Spector 2e Instructors Manual

INSTRUCTOR’S MANUAL CHAPTER 1: Organizational Change

Main Teaching Point Organizations engage in a process of strategic renewal in order to respond to changes in their competitive environment. But in order to make strategic renewal work, leaders must find ways to alter the behavioral patterns of their employees through involvement and participation.

Learning Objectives 1. Identify the role of strategic renewal in propelling change. 2. Focus on the behavioral aspect of organizational change. 3. Analyze the dynamics of motivating employees to alter their behaviors. 4. Differentiate the three faces of change. 5. Understand the source of both employee resistance to and support for change.

Opening Case—Tales of Woe at Concord Bookshop Theory to practice of case: Effective strategic change requires not only recognition of the need for change but also a successful implementation process. Case Summary: Concord Bookshop is a 64-year-old independent bookstore in New England with a national reputation for sound bookselling and a local reputation for customer service and interesting programming. The owners want to hire a new general manager to reconsider policies and programming. Three top managers and five more long-time employees are resigning, and local authors and customers have expressed outrage. Analyzing the Case 1. From whose point of view is the case told? The case is told mostly from the perspective of former employees and managers as well as concerned customers.

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2. What is Concord’s change project? Concord is experiencing major competition from national bookstores. President Sannounced that a new general manager will be hired who will examine some of the store’s programs and policies in order to remedy the dire financial situation of the company. 3. Why is Concord doing this? Profit margins for independent bookstores like Concord have gotten very tight over the past few years, due to extensive competition from Barnes & Noble, Borders and Amazon.com. 4. What behaviors will need to be changed? Concord will need to find a way to get all of the people involved on board in the change process. Since all of them seem to really care about the survival of the organization, the major issue might be one of communication, involvement and persuasion. 5. How should Concord executives go about creating the change? This question is key to the entire text. Owners, employees, customers and suppliers all wanted to support the organization’s viability. However, Smith’s approach to change created resistance, conflict and resentment. Organizations need to respond to external changes but they need to do so in a way that also effectively manages internal dynamics.

Lecture Outline I. Strategic Responsiveness Theory to practice: • •

Strategic responsiveness to a dynamic external environment demands organizational change. To implement a renewed strategy, organizational leaders need to engage in a change process.

A. Strategic renewal is a change in an organization’s strategy with the intent of regaining sustainable competitive advantage (company examples in exhibit 1-1, p. 4). B. Strategic renewal requires organizational change (exhibit 1-2, p. 4). Leaders need to align internal processes, structures and systems with the demands of Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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that strategy. New organizational capabilities – employee talents and skills – need to be developed to support the strategic renewal. II. Strategic Renewal through a New Business Model Key Learning Points: • •

It is possible to gain competitive advantage through the creation of a new business model, but changing your existing model will create specific change challenges. Adaptation of a new business model within a corporation will require organizational change.

A. A company’s business model is its approach to generating revenue and profit: the nature and configuration of the linkages between its operations. As environments and technologies change, business models also need to change. E.g., Apple Computer faces the challenge of changing its secretive culture to one that actively involves its customers – a major change in business models. B. Start-up companies often gain competitive advantages by offering novel business models, e.g. Amazon, Starbucks, YouTube, Dell and Southwest Airlines all revolutionized existing businesses. They could do so more easily because they started from scratch (“greenfield”) and could harmonize internal processes and employee competencies with external demands. C. Existing companies find it much harder to change business models. IBM, Lufthansa and Nissan provide successful examples, but AT&T and Enron show that failure is also possible (p. 6). D. Effective business model innovation requires effective organizational change and effective change leaders – people that can guide new linkages, new competencies and new behaviors. . III. Behavioral Change Theory to practice: • • •

If change interventions are to achieve significant and sustainable impact on performance, they must focus on altering patterns of employee behavior. Organizational change seeks to create long-term, sustainable alterations in employee behavior. The way employees behave impacts the bottom-line performance of the company.

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A. Effective strategic renewal requires behavioral change that aligns employee actions with company strategy in order to achieve high performance. B. Behavior is the enactment of roles, responsibilities and relationships by employees within the organization. Behavioral change efforts target the patterns of employee behavior. C. New behaviors need to be long term, sustainable and adaptive to environmental changes. D. Organizations depend on their employees for high company performance. Employee motivation – the commitment of employees to high personal and high company performance - and the resulting behaviors - are key to a company’s competitive advantage. IV. Sources of Behavior Theory to practice: •

Behavior comes from both the individual and the organizational context.

A. The organizational context affects individual behavior and the way they enact their role and relationships in powerful ways through culture, values, leadership, rules and procedures. The company culture at Google, for example, actively encourages employee learning and risk taking so employees are not afraid to openly admit mistakes. Google’s strategy is one of continuous innovation and making mistakes is seen as part of the learning needed to get there. V. Employee Participation and Resistance to Change Theory to practice: • • •

Employees do not naturally resist change but they often resist change because of the way change is implemented. Try to understand the reasons behind employee resistance to change. Employee resistance is not just a negative force to be overcome; it also presents an opportunity to learn.

A. Resistance is overt or covert action to maintain the status quo. Employee responses to change can range from “commitment” on one end to “aggressive resistance” on the other (see exhibit 1-3, p. 10). 1. Commitment to the goals of the organization and the change effort (commitment)

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2. A willing involvement in the called-for new behaviors (involvement) 3. Employees speak out in support of change effort without taking any explicit actions (support). 4. Employees know about change effort but take no action either for or against (apathy). 5. Employees may voice reservation about change effort or may even threaten to quit (passive resistance). 6. Employees make efforts to impede change or undermine the goals of the organization (active resistance). 7. Employees sabotage and subvert the change effort (aggressive resistance). B. There are many causes for individual resistance: - people may be satisfied with things the way they are - they may see the change as a threat - they may feel that the costs of change outweigh the benefits - the change process may be mishandled - they may believe the change effort will not succeed C. Often managers see resistance as negative but it may present a positive opportunity to learn. VI. How Managers Inadvertently Fuel Resistance during Implementation Theory to practice: • • •

Participation in the change process is the best way to build support and overcome resistance to change, but it is no guarantee. Employee resistance can help leaders to learn – what are the sources of resistance? At some point in the change process, employee resistance must be addressed and overcome.

A. Individual differences may affect employee acceptance of or resistance to change but the major factors are the way the process is managed and the degree to which employees are involved. B. Going back to the causes listed above, managers may fuel resistance by not including employees in the assessment process, by not showing them the

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opportunities and benefits, or by not giving them a voice in the implementation process (p. 11). C. When employees resist, they give managers a valuable chance to learn about perceptions, concerns and underlying problems. Sometimes, though, resistance simply has to be overcome. VII. Employee Participation Builds Support for Change Theory to practice: • • • •

Imposing change from above can lead to employee resistance. A participative process can help build support for change efforts. In a unionized environment, employee participation means inviting the union into the decision-making process. Behavioral change seeks to motivate employees to change their behaviors, not to force, coerce or trick them into changing.

A. In the early stages of change, employee participation in problem definition and solution design builds commitment, psychological ownership and motivation for implementation. B. Imposed change creates resistance, while participation invites commitment. People don’t resist change, they resist being changed. A contrasting example is provided within the same company, General Motors. 1. Imposed changes at their Lordstown, Ohio Vega plant led to resistance and rebellion. 2. Participatory changes at their Livonia Cadillac plant led to support and improved effectiveness. C. Sustainable change requires motivation on the part of employees for the change. This cannot be created through manipulation or coercion. The organizational context must be shaped to encourage and support employees’ desire for individual and company change. VIII. The Three Faces of Change Theory into practice: • • •

Not all change is behavioral. Turnaround may be necessary but it is not sufficient to ensure long-term effective change. Outsourcing is a change technique with important turnaround and transformational behavior change implications. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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Outsourcing can be a helpful change tool but it can also undermine motivation and disrupt essential linkages and relationships. Effective strategic renewal efforts combine aspects of turnaround, tools and techniques, and transformational behavioral change.

A. Effective organizational change combines the 3 faces of change: turnaround, tools and techniques, and transformation (exhibit 1.4, p. 18). B. Turnaround – an attempt to improve the immediate financial position of the organization through cost cutting, layoffs, plant closings, and the like. Turnaround may be very necessary but it is painful and costly in areas of morale and motivation. Turnaround strategies must be paired with process and behavioral strategies; otherwise, they may result in temporary gain and long-term loss. C. Tools and Techniques – changes in organizational processes, technologies and interactions. These changes are often central for strategic renewal, but unless they are supported by changes in employee behavior, they will not succeed. -Outsourcing, the farming out of certain value chain activities to external specialists or strategic allies, is one of these techniques. -Outsourcing has important turnaround (i.e. cost saving) implications. -Unless it is carefully managed, outsourcing can have negative effects. Companies must make sure that employee behaviors are aligned with the company strategy and customer expectations. D. Transformation – behavioral change on the part of employees with the goal of enhancing human capabilities, aligned with the company strategy and structure. IX. Trigger Events and Change Theory to practice: •

Trigger events precipitate the need to alter behavioral patterns of employees.

A. Organizational change is initiated in response to a trigger event – some shift that precipitates the need for a change in company strategy and employee behavior. B. External trigger events can be increased competition, a change in technology or a shift in consumer demands. C. Internal trigger events can be new leadership in the company or employee dissent. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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X. Conclusion A. Strategic responsiveness to a dynamic environment requires organizational change. B. Change can be triggered internally or externally. C. Effective change requires that leaders combine the 3 faces of change: turnaround, technology change, and behavioral change. D. Change implementation may cause resistance. Employee involvement can reduce resistance and increase motivation.

Additional Suggested Reading •

James C. Collins and Jerry I. Porras, Built to Last: Successful Habits of Visionary Companies (New York: HarperBusiness, 1994).

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Lynn A. Isabella, “Managing the Challenges of Trigger Events: The Mindsets Governing Adaptation to Change,” Business Horizons 35 (September-October 1992).

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Michael A. Mische, Strategic Renewal: Becoming a High-Performance Organization (New Jersey: Prentice Hall, 2001).

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David A. Nadler and Michael L. Tushman, “Organizational Frame Bending: Principles for Managing Reorientation,” Academy of Management Executive (1989), pp. 194–204.

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Randall S. Schuler, “Strategic Human Resource Management: Linking the People with the Strategic Needs of the Business,” Organizational Dynamics 21 (Summer 1992), pp. 18–33.

Chapter Discussion Questions 1. Review Exhibit 1-1. Select one of the companies. Based on the brief statement of their renewed strategy (or research the company for further details), think about how patterns of employee behavior will have to change. Enron—would have to hire employees with high skills in sophisticated financial deals (and also make a legitimate profit!). GE—high value-added products and services require employees with high knowledge base and customer responsiveness.

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IBM—really, the same as GE: service and consulting require more knowledge, more customer responsiveness and higher levels of collaboration across organizational boundaries (Jack Welch called it “boundarylessness”). Marks and Spencer—more focused employees who were willing to alter past supply-chain relationships. Renault—no more French-centric employees, willing and able to travel, work in other cultures (most notably Asian), probably multi-lingual. Walgreens—greater risk takers, more innovative thinkers. Facebook – have a more diverse employee population, attuned to and responsive to different customer populations and their varying needs, interests and skill levels. 2. Explore the challenges that faced Morgan Smith at Concord Bookshop. What explanations can you offer for the high level of employee resistance that emerged from the changes? It seems that employees, customers and other stakeholders were not at all informed about or involved in the change process, which would trigger all of the causes of resistance. While no employees were laid off, the uncertainty surrounding the announcement, combined with a unilateral decision about changes in leadership, seriously affected people’s sense of the mission and culture of the organization. Employees lost faith and thereby, motivation and connectedness. 3. What are the three approaches to organizational change? In what ways are they different and in what ways do they overlap? Turnaround emphasizes cost-savings, downsizing, and maximizing return on shareholder investment. Technology involves redoing processes—often by adding new equipment—to make workers more efficient and productive. Behavioral change involves motivating employees to alter their behaviors in order to achieve new strategies. Turnaround tends to be short term while behavioral change tends to be long term. Technology can have an enhanced impact on organizational performance if patterns of behavior also change.

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4. Identify the main external forces triggering the requirement for organizational change today. Pick three and discuss how they might necessitate behavioral change on the part of organizational employees. Globalization requires greater flexibility, adaptability, and ability to work together. Changing labor markets requires greater attention to attracting and retaining the “right” employee. Increasing diversity requires greater flexibility, adaptability, and ability to work together. Increasing salience of stakeholders requires greater attention on growth opportunities, and ability to work efficiently. Regulation and deregulation requires greater adaptability. Mergers and acquisitions require the ability to work effectively in different organizational cultures. Rise of the Internet requires greater flexibility, adaptability, and ability to work together. 5. Why is motivation important to behavioral change? How might leaders approach change differently if they are trying to motivate employees to change rather than force them to change? Using coercion or manipulation to create behavioral change will work against the long-term interests of change leaders. Coerced or manipulated behaviors are not likely to be long lasting; that is, even if leaders can force employees to change their behaviors, those employees are likely to revert back to their old behavioral patterns over time. Also, coercion and manipulation lead to compliant behavior, but they drive out creativity—the source of innovation. Finally, using coercion and manipulation would be unethical.

Final Case—Read “Two Stories of Outsourcing” and answer 2 questions. Introducing the Case The case illustrates the different faces of change and how they interact through two different stories of change. The first story is told by John Hearst, an engineer from Auratek, manufacturer of DataSafe, an industry-leading data storage device. Auratek had Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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a very successful history of quality control through cooperative efforts between groups of engineers in the design, verification and fabrication process. In order to save costs, the company decided to outsource the bulk of the verification process to India, with disastrous results for morale, quality and communication. The second story is told by Caroline Matthews. She is an engineer working for K-PUB, an electronic publishing company targeting IT professionals with printed and online materials. K-PUB decided to outsource what was called the “translation process” – converting desktop publishing formats into XML – a difficult, often subjective process requiring a lot of quality assurance to ensure acceptable results. Internal efforts to improve the process using software and automation were only partially effective. When K-PUB outsourced the process to India, the process itself took longer but they realized a substantial cost savings. The company hopes to take back the process once it is completely automated. 1. What is the nature of the changes sought by Auratek and K-PUB? Are they turnaround, tools and techniques, transformation or some combination? Auratek was turnaround, they were after cost savings only – there were no other problems that necessitated the change. Their process required transformation also but this was severely neglected. K-PUB had a real operational problem involving a need to change tools and techniques as well as a need to contain costs. 2. How do you account for the apparent differences in effectiveness in the use of outsourcing by these two companies? In the case of Auratek, the company made a very unilateral decision to intervene in an otherwise very effective process and one that had been created through a lot of employee motivation, commitment and involvement. The company was doing well, their product was an industry leader and they were managing quality very well. Making this change had no real benefits to the employees who were not even properly involved. At the same time, they were relying on the few remaining engineers to make the process work – something which was doomed to failure. In the case of K-PUB, the ongoing nature of the problem was clear and the company remained interested in eventually taking the process back, once the automation efforts were fully implemented. In the meantime, the entire task of translation was outsourced, not requiring additional participation in the work from existing employees. CHAPTER 2: Theories of Effective Change Implementation Main Teaching Point Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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The teaching point to be made by Chapter 2 is to introduce students to key theories of effective change implementation and change resistance.

Learning Objectives •

Present the three phases of the planned change theory of Kurt Lewin.

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Delineate the key insights to effective implementation offered by the field of Organizational Development.

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Differentiate between content-driven and process-driven change.

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Explain an approach to change management that emphasizes task requirements and performance results.

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Offer a framework for change implementation that encompasses multiple theories.

Opening Case—Turnaround and Transformation at Duke University Children’s Hospital Key Learning Point of Case: The case illustrates an effective change implementation at a university hospital using key concepts in this chapter, such as process-driven change and task alignment. Analyzing the Case 1. From whose point of view is the case told? The case is told from the point of view of Jon Meliones, the chief medical director of the Duke University Children’s Hospital. 2. What is leading the Children’s Hospital to alter their strategy? Changes in insurance reimbursement for patients have put tremendous pressure on net margins; revenues are declining, and patient and staff satisfaction are “at an all-time low.” 3. What steps has Meliones taken? (1) Led staff through a shared diagnosis of root causes of financial problems. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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(2) Created cross-functional team with the goal of figuring out how to provide both excellent patient care and excellent financial performance; articulated in strategic renewal motto: “No margin, no mission.” (3) Piloted change in a single unit: pediatric intensive care. 4. What behaviors will need to be changed? Need to eliminate “fiefdoms” of people focusing on individual goals and develop a shared commitment to improving margins and serving patients. 5. How did he drive change within the pilot unit? Roles, responsibilities and relationships within the unit were redesigned to serve the new strategy; balanced scorecard (BSC) was used to reinforce behaviors. 6. How effective was the effort? The hospital returned to profitability in three years.

