Built to Change E-Book

Edward E. Lawler

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 437

Veröffentlichungsjahr: 2011

Beschreibung

In this groundbreaking book, organizational effectiveness experts Edward Lawler and Christopher Worley show how organizations can be "built to change" so they can last and succeed in today's global economy. Instead of striving to create a highly reliable Swiss watch that consistently produces the same behavior, they argue organizations need to be designed in ways that stimulate and facilitate change. Built to Change focuses on identifying practices and designs that organizations can adopt so that they are able to change. As Lawler and Worley point out, organizations that foster continuous change * Are closely connected to their environments * Reward experimentation * Learn about new practices and technologies * Commit to continuously improving performance * Seek temporary competitive advantages

Leseprobe

Table of Contents

Title Page

Copyright Page

Foreword

Preface

Chapter 1 - Why Build Organizations to Change

WHY ORGANIZATIONS NEED TO CHANGE

TYPES OF CHANGE

ORGANIZATIONS ARE BUILT TO BE STABLE

THE BUILT TO CHANGE LOGIC

CONCLUSION

Chapter 2 - A Dynamic View of Organizational Effectiveness

ORGANIZATIONS ARE LIKE CAREERS

THE BUILT-TO-CHANGE MODEL

ENVIRONMENTAL SCENARIOS DRIVE STRATEGIZING AND EFFECTIVENESS

IDENTITY IS CENTRAL TO GOOD STRATEGIZING

STRATEGIZING IS A PIVOTAL CONVERSATION

CREATING VALUE THROUGH COMPETENCIES AND CAPABILITIES

DESIGNING INTEGRATES THE ORGANIZATION

CONFIGURATION AND ALIGNMENT DRIVE PERFORMANCE

CONCLUSION

Chapter 3 - Strategizing

STRATEGY IN B2CHANGE ORGANIZATIONS

IDENTITY

STRATEGIC INTENT

THE STRATEGIZING PROCESS

CONCLUSION

Chapter 4 - Structuring for Effectiveness and Change

EXTERNAL FOCUS

STRUCTURING FOR CHANGE

CREATING NEW BUSINESSES

CONCLUSION

Chapter 5 - Developing the Right Information, Measurement, and Decision-Making Processes

INFORMATION

MEASUREMENT

DECISION MAKING

CONCLUSION

Chapter 6 - Acquiring the Right Talent

ADOPTING AN EMPLOYMENT STRATEGY

MOTIVATION AND RECRUITING

ATTRACT THE RIGHT TALENT

IDENTIFYING THE RIGHT TALENT

ACQUIRING COMPANIES AND HUMAN CAPITAL

RERECRUITING THE BEST

CONCLUSION

Chapter 7 - Managing Human Capital

KEEPING THE RIGHT PEOPLE

MEASURING HUMAN CAPITAL

TARGETING CRITICAL WORK AND INDIVIDUALS

CREATING CAREER OPPORTUNITIES

MANAGING LAYOFFS AND DOWNSIZING

DEVELOPING A TRAINING STRATEGY

CONCLUSION

Chapter 8 - Meeting the Leadership Challenge

EFFECTIVE LEADERSHIP REDEFINED

LEADERSHIP TALENT

A COMPANY OF LEADERS

CONCLUSION

Chapter 9 - Designing Reward Systems

MOTIVATION AND REWARDS

REWARDS AND PERFORMANCE

ORGANIZATION STRUCTURE AND REWARDS

ORGANIZATIONAL IDENTITY AND REWARDS

STRATEGIC INTENT AND REWARDS

CONCLUSION

Chapter 10 - Rewarding Performance and Change

SENIORITY-BASED REWARDS

MERIT-PAY PLANS

BONUSES

PROFIT SHARING

STOCK OWNERSHIP

PERSON-BASED PAY

EGALITARIAN PERQUISITES

REWARDS FOR RISK TAKING AND INNOVATION

DEALING WITH FAILURE

CONCLUSION

Chapter 11 - Creating a Built-to-Change Organization

THE TRANSITION PROCESS

CREATE A CHANGE-FRIENDLY IDENTITY

PURSUE PROXIMITY

BUILD AN ORCHESTRATION CAPABILITY

ADOPT STRATEGIC ADJUSTMENT AS A NORMAL CONDITION

SEEK VIRTUOUS SPIRALS

CONCLUSION

Notes

Acknowledgments

About the Authors

Index

Copyright © 2006 by John Wiley & Sons, Inc. All rights reserved.

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Library of Congress Cataloging-in-Publication Data

Lawler, Edward E.

p. cm.

Includes bibliographical references and index.

ISBN-13: 978-0-7879-8061-0 (cloth) ISBN-10: 0-7879-8061-7 (cloth)

1. Organizational change. 2. Organizational effectiveness. I. Worley, Christopher G. II. Title.

HD58.8.L379 2006 658.4’06—dc22

2005031021

HB Printing

Foreword

During the past decade, scandals at Enron, Tyco, WorldCom, and others brought into sharp relief difficulties in governing organizations in a world fraught with unbounded greed and abundant opportunity to satisfy it. Driven by technological innovation, new industries sprouted with few rules or norms to guide the behavior of their leaders. As we face the next decade, organizations will become even more global, with flatter hierarchies, faster information flows, and increased interdependence. New competitors from exploding economies such as China and India will change the economic landscape, causing some U.S. industries to fight for their lives while others face limitless opportunity.

