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19
Continuous Change
learning objectives
Compare and contrast four continuous change organization development (OD) interventions.
Describe the elements and processes associated with the dynamic strategy-making intervention.
Define the demands of turbulent environments and describe the self- design intervention.
Outline the definition and application of organization learning interventions.
Explain the logic and process of developing built-to-change organizations.
This chapter describes interventions that enableorganizations to change themselves contin-ually. These change processes are increas- ingly common in organizations, but are still being developed and refined. They are aimed at the growing number of organizations facing highly turbulent environments, such as firms in high- technology, entertainment and fashion, and bio- technology industries, where timing is critical, technological change is rapid, and competitive pressures are unrelenting and difficult to predict. In these situations, standard sources of competi- tive advantage—strategic positioning and core competencies—erode quickly and provide only temporary advantage.1 What is needed are dynamic capabilities2 built into the organization that enable it to renew forms of competitive advantage constantly to adapt to a rapidly shift- ing environment.
Continuous change interventions extend trans- formational change into a nonstop process of
strategizing, designing, and implementing.3 Rather than focus on creating and implementing a particular strategy and organization design, continuous change addresses the underlying structures, processes, and activities for generating new forms of competitive advantage. Thus, the focus is on learning, changing, and adapting—on how to produce a constant flow of new strategies and designs and not just on how to transform existing ones.
Dynamic strategy making uses a process of “guided involvement” to help organizations implement a strategic system.4 A statement of strategic direction—the organization’s competitive logic, goals, organization design, and action plan— and a repeatable strategic process define the strategic system. OD practitioners work with managers and key stakeholders to build a system that continually adapts. Dynamic strategy making addresses both the content (the “what”) of strategy formulation and the process (the “how” and “who”) of strategy implementation.
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Self-designing organizations have the capability to alter themselves fundamentally and continuously. Creating them is a highly participative process in which multiple stakeholders set strategic direc- tion, design appropriate structures and processes, and implement them. This intervention includes considerable innovation and learning as organizations gain the capacity to design and implement significant changes continually.
Learning organizations are those with the ability to learn how to change and improve themselves constantly. Distinct from individual learning, this intervention helps organizations move beyond
solving existing problems to gain the capability to improve constantly. It results in the development of a learning organization where empowered members take responsibility for changing the organization and learning how to do this better and better.
Built-to-change organizations include strategizing processes, design elements, and managerial practices that support change as the primary driver of effectiveness. This intervention provides design and implementation guidelines for building change capabilities into the structures, processes, and behaviors of the organization so that it can respond continually to a rapidly changing environment.
19-1 Dynamic Strategy Making Dynamic strategy making represents a new type of OD intervention that combines OD’s traditional human process focus on relationships among organization members with strate- gic management’s customary emphasis on strategy and organization design to help organi- zations manage strategic change. Similar to integrated strategic change (ISC) (Chapter 18), dynamic strategy making is a deliberate, coordinated process that leads to continuous realignments between an organization and its environment. Whereas ISC focuses on mak- ing a systemic and revolutionary change, dynamic strategy making creates a continuous strategic change process intended to improve performance and effectiveness over time.5
Greiner and Cummings developed the dynamic strategy-making process based on their research and practice in strategy implementation.6 They found that managers consistently underestimated the impact of change and human process issues during strategy execution.7
Greiner and Cummings’ analysis of the history and practice of strategy formulation and implementation, along with the increasing pace of change in complex environments, led them to propose several criteria for an effective strategic change process:8
• Speed over delay. New opportunities and threats need immediate strategic action, but organizations are often slow to react, gathering more information and assessing more solutions instead of acting.
• Breadth over narrowness. Unpredictable and complex conditions require expansive thinking and openness to innovative ideas, but organizations tend to be discipline focused and take input from select stakeholders.
• Flexibility over rigidity. Organizations must discover new solutions, adjust priori- ties, and reallocate resources constantly, but they are often ruled by rigid policies and annual budgets.
• Empowerment over autocracy. Strategy making must permeate the entire organiza- tion and give members the freedom to respond to local changes; it cannot remain the sole domain of top management.
