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Implementing Organizational Change Ashish Nanda Morgan 143 Harvard Business School Soldiers Field Boston MA 02163 Tel: (617) 475 6506 Fax: (617) 496 5271 e-mail: [email protected]

March 25, 1996

I am grateful to Chris Argyris, Joe Badaracco, Chris Bartlett, Richard Caves, Jay Dial, Jim Heskett, Jay Lorsch, Phil Rosenzweig, Julio Rotemberg, Don Sull, Dick Walton, Mike Whinston, and participants of Industrial Organization seminar as well as the informal General Management seminar at HBS for helpful comments and discussions.

Abstract To secure the participation essential to move an organization from an inferior state to a superior state requires that workers be offered two incentives: (1) security that they will be excused if coordination breaks down, and (2) encouragement to make an effort to change rather than free-ride on the efforts of others. If offering both incentives is too costly, the organization continues to languish in the inferior state. Organizational inertia will not be overcome by merely increasing the attractiveness of the desired state or attempting to coerce workers to abandon established routines. Organizational change can be induced by actively managing the change process, as by shuffling parts of the work force and nominating change agents from among the workers. Moreover, the change process can be designed to make an organization more amenable to change: for example, starting with a “kick-off” event and making the process a vigorously disequilibrating phenomenon. Whether the change process is implemented incrementally or radically depends on how the manager trades off the cost of instituting wrenching change against the cost of having the organization partially misaligned with strategic necessity.

I.

Introduction

This paper considers the puzzling case of resistance to change in positive sum games in which the alternate organizational configuration enhances the value pie. This case would seem to lead handily to a pareto superior outcome, with everyone at least as well off as at present and, hence, with little reason to resist the change. Yet managers often remark that their greatest challenge lies less in recognizing the need for the strategic change (external environment, technological conditions, or the manager’s vision change the manager’s estimation of value1 that different organizational forms can yield such that the existing organizational configuration is no longer optimal) than in implementing the organizational change needed to redirect strategy. We argue that organizational change is difficult to achieve because firms get stuck in coordination equilibria that are no longer optimal. In the following section, we use case studies of managers challenged with implementing organizational change to delineate what we mean by the term “organizational change.” In Section III, we consider existing theories of why organizational change is so difficult to achieve and the questions that they leave unanswered, and in Section IV suggest why it makes sense to think of organizations stuck in sub-optimal equilibria when we consider the dynamics of organizational change. A simple model is developed in Section V to demonstrate that one reason organizations become stuck in inferior equilibria is that their managers are unable to make the desired states sufficiently attractive to workers. Strategies for getting organizations unstuck and implementing change are proposed in Section VI. In Section VII, we suggest that a prescient manager can configure an organization in anticipation of circumstances that are yet on the horizon. Section VIII offers concluding remarks.

II.

What is “organizational change?” Some examples from real life case studies

“Leading organizational change” has been applied to such wide ranging activities that few know any longer what a person using this phrase exactly means. It is important, therefore, to clarify which classes of phenomena we refer to when using the term “organizational change.” One way to do this is to clearly delineate situations that we do not focus on. There are three such situations, characterized by some academics and practitioners as organizational change phenomena, that we specifically exclude from consideration. 1)

Activities that do not enhance value but merely redistribute it among the various stakeholders. Terms such as “restructuring” and “reengineering” are sometimes used to connote non-value enhancing exercises that aim simply to redraw the pie-partition, typically between stockholders and workers. The bargaining process in these zero-sum games is bound to be fractious and the party sitting on the opposite side of the table is bound to resist. The oft-encountered value creation situations that involve value redistribution as well, on the other hand, are considered.

2)

What Burns calls transforming leadership: “[E]ngaging with others in such a way that leaders and followers raise one another to higher levels of motivation and morality” (1978, p. 20). Examples of such leadership would include Roosevelt’s New Deal, Gandhi’s non-violent campaign against British rule in India, and the unswerving commitment of Ben and Jerry’s chairman Ben Cohen to social

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For managers, who are agents of owners, we equate value with the profit that accrues to the owners. Hence, we presuppose that a) owners care about their profits, and b) suitable contracts exist between owners and managers such that the managers care about the profits that accrue to the owners.