What might organizations do differently to respond more quickly and effectively to this increasingly chaotic environment? What might leaders do differently to build their organizations for change?

I will explore two themes as the basis for dealing with these questions. First, leaders must understand their organization’s values, and work to shape them in such a way that those values guide and sustain needed changes rather than undermine them. Second, leaders must architect their organizations to embrace rather than resist change. In Built to Last, Jim Collins and I found that the enduringly great (visionary) companies we studied held a small set—between three and five—of values so fundamental and long-lasting that they could be thought of as core. These core values helped to guide behavior in the company over the very long term and kept it from engaging in practices detrimental to its essence. As such, core values can play a positive role in change by defining what’s “in play” and what’s not, that is, change everything in the organization except the core values. Ed Lawler and Chris Worley agree, and use the concept of identity to recognize the importance of stability.

The notion of values is a tricky one, especially when we think about the ways values become imbedded in an organization or, more important, changed. Increasingly, leaders attempt to define new values for their organizations and then go about “selling” them to employees, only to find out that the selling doesn’t always work as well as expected. Often, the breakdown occurs when leaders attempt to convince their employees to accept and internalize the new values as core. I don’t think anyone can convince adults to adopt a core value not previously held. Core values exist deep in a person’s belief system and generally develop as a result of early childhood experiences and learning. Once embraced, changing them just doesn’t happen. Here, too, Lawler and Worley agree, and build their changeable organization approach around the idea of stability.

So, what are leaders to do? Well, first and most obvious, leaders must seek to discover those values truly core for the organization. Unfortunately, in my experience, few organizations succeed in this search because the vast majority of them don’t have core values. For a value to be core it must pass three tests: it should (1) have existed in the organization since its earliest days; (2) still be around 100 years from now; and (3) have evidence of events in which the organization lived the value and paid some cost or suffered in some meaningful way for doing so. Most organizational values come and go as CEOs change or strategies change, or fall by the wayside when a significant benefit can be gained by ignoring them. Bottom line, all organizations have values, but few have any that meet the core standard.

So, if no core values exist for the organization, an alternative for a leader is to identify a set of values that the organization aspires to make core. (Important to note: when communicated, these values must be clearly labeled as aspirational. Failing to refer to them as such risks cynical reactions from organization members who may well possess numerous examples of their leaders not living them.) As aspirational, these values provide a future to strive for, and hopefully, in ten to twenty years, the organization can provide concrete evidence of actually having lived them. People won’t follow leaders who espouse core values but don’t live them. More likely, they will follow leaders who aspire to live a new set of values they wish to make core and who want to be held accountable when they don’t.

Once identified, core or aspirational core values must guide hiring and firing decisions (“If you fit, join us!” “If you don’t fit, leave.”), reward and promotion decisions, and generally the architecture of the organization. I’ll speak more about this point later, but for now, let’s turn to a second recommendation on how leaders can use values to enhance the organization’s ability to effectively change.

Leaders must understand the difference between core values and all the other values floating around in an organization. Not all organizational values are core or aspirationally core, and those that aren’t can be thought of as “strategic,” that is, values that the organization adopts to help it successfully implement a specific strategy developed for a specific external environment. Not deeply anchored in the belief system of either the individual or the organization (that is, not core), these values can and should change—should change because, if they don’t, they inhibit the implementation of any new strategy. Often strategic values that played a significant role in making execution of the previous strategy successful simply don’t fit a new strategy. Helping organizational members see and accept the difference between core and strategic values makes change in the latter easier.

Finally, some values promote change while others inhibit it. Inculcating core values such as customer focus, risk taking, innovation, open communication, collaboration, or participation can help an organization to continually change. Other values such as loyalty, consistency, individuality, profit maximization, or engineering excellence may—especially when taken to their extreme—block or inhibit effective change. The lesson here points to the necessity of being careful about the core values a leader wishes to instill in his or her organization. Built to Last taught us that enduringly great companies have a passion for change, and the core values guiding these organizations support their ability to do that.

Earlier I surfaced the idea of organizational architecture. Let me now be more specific about what I mean. Architecting an organization for change means designing its key work-setting components such that they promote change while at the same time are themselves readily changeable. In agreement with the main theme of this book, the Built to Last findings showed that for an organization to be enduringly great it must be incredibly skilled at changing itself. And, in these companies, organizational change began with change in their senior leaders.

Since the top leader must change first before change in others can be expected, leaders must develop their ability to change themselves before they attempt to change the organizations they manage. Yet, it has been my experience that most leaders do not possess the skills to change themselves. They focus so much on managing others and getting others to do their bidding that self-awareness tends to fall by the wayside. Increased coaching and exposure to group process skills training will go a long way toward developing this skill.

Leaders also must begin to see themselves as organizational architects instead of rock star, charismatic, visionary types. They must see themselves as builders of their organization rather than as traditional leaders. They must understand the key principles of organizational architecture before they can begin to design work settings that promote change. They must value the role of architect and have as their passion building an enduringly great organization rather than striving to have their picture on the cover of Fortune or Business Week.