• Simplicity over complexity. Complexity threatens to overwhelm organization mem- bers; strategy needs to be concrete and specific enough to be acted on but not so detailed that members cannot respond and improvise as situations change.
• Unity over fragmentation. Strategy must promote consistent and integrated action, because organizations spread out across countries, markets, and businesses tend to fragment, lose coordination, and deviate from the intended strategy.
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19-1a Conceptual Framework Dynamic strategy making is a comprehensive and pragmatic approach to strategic change. It views strategy as a central concept that permeates the organization rather than being another element to align with other parts. It treats the process of creating and implementing strategy and the content of strategy interactively and seeks strategies that are executable and flexible. Figure 19.1 broadly outlines the framework. The strategic system is the core of dynamic strategy making. It includes strategy content in the form of a statement of strategic direction and a strategic process for developing and executing the strategy. When designed effectively, the strategic system continually matches the firm’s resources and capabilities to changing environmental opportunities and demands.
The specific issues addressed in the strategic system come from senior managers’ situational assessments about the organization and its environment. The organization is examined to identify core capabilities, resources, know-how, and all potential strengths needed to succeed in the marketplace. Because neither the organization nor its environ- ment is static, this assessment is not a one-shot event and so the strategic process is ongoing and built into the organization. In fast-moving environments, the results of strategic analysis have a short shelf life, so data collection and assessment need to be continuous and keep pace with change.
Statement of Strategic Direction A written statement of strategic direction is the primary outcome from the situational assessment—it makes strategic information about the organization and environment concrete and permits revision over time. It provides a way to record, communicate, and implement the strategy. A written statement avoids misunderstandings in the future and provides a clearer way to articulate the con- tent with organization members and other stakeholders about the journey ahead.9
FIGURE 19.1
A Dynamic Strategy System
SOURCE: Adapted from Greiner and Cummings, 2009.
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The statement of strategic direction includes four elements: (1) the competitive logic that describes the organization’s market position and customer tiebreakers, or the business model for gaining competitive advantage; (2) the financial and rallying goals that will direct and motivate members’ behavior; (3) the organization design that will structure and link members to work activities, each other, and company values; and (4) the action plan that includes strategic initiatives and specific steps for implementing the strategic system. The four elements are described below:
1. Competitive logic. An effective strategy centers on a value proposition that connects the firm’s capabilities to market opportunities. This value proposition is the compet- itive logic, or how the firm will compete in the marketplace, and includes statements about the organization’s market position and customer tiebreakers. The best market position is one where the organization has the capabilities to deliver value to specific customers in ways that competitors cannot easily match. Finding and describing this position is more creative than deductive, but is assisted by such traditional strategy tools as strengths, weaknesses, opportunities, and threats (SWOT) analyses or Porter’s competitive strategy model.10 More recent methods, such as value migration techniques, the resource-based view of strategy, or “blue ocean” models, can also be used.11 The organization’s customer tiebreakers are the differentiators that attract and retain customers. Tiebreakers are the product, service, after-sales support, or brand characteristics that customers use to make purchase decisions. The organiza- tion’s capabilities must be able to deliver on these tiebreakers for a competitive logic to be effective.
2. Goals. Greiner and Cummings suggest that goals represent the unifying target for achievement, and should be separated into financial goals and a single rallying goal. Financial goals direct effort and measure progress. Research suggests that when top management teams agree on the financial goals and their importance, the firm’s performance is higher than it would have been otherwise.12 A few specific and clear goals help to unify and motivate employees to make the strategy happen. Unfortunately, too many organizations set too many goals that diffuse and dilute the energy and focus of organization members.
A single rallying goal motivates the workforce to embrace the strategy, espe- cially for those who find abstract financial goals less exciting. For example, the use of “big, hairy, audacious goals” (BHAGs) has been associated with short-term success.13 Once goals are accomplished, old goals can be dropped, and new ones can be set and added to the statement.