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causes and community support. Situations in which the leaders mold the preferences of their followers, however powerful and moving, are not considered.2 3)

Settings in which people work and produce results entirely independently of one another. We are concerned with change in organizations in which productive output results from the joint efforts of specialized sub-units of workers who must coordinate their activities.3 A skeptic might argue that in delimiting the meaning of organizational change we have drawn the boundaries so tight as to leave hardly any real life analogs. We do not believe this to be the case. Indeed, we believe that managers are frequently challenged to implement precisely what we construe to be “organizational change.” Four examples from practice are related below. A software company. Owing to the geographical distance between facilities in Silicon Valley, California and Bangalore, India and differences in the programming capabilities of the respective workforces, a software company broke programming projects up into self-contained pieces that could be developed relatively independently in order to save communication costs. Advanced programming projects went to Silicon Valley, routine tasks were sent to Bangalore. But circumstances changed. Enhanced telecommunications facilities with expanded bandwidth capability facilitated internetworking at a low cost, and Bangalore programmers had become as proficient as their Silicon Valley counterparts. Believing the benefit of speeding development to outweigh increased communications costs, the firm’s CEO proposed to restructure project allocation such that programmers at both facilities could work on the same project by exchanging code daily. The restructuring called for project teams to span geographical boundaries and interactivity to take precedence over independent work. Project managers, hitherto organized under geographic heads, would have responsibilities spanning both locations. The CEO was struggling with the issue of how to effectively implement the desired change. A large systems and management A multinational consulting company’s European operations. consulting firm had developed a powerful presence in Europe by nurturing independent country practices. But the area managing partner (AMP) for Europe, perceiving that the firm’s clients were becoming increasingly international, anticipated growing demand for consulting services that spanned geographic boundaries. Believing the benefits of developing a pan-European practice – uniform service to multinational clients and flexibility to move skilled consultants from one country to another – to outweigh the costs of reduced local sensitivity and autonomy, he proposed a significant organizational change. Industry heads who had previously reported to geographic heads would operate across countries, the role of the latter would be allowed to atrophy, and consultants would be expected to shift focus from developing local contacts to building industry expertise.

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For expositional reason, we sharply distinguish between the challenges of push through change given people’s innate desires and molding people’s preferences. Real life does not take such extremes: Leaders confront having to push change given people’s wishes even as they attempt to influence their desires. One can, however, envisage a continuum with some situations being closer to implementing change given preferences and other situations being closer to transforming people’s desires. This paper informs situations that lie close to the former type of situations. 3 Hence, we exclude from consideration those conglomerate organizations whose sub-units operate entirely independently. However, we believe that the excluded group would be a tiny minority, since a key reason why activities are organized within a firm is that they need to be coordinated. Barnard’s (1938, p. 73) definition of an organization highlights the importance of coordination in an organization: “[An organization is] a system of consciously coordinated activities or forces of two or more persons.”

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Rather than attempt to move directly to a pan-European organization, the AMP divided Europe into three regions and simultaneously announced a number of new assignments. Some high-performing country managers assumed the new responsibilities of regional managers while former geographic managers assumed new functional responsibilities. Emphasizing that these changes were but one step towards a pan-European organization, the AMP believed, provided sufficient indication of forthcoming change to afford erstwhile geographically-focused executives time to alter direction and cultivate industry skills. Protected from foreign competition by duties A commercial vehicles manufacturer in a developing country. and tariffs, the commercial vehicles industry in a developing country had for more than three decades remained a duopoly. In the face of licensing constraints that held output well below potential demand, the industry leader, which commanded 70% of the market, focused on maximizing production. When political and macro-economic considerations led the government to eliminate import barriers and encourage foreign collaborations, five foreign commercial vehicles manufacturers promptly entered the country in collaboration with domestic firms. Recognizing the need to shift priorities dramatically, the CEO of the dominant local manufacturer proposed that marketing’s role be changed from rationing agent to purveyor of market intelligence and production’s philosophy be shifted from maximizing capacity utilization to meeting customer requirements. To drive these changes, the CEO organized weekly meetings of senior marketing and production executives to discuss production plans. After six months of having these meetings, the CEO was frustrated that decision processes were still mired in the old framework. Manufacturing continued to be preoccupied with production bottlenecks, countering sales executives’ requests for products that varied from production plans with concerns about switch-over costs and inventory, and unable to countenance sales’s inability to quickly dispose of the vehicles that came off the line. The CEO’s strong encouragement notwithstanding, sales executives often slipped into asking manufacturing executives what they planned to produce. Such forecasts as were produced were wildly inaccurate and subject to dramatic revisions, reflecting less an enthusiastic belief in them than a desire to satisfy the CEO. Procurement activity in a defense equipment manufacturing firm4 Perceiving impending difficulty securing essential raw materials, the president of a large concern that made equipment for the U.S. armed forces asked an executive appointed to a newly created position of vice president in charge of purchasing to coordinate purchase decisions across all 20 of the company’s plants. Believing that centralized purchasing would yield significant economic benefits as well as afford the company the leverage to demand better terms from suppliers, the new vice president asked the plant executives responsible for purchases to clear with him in advance all purchase contracts that exceeded $10,000. Although the executives enthusiastically acceded to the request, the head office received not a single request for purchases over the next six weeks, yet the plants continued to function busily in their usual routine. Upon enquiry, the vice president discovered that the local purchasing executives had broken large contracts into smaller orders, each well below $10,000. Top managers in each of the foregoing companies had delineated, in response to strategic changes, alternative organizational configurations that promised to generate greater value, only to discover that implementation of change was fraught with difficulties. We explore in the following section some rationales for why this is so often the case.