When something is built it must have architecture—architecture guided by a set of principles that provide the basis for design. In the case of organizations, the design principles would need to explain how and why people change their behaviors and the role the work setting plays in precipitating desired change. I’d like to focus on the work setting because I adhere to the body of psychological theory that emphasizes the role of environment in precipitating individual behavior change. In the case of organizations, the relevant environment for individuals is the work setting.

Let’s turn then to some examples of work-setting dimensions to consider when thinking about how to design organizations for change.

Audacious goals—bold, exciting, compelling, highly stretching, deadline based—drive change in the organization. When setting truly audacious goals leaders don’t know exactly how to achieve them. They have confidence that they will figure out what it will take, but at this point in the process they aren’t sure of the exact steps. New capabilities must be developed, new skills evolved—the organization and its people must change.

Highly audacious goals also drive change because employees who must execute on the goals can’t achieve them by just working harder, faster, or longer hours. They must, in addition, do new and different things. Without change in the organization and the behavior of its people, this type of goal can’t be attained. Our research showed that when organizations set and truly committed themselves to highly audacious goals, they changed their ways of operating and, almost all of the time, successfully achieved them.

Not so surprisingly, organizations that achieve truly audacious goals also perform at a superior level while doing so—witness NASA when it pursued the audacious goal of getting a man on the moon and back by the end of the decade.

Cultural norms that support rather than resist change also play a key role in how well an organization alters its functioning. Charles O’Reilly identifies social control as the most powerful type of control in organizations. Guided by norms, people pressure each other to adhere to them or risk negative reactions from their colleagues. Since norms can either block or encourage change, organizational architects must support norms that promote behaviors facilitative of change.

Evaluation and reward systems that measure and reward needed changes in behavior provide an obvious work-setting dimension to design appropriately. Often organizations talk change but, in fact, don’t measure or reward it—then they wonder why people resist so much. Clearly many reasons exist for individual resistance, but the evaluation and reward system—perhaps the most easily accessible change lever—should be pulled first and often.

Another important change lever—control and information systems—presents a significant opportunity for designing change friendly work settings. The more expensive a system design and implementation, the less inclined leaders will be to subsequently change it. Designing systems with an eye toward their future change makes the expense of subsequent alterations much lower and their change more likely.

Job design also plays a key role in the group of work-setting dimensions that either facilitate or block change. Jobs can be rigid or flexible, tightly controlled or autonomous, highly specified or end-results focused, and on and on. Jobs that sit more at one end of these continua than the other facilitate change. Designing changeability into the way work gets done either helps needed future change or blocks it.

Typically, physical settings impede change rather than assist it. Office walls can’t be removed or moved easily. Expanding to adequate office space costs more than the company wants to spend. Moving people’s offices to match new organizational structures seems too expensive. Yet, all of these physical setting issues impact changes in other organizational dimensions and often make needed behavior change quite difficult. Designing facilities to support existing organizational configurations and work processes—and then to be easily changeable—provides advantages for any organization attempting to change itself.

These are but a few examples of architecting an organization for change. Many more exist, and leaders must continually experiment with different forms to discover the ones that most facilitate change in their own companies. Built to Change is about just such an architecture; it describes ways to think about strategizing, creating value, and designing organizations that are changing all the time. Organizations differ, and architectures must also differ to fit specific needs. However, in any case, great companies that endure need to be guided by meaningful, unchanging core values while at the same time be architected to change. This paradox of no change and change helps leaders create superior organizations that last.

Palo Alto, California

November 2005

Jerry Porras

Preface

Excellence is about change. We would not have said this in the 1980s or perhaps even in the 1990s. Today it almost goes without saying. Most organizations simply cannot sustain excellent performance unless they are capable of changing.

In the 1980s, the best-known management book was In Search of Excellence. It identified a number of companies that were excellent performers. By the late 1980s many of them had ceased to be excellent performers. It was not that they had lost the ability to do what they had done; it was simply that what they had done no longer fit the demands of the business environment.

In the 1990s, the leading book on organizational excellence was Built to Last. Contrary to many people’s perceptions, Built to Last was not about high-performing organizations, although the authors report that their visionary companies outperformed the market. Their purpose was to identify the principles that allow firms to endure.

Foster and Kaplan, in their book Creative Destruction, make a strong case that surviving is not the same thing as performing. They note that only 29 of the firms in the original 1917 Forbes 100 list made it to 1987. The survivors earned a long-term return during the period that was 20 percent less than the market. Similarly, they note that of the firms in the 1957 S&P 500—a list that contains both Built to Last visionary companies and their paired counterparts—only 74 remained on the list in 1997 and only 12 of them outperformed the S&P 500 index over the same period. Foster and Kaplan’s analysis shows that many of the Built to Last visionary organizations were never consistently high performers, just really good survivors.

It is interesting to note that over the last decade about half of the Built to Last companies have not been able to sustain a high performance level. It is about the same percentage of In Search of Excellence companies that struggled in the decade following the publication of Peters and Waterman’s best-selling book.

The frequent decline of high-performing organizations makes a sobering point: successful management approaches and business strategies often have an expiration date. As a result, we have not written a book about patterns and principles we found in studying companies that have been highly successful. Nor have we created a list of high-performing companies to emulate. Instead we have written a book about a useful and internally consistent vision of how organizations should be designed so that they can be successful and change. Our belief is that by looking forward we have identified what organizations can do to achieve and maintain excellence.

