes in organizing and managing they had made. The division manager and his team also decided to lead the seven step task alignment process once a year as a way of fostering continuous change. Five years later HP’s top management felt that SRSD, which had lagged its sister divisions in performance and effectiveness, was now a model to which others divisions could look. Division management had successfully led change and innovated when they adopted the Strategic Fitness Process for fast change.
ASDA: successful corporate-wide strategic change
ASDA, a UK grocery chain, offers an example of excellent top management leadership of strategic change (Beer and Weber, 1998b). With the company £1.5 billion in debt and near bankruptcy, Archie Norman was appointed as CEO to turn round the company. Upon arriving in December of 1991, he met with his top team and quickly resolved to make changes in its membership. He also announced that while he did not have any preconceived ideas about what the problems were or how to solve them, he would insist on debate and transparency. He also announced that a “renewal store” would be identified where managers would be given license to innovate in the retail proposition, the physical space, and in the way people were organized and managed. He promptly began an assessment of the company’s situation by making unannounced visits to many of the company’s 200 stores. There he talked to lower level workers and store management asking them to tell him about barriers to company performance. They quickly informed him that for years headquarters, particularly the trading (purchasing) department, had not been listening to stores about what products the stores thought would sell.
Within months he began to reshape the way the top team worked together and the way the trading department at corporate headquarters communicated with and incorporated store views into their buying decisions. He told everyone that stores were to be “loved” and listened to. He established multiple mechanisms for communication between headquarters and the stores, and between store management and customers and employees. Within nine months a totally new approach to retailing and organizing and managing a store was created in the “renewal store” by the store manager and his top team working with a corporate cross-functional team. Sales increased immediately, as did morale. Over a six-year period virtually every store in the company had gone through the renewal process. Sales and profits not only improved, but also improved at a faster rate than its competitors. By 1998 the stock price had multiplied eight-fold.
The success of the renewal program - the heart of the change effort - rested on top management’s recognition that it had to spread innovation in the first renewal store to all 200 stores. What enabled this to happen was top management’s decision to withhold financial resources for a given store’s renewal until its management had exhibited the behavior and values of teamwork, delegation, and communication top management thought were critical to store performance. It also became clear to store managers that their career success was now dependent on leading a renewal process in their own store. A “Driving Test” - an assessment of the extent to which each store’s management had turned barriers like the “silent killers” into organizational and managerial strengths - was employed to assess a store’s senior team’s readiness to lead change. In stores where this did not happen quickly enough they replaced the store manager. Six years after the change effort began over 50% of store managers had been replaced with leaders who would and could lead store renewal.
So long as the objectives of organizational change are the development of organizational capabilities for sustained competitive advantage over time, the principles and guidelines offered in this chapter hold. If, however, the objective is to enhance shareholder value quickly without regard to developing organizational capability for the long term, the guidelines for change proposed in the chapter do not apply. Management that wants to obtain short-term improvements in stock price are much more likely to succeed by drastic restructuring, cost reductions, and layoffs. Considerable evidence exists that such steps enhance the stock price of companies in the short term, but do not create alignment and sustained high commitment and high performance (Cascio, 2002). This is precisely what Al Dunlap did in just a few years as CEO of Scott Paper. What was not downsized was sold. The company no longer exists today.
There are, of course, many instances where top management wants to build organizational capability for the long term but the company’s performance is so poor that drastic steps have to be taken to reduce cost in the short run. Under these circumstances there are two options (Beer and Nohria, 2000). The first option is to phase the change process so that restructuring (selling businesses that could not be turned around), productivity improvements, cost reduction, and layoffs come first, followed by the action steps outlined in this chapter. That is what Jack Welch did at General Electric with great success. The second option is to press forward with both cost reduction and layoffs while also following the guidelines in this chapter for a change process that builds organizational capability. There is evidence that such a dual strategy, cost reduction, and investment in building organizational capability can lead to successful change (Beer et al., 1990; Beer and Nohria, 2000). Companies that emphasized cost reduction at the expense of the steps described here did not successfully change their culture.
Embedded in the change process recommended here is an assumption that leaders value excellence, people, involvement, teamwork, and learning, including learning about themselves. Autocratic, controlling, and defensive leaders are unlikely to be able to implement the seven step change and alignment process. These steps require a commitment to building organizational capability, organizational learning, and to empowering leaders throughout the organization to lead change in their subunits. The somewhat slower pace of capability building change demands that leaders buy time by managing expectations of capital markets. Again, the case of ASDA described above is an excellent example of what can be done in this regard. By telling financial markets that they would not see major improvements in performance for three years, CEO Norman bought the time he needed to begin to rebuild organizational capabilities.
CONCLUSION
Organizations are complex systems normally resistant to change. Multiple facets of the organization - its design, its leadership, and its people - become tightly aligned with the historic strategy of the organization. This tight alignment leads to a distinctive and persistent pattern of behavior resistant to change. Resistance is caused by fear that change will result in losses of power, status, esteem, and position. Fear leads to defensiveness and the inability to consider new alternatives and to learn about what has to change.
Organizational change is motivated when leaders use environmental pressures, poor performance, or the prospect of poor performance to develop dissatisfaction with the status quo. When people realize that the organization’s future is endangered, energy for change is released. Successful change managers lead a process that approximates the seven steps described in this chapter. They mobilize energy for change, develop a new compelling direction, identify organizational barriers to implementing the new strategy, develop a vision of how the organization will operate in the future, communicate the vision and involve people, support behavior change through coaching, and recycle learning and change to monitor progress and make new changes whenever the business faces new strategic inflections.
In large multi-unit corporations the responsibility for change lies with leaders at every level, not just with corporate top management. Top management’s responsibility is to demand that unit managers lead change consistent with the competitive task faced by their unit. They then spread change to all parts of the larger organization through transfer of managers from leading edge to lagging units. They must also lead change in the top management unit. Change can start anywhere, but will be slow to spread unless top management creates a context that encourages change in subunits.
The capacity to lead an organization through change is increasingly important as the pace of competition and change increases. Effective change leadership enhances organizational performance, economic value, and organizational effectiveness needed in the long run. Managers who do not recognize the need for change or lack skills to lead it will ultimately be replaced as the performance of their organization lags expectations.
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Assess the alignment of your MBA program and diagnose reasons for misalignment
1. Instructor leads a discussion of what students expect to obtain from the MBA education.
2. A consensus-strategic statement which represents three or less primary goals of students is crafted (30 minutes).
3. The goals will serve as the strategy statement for the remainder of the exercise.
4. The class is divides into trios.
5. Each trio is assigned the following task: a. Students interview each other about shortfalls they see in achieving student aspirations for the MBA program and the barriers they see to their achievement (30 minutes). b. Groups diagnose the root causes for the success or failure of the MBA program in achieving strategic goals (45 minutes).
6. Groups report their findings.
Develop a change plan that will align the MBA program with strategic goals articulated in the first exercise
1. Class is divided into trios.
2. Groups discuss success or failure of change efforts each person experienced in their previous job. Each student presents a success or failure and ties it to the principles discussed in this chapter (30 minutes).
3. Each group decides on what must change in the MBA program in order to achieve strategic goals developed in the first exercise (30 minutes).
4. Each group arrives at barriers to change they anticipate (20 minutes).
5. Each group develops recommendations for a change strategy the dean should employ (30 minutes).
6. Group reports: what are the barriers to change and their implications for leading change in the MBA program (30 minutes)?
7. Instructor leads a discussion of reports.