Lecture Outline I. Theories of Change Implementation To understand effective change implementation requires understanding what levers can be applied - diagnosis, cross-functional teams, measurement systems - and in what sequence. • Theory into Practice Effective change involves both content—what is being changed—and process—how the changes are being implemented. • Theory into Practice Telling employees why they need to change will not build motivation to change; it is necessary, but not sufficient. • Theory into Practice Don’t assume that poor organizational performance will create an urgent need to change within a company. 1. Kurt Lewin’s Field Theory in Social Science a. Context plays a key role in shaping individual behaviors: B = f(P,E) with B = behavior, P = person and E = environmental context Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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• • • •

Behavior is shaped by group norms - shared expectations of how group members ought to behave. Group norms keep old habits in place. Social habits only change when there is dissatisfaction with status quo. To break the “social habits” that support current patterns of behaviors, effective implementation needs to start with dissatisfaction, disequilibrium, and discomfort.

b. To create change, people must go through 3 phases: • unfreezing: dissatisfaction or frustration with the way things are • moving: altering patterns of behavior • refreezing: institutionalizing the new patterns of behavior • See examples on p. 30, exhibit 2-1 c. To create change, focus first on changing group norms, then individual behaviors • Theory into Practice To break the “social habits” that support existing patterns of behaviors, start with creating dissatisfaction, disequilibrium and discomfort. • Theory into Practice In order to implement change, target group norms first and then focus on individual behaviors. II. Organization Development and Change Implementation 1. Organization Development is an approach to organizational effectiveness that calls on the fields of behavioral and social sciences to provide guidance to planned change efforts. •

Ten key insights from OD are shown in table 2-2 on page 31: 1. systems perspective 2. alignment perspective 3. participation perspective 4. social capital perspective 5. teamwork perspective 6. multiple stakeholder perspective 7. problem-solving perspective 8. open communications perspective 9. evolution/revolution perspective 10. process facilitation perspective Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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Three are particularly important:

a. Open Systems Perspective (OSP): OS is an organism or entity that exists in a constant interactive state with its external environment. An OSP presents a relational view on organizations and stresses the importance of alignment: congruence or compatibility between and among various elements of a system, including the internal context, the external environment and patterns of employee behavior. •

Theory into Practice 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.

b. Multiple Stakeholder Perspective (MSP): Stakeholders are individuals or groups who lay legitimate claim to the performance of the organization. An MSP argues that stakeholders should be seen as citizens of the organization and their concerns and interests must be addressed. •

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 open communications

c. Open Communications Perspective: Conflict must be approached with an attitude of problem solving, openness and trust. Also, try to create a sense of ownership and inclusion. •

Theory into Practice Don’t shy away from conflict. As individuals articulate and analyze differences, they can improve organizational effectiveness.

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Theory into Practice Be sure to create an inclusive change process—one that builds ownership of and commitment to the desired improvements.

III. Process-Driven Change Interventions A. Change interventions can be content-driven or process-driven.

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Content-driven change: programmatic change in which specific programs—customer relationship management, balanced scorecard and lean enterprise, for example—are used as the driver and centerpiece of implementation.

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Process-driven change: an approach to change implementation that emphasizes the methods of conceiving, introducing and institutionalizing new behaviors and uses content as a reinforcer rather than a driver of new behaviors.

Content-driven changes are very popular in organizations because they are quick, simple and trendy but they are rarely successful because they do not build motivation for change. Content driven changes: • • • • • •

Serve as the initial centerpiece for launching and driving transformation throughout the company or unit. Are imposed by top management Do not proceed from shared diagnosis. Rely on standardized, off-the-shelf solutions. Are imposed uniformly across the organization Long list of examples on p. 38, exhibit 2.5

Theory into Practice • • • • •

There are no one-size-fits-all solutions to performance problems in your organization. Just because top leaders believe in the need for change doesn’t mean that all employees share that conclusion. Content-driven change often fails because of inadequate attention to the process of change. Repeated failure to implement change effectively can build cynicism in an organization, “inoculating” it against future change efforts. Content-driven change is both tangible and measurable—but that doesn’t make it effective.

B. Process-Driven interventions create a collaborative approach to change, using involvement, participation and task alignment. 1. Task alignment is an approach to behavioral change that starts with the identification of the key strategic tasks of an organization or unit and then asks employees to redefine their roles, responsibilities, and relationships in order to perform those tasks. 2. Task alignment focuses behavioral change on the requirement to improve the manner in which employees perform the strategic tasks of the organization. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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3. Task-aligned change implementation starts with the goal of improving performance and implementing strategy and then seeks appropriate supportive behavioral change. 4. Line managers have far greater ability to diagnose business and performance problems than to engage in psychological or therapeutic analysis of individuals. 5. By focusing on solving real business problems, task alignment takes advantage of the knowledge and expertise in the organization. 6. Tangible performance results that accrue from task-aligned change interventions reinforce the efficacy of such efforts, which, in turn, creates momentum for renewed change intervention. Task alignment builds commitment by focusing on real and immediate performance problems and producing tangible results. 7. Task alignment increases not only the motivation of employees to change their behavior but also managers to support organizational change. Theory into Practice • • •

Process-driven change seeks to create an organizational climate in which employees will be motivated to adopt new behaviors consistent with the strategic direction of the organization. Task alignment combines the insights of organizational development with a bottom-line focus on performance. A task-aligned approach to change implementation can help create motivation to adopt new behaviors by focusing on real, immediate business problems and producing tangible results.

C. Building a Theory of Change Implementation Exhibit 2.6 on page 42 shows the 4 key components to effective change implementation: Lewin’s field theory, OD, process-driven change and task alignment. These create a sequential 4-step process model, supported by 2 key concepts: shared diagnosis and mutual engagement, as shown on page 43. 1. Shared diagnosis is a process that creates widespread agreements about the requirements for change – the dissatisfaction needed for “unfreezing.”

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2. Step 1: Moving to redesign requires a focus on strategy, performance outcomes and task alignment. 3. Step 2: Organizations can and should offer employees help in enacting new behaviors. 4. Step 3: Shared diagnosis and task alignment should be followed by people alignment. 5. Step 4: New behaviors must be reinforced through establishing systems and structures – the refreezing stage. 6. Mutual engagement at the core is necessary to ensure learning and commitment at every stage. This requires 4 things: -

mutuality: all parties accept the belief that the other party has the capacity and willingness to learn and change

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reciprocity: all parties accept the belief that each side can learn from the other side

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advocacy: willingness and ability of all parties to be open about their own positions and assumptions

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inquiry: willingness and ability to allow others to question and challenge their positions

7. Finally, avoid implementation traps, especially those associated with skipping steps and ignoring key principles, as shown in exhibit 2-9 on p. 48. Theory into Practice • • • • •

Kicking off change implementation with shared diagnosis builds both dissatisfaction with the status quo and a commitment to enact new behaviors. Asking employees to enact new behaviors—roles, responsibilities and relationships—can be supported by organizational help in learning new skills. Effective change implementation requires new skills and competencies on the part of the organization’s employees. Altering formal organizational systems and structures can come at the back end of a change implementation in order to refreeze new patterns of behavior. Mutual engagement at every stage of the implementation process helps assure learning and builds commitment.

IV. Conclusion

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The sequential model of effective change implementation represents an integration of key theories of organizational change.

Chapter Discussion Questions 1. How might Blue Cloud general manager Shel Skinner have handled his attempt to introduce more efficient software development differently? Skinner should have involved his engineers in a process of shared diagnosis and task alignment. Rather than simply superimposing the Agile methodology on the work structure, a systematic process-driven change intervention would have worked more effectively. 2. According to Kurt Lewin, why is it so difficult to motivate employees to alter their patterns of behavior? Lewin pointed out that people’s behavior exists within an equilibrium of forces that keep it in place. The only way to change that behavior is by creating a disequilibrium – some sense of imbalance or dissatisfaction that generates the motivation to change. Because people respond positively to the social norms in their environment, changing the social context is key to the process of changing behavior. 3. Discuss the various ways in which change theorists have attempted to introduce performance and results into the implementation process. Most of the approaches have been content-driven and disconnected with the key processes, tasks, structures and relations in the organization. While this is usually a quick and easy approach, it is also doomed to failure. A process driven approach and in particular one that emphasizes task alignment ensures that the focus in the change process remains on the goals and tasks of the organization. It also ensures a collaborative process that involves people, structures and tasks. 4. What were the sources of resistance at the Concord bookshop in chapter 1? Most of those sources were social in nature and had to do with a satisfaction with the status quo. Involving employees in the diagnostic process would have helped to generate motivation for change.

Additional Suggested Reading

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Michael Beer, Organization Change and Development: A Systems View (Santa Monica, CA: Goodyear Publishing, 1980).

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Michael Beer, Russell A. Eisenstat, and Bert Spector, The Critical Path to Corporate Renewal (Boston: Harvard Business School Press, 1990).

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Michael Beer and Bert Spector, “Human Resource Management: The Integration of Industrial Relations and Organization Development,” in Kendrith M. Rowland and Gerald R. Ferris, eds., Research in Personnel and Human Resources Management: A Research Annual, Vol. 2 (Greenwich, CT: JAI Press, 1984), pp. 261–297.

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Leon Coetsee, “From Resistance to Commitment,” Public Affairs Quarterly (Summer 1999), pp. 204–222.

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Kurt Lewin, Field Theory in Social Science: Selected Theoretical Papers (New York: Harper and Row, 1951).

Case—The Asda Way of Working (A) Introducing the Case Asda is a struggling grocery store chain in need of transformational strategic renewal (Chapter 1). The board imports a new CEO—Archie Norman— and the case follows Norman for the first six months as he hires a new top management team, articulates a new strategy and set of values, and anticipates moving change into the stores. Key Learning Point Effective strategic renewal requires change at all organizational levels and a leader who can orchestrate that change. Assignment Questions for Students: 1. Based on your understanding of the theories of effective change implementation, how would you evaluate the change leadership of Archie Norman and his top executives during their first six months at Asda? Remember, this is still early in the process. Still, students can ask: is he off to a good start, a bad start, or somewhere in between? Once you read all three cases in the sequence, you will realize that this has been a remarkable success. However, at this stage, you are likely to get a lively debate. Here are some of the points that may come up.

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He has done well at building dissatisfaction with the status quo in order to create the required disequilibrium. Some students will wonder, however, whether he is prematurely negative when he says everything must change.

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He has spent a lot of time in three stores gathering data from store employees about the operation. Some students will wonder if he and his top team are spending too much time on their own coming up with a new strategy.

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Should he have fired the CFO before coming into Asda? Some will say no; it was too quick. Others will say the CFO should be fired for allowing the company to get into this mess.

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He recruited a new team. Some students will note the lack of retail experience the team has (he did keep one manager from the past).

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He accomplished a great deal in his first six months: a new strategy, an articulated set of values, and a diagnosis of the situation. Some will say he hasn’t done enough because nothing has changed in the stores. Others will see this as quite a bit for six months (don’t overlook the closing of non-food operations, headcount reduction, and a pay freeze!).

2. Based on your understanding of effective change implementation, what specific steps would you recommend be undertaken over the next 18 months? Shared diagnosis – make sure that everyone is on board as much as possible with the analysis on what is wrong and what is right. This is a key requirement if Asda as a whole is going to move forward. Remember, shared diagnosis is designed to create widespread agreements about the requirements for change – the dissatisfaction needed for “unfreezing.” Step 1: Moving to redesign requires a focus on strategy, performance outcomes and task alignment; the first key steps in this direction have already been taken through the formulation of the renewal strategy: the statement of corporate strategy, the articulation of company values and the blueprint for the Asda Way of Working. Step 2: Organizations can and should offer employees help in enacting new behaviors –Norman needs to be very conscious of the kinds of help that corporate and store level managers might need to put this new approach in place. Just announcing it is not enough. It will take a lot of work to get everyone to understand the detailed implications of this at the task alignment level. Step 3: Shared diagnosis and task alignment should be followed by people alignment. These strategies too will need to be worked out. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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Step 4: New behaviors must be reinforced through establishing systems and structures – the refreezing stage. Norman needs to be conscious of the necessary impact of these changes on rewards systems and other structures. Norman needs to remember the importance of mutual engagement at the core which is necessary to ensure learning and commitment at every stage. The management team’s perception of Norman as “controlling” is potentially problematic. On the other hand, he seems to have embraced principles of mutuality, reciprocity, advocacy and inquiry, as evidenced in his emphasis on empowerment, involvement, meetings and the principle of equality. He needs to be careful to avoid implementation traps, especially those associated with skipping steps and ignoring key principles, as shown in exhibit 2-9 on p. 48. CHAPTER 3: Organizational Diagnosis

Main Teaching Point To initiate behavioral change, leaders need to unfreeze “social habits” by creating a sense of dissatisfaction with the status quo. To do that, effective organizational change implementation starts with diagnosis; that is, a dialogue about the need for change in response to how best to achieve strategic renewal and the requirements for effective implementation.

Learning Objectives 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 open, candid dialogue. Provide the key ingredients of a diagnostic intervention. Define the role played by after-action reviews in creating quick learning and improvement.

Opening Case—Bringing GE’s “Magic” to Home Depot Key Learning Point of Case: Effective change starts with diagnosis, not with solutions.

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Analyzing the Case 1. From whose point of view is the case told? Robert Nardelli, newly appointed CEO of Home Depot. (HD) 2. What type of change is Nardelli attempting to implement? Nardelli implemented a transformational change. Previously, Home Depot used a decentralized, autonomous store structure, balancing the advantages of size with a culture that promoted responsiveness to local customers. Nardelli is trying to implement a major change, focusing centralization and standardization to accomplish operating efficiencies and discipline. There was also a major increase in part-time employees. 3. What has precipitated the requirement for change (trigger events)? Nardelli was hired to lead Home Depot to a new generation of growth. 4. What was Nardelli’s approach to change? The case suggests that Nardelli brought a formula with him based on his experience at GE. There was no diagnosis and no participation. In response, many long-term managers left and customer satisfaction declined significantly. 5. Was the change accepted? No. It seems that managers, employees and customers all rejected the change. There was no involvement of any of the parties in the change process. The results were negative. While there was expansive growth (from $42 billion in revenue in 2000 to $81 billion in 2005), HD stock declined from $37 to $23 while Lowe’s – HD’s main competitor – gained both market share and a 210% increase in stock price. In 2007, Nardelli resigned only to be hired by Chrysler. 6. What did Lowe’s do that was different from Home Depot? Lowe’s focused on customer satisfaction and relied on full-time employees.

Lecture Outline I. Effective change starts with actions, but not with solutions. A. That’s the lesson of the HD case! B. Diagnosis is the process of learning about the dynamics of the organization in order to take action intended to improve performance. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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C. Diagnosis is about learning what needs to be changed and why. D. Diagnosis also needs to build consensus around how things need to be changed. E. The sequential implementation model starts with shared diagnosis to provide the basis for unfreezing. F. Only when the same diagnosis is shared by many people, can the change process move forward effectively. G. Diagnosis can occur on the individual, group and organizational levels and create a shared dialogue about how the organization can meet the demands of its renewed strategy.

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. That approach to change can be overly simple, misleading and dysfunctional. • The most effective change implementation starts with a diagnosis that is shared by many employees at multiple organizational levels. • Use diagnosis as the preliminary stage in implementing change. II. Requirement for a Systemic Framework A. Diagnostic framework is a roadmap for analyzing alignments that makes explicit both the key elements of an organization that need to be aligned and the interconnections and interdependencies among those elements. B. Diagnosis should be guided by a framework. This framework should help the organization understand what needs to be changed, why and how by offering a general model. The framework should lead people to systemic thinking and identifying disjunctions. C. Example: FBI – after 9/11, focus changed from battling criminals to preventing attacks. This was a whole new model of thinking about the organization. D. Framework should be complemented by open dialogue about what needs to happen. E. The framework should be: 1. explicit – all elements and connections should be clear 2. operationally defined – focus on measurable concepts and criteria 3. empirically validated – backed up by knowledge and data 4. acceptable through face validity – must make sense to organizational members 5. generalizable – applicable to different organizations and settings 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. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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•

Use a common organizational framework to shape mutual engagement and shared diagnosis.

III. Starting with Mutual Engagement A. Dialogue involves a structured, collective discussion among two or more parties without a predetermined outcome. B. The goal of dialogue is learning. The process of participation in dialogue builds commitment.