As the rate of change in the business environment continues to increase, the premium on organizations’ being able to change is growing ever more significant. Senior managers in particular need to constantly ask themselves whether they are providing the kind of leadership and direction to their corporation that will allow it to change when needed.

For several decades, we have been interested in why organizational change efforts so often fail. Like many others, we have been intrigued by the various change models that have been offered. Most of them suggest that with the right interventions, most, if not all, organizations can make significant changes. We are not at all sure that this is true. If it were, more of the Built to Last companies would still be excellent performers. Many of them tried to change and had the resources to change but still fell short.

We believe that some, maybe even most, organization change projects are doomed to failure from the beginning. The type and amount of change that is being attempted is simply beyond the ability of most organizations to adopt successfully. Admittedly, some organizations have made amazing transformations. Nokia, for example, has become a successful global electronics company, even though its roots were in a different technology and a local market. But the reality is that most change efforts in established organizations fail to meet expectations because the internal barriers to change are so strong. We believe that the only way to ensure that organizations will be able to change is to design them to change, to create organizations that love to change.

There is a great deal of research today on organization effectiveness and organization design that provides invaluable information about how to build an organization that is ready to change. We also can identify a number of examples of companies that have successfully managed to change time and time again. In many respects this is a book about those organizations, one driven by them and based on their successful change efforts. It is about how Procter & Gamble, Johnson & Johnson, Limited Brands, and Toyota have managed to respond to a changing business environment. The contrast between them and companies that have failed to change is dramatic. GM continues to lose market share; Toyota gains it. Sears has struggled while the Limited has grown. Proctor & Gamble and Johnson & Johnson have both shown that they can nimbly adapt to a notoriously changeable world.

This book is not focused on the kind of transformation that AT&T needed to make, and failed to make, when it was suddenly faced with deregulation. Even if AT&T had been designed to change, it is doubtful that it could have successfully made the transition from a regulated monopoly environment to today’s crazily competitive telecommunications world. In short, the company was probably doomed to fail; it was just a matter of time before it did. Enron is a high-profile example of just what can happen when a transformation fails. It was transformed from a regulated public utility to a financial trading organization. In some respects, this was actually a successful transformation, but it ended in disaster because Enron moved too far away from its core identity and lost touch with reality.

Although we are pessimistic about organizational transformations of the kind that AT&T needed to make and the kind that Enron tried to make, we are optimistic that organizations can be built to change. Our optimism is based on the ability of some companies to do this and on research that suggests the right policies, practices, and organization designs can make a company “change ready.”

In many respects, the ultimate competitive advantage in today’s business environment is the ability to change. Built to Change focuses on how organizations can develop this advantage. We have chosen to focus on identifying practices and designs that organizations can adopt in order to be able to change. Through examples, we show how some organizations have successfully used pieces of a built-to-change approach. We have chosen not to identify a set of built-to-change (b2change) organizations—in part because an organization’s past success, the usual criterion for identifying excellent companies, is not a sufficient basis for identifying companies that are likely to be successful in the future.

We recognize that it is increasingly difficult for senior executives to think very far into the future because of the tremendous pressure placed on current operating results. Thus, as we look at practices and designs that make an organization ready to change, we also consider whether they contribute to current organizational effectiveness. The optimal practices and designs are those that create high-performance organizations that are ready and able to change. There are enough of these practices available that organizations can—with only a little additional investment in change readiness—be both high performance and built to change.

A word about our title is in order. It plays off the mistaken notion that Built to Last was about organizing for stability. Collins and Porras clearly suggest that the study was not about stability but about the principles of survival over long periods resulting in truly iconic companies. Collins suggests, in his Preface to the 2004 edition, that Built to Last is the sequel to his 2001 book Good to Great. We see Built to Change as the sequel to Built to Last; it represents what organizations need to do once they have developed the foundation for survival and want to increase their effectiveness over time.

We begin our discussion of b2change organizations by identifying the determinants of organization effectiveness and providing a way to think about these determinants. We then look at the various required elements in the design of a b2change organization. These include the strategy and the ability to change the strategy, as well as the processes, structure, leadership behaviors, human capital, and reward system of the organization. In each case, we focus on practices that both support current high levels of performance and facilitate an organization’s ability to change.

We conclude by discussing the challenges involved in creating a b2change organization—a difficult journey and one that not all organizations are likely to be able to measure up to. We believe that those companies that do make the transition will thrive, because they will be able to respond effectively to an uncertain and often unpredictable future.

Los Angeles, California

November 2005

Edward E. Lawler III

Christopher G. Worley

Chapter 1

Why Build Organizations to Change

Built-to-Change Strategy: Seek Temporary Advantages

All organizations are experiencing a business environment characterized by rapid change. This is not news to most people—their lives have changed because of it. What may be news is just how much the speed of change has increased. An analysis of Fortune 1000 corporations shows that between 1973 and 1983, 35 percent of the companies in the top twenty were new. The number of new companies increases to 45 percent when the comparison is between 1983 and 1993. It increases even further, to 60 percent, when the comparison is between 1993 and 2003. Any bets as to where it will be between 2003 and 2013? An early indicator is that the 2004 list shows a 10 percent change in comparison to the 2003 list.