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I am grateful to Jay Lorsch for bringing this case to my attention.

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III.

A review of existing scholarship on why organizational change is so difficult

Before considering what might be done to extract firms from suboptimal equilibria, we explore some rationales for why they become mired therein in the first place. We attempt below to synthesize the accumulated wisdom of the field with particular emphasis on issues upon which researchers agree or differ. The examples cited in the previous section suggest, and management scholars such as Vandermerwe and Vandermerwe (1991, p. 174) conclude that the principal obstacles to implementing organizational change are “people related.” Attempts to account for this have tended to follow one of three broad lines of reasoning related to: lack of communication; uncertainty avoidance; and defensive routines. We explore below the assumptions that underlie these lines of reasoning. A.

Workers are unaware of the benefits of change

Resistance to change can arise out of ignorance of its potential benefits, implying management’s failure in communicating these benefits. This rationale rests on the assumption that employees are uninformed, either complacent with the existing state which they perceive to be better than it actually is, or unaware of how much better the changed state might be. Tichy and Devanna (1986, p. 44) term this organizational complacency the “boiled frog phenomenon,” asserting that companies’ thresholds for recognizing the need for change are too high. This rationale can obtain only if management possesses, but does not share with employees, knowledge about the benefits of change. If change will, indeed, increase the size of the value pie, it is in management’s interest to communicate this intelligence in order to motivate employees to effect the change. Management scholars have remarked on the importance of communicating the change vision as “a set of blueprints for what the organization will be in the future” (Tichy and Devanna, 1986, p. 128). Kirkpatrick (1985, p. 35) has identified in the literature a common theme that: “[e]ffective communication is a must. People must be informed in advance and must understand the reasons for change.” As long as the change remains an unknown,” observe Bucholz and Woodward (1987, p. 145), “the organization will be like the kingdom in the fairy tale – unproductive. But as more and more people ‘call out the dragon’ – that is, specify the problem – they will be able to define objects and then, as if by magic, come up with creative and innovative ways of dealing with those problems.” Communicating the message that change will benefit the organization may be an extremely difficult task, requiring that workers be acquainted with complex issues, such as competitive dynamics and market forecasts. Indeed, communicating the entire message may be well nigh impossible, and even to the extent that it is communicated effectively, employees may withhold their buy-in unless they are assured of management’s credibility and astuteness of judgement. Exhortations to change are frequently met with employee skepticism expressed in remarks such as “We have been fed this line before,” and “All that management wants to achieve through these ‘change programs’ is a reduction in head count.” How does a manager surmount the twin hurdles of conveying what is often complex information and overcoming low credibility? A powerful and efficient way is to protect the employees from potential downsides and offer them an upside if they make the desired transition. Assume, for example, that the present

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organizational configuration generates B units of value shared thus: a for employees and B-a for management.5 An alternative organization can generate B+b units of value. Management might accompany a proposal to reorganize with an offer to compensate employees at a+"b units (0