Theory into Practice • Creating a dialogue offers the opportunity for an open and honest conversation among employees. IV. Organizational Enablers of Dialogue A. Dialogue is risky business. B. Example of Carleton Fiorina at HP: Fiorina set about creating a major change. Executives failed to speak up about her reorganization plan even though they did not fully understand or necessarily agree with the plan. This is an example of organizational silence. C. Organizational silence is the lack of truthful dialogue in organizations caused by the widespread assumption on the part of employees that candid feedback and the open exchange of ideas will have either no positive impact or negative consequences to the individual, or both. D. Hierarchy creates power distance; this in turn encourages silence and compliance, and discourages dialogue. E. Power distance most often exists in vertical relationships but it can also exist horizontally, between functions and departments. F. Because power distance and power inequities can hinder the open exchange of ideas and information in a dialogue, managers can take these steps to equalize power: a. Delayering—removing hierarchical barriers that create distance and distort communications. b. Decentralizing—pushing down decision making to close the gap between decision makers and “doers.” c. Egalitarianism—removing external “artifacts” of status differentials. d. Third-party facilitation—structuring effective “rules-of-engagement” around feedback and dialogue. e. Representation—inserting voices from multiple levels, both vertical (managers, shop-floor employees) and horizontal (union and management, various functions), into dialogue. f. Teamwork—building shared purpose and mutual responsibility to ensure equal participation and influence by all members in dialogue. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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G. Mutual engagement and dialogue need to exist in a context of psychological safety – a belief on the part of employees that the organizational climate is conducive to taking personal risks, especially in dialogue. Theory into Practice • Don’t confuse passive acceptance with agreement. • Leaders can ask themselves – has their organization bred a “climate of silence that discourages subordinates from speaking up and discourages bosses from seeking feedback”? • A large power distance between parties in a dialogue inhibits openness and risk taking while distorting communications. V. The Consultant Role A. Consultant refers to any individual possessing a broad range of diagnostic and developmental skills who contracts with the organization’s leaders to facilitate an intervention. B. Consultants can come from outside the firm or they can be internal to the company. Theory into Practice: • Leaders can call on a consultant to introduce and teach new dialogue skills to organizational employees. VI. Getting started with organizational diagnosis A. Diagnosis consists of 4 steps: 1. collecting data on the organization and the environment 2. Entering into a dialogue of discovery 3. Receiving and providing feedback on what has been learned 4. Institutionalizing dialogue and diagnosis B. Diagnosis should follow 6 principles (see exhibit 3-2, p. 68): 1. Systemic focus 2. Consultant facilitated 3. Client-oriented 4. Data-based 5. Honest conversation 6. Psychological safety VII. Data Collection A. Effective diagnosis is data-driven. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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B. There are 3 basic forms of data collection; they are not mutually exclusive. The three forms and their advantages and disadvantages are summarized in exhibit 3-4 on p. 72. 1. Questionnaires are self-administered paper-and-pencil data-collection forms, often stressing areas of behavioral interaction such as communications, goals and coordination (see example in exhibit 3-3 on p. 70). They are easy to use, cheap and can cover many people in a short time, but they are not good at generating rich data nor do they create engagement. 2. Diagnostic interviews are a form of data collection in which a trained diagnostician meets with an employee, or small groups of employees, to solicit information pertaining to the performance of the organization. They generate rich data. Consultants or trained employees can conduct these interviews. Results may be hard to quantify and they lack anonymity. 3. Behavioral observation is a form of data collection in which a trained diagnostician can watch actual behaviors of employees. Observers can observe from a distance or they can become participant observers. Good observation requires training and is time consuming. Theory into Practice: • Make sure that diagnosis flows from valid data about the organization. • The process of collecting data can help build motivation and commitment to altering patterns of behavior. • Be careful about the overuse of questionnaires in collecting data about organizational effectiveness. They do not create mutual engagement. • Use diagnostic interviews and behavior observation to collect rich and valid data about how employees behave and how the organization functions. VIII. Creating a Dialogue of Discovery A. Discovery is the process of analyzing and making sense of data that has been collected as part of an organizational diagnosis. B. The first requirement is determining who to engage. Involving a blend of people and functions will help ensure a systemic perspective. It will create what Senge calls an exploration of “complex difficult issues from many points of

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view”—in order to move beyond the insight and understanding of any one individual. C. To ensure the systemic nature of the process, use a framework such as was presented earlier in exhibit 2-3 on p. 32. D. The discovery phase of diagnosis involves a dialogue among employees concerning the validity and meaning of the data that has been collected. Theory into Practice: • Mutual engagement in the discovery stage will help both to assure the validity of the conclusions and build commitment to corrective action.

IX. Closing the Loop A. Feedback is the process of receiving information focused on the effectiveness of one’s actions and performance B. Feedback takes place during the discovery phase. It can also occur later when results are communicated back and employees react to the reports. This allows the feedback loop to become continuous and ongoing. C. Closing the loop here means making feedback an ongoing process. D. Two mechanisms advance the feedback process: 1. Feedback from top management can occur in face-to-face groups to promote rich and open dialogue 2. The learnings and the change plans should be presented as tentative rather than final, inviting additional dialogue and discovery. Theory into Practice: • Mutual engagement can be enhanced when top management feeds back to employees what it has learned from the diagnostic process and uses that feedback as an opportunity to generate more learning. X. After Action Reviews A. After Action Review (AAR) is an organized, disciplined approach to shared diagnosis and mutual dialogue in the immediate aftermath of a specific action or event. B. AARs were originally developed by the U.S. Army as a way to promote learning. C. Example of Wall and Somerset company – a large corporate contract was fumbled. Using an AAR, they were able to learn what went wrong and develop an action plan to correct it. D. AARs involve 8 components: 1. Review takes place during or immediately after event under study. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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2. 3. 4. 5. 6. 7. 8.

Review starts with a shared understanding of the goal of the event. Review focuses on overall performance of the group. Review is conducted by participants in the event. The review is governed by open-ended questions Review identifies strengths and weaknesses. Review leads to new actions. Lessons of the review become part of future training.

Theory into Practice: • After-action reviews provide an opportunity for a sharply focused and timely mutual engagement that can lead to quick corrections.

XI. Conclusion If the need for change is urgent, executives may be tempted to rush toward a solution. Because of power distance, organizational silence may appear as agreement and the change effort will fail. On the other hand, mutual engagement in dialogue, diagnosis, feedback and review help to generate data, motivation and commitment. An organization’s ability to do this successfully will depend on its culture – this will be explored in the next chapter. Key learning point: client-centered consultants can build commitment to learning, motivation to change and competency on the part of employees to implement diagnosis in the future.

Additional Suggested Reading Chris Argyris, Flawed Advice and the Management Trap: How Managers Can Know When They’re Getting Good Advice and When They’re Not (New York: Oxford University Press, 2000). Michael Beer and Bert Spector, “Organizational Diagnosis: Its Role in Organizational Learning,” Journal of Counseling and Development 71 (JulyAugust 1993), pp. 642–650. Peter Burrows, Backfire: Carly Fiorina’s High-Stakes Battle for the Soul of Hewlett-Packard (New York: John Wiley & Sons, 2003). Edward E. Lawler III, David A. Nadler, and Cortlandt Cammann, Organizational Assessment: Perspectives on the Measurement of Organizational Behavior and the Quality of Work Life (New York: John Wiley & Sons, 1980).

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Paul E. Lawrence and Jay Lorsch, Developing Organizations: Diagnosis and Action (Reading, MA: Addison-Wesley, 1969). David A. Nadler, Feedback and Organization Development: Using Data-Based Methods (Reading, MA: Addison-Wesley, 1977). Richard E. Walton, Interpersonal Peacemaking: Confrontations and Third Party Consultation (Reading, MA: Addison-Wesley, 1969). Elizabeth Wolfe Morrison and Frances J. Milliken, “Organizational Silence: A Barrier to Change and Development in a Pluralistic World,” Academy of Management Review 25 (October 2000), pp. 706–725.

Chapter Discussion Questions 1. How might Bob Nardelli have structured his early efforts at Home Depot? Pay particular attention to how he might have used the principles of mutual engagement and shared diagnosis. He needed to involve upper management and employees at all levels in dialogue and diagnosis. Instead of saying, “Here’s what we’re going to do,” he could have said, “Let’s look at what has been working, what will continue to work and what could/should be changed. Data collection from employees, most probably through diagnostic interviews and also focus groups, could have provided important insight to guide top executives to figure out how to achieve outstanding performance at HD. 2. What are the potential advantages of relying on a systemic framework for guiding diagnosis? Are there any potential disadvantages? In order for a framework to be effective, it must meet the criteria listed on p. 62: explicit, operationally defined, empirically validated, have face validity and be generalizable. The advantages of relying on such a system would be: - The framework identifies the key components of the organization and suggests relationships and interdependences among those elements. - Having a common framework for the entire organization facilitates communication that can help those involved in a diagnosis “to approach their task with a common set of terms and frame of reference.”

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- A framework makes clear the factors and relationships that are of interest in a diagnosis. Disadvantages, if there are any, might be: - The framework is too narrow and doesn’t include all the vital elements. - Employees may not be able to process the amount of information generated by a framework-guided diagnosis. When applying the framework, make sure to keep in mind the diagnostic principles listed in exhibit 3-2 on page 68.

3. Why is open dialogue so difficult to achieve in many organizations? Large power distances within hierarchies create reluctance to engage in open dialogue. Organizational cultures often lead executives to avoid criticism, disagreement and debate. Finally, there are often simply no mechanisms created that might allow a dialogue to occur. 4. In what specific ways can an executive actively promote a sense of psychological safety among employees to engage them in an honest conversation about performance? They can take steps to equalize power, as listed in Exhibit 3-1 on page 66. Also, they can hire professionals to help employees learn how to collect data. They can focus on data collections of issues of strategic performance to avoid personal clashes. They can reward managers for engaging in dialogue. Finally, they can participate in honest dialogue themselves. 5. How might the three forms of data collection be used together in the opening stages of a change process? Diagnostic interviews are a good way to start the diagnostic process because they allow for open-ended dialogue about performance. At the same time, behavioral observation can focus on work teams to help with behavioral issues. Questionnaires can be used at a later stage to create comparative benchmarks and chart improvement.

Final Case—Managing Transformation at National Computer Operations

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Note: As a way of getting at those specific questions, I like to use a group exercise. Divide the class into groups of five or six students. Distribute copies of the 12 potential interventions listed below and ask them to devise an action plan for Finnvold. In doing so, they should be able to suggest what they would do immediately (say, within the first week), what they would do in the longer term, and what—if anything—they would not do at all. Then debrief the groups to look for areas of agreement and disagreement. Managing Transformation at National Computer Operations Assignment Questions for Students: a. Prepare an implementation plan for change that would enable Gar Finnvold to create a fully competitive computer service within two years. b. How could Finnvold conduct an organizational diagnosis that would lead off his implementation? Be specific about how he could ensure mutual engagement. Review the list of possible interventions below as you develop an implementation plan for NCO. 1. Redo the compensation system to tie a larger portion of an individual’s pay to an assessment of that employee’s performance. 2. Evaluate all middle managers to determine whether they possess the requisite skills—redeploy those who don’t elsewhere in the bank. 3. Ask the Chairman to invite bids from external computer operation suppliers to outsource all services now provided by NCO; distribute the specifics of the bids to all NCO employees. 4. Allay fears by assuring employees that no further layoffs will occur. 5. Involve employees in discussions with senior management about what’s wrong with NCO. 6. Have Finnvold and the Management Committee adjourn to an off-site meeting to develop a vision and strategy for NCO. 7. Survey current customers to determine their level of satisfaction with NCO services. 8. Redo the performance appraisal form to include “customer responsiveness” as a criterion for performance evaluation. 9. Urge the Chairman to reconsider allowing National Bank units to outsource computer services. 10. Create a core group of employees from all functions and levels to develop a vision statement for NCO’s future. 11. Introduce a bonus system that ties a portion of employees’ salary to overall performance of NCO. 12. Have Finnvold and the Management Committee conduct an industry analysis to understand the dynamics of the computer service business and marketplace.

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a. Possible Answers: Remember, there are no right or wrong answers. I will provide you with my ideas below—feel free to disagree with me! 1. Redo the compensation system to tie a larger portion of an individual’s pay to an assessment of that employee’s performance. This is, at best, a longer-term intervention. It is far too early in the change process to be thinking about redoing the compensation system. I will argue later in the text that compensation should be a lag rather than a lead variable to motivate behavioral change. Plus, emphasizing individual performance may hurt Finnvold’s ability to create collaboration. 2. Evaluate all middle managers to determine whether they possess the requisite skills—redeploy those who don’t elsewhere in the bank. Although I wouldn’t do this immediately, it will have to be done at some point. After new behaviors have been identified and training has been offered, it may be necessary to move out some employees. This is a topic that will be dealt with more fully in Chapter 6 (Human Resource Development). 3. Ask the Chairman to invite bids from external computer operation suppliers to outsource all services now provided by NCO; distribute the specifics of the bids to all NCO employees. This idea was suggested by a student in one of my classes, and I like it. It meets Lewin’s requirement to build dissatisfaction with the status quo in order to motivate change. NCO employees all need to learn how out of line they have become with external competitors because they will have to be facing those competitors soon. So why not do this right away? 4. Allay fears by assuring employees that no further layoffs will occur. No—don’t do this! Finnvold, of course, cannot really make that promise anyway. Plus, the last thing this organization needs is less performance pressure. Task alignment theory says employees will be motivated to improve performance. 5. Involve employees in discussions with senior management about what’s wrong with NCO. Great idea! Do this right away. This is the beginning of dialogue and diagnosis. They will probably need an external facilitator to help ease the dialogue. 6. Have Finnvold and the Management Committee adjourn to an off-site meeting to develop a vision and strategy for NCO. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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They better do this, and do this fast. They might also consider how to involve employees in their discussion. In Chapter 1, we said strategic renewal drives required change. So there has to be agreement on what the renewed strategy is! 7. Survey current customers to determine their level of satisfaction with NCO services. Sure. Part of diagnosis must be to learn from customers. Some students may argue that this will take too long, but in reality it can be done quite quickly, especially with lead customers. Other students will ask, “Don’t they already know what their customers think about them?” Maybe, but there’s nothing as powerful (or powerfully motivating) as getting an earful from your best customers. 8. Redo the performance appraisal form to include “customer responsiveness” as a criterion for performance evaluation. Another one of those ideas that is probably useful, but not now. Chapter 6 talks about how and when to position human resource development interventions. 9. Urge the Chairman to reconsider allowing National Bank units to outsource computer services. No—the last thing you need to do is eliminate performance pressure from the organization. 10. Create a core group of employees from all functions and levels to develop a vision statement for NCO’s future. I like this idea as an immediate intervention. Students may complain that it contradicts number 6: isn’t this top management’s job? Well, yes, but why not make the process of envisioning the future more inclusive? Anyway, it raises an interesting discussion of how and when to involve employees in discussions about the organization’s future. 11. Introduce a bonus system that ties a portion of employees’ salary to overall performance of NCO. As I said earlier, changing the compensation system may have to occur, but it probably should be put off. On the other hand, an organization-level bonus sends a symbolic message: we’re all in this together. This could be an interesting debate. 12. Have Finnvold and the Management Committee conduct an industry analysis to understand the dynamics of the computer service business and marketplace.

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Again, something that should be done right way. b. Key in the entire process is systematic mutual engagement. NCO needs to create a culture of dialogue and involvement that includes continuous data collection, discovery and feedback, using as many levels and as many tools as possible. CHAPTER 4: Organizational Redesign

Main Teaching Point Diagnosis provides the motivation for and target of change. After diagnosis, the first step of change implementation is organizational redesign. This chapter analyzes the complexities of design choices made to support change efforts. Key factors include: integration and differentiation, control and creativity, decision-making rights, high commitment, and teamwork. These design choices will have to be reinforced with formal structures and systems – these will be addressed at a later stage (Chapter 6).

Learning Objectives 1. Define organizational design and differentiate between formal and informal design elements. 2. Explore the main challenges posed by organizational redesign. 3. Analyze the requirements for building coordination and teamwork in an organization. 4. Discuss the dynamics of changing the design of an organization in order to impact patterns of behavior.

Opening Case—Cross-border Integration at Airbus Key learning point of case: The case is designed to introduce students to the challenges of accomplishing integration across the 4 national manufacturing and design centers that existed within Airbus. Analyzing the Case 1. From whose point of view is the case told? Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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The case is told from the perspective of Louis Gallois, CEO of Airbus in 2006.

2. What problem did Airbus face? Airbus was facing major delays in the production of its A380 super jumbo jet – the largest passenger jet ever built with 50% more interior floor space than the nearest competitor. 3. What was Airbus’ approach to production, its business process? Airbus’ business process - an interconnected set of activities that converts inputs to outputs - was based on 4 different national “centers of excellence” – avionics in France, cabin design and installation in Germany, wing manufacturing in the UK and tail section manufacturing in Spain. Each center focused on technological excellence and national price. 4. What was the problem with this approach? The production of the A380 required extensive coordination across the national centers. This was not possible. For instance, the computer modeling software used in Germany was incompatible with that used in France. The failure to coordinate and integrate created delays, costing Airbus an estimated $65 billion in profits. 5. What did Gallois do to resolve the problem? He focused on coordination between the centers through a number of steps, including the formation of transnational teams to create a well-integrated, single company.

Lecture Outline I. Organizational Redesign A. Introduction 1. Vocabulary—organization design refers to the arrangements, both formal and informal, that an organization calls upon in order to shape employee behavior (se exhibit 4-1, p. 82).

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2. Organizational redesign is the process of changing an organization’s design in response to shifting dynamics in the organization’s environment. 3. The difference between formal design and informal design: a. Formal design refers to structures and systems. 1. Compensation and performance measurement 2. Reporting structures b. Informal design refers to the way people perform their tasks and how they work with others. 1. Definitions of roles, responsibilities, and relationships 2. Definitions of relationships inside and outside the organization B. Changing Informal Design First 1. Looking back to the Asda case in chapter 2 illustrates the difference between formal and informal design. The transformation began with changing the informal design. Supervisors were asked to stop being supervisors and become strategic leaders. This is a change in how the job is defined. Only later was this change reinforced with performance measures, pay system changes and the like. The same thing was done with Airbus – first, coordination and collaboration relationships were created, later they were reinforced with formal structures. Theory into Practice • Effective change implementation starts first with informal redesign in order to shape new behaviors; formal design changes can follow as a way of reinforcing new patterns of behaviors. C. Piloting Redesign 1. Organizational redesign should occur in a systemic way, targeting the entire organization and aligning multiple design elements with the new firm strategy. 2. Such a comprehensive approach is often intimidating and uncomfortable. 3. Change pilots are a way out of this dilemma – they are change laboratories of sorts: small units or specific processes which can be

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targeted at the early stage of change implementation to experiment and learn. 4. Change pilots can focus on one business process: an interconnected set of activities that converts inputs to outputs. 5. Example of Midwest Data Services, an administrative support organization that was suffering from service quality problems. Major changes in business process were implemented in a pilot project with one customer. MDS traced service delivery from start to finish which led to making the process seamless. This change was later leveraged into other MDS units. 6. Be careful in selecting the change pilots: early success builds credibility and momentum. Good selection criteria include: -self-contained unit or process with clear customer and measurable outcomes -unit or process of strategic company importance -unit or process that exemplifies future company state -unit or process where success is most likely Theory into Practice • The most effective way to change organizational design is to be systemic and strategic rather than piecemeal and haphazard. •

When implementing change, seek early wins through pilot project.