Wal-Mart is now seen as an unstoppable giant (in 2004, it was once again at the top of the Fortune 1000), but in 1993 it was not even on the top twenty list. Back then, Wal-Mart ranked twenty-sixth—behind Sears! In the ten years from 1993 to 2003, Sears, JCPenney, Kmart, and Montgomery Ward all lost market share to Wal-Mart and to newcomer Costco.

Montgomery Ward ended up in bankruptcy; Kmart and Sears merged to try to compete with Wal-Mart and Costco. In their heyday, Kmart and Sears probably felt safe—and were safe. Retail was a traditional, unattractive industry, and they were well-established incumbents. But feeling safe and being safe are two different things. The growth of Wal-Mart demonstrates how a changing environment can rapidly dethrone existing leaders. Will Wal-Mart still be at the top in 2013? Given the rate of change, it is far from a sure thing, particularly when you consider that in 2005 Wal-Mart’s same-store growth in sales slowed for the second consecutive year.

The lesson from the changing of the guard in the Fortune 1000 is clear: change is all around us and is occurring more and more rapidly. It demands the attention of every executive and every organization that wants to survive.

Not surprisingly, the number of books and articles on organization change has skyrocketed. There are books on how to implement Six Sigma programs, organize work teams, create customer-focused organizations, go global, deploy largescale information systems, manage change, and lead change. For all that is written about organizational change, companies ought to be getting better and better at it, but they aren’t.

We believe that a major reason why organizations are not getting better at executing change is that existing theory and practice in organization design explicitly encourage organizations to seek alignment, stability, and equilibrium. Little mention is made of creating changeable organizations.

Organizations are encouraged to institutionalize best practices, freeze them into place, focus on execution, stick to their knitting, increase predictability, and get processes under control. These ideas establish stability as the key to performance. As a result, organizations are built to support enduring values, stable strategies, and bureaucratic structures, not to change.

Change is viewed as a necessary evil. It is costly, undignified, annoying, hard, and, more often than not, ineffective. Organizations must be disrupted, unfrozen, shocked, and changed; a crisis must be created, a case for change articulated and sold. It is no wonder that people resist it and organizations avoid it. This view of change fails to reflect the reality of today’s business environment and needs to go the way of black-and-white TVs, 8mm home movie cameras, and Oldsmobiles.

But what about creating organizations that don’t resist change, that are built to change? We believe that instead of pursuing strategies, structures, and cultures that are designed to create long-term competitive advantages, companies should seek a string of temporary competitive advantages through an approach to organization design that assumes change is normal. Instead of having to create change efforts, disrupt the status quo, or adapt to change, organizations should be built to change. Further, we believe that many current organization practices and designs actually prevent leaders from successfully implementing necessary changes. Organizations need to be built around practices that encourage change, not hinder it.

WHY ORGANIZATIONS NEED TO CHANGE

The environment in which most organizations operate today is continuously changing, and the rate of change is accelerating. Looking back only ten or fifteen years, one can see tremendous change. There are new countries, such as Slovenia, Namibia, Slovakia, and Kazakhstan. The Deutschmark and French Franc have disappeared. China has joined the WTO and become a leading force in Western economies. A decade ago, American computer programmers hadn’t even heard of Bangalore; now it’s the place they go to visit their old jobs.

We are experiencing a massive increase in international trade, partly due to the enthusiastic entry of India and China into the global market, but also stimulated by the opening up of Eastern Europe and the economic growth of such countries as Korea, Singapore, Malaysia, Vietnam, Cambodia, and Thailand.

The globalization of business has had two profound effects. First, it has raised the level of competition in most industries. Singapore is making a play to take a leadership role in bio-tech; Korea’s Samsung and LG have become respected international brands; Malaysia is a leader in chip manufacturing. These new competitors have advantages that range from geography to high-skill, relatively low-wage workforces. Second, international trade and information technology have opened new markets and challenged firms to deal with global consumers. Overall, international trade has created a world in which the bar that marks “good enough” keeps moving higher and higher.

Perhaps the most dramatic changes in the last decade have been in the area of telecommunications. The Internet, satellite TV, and cell phones have connected most of the world. Perhaps the most striking example of the rapid evolution of technology is the Internet. The number of unique websites grew an average of 53 percent per year between 1998 and 2002 and continues to grow at a rapid rate. In just a few years, the Internet has created a host of new businesses that serve customers in new and different ways. It also has facilitated the movement of work to India, Russia, and a host of other countries.

Human Capital Is Critical

In this new world of global competition and technological change, the era of human and social capital has arrived. There is no single reason why it has finally happened, but it is possible to identify some key changes. Combined, they have made human capital a critical and nearly universally acknowledged element in the effectiveness of organizations and a key source of competitive advantage.

The rapid growth in scientific and technological knowledge is one driver that has contributed to the growing importance of human capital. Second, the information technology boom of the 1990s and the accompanying talent shortage got firms thinking about human capital as never before. Finally, there is a growing recognition that more and more of the market value of firms rests in their human capital.

Knowledge Is Central

The centrality of knowledge to organizational effectiveness has changed the very essence of organizations, what they do, and how they do it. Because of the growth in knowledge and the ways it is used by organizations, the nature of individual work has changed. Increasingly, work in developed countries is knowledge work in which people manage information, deal in abstract concepts, and are valued for their ability to think, analyze, and problem-solve. Fewer and fewer people are doing the mind-numbing, repetitive manual tasks that used to dominate the work scene. It is being done by machines or transferred to low-wage economies.

Organization Makes a Difference

There is growing evidence that the way corporations are organized can in fact provide a competitive advantage. Research focusing on the performance impact of total quality management programs, knowledge management, employee involvement programs, and various organization designs and structures has shown that getting management and organization right can, in fact, produce superior financial returns for organizations.1

Similarly, research on the impact of companies’ human capital management practices, such as their training programs, efforts to create a desirable place to work, and reward systems, has found that there are practices that produce superior financial results.2 Other research suggests that one of the factors that increasingly determines the market value of corporations is the quality of their management talent. When surveyed, stock analysts and investors say that it is a very important intangible feature of a company’s assets.

Investors appear to be very aware that a shift in the source of competitive advantage has occurred. A growing body of research shows quite clearly that the stock price of an organization less and less reflects its book value. In other words, investors no longer primarily price a stock based on its tangible assets: cash in hand, equipment, and buildings. Tangible assets accounted for 62 percent of the typical New York Stock Exchange company’s value in 1982, whereas in 2000 it had decreased to 15 percent of the company’s market value.3

Of course, an organization’s human capital and management systems are not the only intangibles that make a difference. The company’s brands and intellectual property are among its other key assets, although even these cannot be completely separated from its human capital, and certainly not from its management practices. Knowledge is not only generated by individuals but also carried in their minds; it therefore walks out the door every day and may or may not return the next. The return of employees, like their performance, depends on how they are organized and managed.

Perhaps less related to human capital is a company’s brand or brands, but they too are definitely related to its organization and people. One slip-up by an employee can quickly destroy the reputation of a major brand in such areas as health care, food, and transportation. A clear example is Krispy Kreme donuts, which seriously tarnished its formerly enviable reputation by stuffing the distribution channel (sending more donuts to stores than could be sold) to meet short-term revenue targets.

When competitive advantage rests in a company’s people and its ability to organize its human capital, the situation is dramatically different than when organizations compete on the basis of tangible assets. Organizations are now competing based on their ability to organize. Thus innovations in management and organizational change need to be much more frequent and effective, and survival much more a function of possessing the ability to change. When the development of new approaches to organizing is combined with the rapid changes taking place in the environment and the new competitors that have appeared on the global scene, it is clear that performance levels that were good enough a few years ago are almost never good enough today.

TYPES OF CHANGE

Many of the changes that occurred in the last decade were unpredictable, or at least unpredicted. The rise of the Euro as a potential alternative to the U.S. dollar as a global reserve currency, for example, although discussed at times, certainly was not predicted. The implication of the unpredictable nature of change for organizations is clear: although in many cases they may not be able to anticipate change, they can always be fast adapters.

The world of human resources (HR) consulting provides an interesting case of change and product obsolescence. Younger HR managers cannot believe the time and energy that went into job evaluation in the 1970s and 1980s. The major benefactor of this passion for job evaluation was Hay Management Consultants.

In the 1960s, Hay’s CEO, Milton Rock, took the pioneering work of Ed Hay and turned it into a finely tuned consulting process. Rock opened Hay offices around the world. Hay raked in the cash. But as the 1980s wound down, the environment started to change.

Big, stable bureaucracies were ripped apart by downsizing. Constant reorganization meant that this week’s job evaluation might be obsolete next week. Managers were suddenly saying, “I don’t want to spend two hours in a committee deciding what grade a job is in!” Hay needed to change to survive—it almost didn’t. What saved Hay was the acquisition of the McBer consulting firm and the launching of a new area of consulting: competency modeling. The rise of a new consulting practice upset power relationships within Hay, changed the type of consulting Hay did, and required a different image for the firm. Hay was hardly a poster child for smooth transition to a new product area, but it got it done. Hay managed to survive an environmental change that took away a big part of its core business; many firms do not, and this is understandable.

In uncertain and rapidly changing environments, organizations are challenged to accomplish two often conflicting objectives: performing well against a current set of environmental demands and changing themselves to face future business environments. To meet these objectives, organizations must manage at least two types of change: the natural process of evolution, or what we will call strategic adjustments, and strategic reorientations. In some cases they also have to manage a third type of change, transformational change.

Strategic adjustments involve the day-to-day tactical changes required to bring in new customers, make incremental improvements in products and services, and comply with regulatory requirements. This type of change helps fine-tune current strategies and structures to achieve short-term results. It should be incremental, constant, and natural; it should not be an option or a nice thing to do. Like the continuous improvement capability that many organizations focused on in the 1980s, this basic capability to evolve is essential if an organization is to survive.

The second kind of change, strategic reorientation, involves altering an existing strategy and, in some cases, adopting a new strategy. When the environment evolves or changes sufficiently, an organization must significantly adjust some elements of its strategy and the way it executes that strategy. It needs to develop new competencies and capabilities. In the Hay example, the Milton Rock years were a time of strategic reorientation. For example, introducing Hay’s existing products and services to foreign markets required hiring new staff, opening new offices, creating new policies regarding worldwide pricing, and developing mechanisms to deliver consistent services in different countries. Hay’s shift away from job evaluation toward competency consulting is an example of a strategic reorientation.