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Change pilots offer an opportunity to focus attention, experiment and learn before diffusing change throughout the larger organization.

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In selecting change pilots, select units where the change is most likely to be successful; early success builds credibility and momentum.

II. Understanding Design Challenges A. All organizations face common design challenges: -they all require some level of differentiated activity -they all need some amount of integration -they all require some type of control mechanism -they must decide how and where to locate decision making

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Three challenges are key: balancing differentiation and integration, balancing control and creativity, and allocating decision-making rights. B. SAP America example 1. SAP America is given as an example of a company that has grown with an emphasis on differentiation and now needs to emphasize integration as part of its strategic renewal. 2. SAP structure was characterized by high levels of differentiation: highly autonomous, market-based, regional operations, each of which had its own processes for selling SAP software. New president Coote worked on developing integration links between regions and consultants to optimize learning and service. 3. The challenge for companies such as SAP America is to achieve high integration without sacrificing differentiation. C. Differentiation and integration 1. Differentiation is the degree to which different functions, departments, and units in an organization are allowed to develop their own approaches in response to their particular goals and unique competitive environments. 2. Lawrence & Lorsch identified 4 distinct dimensions of differentiation within organizations: goals, time orientation, interpersonal style and formality. Theory into Practice: high differentiation enables different functions, departments, and units in an organization to develop their own responses to their particular goals and unique competitive environments. 3. Differentiation is necessary but not sufficient to achieve outstanding performance – it must be matched by integration. 4. Integration is the required level of coordination across differentiated functions, units, and division. Theory into Practice: • Levels of differentiation must be matched by appropriate levels of integration. •

Theory into Practice: use integration to enable the organization to achieve efficient operations among different functions, departments, and units.

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5. The organization’s environment determines the appropriate levels of differentiation and integration. Two factors are critical: environmental complexity and environmental dynamism. a. Environmental complexity is the number of external factors that impact how the organization operates. b. High levels of environmental complexity require high levels of differentiation. c. Environmental dynamism is the rate of change that is occurring in a firm’s external environment. d. High levels of environmental dynamism require high levels of integration. e. The challenge for organizations in a high complexity/high dynamic environment is to achieve high levels of both differentiation and integration. f. See Summary table in exhibit 4-3 on page 90. g. Lawrence and Lorsch note that the demands of differentiation and integration are inversely related. Theory into Practice: organizations operating in a complex and dynamic competitive environment will have to develop increasingly sophisticated mechanisms for integration to match the requirement for high differentiation. 6. Integration can be achieved in various ways: -cross-functional teams - global teams - strong sense of common purpose and direction, combined with unified commitment to core values and business strategy -common, well-understood values applied across business units D. Creativity and control. 1. Control refers to design choices called upon to shape employee behavior in alignment with the requirements of outstanding performance. 2. A number of companies try to achieve control—mechanisms used to shape employee behavior—without sacrificing creativity.

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3. Organic controls involve an approach to shaping employee behavior that emphasizes shared values, a common understanding of strategy, loosely defined roles and responsibilities, and overall organizational performance. Theory into Practice: • Traditional mechanistic control tools can create predictability and standardization but can undermine creativity, flexibility, and collaboration. • Organic controls, which are intended to increase employee flexibility and creativity, rely on shared values and clarity about overall strategy and performance expectations. 4. Sun Hydraulics is highlighted as a company that uses organic-type controls. Also mentioned are: Southwest Airlines, United Services Automotive Association, Nordstrom, and W. L. Gore. E. Allocation of decision-making rights 1. Decision-making rights involve the determination of who should make what decisions in organizations. 2. The ideal design is one that grants decision-making rights to “those who have the best information relevant to the decision” (Nohria) 3. United Services Automotive Association (USAA) is given as an example of a company whose president, Robert McDermott, believed in pushing decision making down to front-line employees. Theory into Practice: allowing front-line employees to make autonomous decisions is intended to unleash motivation and creativity among those organizational members with the “best information” to make decisions. F. The special case of multidivisional organizations 1. Multidivisional organizations such as Cisco Systems face a special challenge of achieving corporate coordination while allowing for divisional autonomy. 2. Multidivisional organizations want to promote an “entrepreneurial zeal” among their units while simultaneously allowing for collaboration and exploitation of corporate-wide synergies. 3. Synergies are the advantages of efficiency and effectiveness conferred by the combined effect of interaction and collaboration among multiple units. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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4. Multidivisional organizations call on a number of mechanisms to achieve coordination without stifling autonomy: a. Planning and budget systems. b. Regular meetings among corporate and divisional executives. c. Task forces. d. Measurement and reward systems for divisional executives tied to corporate performance. Theory into Practice: the challenge for multidivisional organizations is to allocate a high level of autonomy to separate divisions as a way of achieving marketplace responsiveness while simultaneously making corporate-level decisions that allow the exploitation of synergies across the divisions.

III. Building high commitment Theory into Practice: high employee commitment can improve organizational performance by enhancing productivity, creativity, collaboration, and the willingness to change. A. Employee commitment—the internalized desire of employees to expend energy and discretionary effort on behalf of the goals of the organization. B. Companies in almost every industry—Lincoln Electric, Steak n Shake, Nordstrom, Southwest Airlines, SAS—are designed for higher employee commitment. C. Creating high commitment involves a number of common design elements (see exhibit 4-4 on p. 95): 1. Clarity of organizational goals—employees at all levels and in all units are provided with an understanding of the goals and values of the organization as well as its strategic choices. 2. Teamwork—teams designated to perform interdependent tasks. 3. 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.

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4. Organic controls—control exerted through peer pressure, organizational culture, and expectations of outstanding performance reinforced through performance feedback. 5. Individual developmental opportunities—employees provided an opportunity through a combination of mechanisms—job mobility, task variety, facultative supervision, and formal training—to develop competencies consistent with their own needs and those of the organization. D. Job redesign is an approach to building greater employee commitment. 1. Job design refers to organizational expectations for how tasks will be performed in order to meet both individual task requirements and the overall performance requirements of the organization. 2. Job enrichment is an especially powerful way of increased employee commitment. Hackman and Oldman devised a model for job enrichments that uses 5 characteristics (see exhibit 4-5, p. 97): a. Skill variety—the degree to which a job requires a variety of different activities in carrying out the work, involving the use of a number of different skills and talents. b. Task identity—the degree to which the job requires completion of a “whole” and identifiable piece of work; that is, doing a job from beginning to end with a tangible outcome. c. Task significance—the degree to which the performance of the task has a substantial impact on outcomes that are deemed to be important to employees, to the organization, and/or to society as a whole. d. Autonomy—the degree to which the job provides substantial discretion to the individual in scheduling work and determining procedures for carrying it out. e. Feedback—the degree to which carrying out work activities required by the job results in the individual acquiring direct and clear information about the effectiveness of his or her performance. Theory into Practice: by enriching jobs along any or all of five characteristics—skill variety, task identity, task significance,

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

IV. Building teamwork A. Organizations are increasingly relying on teams: Pacific-Bell, General Mills, Pratt and Whitney, Texas Instruments. B. Teams are interdependent groups with shared responsibility for an outcome. C. Cross-functional teams are teams made up from representatives of multiple organization functions typically intended to achieve required coordination along a chain of inter-related activities and processes. Theory into Practice: Use cross-functional teams to help create seamless, well-integrated processes. . D. Different team types (exhibit 4-6, page 98) 1. Work team—by sharing responsibilities, developing multiple skills, and performing varied tasks, motivation and quality are enhanced. 2. Product development team—through concurrent rather than sequential development activities, speed-to-market and innovation are enhanced while costs associated with rework are diminished. 3. Problem-solving team—by bringing together individuals from multiple functions, problems associated with hand-offs and crossfunctional interactions can be creatively addressed. 4. Project management team—the multiple functions and tasks of the value chain are linked in order to enhance quality and customer responsiveness. E. Creating Effective Teamwork. 1. Effective teamwork derives from four design factors (exhibit 4-7, page 99): a. Shared purpose—effective teamwork starts with the need to create a central purpose focused on company-wide goals and equally accepted by all members.

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b. 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. c. Team empowerment—unless affirmative actions are taken to equalize power, the functional organization will likely overwhelm. d. Team enablement—providing team members with the required skills and resources. 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. • When members of a team feel equally responsible for the outcome of their efforts, teamwork is enhanced. • 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. • In order to encourage teamwork, organizations can take care to ensure that team members have the appropriate skills to perform the task effectively. • Creating effective teamwork requires providing a group of individuals with shared purpose and responsibility, empowering those individuals to make shared decisions, and making sure they have the competencies and resources required to be effective as a team.

V. Conclusion A. Formal and informal design elements are different. B. Effective change implementation addresses informal design matters at the early stages and formal design elements later in the process. Theory into Practice: organizational design involves both formal and informal elements; effective implementation targets informal design elements first, and then addresses more formal elements like structure and systems later in the process.

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Additional Suggested Reading •

Allan Afuah, Business Models: A Strategic Management Approach (Boston: McGraw-Hill Irwin, 2004).

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Michael Goold and Andrew Campbell, “Do You Have a Well-Designed Organization?” Harvard Business Review (March 2002).

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J. Richard Hackman and Greg R. Oldham, Work Redesign (Reading, MA: Addison-Wesley, 1980).

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Robert Kanigel, The One Best Way: Frederick Winslow Taylor and the Enigma of Efficiency (New York: Viking, 1997).

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Paul R. Lawrence and Jay W. Lorsch, Organization and Environment: Managing Differentiation and Integration (Boston: Harvard Graduate School of Business Administration Division of Research, 1967).

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Danny Miller, The Icarus Paradox: How Exceptional Companies Bring About Their Own Downfall (New York: Harper Business, 1990).

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Susan Albers Mohrman, Susan G. Cohen, and Allan M. Mohrman, Jr., Designing Team-Based Organizations: New Forms for Knowledge Work (San Francisco: Jossey-Bass, 1995).

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David A. Nadler and Michael L. Tushman with Mark B. Nadler, Competing By Design: The Power of Organizational Architecture (New York: Oxford University Press, 1997).

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Bert Spector, Taking Charge and Letting Go: A Breakthrough Strategy for Creating and Managing the Horizontal Company (New York: Free Press, 1995).

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Richard E. Walton, “From Control to Commitment in the Workplace,” Harvard Business Review (March-April 1985).

Chapter Discussion Questions 1. Why do organizations find it so difficult to address the requirements of differentiation and integration simultaneously? Differentiation and integration work at cross-purposes and seem to be contradictory. Differentiation emphasizes autonomy and independence, while integration emphasizes collaboration and interdependence. To do both simultaneously is quite difficult. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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2. What are the advantages and disadvantages of allowing for high levels of autonomy within divisions of multidivisional organizations? What are some effective means of coordinating efforts among divisions? Autonomous divisions have the ability to be highly responsive to their customers and their competitive environments. In addition, autonomy allows faster decision making at the divisional level. Disadvantages are that divisions may end up working against each other and undermining the efficiencies of the entire corporation. The chapter lists a number of coordinating mechanisms: • • • • •

Planning and budget systems Regular meetings among corporate and divisional executives Task forces and various teams Measurement and reward systems for divisional executives tied to corporate performance Common purpose, values, goals and strategy

3. Why is it so difficult to achieve high levels of employee commitment within today’s business organizations? List the factors that are working against commitment and the potential benefits to be achieved through high commitment. A competitive environment where advantage depends on rapid, coordinated response will rely far more on high levels of employee commitment than it will on hierarchy and top-down control. But today’s managers must seek to build such commitment in an environment which has replaced loyalty and seniority with free agency, frequent turnover, and employment insecurity. The increasing importance of financial analysts and investors puts greater pressure on short-term results which can lead organizations to sacrifice long-term effectiveness. Those contextual changes do not make commitment any less vital; they do make the achievement of commitment more challenging. 4. Some people have argued that there is far too much emphasis on “teamwork” in today’s business world and that the danger is that individual creativity and initiative is being sacrificed. Do you agree or disagree? Explain. There is plenty of evidence that creativity is generated not just by individuals but also by working in collaboration with others. Plus, organizations are not simply seeking creativity; they need to bring Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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creative ideas (new products and services) to market. That commercialization of creativity (what can be labeled organizational innovation) requires collaborative effort. On the other hand, it would be fair to say that many organizations overuse teams. Plus, if team members are not given the appropriate skills, their teams can fail to unleash the creativity of individuals. Finally, forces like conformity, social loafing and groupthink can work against creativity. 5. The chapter argues that change efforts should address informal design before addressing formal design. Do you agree with that theory? Explain your thinking. The chapter makes the argument that informal design change allows for experimentation and learning. Formal design change cements new responsibilities and can lead to resistance and the requirement to redraw the lines again. On the other side, it might be argued that employees need to have a degree of certainty about structures and systems. You are going to have to change them eventually; why not attack the issue right upfront?

Case Discussion – Performance Plus Introducing the Case Maine Papers (MP), a century-old developer and manufacturer of specialty papers, has been engaged in strategic renewal. As part of this effort, it intends to double the percentage of revenue generated by new products. The case focuses on the Book Publishing Division, managed by Steve Cook. The BPD is subdivided into 3 units: trade books, textbooks and auxiliary materials. Cook believes that the publishing industry has changed drastically, blurring the traditional distinctions between book markets. This is why he launched Performance Plus (PP), a full-service program to meet the needs of all markets, headed by a cross-functional PP team. The PP team has been functioning for a year and meets once a week. Different team members bring different perspectives and concerns. At this point, the team is behind schedule and working on a May deadline. Part of the issue deals with the inclusion of a new feature – Strong Bond, a product that enhances the durability of book binding – to the products.

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This case brings together many of the key elements of this chapter and serves as an effective review and integration device. 1. What steps should Steve Cook, as a general manager, take to ensure that the Performance Plus team delivers a high quality product on time? When creating strategic renewal, it is important that MP and BPD consider the business process. In this case, PP seems to be designed as a way to informally redesign the organizational structure, focusing on client service – this is good. PP creates integration between 3 differentiated functions. In light of the complexity and dynamism of the environment, this would be an appropriate change (p. 90). Cook does need to make sure that the team meets the 4 different effectiveness criteria (p. 99), has been properly trained, and has access to all necessary information pertaining to its project functioning. Because the PP team is the pilot project within BDS, Cook needs to ensure that it is successful. Finally, because the old structures are still in place, Cook may want to consider if there are incentives and rewards for the PP team to work together effectively, or if members are rewarded instead for retaining their unit focus. 2. What have been the main causes of the difficulties being experienced by PP team members? Differentiation and integration require very different kinds of approaches. Differentiation requires autonomy and independence, while integration requires collaboration and interdependence. The unit members seem to be retaining their differentiated perspective, each bringing with them a different view of goals, time orientation, and possibly style and formality (p. 88). In order to effectively accomplish integration, a cross-functional team is a good move. However, in addition, a strong sense of common purpose and direction, combined with a unified commitment to core values and business strategy is needed (p. 91). This does not yet seem to be in place in the team. Shifting from mechanistic to organic controls would help here (p. 91) as well as a clarification of decision-making rights. In addition, one should ask if the team has been properly trained in team process, integration, and decision making.

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3. Looking particularly at the Strong Bond question, how would you suggest that the issue be resolved? A key question to ask here is if the team is getting the necessary performance information. For instance, not knowing if Strong Bond is important to the client or not would be a real concern. Similarly, not everyone seems to understand the questions pertaining to deadlines, production schedules and other logistics. Assuming that the team has worked through the key issues of shared purpose, shared responsibility, enablement and empowerment, the question here would come down to information gathering, decision making and then team commitment to the decision. Chapter 5: Developing Human Resources

Main Teaching Point Using the sequential model of change implementation, the organization begins by establishing a strategic renewal direction for using shared diagnosis, and in Step 1, informal organizational redesign creates demands for new patterns of behavior. Now, organizational leaders need to find ways of developing the human resource capabilities of their employees. In Step 2 of effective change implementation, the organization focuses on employee development, followed by Step 3, which involves the aligning of the talents, skills, attitudes and behaviors of employees with the strategic requirements of performance.

Learning Objectives 1. Define human resource development and its role in implementing strategic renewal and organizational change. 2. Understand how to match selection and recruitment with the shifting requirements of behavioral change. 3. Analyze how an organization can help employees gain the new skills required for the change effort. 4. Present the particular choices available to organizations as they seek to align employee competencies with the requirements of the organization as part of their change effort. 5. Analyze the role and usage of removal and replacement in implementing change. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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Opening Case—Changing Employee Behavior at Grand Union Key learning point of case: To identify the interdependence between strategic renewal and behavioral change. Analyzing the Case 1. From whose point of view is the case told? The case is told from the point of view of Bill Reffett, senior vice president of human resources. 2. What is Grand Union’s new strategy? To move “up-market” and offer high-end products and services (with, presumably, higher profit margins) to wealthier customers. 3. Why is Grand Union changing its strategy? Executives have decided that, rather than compete with the likes of WalMart, they will differentiate their chain with higher-end goods and customer responsiveness. 4. What behaviors will need to be changed? Grand Union’s human resource VP has identified the need for behavioral change to support the new strategy. This requires new competencies: employees need to become customer focused, responsive and knowledgeable about the store and managers need to learn how to motivate and support employees in their new behaviors. 5. How should Grand Union executives go about creating this behavioral change? Recruitment and selection will have to change, along with training. At this stage, students can look at the make/buy option. Buy means hiring new employees that can fit into the new system. Make means developing employees with the required skills among the current work force. Students can at least raise questions about time and costs, as well as the degree to which all employees can alter behaviors as required by the renewed strategy.