More and more often, organizations have to face a transformational change. It involves not just a new strategy but a transformation of the business model that leads to new products, services, and customers, and requires new competencies and capabilities. It is often stimulated by the appearance of what Clayton Christensen calls a disruptive technology.4 Enron’s conversion from a regulated pipeline company to a multibusiness energy financial trader is an extreme example of this type of change. A possible example of this kind of change is under way at BP. Recognizing the finite limits of oil and gas supplies, BP has committed itself to a “green strategy” built on a fundamentally different economic logic, one that will rely more on revenue from solar, fuel cells, and other sources of energy that are currently viewed as “alternative.”

Transformational change is something very special. Successful cases of it occur relatively infrequently. Unlike strategic reorientations, during which the strategy can remain relatively stable but the organization’s design undergoes substantial revision, transformational change is associated with fundamental shifts in the organization’s strategy, organization design, and processes. Unisys is now known as a supplier of IT services, but some readers will recall that it was once a major mainframe manufacturer. This dramatic shift from manufacturing to services is an example of successfully mastering transformational change.

Unfortunately, the execution of transformational change is particularly likely to be inadequate, too late, or poorly managed. To us this is not surprising, considering that despite all the talk about change, organizations are in fact designed for stability. But even if an organization is not designed for stability, it may not be able to execute a strategic transformation quickly enough to be successful. All too often a new organization that doesn’t have to change wins out because it gets the new business model right first. Fortunately for existing organizations, the need for transformational change is relatively rare.

ORGANIZATIONS ARE BUILT TO BE STABLE

Most of the writing and consulting done on change management offer suggestions and remedial actions that an organization can take when it is not designed to change. Unfortunately, remedial actions are often desperate efforts to enable an organization to do something that is very much counter to what it is designed to do—change! As a result, most efforts at designing and managing organization change are dismal failures. Scarce resources are wasted, organizational cultures destroyed, and lives disrupted for little or no gain.

Human Nature Is Not the Problem

A major barrier to change is how individuals react to it. There is a great deal of writing on the reactions of individuals to change that emphasizes their resistance to it. Many discussions of change picture this resistance as irrational and perhaps a part of “human nature.” We don’t think this is true. We know of no evidence that there is a resistance-to-change gene!

It is true that when people have been successful at doing something over and over, and have been rewarded for doing it, they may take a great deal of pride and comfort in doing it. Change is particularly difficult in these situations not because people are inherently resistant—after all, they learned to perform this way in the first place—but because they have not been told to expect change, don’t see any advantages to change, continue to be rewarded for doing what they have always done in the past, and are understandably confused by the suggestion that doing what they were trained to do is no longer valued. Further, change often requires learning and developing new skills, forming new relationships, and disrupting one’s personal life. Although learning and establishing new relationships can be rewarding, it also can be hard work, uncomfortable, and stressful.

When email was new, many executives would have their assistants print out incoming emails, then write out their replies by hand, which the assistant would then email out. The IT folks tore their hair out! They despaired at this “irrational resistance to change.” They said things that we sincerely hope the executives never heard. Yet to the executives, resistance to email was rational. Why take time away from running the business to learn about electronic communication when paper communication had always worked just fine?

The bottom line is that organizational change is difficult because management systems are designed, and people are rewarded, for stability. For people to change, there needs to be a reason for them to change. There may be a few people who irrationally resist change, but given a strong case for change, and appropriate rewards and support, people will change the way they work and the way they operate. We will talk specifically about how to handle rewards in Chapters Nine and Ten.

Traditional Design Is a Problem

In many respects, traditional organizations are built to resist change. Their numerous rules, regulations, and provisions limit experimentation, program in traditional behaviors, and reward consistent performance. They have many checks and balances in place to ensure that the organization operates in the prescribed manner.

Teleworking wasn’t widely adopted until long after it was technically possible, simply because organizational rules required people to be physically at their desks. An innovative manager favoring telework had to go up against the bureaucracy in allowing an employee to work at home.

There is good reason why organizations are built to operate in a stable, predictable manner. Behaving this way is often critical to an organization’s ability to perform well in the short term. It is perfectly consistent with the objective of achieving success under current business conditions, but it is inconsistent with achieving continuing success when change is needed.

The traditional approach to change management assumes resistance and reinforces stability. It identifies three phases: unfreezing, moving, and refreezing.5 Unfreezing involves creating dissatisfaction with the current state so that an organization will abandon its traditional ways of operating. The whole notion of unfreezing implies that an organization exists in some form of equilibrium that needs to be disrupted. Once the status quo is considered obsolete or ineffective, the organization is expected to go through a period of change, during which a new set of behaviors and systems is implemented. Refreezing involves institutionalizing the change and returning to a period of stability. As is true of unfreezing, refreezing implies that the organization should seek stability following a period of change.

As a general rule, the more radical or disruptive the changes that an organization tries to implement, the more likely that it will be unable to successfully change. Indeed, the more radical the change, the more likely that new organizations, often start-ups, will ultimately emerge as the winners. There is clearly not just a first-mover advantage when disruptive changes are involved; there is a new organization advantage.