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Lecture Outline I. Human resource development and change. A. Human resource development—the creation of required knowledge, skills, and attitudes within an organization to enable the effective implementation of shifting goals and objectives. B. In developing required competencies, executives face a make/buy decision. 1. Buy means recruiting and selecting new employees who fit with the desired change. 2. Make means training and developing within current employees’ required new competencies and behaviors. 3. Exhibit 5-1, p. 111 shows the steps and dis/advantages for Make/Buy Options for Changing Human Resources. 4. This is not an either/or choice and most change efforts will require both. Theory to Practice: in order to develop required human resource competencies, organizational leaders need to align the selection, training, development, and removal of employees with the behavioral requirements of the desired change.

II. Developing competencies to support change. A. Training 1. Two components of training: a. Building knowledge b. Developing skills Theory into Practice: • Training can help convey to employees how their competitive environment is changing and why their own behaviors need to be altered. • Training can, under the right circumstances, help employees gain new behavioral competencies.

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2. Organizations can use experiential training in order to develop skills and instill new behaviors. a. Experiential training focuses on behaviors and allows employees to “try out” new behaviors and receive feedback. b. General Motors’ Livonia plant used experiential training to help deliver not just new knowledge but also new behaviors (Chapter 1). c. Experiential training can encounter the problem of fade-out. a. Training fade-out refers to the failure of behaviors learned as part of a training exercise to transfer to on-the-job experience or to disappear over time. d. Training fade-out will erase the benefits of training programs unless certain conditions are met. (1) Supervisory/managerial support—does the employee’s supervisor/manager endorse, encourage, provide feedback, and reward new behaviors or does that supervisor/manager discourage or oppose the application of new skills and behaviors? (2) Peer support—do the employee’s peers support the application of new skills and behaviors, inquire about that learning, provide feedback, and encourage, 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? Theory into Practice: • Watch out for fade-out – whatever is learned in a training opportunity can lose its impact over time. B. Development 1. Feedback is a key element in developing new skills and competencies. a. Make sure that feedback maximizes its impact on behavior. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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b. Make sure that feedback moves employees toward new behaviors. 2. Performance feedback is valuable because: a. it allows an assessment of the current state of performance b. it helps to identify gaps between current and needed skills c. it identifies poor performers and potential future leaders d. it targets required T&D efforts 3. Performance evaluation takes place simultaneously in two forms: a. informal, ongoing feedback b. formal performance appraisals: a formal, regularly scheduled mechanism designed to provide employees with performance feedback, typically resulting in a performance rating. 4. Most performance appraisal systems are highly ineffective. Subordinate performance often deteriorates as a result of performance appraisal. Key reasons are a perceived lack of validity and accuracy. Employees see the appraisal as subjective and unrelated to the real demands of the job. 5. To combat this problem, organizations can use: - The 360◦ feedback system which uses performance feedback gathered from peers, subordinates, supervisors and customers -Self-appraisal which actively involves the employee in the appraisal process Theory into Practice: • •

Formal performance appraisals often fail to bring about the desired behavioral change. Self-appraisal and data from multiple sources can help increase the validity and effectiveness of performance feedback.

C. Top Management Development 1. Developing new competencies in organizational executives is a key component of strategic renewal and change. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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a. Both behavioral and cognitive interventions are useful but on-the-job experience is essential. b. Consider the buy/make options – there are advantages and disadvantages to each. c. Internal candidates can be developed through succession planning: a formal process in which top executives regularly review all managers at or above a certain hierarchical level, looking at both performance and potential, and devising developmental plans for their most promising individuals. d. The implementation of succession planning is often flawed by inadequate—even non-existent—follow up. 2. Organizations can take specific steps to develop leaders capable of leading change (see exhibit 5-2, p. 117): a. Structural and design changes—delayering, increased span of control, matrix, or horizontal structures—all of these work to develop generalists far earlier in their careers and place a greater premium on interpersonal competencies. b. Explicit international movement—assigning managers to work in a non-native culture and environment for a significant period of time develops cross-cultural awareness and skills that can be vital in a culturally diverse environment. c. 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. d. Slower velocity to allow greater learning—so-called fast track managers often fail to stay in one position long enough to deal with the consequences of their actions (and the reactions of employees). Learning about and dealing with the consequence of actions requires greater length of tenure in a position. 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. • Companies can manage the careers of executives in order to create a continuous stream of leaders from inside the organization capable of overseeing and leading effective change.

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Successful transformation depends on “getting the right people on the bus” and “getting the wrong people off the bus.” This section deals with the processes of selection and removal that are key to step 3 in the change process: people alignment.

A. Selecting the “right” employees 1. Individuals are attracted to organizations in part because of their perception that they will fit in; that is, that their individual personality matches the perceived personality of the organization. 2. Organizations need to think about attracting and hiring the “right” employee. Disney World, for examples, looks for recruits with the right personality, figuring that it can train the appropriate skills after the hire. 3. Employees that were a good fit in the past may not be a good fit in the future. 4. “Fit” means that the employee meets organizational needs requirements: technical, behavioral, attitudinal or some combination. 5. See Case example of the Rolling Stones’ search for a new lead guitar player to replace Mick Taylor. Richards says explicitly that he was not looking for the best guitarist (person-task fit). Had he been doing so, he would have hired Jeff Beck. Instead, he was looking for someone who will fit into the Stones (person-organization fit) based on the following criteria: • • •

Must be British. “This is an English rock and roll band, after all.” Personality. Must be somebody band members could “live with” on the road. Must be able to blend well with Richards’ playing. “Woody [Ron Wood] and I can start playing together,” says Richards, ‘and we don’t know who played the last lick. It’s as close as that.”

Selection based on person-organization fit can create long-term, adaptive organizations. Not only are the Stones still going strong, but Wood remains their lead guitarist. Theory into Practice:

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•

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.

B. Criteria for Selection 1. Looking for the “right” person involves some combination of person-task and person-organization fit. a. Person-task fit—screening and selecting individual employees based on their ability to perform certain tasks and fill specific jobs. b. Person-organization fit—screening and selecting employees based on congruence between patterns of organizational values and patterns of individual values. (1) Disney World’s focus on “personality” suggests an emphasis on person-organization fit. (2) Patagonia’s CEO says that it is easier to teach skills than to alter personality. (3) Microsoft considers creative problem solving the cornerstone of the culture. 2. The definition of “right” employee is likely to change as an organization’s competitive environment and strategy changes. 3. An explicit and shared understanding of the new behaviors required can help to overcome the dangers of selective perception, reproduction and “cloning” tendencies on the part of supervisors. 4. Return to Putting the Customer First at Grant Union (Chapter 1) to see how the “right” employees from the past are the “wrong” employees for the future. C. Screening for Fit 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. • To support strategic renewal, the selection process should focus on attracting and hiring individuals who already possess the desired traits that are both critical to performance success and that are most difficult to develop. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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•

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

1. Selection Techniques: In order to screen for person-organization fit, organizations have a number of techniques available to them. Exhibit 5-5 on page 124 summarizes three of them. a. Paper-and-pencil tests. a. Paper-and-pencil tests are standardized, selfadministered and quantifiable tests used as part of a screening, selection, or assessment process. b. Pluses: (1) Easy to administer and score (2) Inexpensive to use on large scales (3) Simple to compare (4) Valid job success predictors when used in combination with other mechanisms c. Minuses: (1) Produce homogeneous work force (2) May be resisted/resented by applicants b. Behaviorally-anchored interviews. a. Behaviorally-anchored interviews in which potential hires are asked to recount specific examples from their past experience to illustrate how they have responded to challenges and opportunities. Exhibit 5-3, p. 122 shows examples of BAI questions. b. Pluses (1) Can focus on specific behaviors (2) Valid supplement to other screen mechanisms (3) Validity increases when multiple interviewers score results c. Minuses (1) Deal with recounted rather than actual behaviors (2) Can be slow and expensive to administer c. Behavioral simulation. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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a. Behavioral simulation asks potential hires to demonstrate behaviors, usually in a structured role play exercise with external observers. Exhibit 5-4 on page 123 shows components of a behavioral simulation. b. Cummins Engine asked job applicants to go through team-based role-play exercises. Current employees viewed the behaviors of the applicants and used that to make hiring decisions. c. Pluses—focus on actual rather than recounted behaviors. d. Minuses—can be slow and expensive to administer.

IV. People Alignment: Removal and Replacement During a process of strategic renewal, companies will have to engage in some degree of removal and replacement. A. Removal and replacement is a change tool that targets individuals who cannot or will not adopt behaviors required of the redesigned organization. 1. Workforce reductions and employee layoffs may be effective in improving short-term performance but will not by themselves produce the human resource competencies required to support strategic renewal and sustain outstanding performance. 2. Effective change requires “getting the wrong people off the bus” as well as “getting the right people on the bus” by removing and replacing employees who have not made the required behavioral change. 3. Asda is offered as an example of using removal and replacement effectively. Other examples mentioned: Rubbermaid. Theory into Practice: • Don’t count on workforce reductions and employee layoffs to produce the human resource competencies required to support strategic renewal and sustain outstanding performance. B. Fair Process: Managers need to be sure that the process of removal and replacement is viewed as “fair and just.”

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1. Unless removal and replacement decisions are viewed by employees as being fair in process, valid in content, and appropriate in sequence, the decisions can undermine commitment to change implementation. 2. Fair process is a widely shared perception that decisions are being made on the basis of valid criteria. Fair process derives from three factors: a. Engagement: involving individuals in decisions that impact them b. Explanation: making transparent the thinking that underlies decisions c. Expectation clarity: making the decision criteria clear 3. Some other factors to consider: - Validity: are decisions being made according to personal biases and beliefs of individual supervisors (low fairness) or in alignment with the clear requirements of outstanding performance (high fairness)? - Due process: are decisions seen as final and arbitrary (low fairness) or are employees able to voice their opinions and appeal what they consider to be invalid conclusions (high fairness)? - Sequencing—are decisions made before an employee is given an opportunity to acquire the required skills (low fairness) or are employees given an opportunity to develop and display the desired new behaviors (high fairness)? 4. Perceived fairness will be enhanced if decisions are preceded by shared diagnosis, organizational redesign, and training and development.

V. Conclusion A. Diagnosis surfaced a misfit between current behaviors and competitive realities, pointing to the need for strategic renewal. B. In the redesign phase, Step 1, employees create a behavioral model for responding to these realities. Part of the model is the identification of new behaviors, skills and competencies. C. Through a process of mutual engagement, employees are offered the opportunity to develop these new competencies in Step 2. D. In Step 3, the process of people alignment focuses on removal and replacement for those who cannot or will not develop, and on selection of new Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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employees who fit with the strategic requirements. Maintaining fairness is key in this process. E. The final stage, Step 4, is the reinforcement of new behavior patterns – this is the focus of the next chapter.

Additional Suggested Reading •

Richard E. Boyatzis, The Competent Manager: A Model for Effective Performance (New York: Wiley, 1992).

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Jennifer Chatman, “Matching People and Organizations: Selection and Socialization in Public Accounting Firms,” Administrative Science Quarterly 36 (1991).

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Robert Folger and Russell Cropanzano, Organizational Justice and Human Resource Management (Thousand Oaks, CA: Sage Publications, 1998).

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Douglas T. Hall, “Dilemmas in Linking Succession Planning to Individual Learning," Human Resource Management 25 (Summer 1986).

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Gerald E. Ledford, Jr., and B. Nathan, “Hiring for the Organization, Not the Job,” Academy of Management Executive 5 (1991).

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Raymond A. Noe, Employee Training and Development (Boston: McGrawHill Irwin, 2002).

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Leonard A. Schlesinger and James L. Heskett, “The Service-Driven Service Company,” Harvard Business Review (September-October 1991),

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Benjamin Schneider, “The People Make the Place,” Personnel Psychology 40 (1987).

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Benjamin Schneider, Harold W. Goldstein, and D. Brent Smith, “The ASA Framework: An Update,” Personnel Psychology 48 (1995).

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John W. Slocum, James R. Morris, Wayne F. Cascio, and Clifford E. Young, “Downsizing After All These Years” Organizational Dynamics 27 (Winter 1999).

Chapter Discussion Questions

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1. What specific suggestions would you have made to Bill Refett at Grand Union in order to develop the required human resource competencies to support the firm’s new strategy? Refett needs to begin with a process of mutual engagement that connect the existing employees with the strategic change. Have the employees been involved in the diagnostic process? Is the list Refett’s list or does it belong to everyone? If employees were involved, do they understand what changes are needed in their everyday behavior? The second step is training and development. All of the employees and all of the managers should be invited to participate in an extensive training program that focuses on customer service and product/store knowledge. Successful completion of the program is phase 1. Employee-owned assessment of the implementation of the new learnings is phase 2 and a 360-degree feedback program will be helpful here. Training should include employees and managers. Any employees and managers who do not show sufficient change within a generally agreed upon time period should be given the option to resign or be retrained, but now with more stringent performance expectations. All new hires should be selected with the new performance criteria in mind, selection for fit with the strategy of customer service. 2. Is the increasing diversity of the workforce—in terms of race, gender, national origins, health status, cultural values, and so on—a positive or negative in terms of helping organizations make successful transformations? Explain your answer. Diversity should be viewed as a positive. The goal of any effective change implementation is to increase required collaboration while allowing for required independence and differentiation. The last thing an executive would want is a workforce that is devoid of diversity of experience, opinion, talent, points of view, etc. The change process will be enhanced by such diversity. At the same time, employees and managers are not necessarily prepared for or skilled at dealing with diversity and this may be part of the T&D agenda. 3. What are the main differences between hiring for task and hiring for organizational fit? Why is hiring for organizational fit so difficult to do? What techniques might an organization use? Hiring for task involves identifying specific technical requirements and making sure new applicants possess those skills. Hiring for organizational

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fit attempts to find individuals who will fit into the desired future direction of the company. Although hiring for organizational fit may make sense, it is not easy to do for five reasons: 1. The organization has to be able to identify the desired culture and specify the individual attributes that will fit into that culture. 2. Even when hiring for organizational fit, companies may make the mistake of finding employees who fit with the past and not with the future. 3. The techniques for screening are not as easily applied and interpreted. 4. Organizations have to beware of using the person-organization fit approach in ways that screen out diversity. 5. The process of screening for person-organization fit is costly and resource demanding. 4. What specific recommendations would you make to an organization seeking to avoid training fade-out? •

Supervisors, managers, and executives should publicly and visibly endorse, encourage, provide feedback, and reward new behaviors.

•

Employees should have the opportunity to use new skills and behaviors when back on the job.

5. The author sees removal and replacement as a key element of devolving human resource competencies. Do you agree or disagree? Why? Let’s start with potential disagreements: •

Removal and replacement may be seen as a threat to the workforce, making people more risk averse and less likely to change.

•

It may be difficult, if not impossible, to get employees to see removal and replacement as a fair and equitable process, thereby undermining trust and commitment.

•

Managers may get impatient and remove employees who could learn new behaviors.

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•

Removal and replacement may remove valuable skills and loyal individuals from the organization.

Although these points raise real concerns, effective management of the process can deal with those concerns: •

If managers leave resisters in place far too long, employees will become cynical about the true intentions of management or the ability of management to implement change effectively.

•

By following processes of fairness and validity—which will be helped by appropriate sequencing of removal and replacement in the implementation process—employees are more likely to see the intervention as fair.

•

Again, by following an appropriate sequence, managers will give employees time to learn and utilize new skills before making replacement and removal decisions.

•

Removal and replacement must carefully consider skills, but look at skills needed for success in the future, not in the past.

Case—“Employee First, Customer Second”: Vineet Nayar Transforms HCL Technologies. Introducing the Case HCL Technologies, an international organization headquartered in India, is trying to make a shift from its 25-year focus on IT hardware to software and infrastructure services, “working with clients in areas that impact and redefine the core of their business.” President Vineet Nayar wants to implement a transformational change designed to have the company focus on “high valueadded integrated service consulting and outsourcing.” 1. Explain how – or if – Vineet Nayar’s new strategy for the company and his approach to human resource development (HRD) reinforce each other. Nayar’s strategy involved the following aspects: • • •

Pay more attention to internal operations and emphasize innovation. Employees rather than leaders would be the source of improvement and innovation. Invert the organizational pyramid.

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To accomplish this, Nayar developed his “Employees first, Customers second” initiative, designed to create a culture that was unique, transparent, accountable, value-driven and hierarchically inverted. The focus was on employee development and producing bottom-line results. Specific steps included 360-degree performance evaluations for top managers, with publicly posted results. Also, open communication channels, training programs, and “trust pay.” The result was a high level of organic growth and improved retention. The new strategy for the company would require increased integration and enhanced training in order to produce effective service consulting. Opening up communication channels, inverting the pyramid and training would all help with this. What is not clear from the description is if the right process was followed, i.e. were the strategy and the approach developed through mutual engagement and shared diagnosis? It seems, e.g., that even his top managers were startled by publicly posting the results of the evaluations. 2. Do you see potential problems implementing Nayar’s human resource initiatives within India? The initiatives are contrary to traditional cultural relations in India, particularly those related to status, position, form and face saving. Nayar is expecting his managers and his employees to be able to step away from these traditions to follow the strategic plan for HCL. This may be demanding quite a bit. At the same time, HCL needs a strategic change and unless the change happens, the company may not survive. It appears that many employees are satisfied enough to stay – turnover has reduced somewhat. Strategic selection and removal may need to be considered in order to further implement the change. 3. Are Nayar’s ideas about HRD transferable to other industries and countries? Nayar’s ideas about the kinds of changes that are needed in organizations are already being implemented in other industries and cultures. Often described under the heading of “learning organizations,” selected organizations across the globe are finding many benefits of open and inverted organizations. Students will probably mention that these kinds of structures run counter to tradition – this is true and that also means that they need to be supported with not only T&D, but also with selection/removal. Finally, it is important that behaviors be reinforced through changes in the formal structure and reward system. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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CHAPTER 6: Reinforcing New Behaviors

Main Teaching Point At the final stage of implementation, organizational leaders reinforce the new behaviors through what might be thought of as the “hardwiring” of the organization: structures, systems and technologies.

Learning Objectives 1. Identify the major structural choices faced by organizational leaders and the behavioral implications of those choices. 2. Consider the requirement of aligning financial measures with the strategic goals of the firm. 3. Appreciate the role of compensation in shaping desired behaviors. 4. Analyze the role of information technology in impacting employee behaviors.

Opening Case—Global Structure at IBM Key learning point of case: The case discusses Lou Gerstner and IBM. Gerstner’s change implementation created resistance when he started with structural change. Students can begin to appreciate why structural change is most effective when it follows and reinforces rather than leads and forces new behaviors. Analyzing the Case 1. From whose point of view is the case told? Lou Gerstner, CEO of IBM. 2. What renewed strategy is Gerstner trying to pursue? He is trying to position IBM as a truly global organization in response to global customers such as American Express. This is an example of moving from a multinational to a global organization—one that allows seamless responsiveness to global customers.

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3. What behavioral changes will be required? Gerstner has targeted the behaviors of IBM’s country managers. In the past, IBM has emphasized and benefited from high levels of autonomy within each country. Now, however, Gerstner wants country managers to act as part of a highly interdependent team, working with customer groups. 4. How has he approached change implementation? Gerstner has taken his past experience at McKinsey & Co. and imposed their structure—globally-focused customer groups—on IBM. 5. How effective has the change implementation been? Ultimately, it did work but it took three years. Predictably, the country managers resisted and even rebelled. The process, Gerstner admits, was “painful and sometimes tumultuous.” Some of that pain and tumult (although, undoubtedly, not all) could have been avoided if country managers had been involved in the diagnosis and the redesign effort.

Lecture Outline I. Selecting the Appropriate Organizational Focus A. Choices of organizational structures 1. Organizational Structure is the manner in which employees are subdivided into units and divisions as a way of focusing effort on the required tasks of the company. 2. Two questions must be answered: -

What structures do we use?

-

How and when do we change structures?

3. Structures are often thought of as boxes and lines, but the real structural question is what the organization focuses on: a. Functional or technical activities; or b. Responsiveness to the external marketplace

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4. Organizations must focus on both, but typically prioritize their focus through different structures. Theory into Practice: • Organization structure is more than just boxes and lines; it is a way to focus the activities of the employees. B. Focus on Functional Excellence: 1. Functional structures focus on functional and technical tasks – example is given in exhibit 6-1 on p. 139. 2. Functional structure—an organizational design choice that groups people together in units based on common tasks and specialized skills. a. Open Markets, Inc. is given as an example of a start-up that moved to functional organization because, “as we get larger, we need a little more structure.” b. Functional structures lead to certain desirable behaviors. (1) Development of in-depth technical expertise (2) Clear career paths for employees (3) Discipline and efficiency c. Not all resulting behaviors are positive. (1) Employees focused on efficiencies and incremental improvements in existing processes are less likely to be creative, thus stifling innovation. (2) May evolve into low coordination among functional groups Theory into Practice: • Use functional structures to shape the development of technical skills and expert knowledge on the part of employees. • Organizations seeking to create seamless coordination across functions may find that the silos erected through functional structures get in the way.

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C. Focus on Marketplace Responsiveness 1. Divisional structure—an organizational design choice that groups people together in units based on common products, services, or customers – example is given in exhibit 6-2 on p. 141. 2. General Motors is an example of a product divisional structure: Chevrolet, Buick, Cadillac, Hummer, Opel, Pontiac, Saturn, Saab and Vauxhall. 3. Siemens is an example of an organization that uses multiple strategic business units – power, transportation, and lighting – each with its own set of autonomous divisions. 4. McDonald’s non-U.S. operations is an example of geographic divisional organization: United States, Asia/Pacific/Middle East/Africa, Canada, Europe, and Latin America, as was IBM prior to Gerstner (opening case). 5. Cisco Systems is as an example of a hybrid—three business-line divisions (enterprise, small/medium businesses, service provided) and several centralized functional areas (manufacturing, customer support, information technology, sales and human resources). 6. Positive behaviors—employees focused on particular customers or regions allows for marketplace responsiveness. 7. Negative behavior—potentially low coordination across divisions; costly duplication of functions. Theory into Practice: • Divisional structures enhance coordinated focus on the marketplace, but make integration across highly autonomous divisional units difficult to achieve. • Centralizing some functions, such as finance or marketing, may make sense economically, but organizations need to be careful that centralizing does not interfere with the goal of marketplace responsiveness. • Functional silos can exist within divisional structures. D. Dual Focus 1. Matrix structure—an organizational design choice that groups people by both function and product or product and geographical region example is provided in exhibit 6-3 on page 143.

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2. ABB is given as an example of a matrix structure with overlapping regional and market segment structure. 3. The most difficult part of a matrix structure is the dual reporting relationship – this violates the common assumption about the need for a clear and direct chain of command. 4. Matrix structures help support dual focus—on technical expertise and marketplace responsiveness—but will only be successful in organizations that can manage ambiguity, tension, and conflict effectively. Theory into Practice: • Organizations can move to a matrix structure to help support dual focus – on technical expertise and marketplace responsiveness. • Matrix structures will be most effective in organizations that can manage ambiguity, tension and conflict well. E. Focus on the Value Chain 1. Value chains are the separate activities that are performed in delivering and supporting a product or service. 2. Horizontally linked structure—an organizational design choice that groups people along the value chain activities and processes that produce, market, deliver, and service the firm’s offerings. 3. Horizontal structures often supplement rather than replace functional or divisional structures. 4. Company examples: a. Zara is given as an example of a company that uses teams to link together elements of the value chain in a way intended to provide competitive value. Exhibit 6-4 on p. 145 shows the Zara structure and the process by which it can bring a new product to market in 3 to 15 days. b. Companies that have been successful typically started out with unique value chain linkages: Dell, Southwest Airlines, and WalMart. c. Examples of organizations that have had difficultly changing their structure to adopt value chain linkages: Delta, Marks and Spencer, Kmart, Compaq, and HP.

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5. Horizontally linked structures do not guarantee coordinated value chain activities. The key is support and reinforcement of the linkages Theory into Practice: Organizations can use cross-functional teams to achieve linkages across the various and interdependent activities of an organization’s value chain. F. The Role of Structural Intervention in Implementing Change 1. Structural interventions should not drive the change; rather, they should be used to reinforce new patterns of behavior that have been created in the earlier intervention steps. 2. Gerstner and IBM were an example of trying to lead change through structural change: it was difficult and painful because managers had not been part of the diagnosis and redesign, nor had they received training in the new structure being imposed. 3. If structural change takes place late in the change process, it will not be seen as a unilateral imposition. People don’t resist change – they resist being changed. Theory into Practice: • Think of structural change in terms of Lewin’s refreezing, not in terms of unfreezing. • 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; for that reason, structural change often works better as a reinforcer of behavioral change.

II. Aligning financial measures with required behaviors. A. Traditional accounting systems can work against the goals of change because they are typically built around annual budgets and operating plans. 1. Adherence to plan is rewarded; variance from plan is discouraged. a. By focusing employee attention inward rather than outward. b. By blurring the distinction between value-added and non-valueadded costs. 2. GE is given as an example of focusing employee attention internally rather than externally through emphasis on budget adherence. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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3. Accounting systems must reinforce, not undermine strategic goals. Consider using marketplace-based performance goals, such as market share, speed-to-market or customer satisfaction. Theory into Practice: • In the later stages of change implementation, organizations can develop a set of measurements that place financial performance within a broader strategic context that looks at outcomes from the perspective of multiple stakeholders and takes into account long-term outstanding performance. B. Alternative Financial Control Systems: 1. Activity-based management (ABM). a. Activity-based management (ABM) is a financial tool that helps managers make decisions by separating the costs of activities that add value to a product or service line from those costs that do not add value. b. MiCRUS is given as an example. Theory into Practice: • Organizations can use ABM to help insure decisions that are made as part of the change process are based on an accurate financial picture of their operations. 2. Balanced scorecard (BSC) a. Balanced scorecard (BSC) is a tool for measuring multiple outcomes—financial performance, customer satisfaction, internal process excellence, and employee learning and growth—and the connection of those outcomes to the vision and strategy of the organization – see exhibit 6-5, p. 150. b. BSC balances four metrics: (1) Financial performance (2) Customer satisfaction (3) Efficient internal business processes (4) Allows change and improvement c. At the core of the BSC lies a clearly stated and widely understood vision and strategy for the organization.

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Theory into Practice: • BSC is a tool for measuring the effectiveness of change efforts on multiple dimensions. • Use financial controls to reinforce and assess desired change rather than to drive change.

III. Using incentives to support new behaviors. Organizations expend a huge amount of resources on pay. How successful are monetary incentives in shaping and altering employee behaviors? A. Pay for performance. 1. Pay for performance—pay that is tied to the performance in the form of either a merit raise to base pay or an incentive bonus that does not increase base pay. 2. Many different options are available. Organizations need to look for a mix of rewards to ensure alignment between employee behaviors and strategic goals. 3. Key question deals with level of aggregation: should PP incentive be targeted at individuals, teams, or the organization? a. Pay for individual performance is the most popular form in the U.S. – see exhibit 6-6, p. 153. i. Piece rate—employee earns all or part of a wage based on number of units produced. ii. Commission—sales person earns all or part of a wage based on number of units sold. iii. Merit pay—employee earns raise to base wage based on performance evaluation. iv. Bonus—employee earns extra payment based on performance evaluation. b. Pay for individual performance plans have many potential pitfalls. i. Individuals do not always have control over the outcomes that are being measured and rewarded.

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ii. Incentive systems do not always target appropriate measures of performance. iii. The pay increments for outstanding performance must be perceived as significant in order to be motivating. iv. To be effective, raises should be accompanied by public recognition and praise, but this is often hampered by secrecy and concern over confidentiality. v. Pay for performance must be based on valid judgment, not subjective assessment. In addition, exhibit 6-7 on p. 154 shows the following problems: - Performance appraisals on which raises are often based are inherently subjective, with supervisors evaluating subordinates according to their own preconceived biases. - Emphasize individual rather than group goals that may lead to dysfunction conflict in the organization. - Encourage a short-term orientation (the performance period being evaluated) at the expense of long-term goals. - Merit pay raises become an annuity on which employees continue to draw regardless of future performance. - The often lengthy time lag between actual performance and reward undermines perceived connection between the two. - Many of today’s jobs cannot be individually isolated and precisely measured without taking into account complex interdependencies. - Pay differentials between performance levels tend to be relatively small and therefore of questionable behavioral value. - Actual payout of program often determined by organizational factors beyond the control of individual employees and only indirectly related to actual performance. c. Team-based bonus plans are becoming more popular.

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1. Teams can share a performance bonus equally or allocate to individual members based on an evaluation of their contribution. i. Team-based bonuses enhance team performance, although the effect is relatively weak. ii. Team-level bonuses can hurt collaboration among and between teams. d. Because strategic renewal focuses on organizational performance, organization-level incentives often supplement or replace individual bonuses. i. Part of Asda’s strategic renewal was to offer an organization-level performance bonus to all employees, encouraging everyone to keep focus on the same measures of overall effectiveness. ii. Stock options are intended to tie the total compensation package to the overall performance of the firm. iii. Actual effectiveness of organization-level bonuses is unclear – does the performance bonus result in or from outstanding performance? 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 are perceived as being valid, and when the difference between rewards for high and low performance are significant. • Organizations call upon team-based performance bonuses to enhance the effectiveness of teams, but the bonus may undermine collaboration between teams. • Bonuses based on the overall performance of the organization make a symbolic statement recognizing the shared purpose and responsibility of all employees and organizational units. B. Pay and motivation. 1. Distinguish between intrinsic and extrinsic rewards. a. Extrinsic rewards are rewards (pay, promotion, praise, etc.) provided by the organization to employees.

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b. Intrinsic rewards are rewards (feelings of pride, satisfaction, and self-esteem) that accrue to the individual based on the performance of a task. c. Organizations need to use a combination of intrinsic and extrinsic rewards. Overreliance on extrinsic rewards may dampen internal motivation. d. Providing employees with development opportunities, autonomy and performance feedback are good strategies. e. Unless rewards are perceived to be equitable, employees will not be motivated to support the goals of organizational change. f. Pay equity is a perception by employees that their pay is fair and equitable in relationship to others—peers inside the organization and out, as well as subordinates and superiors in the hierarchy. Theory into Practice: • By relying heavily on extrinsic rewards to shape employee behavior, organizations 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. • Organizations will not be able to call on intrinsic motivation unless employees feel that they are being paid equitably. C. Sequencing the introduction of incentives. 1. Change leaders make choices about incentive design based in part on what behaviors they wish to impact. a. At what level of performance will incentives be set? b. How large will potential incentive earnings be in relationship to base salary? c. To what extent will the incentives emphasize short-term or longterm performance or some blend of the two? d. How far up and down the hierarchy will incentives be offered? 2. Change leaders also have to decide when in the implementation process to introduce redesigned incentives.

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Theory into Practice: • Introducing new incentives early in a change implementation process risks several negative consequences: over focus on pay rather than on new strategies, compliance rather than commitment, and unintended consequences.

IV. Technology and behavioral change. A. Technology is the processes, mechanics, and interactions of human behavior required to convert raw material into finished offerings. B. Choices about how to use technology: 1. Apply technology in a way that automates existing processes. 2. Apply technology in a way that transforms these processes. C. Sequencing technology change. 1. When dealing with new technology, not only the what question is important, but also the how and when questions. Make sure technology fits with the strategy and reinforced desired behaviors. 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. • New technologies can be introduced as a way to support desired behavioral changes.

V. Conclusion. A. Change leaders find interventions designed to alter the hardwiring of their organization—structures, systems, and technologies—especially appealing and often use them to try to drive the change. B. Structural interventions often end up in disappointment, provoking resistance. C. Structural change can occur more effectively at the end of implementation process to reinforce new patterns of behavior.

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Additional Suggested Reading •

Teresa M. Amabile, Creativity in Context (Boulder, CO: Westview Press, 1996).

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Dan Baum, “Battle Lessons,” New Yorker, January 27, 2005.

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Gary Cokins, Activity-Based Cost Management: An Executive’s Guide (San Francisco: John Wiley, 2001).

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Jay R. Galbraith, Competing with Flexible Lateral Organizations, 2nd edition (Reading, MA: Addison-Wesley, 1994).

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H. Thomas Johnson, Relevance Regained: From Top-Down Control to Bottom-Up Empowerment (New York: Free Press, 1992).

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Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management System,” Harvard Business Review (JanuaryFebruary 1996).

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Edward E. Lawler, III, “Pay Strategy: New Thinking for the New Millennium,” Compensation and Benefits Review 32 (January-February 2000).

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Raymond E. Miles and Charles C. Snow, Fit, Failure, and the Hall of Fame: How Companies Succeed and Fail (New York: Free Press, 1994).

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Richard E. Walton, “Social Choice in the Development of Advanced Information Technology,” Human Relations 35 (1982).

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Shoshona Zuboff, In the Age of the Smart Machine: The Future of Work and Power (New York: Basic Books, 1984).

Chapter Discussion Questions 1. In realigning IBM’s global organization with his new strategy, what options did Lou Gerstner have other than restructuring? Students can use the steps previously discussed to construct an alternative scenario: a participative diagnostic process including country general managers and product executives; a redesign of roles, responsibilities and relationships; possibly training for required new skills; replacing a small number of country general managers who could not work well in the new environment, and finally a restructuring to reinforce new behaviors. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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2. It has been said that, given the growing complexity and dynamism of the world of business, all organizations will have to adopt some type of a matrix structure. Do you agree or disagree with that argument? Explain. Arguments for the proposition hold that in an increasingly global and dynamic competitive environment, organizations simply need to focus on many different areas at the same time. Arguments against (and there are many executives who adamantly refuse to use matrix structures) are that they are too complex, dilute responsibility and accountability, and— ultimately—don’t work. Also, there are other alternatives, e.g. hybrid and horizontal structures that may also allow for the kind of integration needed in today’s complex and dynamic environments. 3. What is it about incentive systems that make them so attractive to leaders attempting to oversee an organization transformation? Can you think of examples when it would be useful to create new incentives early in a transformation process? Changing an incentive plan can alter behaviors almost immediately. That’s what makes incentives so attractive. The pitfall, of course, is that the new behaviors that occur in reaction to new incentives may be temporary, dysfunctional, or both. One example of a possible good use of early incentives is to incentivize participation in diagnosis, pilot teams, or transformational training. 4. Can you think of examples from your own experience—at work or in the classroom—where the manner in which your performance was being measured worked against the goals you were trying to achieve? I can tell you two examples I just heard in my class: a. “Professors have us work in groups to learn teamwork and then give us individual grades.” b. “I’m a financial trader. I would actually get hurt financially if I were to share some of my investment models with my colleagues.”