Not surprisingly, many major innovations, such as copiers and low-cost air transportation, were developed by start-up companies. Xerox developed and commercialized the copier; Southwest created the low-cost air carrier market. In essence, the new entrant’s advantage comes from not having to unlearn old habits and creatively destroy old ways of doing things. It is often easier to start with a blank sheet of paper and to create “from scratch” an organization designed to perform in the way that will best serve the new market.6

Even when organizations develop a new technology that leads to a new business, they are often unable to exploit it. The computer industry provides many examples of existing organizations that have ended up as nonplayers even though they pioneered much of the technology. For example, Bell Labs developed transistors, but its parent, AT&T, never became a major player in either semiconductor manufacturing or in the many other products that it has led to.

Xerox developed an early PC and much of the user-friendly software that currently dominates the industry, but it failed to build a computer business. Why? Despite the fact that Xerox had a clear technological lead and a first-mover advantage, it simply was unable to develop the kind of focus and internal organizational capabilities needed to be successful in this new business. In contrast, over the years numerous start-up companies have been able to develop the ability to make quick decisions and stay on the technological edge. Today the PC market is dominated by Dell and Hewlett-Packard, neither of which was in the PC business when it was created.

Consulting work we did with Honeywell years ago helped us understand why existing organizations have problems in businesses that require new kinds of organization designs. Honeywell was an early mover in the computing business. It developed its own product line and also bought General Electric’s computer business. There was one glaring difference between the successful start-up firms and Honeywell: the start-ups were more nimble in their decision making. Why was this?

Basically, Honeywell’s decision processes were designed to support its major businesses (thermostats, airplane guidance systems) at that time. Most of these businesses were relatively slow moving and did not require high-speed decision making and agile behavior. In contrast, the computer business was changing almost daily and needed to be able to respond quickly to competitors’ moves, technology developments, and environmental changes. The required speed of decision making simply did not fit with Honeywell’s kind of internal decision processes or with the elaborate justifications that were required for capital investment and product development.

Leadership Is Not the Answer

The implicit, and at times explicit, message of many management and leadership books is that if an organization can find the right leaders, it can successfully change in response to almost any challenge.7 According to them, the “right” leader is someone who can establish a vision compelling enough to motivate change. The right leader also has the personal drive to get things implemented by challenging the status quo as unacceptable.

The importance of leadership is conveyed by the case studies MBA students are given that feature the leadership behavior of senior executives, and by the popular business press, which profiles leaders who have “successfully changed their organizations despite overwhelming difficulties.” One indirect measure of the star status of senior executives is the number of Business Week covers featuring CEOs from the Fortune 1000. It went from almost zero in 1981 to twenty in 2000.

The reality is that most heroic leaders fail in their attempts to change organizations. Study after study has shown that most would-be saviors are unsuccessful in producing significant organization change.8 This is true whether the leaders are from the outside or from the inside. Regardless of their leaders’ skills and best efforts, many organizations are so change resistant that it is virtually impossible for a heroic leader or leaders to effect significant change.

Organization Design Is the Issue

Models of strategy and organization design that encourage companies to maintain and fine-tune the status quo work well when organizations face stable environments. For example, making big investments in developing job descriptions makes sense if (but only if) the jobs will not change for many years. When advantage derives from geographical location, financial capital, or legislation, the important thing for an organization is to use these assets effectively, and often this is possible only with stable processes. However, when organizations face uncertain environments, organization designs that capitalize on only these sources of competitive advantage are often not sustainable.

The automobile industry provides a clear example of the changing nature of competitive advantage. Japanese manufacturers have consistently gained market share in the U.S. market, despite the fact that they face a significant location disadvantage and well-established competitors.

Initially, the Japanese manufacturers gained market share by charging lower prices, but that did not prove to be a sustainable competitive advantage, so they began to focus on quality. Until recently, they had a clear-cut quality lead over their American competitors.

Beginning in the early 2000s, U.S. auto manufacturers began to equal Japanese quality; as a result, quality has ceased to be a significant competitive advantage. Consumers now take quality for granted. As a result, the competition has shifted to intangibles, such as design, customer experience, service, and image. There is also growing evidence that customers want a car company to exhibit a sense of social responsibility by producing energy-efficient, low-pollution cars. Perhaps the best way to summarize this is that customers want to make a purchase that not only provides reliable, high-quality transportation but also makes a statement.

The Japanese manufacturers once again have adjusted their strategies. They now lead in service, design, and social responsibility. Once again, the U.S. manufacturers appear to be behind. Some have been able to make creative cars like the Humvee, which makes a statement, but how many people want to make a Humvee-type statement?

Indian call centers appear to be repeating the automotive change experience. They are winning business from U.S. competitors despite being many thousands of miles from their clients and living in a different time zone. One leading outsourcer commented, “We were attracted by cost but stayed because of the superior quality of the Indian call centers”—a replay of the Japanese auto story.

The main lesson from the past thirty years is that as industries, technologies, and environments change, so too do the definitions of advantage. Organizational change, whether planned or by accident, is essential for continued success. Simply stated, the law of competition is that an organization must change or become extinct.