Case Discussion – Making the Problem Worse Introducing the Case Medication mistakes – also called, adverse drug events – are a major problem in U.S. hospitals. The most common error is handwriting identification. Complex General Hospital implemented the Computerized Physician Order Entry (CPOE) Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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system as a way to fix the problem. The result was an increase in adverse drug events. 1. What went wrong? How can you explain how the technology actually led to more rather than fewer mistakes? It seems that the technology may have made staff less careful, as technology often does. They relied on information in the system, without double checking it. Also, the system information does not seem to be provided in a form that facilitates effective usage, e.g. the use of warehousing criteria rather than clinical guidelines and the manner of grouping patients. 2. What theories of change implementation would have helped the administrators at the Complex General Hospital solve the problem of medication mistakes? CGH should have started with mutual engagement of doctors and staff in a shared diagnosis of the problem. Following that, a process of redesign should have taken place, along with training and people alignment. The choice of technology should have been a part of this process. Here, the technology was used to drive the change rather than to reinforce an existing awareness of the problem and behaviors selected to address the problem. 3. How might you have gone about solving the problem at Complex General? To what extent, if any, would new technology have been helpful? New technology might have been helpful but it should have been a part of the process described above. Also, the technology should have been tested in a pilot project and doctors and staff should have been trained in the proper usage of the technology. As it stands, this was a good example of technology applied prematurely in a change process that actually hurt performance. CHAPTER 7: Organizational Culture and Change

Main Teaching Point The chapter emphasizes the role that culture plays in implementing organizational change. A robust culture may actually inhibit change, but some cultures are both strong and adaptive. The chapter will examine the elements of an adaptive culture and the impact that founders and leaders have on culture.

Learning Objectives

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1. Define organizational culture as an emergent phenomenon in organizations. 2. Analyze the relationship between culture and organizational change. 3. Delineate the six cultural traits most associated with organizational adaptation and change. 4. Suggest how organizations can go about assessing their culture. 5. Discuss actions that organizational leaders can take to reshape culture.

Opening Case—Culture and Change at Xerox Key learning point of case: The case can be used to discuss how a strong organizational culture can inhibit a company’s ability to change. Analyzing the Case 1. What was the culture at Xerox? Xerox developed a culture that was intolerant of initiative and experimentation, and was not customer oriented. It became susceptible to competition, particularly from Canon and Hewlett-Packard. 2. What was their renewed strategy? Xerox wanted to move from producing copying machines to “providing allpurpose document management for the office space.” Multiple leaders failed to overcome the culture. Lecture Outline I. Culture and behavior A. Many companies like Xerox and GM struggle against entrenched cultures while others have adaptable cultures and sustained performance. B. Organizational culture refers to the common and shared values and assumptions that help shape employee behavior and are typically passed down from current to future employees.

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C. Culture is the glue that binds organizations together, “the way we do things around here”, the shared DNA, “the software of the mind.” Culture consists of interaction between behavior and values. D. Values are the deeply held beliefs concerning such fundamental matters as the nature of people and relationships, the relative importance of multiple stakeholders, orientations toward time and space, the role of work in one’s life and the appropriateness and utility of control mechanisms. E. Culture is an emergent phenomenon: it cannot be imposed. The values and beliefs of past founders and future leaders affect organizational design and management practices, which in turn create culture – shared patterns of behavior and values (see exhibit 7-1, p. 167). Theory into Practice: • An organization’s culture is composed of the shared values of its members and the resulting patterns of employee behavior.

II. Culture and Change A. Robust organizational cultures often provide a competitive advantage. 1. Robust cultures are cultures in which a common set of values and assumptions are deeply and widely held. 2. Robust cultures enhance organizational performance by: • appealing to values, creating energy, identity, commitment and meaning • enhancing coordination by focusing on strategic priorities without imposing unnecessary controls • can help change implementation 3. Examples of robust cultures: Nucor Steel, Southwest Airlines, Nordstrom, Microsoft, Google B. Strong organizational cultures such as that at Xerox can also impede change. Other excellent examples, if you would like to have your students research them, would be: General Motors, Kmart, Sears and United Airlines. C. To be effective in the long term, cultures must be both robust and adaptive. 1. Adaptive cultures are cultures that encourage responsiveness and change as part of their core values.

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2. The adaptiveness of a culture resides in 7 separate but interrelated sets of values and assumptions concerning the legitimacy of multiple stakeholders, the motivation and development potential of people, performance expectations, employee participation, learning, diversity and a global mindset (see exhibit 7-5 on p. 176 for a summary). a. The legitimacy of multiple stakeholders: assuming that shareholders, employees, and customers are legitimate stakeholders in organizational outcomes leads management to adapt to shifts in customer exceptions and employees’ needs while aligning their actions with outstanding performance. b. The motivation and development potential of people: assuming that employees are internally motivated to contribute to outstanding performance and to adapt and change as required leads management to create conditions that motivate altered behaviors. McGregor’s Theory X/Theory Y are useful in understanding contrasting values concerning people (see exhibit 7-2, p. 170). i. Theory X managers believe: •

The average person has an inherent dislike for work and will avoid it if he can.

•

Because of this inherent dislike of work, most people must be coerced, controlled, directed, and/or threatened with punishment to get them to put forward adequate effort toward the achievement of organizational objectives.

•

The average person prefers to be directed, wishes to avoid responsibility, has relatively little ambition, and wants security above all.

ii. Theory Y managers believe: •

People will exercise self-direction and self-control in the service of objectives to which they are committed.

•

The average person learns, under the proper conditions, not only to accept but to seek responsibility.

•

The capacity to exercise a relatively high degree of imagination, ingenuity, and creativity in the solution of organizational problems is widely, not narrowly, distributed.

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iii. When attitudes become pervasive in a culture, they tend to be reinforced. A self-sealing value loop is a self-fulfilling prophecy in which values lead to behaviors on the part of managers that, in turn, lead to responsive behaviors on the part of employees that, in turn reinforce the original values held by managers (see exhibit 7-3, p. 171). • • •

Managers behave in ways that reflect their values. Employees respond in ways that reflect the values of their managers. Managers come to believe that their values are “correct.”

c. Valuing outstanding performance – assuming that high performance goals motivate and energize keeps change efforts aligned with requirements of outstanding performance. d. Valuing employee participation – understanding the positive performance effects of employee participation. Participation refers to the ability of employees at all levels to influence decisions concerning the planning and execution of key tasks. Employee participation supports change for many reasons: (1) Participation can improve decision-making quality by involving lowerlevel employees who have access to important information and by encouraging diverse opinions. (2) Participation enhances the commitment of participants to the chosen course of action. (3) Participation enhances motivation to achieve performance goals. (4) Participation opens avenues of communication and builds coordination among involved employees. (5) Participation encourages employees to become self-supervising. (6) Participation can improve employee-management relations. (7) Participation allows employees to learn and use new skills while enabling an organization to identify individuals with leadership potential. Some managers avoid employee participation in decision making because they hold contrary values, such as those expressed in exhibit 7-4, p. 173, concerning Control, Competency, Knowledge, Motivation and Responsibility.

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e. Valuing learning – realizing that learning at all levels is key to effective change. Learning is the process by which individuals receive data from the external environment, analyze that data, and adjust their thinking and behaviors based on that analysis. A learning organization is an organization that develops in its employees the competency to create, acquire, and transfer knowledge, and at modifying their behavior to reflect new knowledge and insights. f. Valuing diversity—understanding that diversity of opinions and insights are required for innovation, and outstanding performance makes employees feel valued while encouraging learning, experimentation, and adaptation. Diversity refers to a multiplicity of perspectives that comes when individuals from varied backgrounds and different experiences collaborate. g. Valuing a global mindset – realizing that the complexities of a diversified world offer positive opportunities for learning and opens the organization to cross-national collaboration. If an organization values a global mindset, it will be able to move beyond parochialism without abandoning local responsiveness. Global mindset can be defined as a positive openness of the complexities and opportunities of multiple environments. Example of Nokia vs. Motorola to illustrate the importance of a global mindset in today’s challenging environment. Theory into Practice: • •

• • •

Strong, internally consistent cultures may resist change; adaptive cultures will embrace, encourage, and enable change implementation. When the pervasive values of an organization hold that most employees will exercise self-direction and self-control in the service of objectives to which they are committed, the organization’s culture will be more welcoming to the implementation of behavioral change. Values tend to be self-reinforcing: managers create an environment where employees behave in ways that confirm those managers’ beliefs. The most effective change leaders seek to produce outstanding results, not modest or incremental performance improvements. Managers who are uncomfortable giving up control and responsibility or who do not believe employees have adequate levels of knowledge or motivation will resist allowing for widespread participation in decision making. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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• •

Individuals and organizations learn by receiving and analyzing valid information, then alter thinking and acting as appropriate. Valuing diversity offers the opportunity for creativity within an organization by encouraging collaboration among people with different perspectives derived from varied backgrounds and experiences.

III. Assessing Culture A. Understand the difference between espoused and enacted values. 1. Espoused values are the set of values called upon by individuals to explain or justify their course of action or pattern of behavior. 2. Enacted values are the set of values that are implicit in that course of action or pattern of behavior. 3. Just because an organization says it has certain values, does not mean that those values are actually practiced – see e.g. the difference between espoused and enacted values in Enron CEO Ken Lay. 4. Aligning enacted with espoused values means aligning behavior with words. B. Assessment can help to determine alignment by asking questions such as: • •

Do our current values and principles align with the requirements of our renewed strategy? Are the behaviors of employees at all levels consistent with our stated values and principles?

C. Use a cultural audit that examines actual patterns of behavior and explores the underlying values and principles that shaped the behavior. Theory into Practice: • Culture is determined by enacted rather than espoused values; but when those two are out of alignment, cynicism and frustration will drain energy away from outstanding performance.

IV. Leaders Shape Culture A. Organizational leaders powerfully influence the culture of their companies. 1. Leaders make choices about what to pay attention to, measure, and reward. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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2. Leaders react in certain ways to critical incidents and crises. 3. Leaders use certain observed criteria to allocate scarce resources. 4. Leaders use certain criteria in recruitment, selection, and promotion of future leaders. B. What leaders say matters, what leaders do matters even more.

V. Conclusion. A. A strong organizational culture can either help or hinder the implementation of change. B. To create a culture that supports organizational change—an adaptive culture—leaders need to support and promote a specific set of values.

Additional Suggested Reading •

Chris Argyris and Donald A. Schon, Organizational Learning II: Theory, Method, Practice (Reading, MA: Addison-Wesley, 1996).

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Terrence E. Deal and Allan A. Kennedy, Corporate Cultures: The Rites and Rituals of Corporate Life (Reading, MA: Addison-Wesley, 1982).

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Daniel R. Denison, Corporate Culture and Organizational Effectiveness (New York: John Wiley & Sons, 1990).

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David A. Garvin, “Building a Learning Organization.” Harvard Business Review (July-August 1993).

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Louis V. Gerstner, Jr., Who Says Elephants Can’t Dance? Inside IBM’s Historic Turnaround (New York: HarperBusiness, 2002).

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Frank Heller, Eugen Pusic, George Strauss, and Bernhard Wilpert, Organizational Participation: Myth and Reality (New York: Oxford University Press, 1998).

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Geert Hofstede, Cultures and Organizations: Software of the Mind (New York: McGraw-Hill, 1991).

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John P. Kotter and James L. Heskett, Corporate Culture and Performance (New York: Free Press, 1992). Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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Douglas McGregor, The Human Side of Enterprise. (New York: McGrawHill, 1960).

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Andrew Pettigrew, The Awakening Giant: Continuity and Change in Imperial Chemical Industries (Oxford: Blackwell, 1985).

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Edgar H. Schein, The Corporate Culture Survival Guide: Sense and Nonsense About Culture Change (San Francisco: Jossey-Bass Publishers, 1999).

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Douglas K. Smith and Robert C. Alexander, Fumbling the Future: How Xerox Invented, Then Ignored, the First Personal Computer (New York: Morrow, 1988).

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Bert Spector, “HRM at Enron: The Unindicted Co-conspirator,” Organizational Dynamics 32 (May 2003), pp. 207–220.

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David A. Thomas and Robin J. Ely, “Making Differences Matter: A New Paradigm for Managing Diversity,” Harvard Business Review (SeptemberOctober 1996).

Chapter Discussion Questions 1. How can a culture like the one at Xerox be so successful in supporting outstanding performance and at the same time be so resistant to adaptation and change? Xerox demonstrates that a culture that fits well in a certain competitive environment may not work nearly as well as the environment changed. Xerox’s culture supported the company when it had a virtual monopoly on the technology and did not have to worry so much about responding to customers. The culture resisted change as competitors entered the marketplace and customers demanded greater flexibility and responsiveness. 2. It has been argued that although a strong organizational culture is a necessary component of outstanding performance, it is not sufficient. Do you agree? Explain your position. The reason a strong—or “robust”—culture is a necessary component of outstanding performance is that it provides a common, shared purpose and allows for collaboration across the organization. However, as we saw in the case of Xerox (also General Motors, Sears, Kmart, and many other companies), a robust culture must also be adaptive. Otherwise, it will Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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resist an organization’s effort to respond to a changing competitive environment. 3. Why are organizations that value multiple stakeholders likely to be more adaptive than organizations that value just one stakeholder? Three stakeholders—shareholders, employees, and customers—are vital to an adaptive organization. By working to satisfy all of their interests, organizations can make sure they never substitute the short term for the long term (or vice versa). 4. Referring to Exhibit 7-3, how might the self-sealing value loop work for a manager who holds Theory Y values? Let’s recreate the loop for Theory Y: Self-Sealing Value Loop A manager believes that most employees work and will work hard to be successful.  Because of that belief, the manager allows workers to help participate in the design of the work, hires supervisors who will facilitate employee effort and relies heavily on intrinsic rewards.  With high trust and autonomy coming from the manager, employees are enabled to perform at high levels, to offer their own insight into how to innovate or improve.  Seeing the energy and creativity that employees bring to their job, the manager becomes even more trusting and supportive of employees.  “See. I was right; my own experience proves Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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it.”

5. If the value of employee participation in creating motivation for change is so widely recognized, why is it that managers might still resist the idea? Managers who resist allowing participation may make one or more of the following assumptions: •

Control—What if employees make decisions with which I am uncomfortable/in disagreement?

•

Competency—do employees have the competencies—analytic, strategic, communicative, and so on—required to make valid decisions?

•

Knowledge—do employees know enough—about the organization, its strategy, products, services, and the competitive environment—to make informed decisions?

•

Motivation—do employees really want to be involved in decision making, or would they prefer to cede that responsibility to management?

•

Responsibility—even if employees want to be involved in decision making and are capable of doing just that, isn’t decision making my job?

Case Discussion: Balancing Culture and Growth at Starbucks Introducing the case This case discusses the expansive growth of Starbucks, initially under the leadership of Howard Schultz who bought the company in the mid-1980s and transformed it into an international phenomenon. In 2005, Jim Donald became CEO of Starbucks, with an extensive growth agenda that included expansion into smaller U.S. cities and into many countries. Starbucks sales and stocks plummeted in 2007 and 2009, leading Schultz to remove Donald and placing himself back into the CEO role. Growth was slowed dramatically and a major training session was conducted simultaneously in all stores. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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1. How does the culture of Starbucks support its strategy? Starbucks’ Howard Schultz had a strong vision for the company that included branded coffee and a unique, high-end coffee experience. Starbucks became the fastest growing retail store of all time, moving from nine stores in 1987 to 10,000 stores in 30 countries by 2006, with stock prices rising 5,000 % from 1992 to 2007. Schultz describes the value system of Starbucks as one that values self-esteem, self-respect and appreciation. The culture is seen as one that creates a partnership between employees and customers, in which Starbucks offers a home environment. Employees – who are called “partners” – participate in a Partner View survey designed to assess the maintenance of Starbucks culture. 2. Does rapid growth inevitably undermine a company’s culture? Did it at Starbucks? Culture has to be not only espoused but enacted. Rapid growth often threatens the meaningful integration of new employees into an established company culture. At Starbucks, this concern was expressed in the 2007 memo from Howard Schultz to Jim Donald regarding the “commoditization” of the Starbucks experience, reflected in the lack of coffee bean smells, the emphasis on unrelated merchandise, and the cookie cutter feel of the stores, making it feel like a chain rather than a trusted environment. Schultz advocated getting back to the core, which is coffee. The 2008 training session was designed to accomplish this, by focusing on taste, texture and customer experience.

3. What steps can Starbucks take to maintain its culture while achieving desirable levels of growth? Starbucks is facing a tremendous challenge in the current economic crisis – stocks and sales are continuing to fall, and while they are still expanding, they are also closing many underperforming stores. At this point, growth may need to be slowed even more dramatically. Keeping employees motivated and involved will be a key challenge. Involving them directly in planning and lay-off decisions as well as in strategies to regain the unique Starbucks culture and identity would be a good way to do this.

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Clarifying Starbucks values and instituting or renewing a program to reinforce those values would also help. Continue the assessment and involve customers as well as employees in the assessment process. Chapter 8: Leading Change

Main Teaching Point At every stage of organizational change, leaders intervene to oversee and orchestrate implementation. That reliance on the effective orchestration by leaders in a change process is true not just for top executives, but also for leaders throughout the organization. Implementation depends not just on oversight and orchestration by individual leaders. Effective change demands the coordinated efforts of multiple leaders.

Learning Objectives 1. Define effective leadership. 2. Explore the difficulty of enacting effective leadership. 3. Delineate the tasks associated with effective change leadership. 4. Analyze the requirements for developing future change leaders in an organization.

Opening Case—Robert Horton at BP Key learning point of case: The case demonstrates the disastrous consequences of poor leadership and unilaterally imposed change by recounting the nature and effects of BP CEO Robert Horton’s change strategy. Analyzing the Case 1. From whose point of view is the case told? Robert Horton, CEO of British Petroleum (BP). 2. What is the renewed strategy? It isn’t clear from the case exactly what Horton was trying to do with BP’s strategy, and therein lies a big part of the problem. He tended to talk more about culture than about strategy. He wanted to change the culture from a Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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“civil service” one to an organization with “open thinking, empowering and networking, and he vowed to “make this organization a damned sight quicker and smarter than the opposition.” Is that a strategy? 3. What did Horton do to implement his change? Other than giving talks about the new culture, he took some specific steps: •

Slashing corporate headcount by 50%

•

Eliminating operating committees

•

Demanding that employees attend problem-solving and change management workshops

Despite all that, profits continued to plunge. 4. Why was Horton fired after less than two years as CEO? Students will probably pick up on the gap between Horton’s calls for empowerment and an open culture and his stated views that, because he was smarter than most other people, he was impatient with power sharing and involvement. That undoubtedly was part of it. But the fact remains that employees simply had little idea what he was trying to accomplish and performance continued to deteriorate. This illustrates once again the importance of mutual engagement in all stages of strategic renewal.

Lecture Outline I. Understanding leadership A. To be a leader is not the same thing as exercising leadership. 1. Formal leader is an individual who is granted authority, usually based on hierarchical position, in an organization. Formal leaders play important roles as decision makers, resource allocators and company symbols. 2. Not all formal leaders exercise effective leadership. Leadership effectiveness has less to do with personalities and traits, and more with the impact of actions and behaviors. 3. Leadership involves actions that mobilize adaptive behavior within an organization.

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B. Effective leadership can be found in three separate but interrelated notions. 1. Effective change leadership affects the behaviors of others in the organization. 2. The term mobilize implies that the mechanism used to help shape behavior will be internalized motivation. 3. Adaptive behavior suggests effectiveness is determined by the degree to which leadership moves people in a direction that is in the long-term best interests of employees and the organization. Theory into Practice: • Formal leaders have important roles to play as decision makers, resource allocators, and occasionally even company symbols. • Think of leadership as an intervention into the organization designed to impact the behavior of others. • Leadership can be exercised at all levels of an organization. • Effective change leadership mobilizes adaptive behavior on the part of organizational members.

II. The tasks of leadership. A. Unsuccessful leaders: Text has provided examples of leaders who tried to impose change, with disappointing and frustrating results. 1. Morgan Smith (president of the Concord Bookshop) imposed a new management structure as a way of reducing costs and meeting competitive pressures from online booksellers. 2. Carly Fiorina arrived at Hewlett-Packard and almost immediately announced a new, centralized structure as a way of overcoming what she saw as the company’s inertia and slow responsiveness. 3. Louis Gerstner created a global matrix in order to integrate IBM’s highly autonomous national operations. 4. Robert Horton told BP employees that concepts like “open thinking” and “empowerment” would drive a needed cultural transformation. Theory into Practice: • Strong, demanding leaders don’t always succeed at leading change.

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B. Core Leadership Tasks: Five core tasks lie at the heart of effective change leadership (exhibit 8-1, p. 190): 1. Develop and articulate clear and consistent sense of purpose and direction for the organization. 2. Establish demanding performance expectations. 3. Enable upward communication. 4. Forge an emotional bond between employees and the organization. 5. Develop future change leaders. C. Task 1: Develop and articulate clear and consistent sense of purpose and direction for the organization. 1. Organizational purpose is a clearly articulated and well defined ambition for the organization, e.g. - David Letterman’s company Worldwide Pants: whatever makes Dave laugh - for MySpace: linking with cool people, promoting cool projects 2. Articulating a clear purpose enhances change by (see exhibit 8-2, p. 191): (1) Supporting decentralized decision making—Common sense of direction and goals allows employees at multiple levels to make decisions that further overall purpose of organization. (2) Supporting enhanced autonomy—employees at all levels understand the purpose and goals and can respond quickly and effectively to dynamic environment. (3) Supporting coordination—employees working toward a common goal are better able to coordinate their efforts. (4) Leaders at operational levels can formulate strategy to help advance the common purpose and adapt to environment as needed.

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. D. Task 2: Establish demanding performance goals.

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1. By setting demanding performance goals that drive change, leadership enhances employee commitment to adopt the new behaviors required of outstanding performance. a. Stretch goals are performance expectations that are clearly articulated and challenging. b. Jack Welch at GE is given as an example. Theory into Practice: • Effective change efforts are built on a drive to achieve outstanding performance. E. Task 3: Enable upward communication a. Upward communication is the flow of information from lower to higher hierarchical levels in an organization. b. Through acknowledging the need to learn from lower organizational levels, creating channels for upward communication, and pushing down decision making, effective change leadership responds to a dynamic competitive environment and gains valuable insight into the effectiveness of that response. c. Asda is given as an example of leaders not learning that their new strategy was failing, even though their store managers could have warned the top executives. d. Leaders can take steps to enable upward communication: (1) Acknowledge and recognize that they need to learn from lowerlevel employees. (2) Create channels for information to flow upward in an uncluttered and unfiltered way. . (3) Push decision-making authority down to lower levels, allowing employees to exert authority and take responsibility. Theory into Practice: • Effective leadership involves listening, engaging, and learning, as well as communicating. • 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 different organizational levels.

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•

Take specific steps to ensure that communications move both upward and downward.

F. Task 4: Forge an emotional bond between employees and the organization. a. An emotional bond is a relationship between individuals and their organizations based on a deeply felt commitment to the organization’s purpose and goals. b. By forging an emotional bond between employees and the organization, leaders create a deep and robust sense of commitment to the goals of the organization and to changes required to achieve a renewed strategy and sustain outstanding performance. c. Herb Kelleher, Southwest Airlines’ CEO for nearly three decades, is given as an example. His direct interactions and close involvement with employees created bonds described as “love.” d. Benefits of an emotional bond: (1) Encourages employees to coordinate their efforts, communicate more honestly and freely, and take the risks required of creativity. (2) Enables employees to manage conflicts in ways that benefit the organization. (3) Employees are more willing to make sacrifices on behalf of the organization, to act in ways that are informed by the organization’s core values and renewed strategies, and to alter behaviors in ways that enhance the company’s performance. (4) The need to bond, to form networks, to be part of mutually reinforcing relationships is a basic human drive. 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. G. Task 5: Developing future change leaders. a. GE’s Jack Welch spent more of his time on senior executive development than any other matter. GE became the major supplier of CEOs to other companies. b. Can leaders be developed? Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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(1) “Leaders are born” is an approach to leadership that assumes innate predispositions to lead are a vital trait of successful leaders. (2) “Leaders are made” is an approach to leadership that assumes that some combination of experience, training, and on-the-job learning provides the basis for the effective exercise of learning. c. Failure to address the requirements for effective change leadership can prove disastrous – example of U.S. steel industry is case in point. d. Traditional approaches to leadership development emphasize depth of functional and technical expertise, rapid upward mobility, and short-term performance, all of which undermine an organization’s ability to develop change leaders (see exhibit 8-3, p. 196). (1) Rapid upward mobility—prevents individuals from having to live with consequences of their actions and learning from their successes and failures. (2) Movement within a single function—individuals never gain knowledge of total organization, particularly of how subunits fit together. (3) Short-term performance pressures—individuals get better at tactical and operational management than at long-term strategic and visionary leadership. (4) Recruitment for specific technical skills—internal employee pool is thin on individuals with real leadership potential.

• • • • •

e. In order to remedy these problems, Kotter suggests that future leaders experience: Working through coalitions rather than hierarchies Formulating vision/strategy rather than plans and budgets Communicating purpose and building commitment, rather than issuing reports and policies Thinking in long-term rather than immediate terms Working with culture rather than formal structure

Theory into Practice: • Inadequate attention to leadership development can ruin a company, even an industry. • Rapid upward movement of personnel through the hierarchy can work to hurt an organization’s ability to develop effective leadership.

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III. Beyond individual leadership. A. Effective change leadership will be exercised by multiple individuals at different levels and in different units of the organization. B. Dominant individual leaders can create organizational dysfunctions. 1. High levels of dependency can displace individual and group initiative. 2. That dependency, in turn, can slow decision making. 3. Providing the candid feedback required of learning and adaptation to any leader in possession of such singular power can become a risky, tobe-avoided venture. 4. 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 coordinated effort. C. Example of Robert Horton at BP D. Changing an organization requires distributed rather than individual leadership exercised horizontally and vertically. E. Top executives play a key role in modeling this. They need to: 1. See themselves in terms of interdependent rather than independent roles. 2. Model shared leadership by inviting involvement from different levels in the decision-making process. 3. Be open to diversity of opinion, debate and conflict. Theory into Practice: • Dominating individual leaders can actually hurt an organization’s ability to change.

IV. The challenge of “walking the talk.”

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A. Effective leadership requires alignment of words and deeds (“walking the talk”). B. Renault’s 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.” C. Robert Horton at BP did not walk the talk. D. Stayer at Johnsonville Sausage took two years before realizing that he needed to align his actions with his goals if he was to be successful in creating organizational change.

V. Conclusion. A. The intervention of leaders is critical in determining the effectiveness of an organization’s change implementation. B. In order to mobilize adaptive behavior on the part of organizational members, leaders engage in five core tasks. (1) Develop and articulate clear and consistent sense of purpose and direction for the organization. (2) Establish demanding performance expectations. (3) Enable upward communication. (4) Forge an emotional bond between employees and the organization. (5) Develop future change leaders. C. Effective change leadership requires a collaborative partnership in which formal leaders share authority. D. Leadership needs to model the changes it wants to see.

Additional Suggested Reading •

Christopher A. Bartlett and Sumantra Ghoshal, “Changing the Role of Top Management: Beyond Strategy to Purpose,” Harvard Business Review (November-December 1994), p. 82.

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Jim Collins, Good to Great: Why Some Companies Make the Leap . . . and Others Don’t (New York: Harper Business, 2001).

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Kathleen M. Eisenhardt, Jean L. Kahwajy, and L. J. Bourgeois III, “How Top Management Teams Can Have a Good Fight,” Harvard Business Review (July-August 1997).

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Ronald A. Heifetz, Leadership Without Easy Answers (Cambridge, MA: Belknap Press, 1994). Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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John P. Kotter, The Leadership Factor (New York: Free Press, 1988).

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John P. Kotter, Leading Change (Boston: Harvard Business School Press, 1996).

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Morgan McCall, High Flyers: Developing the Next Generation of Leaders (Boston: Harvard Business School Press, 1998).

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Joseph A. Raelin, Creating Leaderful Organizations: How to Bring Out Leadership in Everyone (San Francisco: Berrett-Koehler, 2003).

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Bert Spector, “From Bogged Down to Fired Up: Inspiring Organizational Change,” Sloan Management Review 30 (Summer 1989).

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Ralph Stayer, “How I Learned to Let My Workers Lead,” Harvard Business Review (November-December 1990).

Chapter Discussion Questions 1. How would you account for Robert Horton’s early exit as CEO of British Petroleum? Horton came into BP from the States with his own analysis—that the culture of the company needed to change. Perhaps it did, but there is little evidence that many others joined him in his diagnosis. He imposed new structures, demanded employees attend training sessions (hardly a way to build commitment to learning new behavior), and created a significant gap between his words about “open thinking” and his top-down, imposed change kind of actions. Perhaps most troubling, most employees said they did not even know the company’s strategy. His arrogant statement in the press was simply “the last straw.” 2. It is said that if you are not leading change, you are not leading. Do you agree or disagree with that statement? Explain. Management is about asserting control, reducing risk, and creating certainty. That’s fine, but if an organization just has managers, it will fail to adapt to the dynamic competitive environment. Leaders are always creating dissatisfaction with the status quo, driving new behaviors to achieve improved performance, and demanding innovation. 3. Why is upward communication so difficult to achieve in organizations?

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Students can refer to discussions of organizational silence in Chapter 3. Hierarchy can stifle honest upward communication. Employees may either fear the consequence of honesty or simply feel there is little hope of their ideas being acted upon. Managers may also signal their discomfort with honest upward communication. 4. Explain the barriers that exist and how leaders might overcome them. The chapter offers three actions that executives can take to overcome the hierarchical barriers to upward communication: 1. Acknowledge and recognize that they need to learn from lowerlevel employees. 2. Create channels for information to flow upward in an uncluttered and unfiltered way. 3. Push decision-making authority down to lower levels, allowing employees to exert authority and take responsibility. 5. Why is a strong emotional bond with the company especially important in times of change? What specific steps can leaders take to create such a bond? A deep emotional bond provides a robust source of support for change when a company enters a transformational period. An emotional bond encourages employees to coordinate their efforts, communicate 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 strategies, and to alter behaviors in ways that enhance the company’s performance. We can turn to Herb Kelleher at Southwest Airlines to look at what he did to build an emotional bond. He involved himself in virtually every aspect of the business, from handing out on-board peanuts to dropping in on maintenance workers at 3 a.m. in Southwest hangers with coffee and donuts. 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-closeand-personal opportunity to see and experience Kelleher as the human embodiment of the company’s values and principles. 6. Do you agree that traditional approaches to leadership development can hurt a company’s effort to develop effective change leaders? Explain. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

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Exhibit 8-3 connects certain organizational practices to poor leadership development. Most organizations are weak when it comes to leadership development. Those that are especially good at it—most famously, General Electric—enjoy a great advantage.

Final Case—Leading Change—Carlos Ghosn at Michelin, Renault, and Nissan Motors Introducing the Case The case introduces students to the long and—up to now, at least—highly successful career of Carlos Ghosn, culminating at this point in his return to Paris to serve as dual CEO of Renault and Nissan. In all of his assignments, Ghosn has demonstrated the saying, “If you’re not leading change, you’re not leading.” He has led by leading change. Students can look for some common characteristics in his approach to change. Since this is a long case and can also be supplemented with a video of one of his talks (listed at the end of the case questions), it may also serve as a good concluding case for the entire course. Assignment questions for students: 1. What are the strengths and weaknesses of Carlos Ghosn’s approach to change leadership at Nissan? To what extent has he succeeded in mobilizing adaptive behavior on the part of employees? Ghosn certainly demanded outstanding performance: out of himself, others, and the organization. What were his weaknesses? Well, he could be brutal about shutting down non-performing operations. And he seemed to work best in a crisis situation. Students may wonder whether those traits might eventually get him into trouble at Renault. 2. Using the core tasks of leadership (Exhibit 8-1, p. 190), evaluate Ghosn’s change leadership at Nissan. Develop and articulate clear and consistent sense of purpose and direction for the organization.

Ghosn did this at every stop on his career.

Establish demanding performance expectations.

Same—he was always putting forward new plans that articulated just how much growth he expected.

Enable upward communication.

This is less clear. We do see

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him listening to dealers about Nissan’s poor design, but there isn’t really much on his style. Forge an emotional bond between employees and the organization.

Probably, especially his hope of building up Nissan around “exciting” new designs.

Develop future change leaders.

Not much evidence. At the end of the case, he does promote Toshiyuku Shiga to COO of Nissan.

3. What are the beliefs and values of Ghosn concerning leadership and change? Show how those beliefs and values have been enacted at his various leadership positions. Ghosn seemed to have a number of principles that served him well in his different leadership roles: •

Be clear about strategy and performance expectations.

•

Build unity and common purpose.

•

Listen and learn but insist on performance improvement.

•

Use cross-functional teams to drive change.

•

Learn before acting.

4. Has Ghosn “walked the talk” on his leadership style—that is, aligned his actions with his words? This could raise an interesting discussion. He seems to be demanding and top-down. Is that something of a contradiction? On the other hand, he says he and his top executives will quit if they don’t perform up to expectations. We’ll never know, because they performed quite well. Still, it’s a question for students to debate. Note: Because this is a complex case, it might be useful to present this chronology of Ghosn’s career: 1952 1976

Born in Brazil Hired by Michelin and moved to Brazil

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1985 1988 1996 1997 1999

Named COO of Michelin-South America Named CEO of Michelin North America Hired as number two man at Renault After cost cutting, Renault returned to profitability Renault-Nissan forge alliance, Ghosn sent to Japan to run Nissan; Ghosn tours Nissan, announces diagnosis in “all hands” meeting; Nissan Revival Plan is announced to the press

2001 2004 2005

With previous plan a success, announces new plan Announces 2001 plan has been a success Ghosn named to take over all of Renault

A free video of Ghosn speaking at the Stanford Graduate School of Business is available at: http://www.gsb.stanford.edu/news/headlines/Ghosn07.html

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