3. Organization. This element describes the formal organization design that aligns work, structure, human resource practices, and management processes to the com- petitive logic and goals. As with all strategic change interventions, a strategy can eas- ily remain abstract and become the latest management fad unless its intent is manifest in the organization’s design. The most important design features to change are the ones that will realize the competitive logic. They can be structural changes, such as placing the right people in the right jobs or creating new departments, or changes in the reward system that encourage new behaviors. For organizations in dynamic and complex environments, the challenge is to build organizations that are both agile and reliable. Many traditional firms may have to transform their entire organization to align with the new strategy and to direct employees to move in a new strategic direction.
4. Action plan. This element describes the initiatives and specific steps required to implement the strategy and to ensure that everyone’s daily behavior reflects the
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strategy. The action plan sets priorities and spells out what things need to happen over a specific time frame to move forward. Action plans are generally organized around four to six broad initiatives that take their cue directly from the other three elements of the statement of strategic direction. Each initiative usually requires three or four specific steps to cause implementation. These steps should specify responsi- bilities, accountabilities, and deadlines and include a realistic evaluation of the costs, benefits, and feasibility of moving the competitive logic forward. Managers revise the action plan continuously, when initiatives are accomplished, or when real-time events make changes necessary. Initiatives that divert energy from key goals or orga- nization design changes, make accountability vague, or cause employees to lose focus should be eliminated.
The four elements of the statement of strategic direction are straightforward and easy for organization members to understand and remember. In a world that frequently requires spontaneous responses, this simplicity is important. It makes it easier for people to make adjustments in line with the strategic direction.
Strategic Process While the statement of strategic direction captures the content of an organization’s strategy and design, Greiner and Cummings suggest that the second part of the strategic system shown in Figure 19.1, strategic process, is equally important to successful strategy making. Strategic process has to do with the “who” and “how” of developing the statement and subsequently implementing it. It involves identifying the relevant stakeholders who should be involved directly in the strategy-making process and engaging them in a highly interactive set of conversations and debates about the organization’s strategic direction and how to move forward. As described below in the application stages, strategic process is informed by the philosophy of “guided involve- ment,”14 which includes a repeatable series of retreats and activities for developing and executing strategic direction. Guided involvement speaks to the nature of the dialogue expected among organization members and to the role OD practitioners can play in building the required organization capabilities. It bridges the learning and applied behav- ioral science aspects of OD with the technical aspects of strategic management and orga- nization design by holding organization participants to a high standard of direct, open, and concrete engagement.
In uncertain environments, a strategic process must promote both quickness and participation. Guided involvement helps participants rapidly assess the organization and its environment, share their knowledge and experience, and agree on strategic direction. As a result, politics—the way power and influence are managed in organizations—is made more constructive through guided involvement. It reaches out to all organization members to encourage their relevant participation in strategy making and facilitates their understanding and commitment to the strategic direction.
19-1b Application Stages Making the statement of strategic direction actionable requires integrated content and a supporting process. Dynamic strategy making helps organizations construct content and process together into a strategic system. The following tools and concepts in the form of building blocks support this construction process.
1. Choosing relevant stakeholders. The dynamic strategy-making process is kicked off by identifying and recruiting the relevant stakeholders. Getting the right stake- holders involved from the start ensures that the strategic system results in a more
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realistic formulation of the strategy and has the commitment necessary to support its implementation. The process is driven by senior executives or the top manage- ment team and they can employ a variety of techniques, including open system planning or stakeholder mapping processes (Chapter 11), to systematically identify stakeholders. Typical stakeholders include the board of directors, union officials, customers, managers and organization members, regulators, and community repre- sentatives, among others. The balance of the application stages describe how the sta- keholders are organized for meaningful interaction and decision making.
2. Holding the first retreat. The purpose of the first retreat is to create an initial draft of the statement of strategic direction, especially the competitive logic and goal ele- ments. Before the session, participants provide information about their perceptions of strengths, weaknesses, opportunities, and threats through personal interviews or other methods. These interviews are important because they will be the primary input to conversations about strategy. Although many organizations are full of data about customers, regulations, competitor actions, and market forces—and these should be available to the group—much of dynamic strategy making is about gain- ing consensus regarding the implications of these data and about the actions to be taken. Interview summaries must not ignore data points only mentioned by one or a few members. OD practitioners should be careful to present all the data and not over-consolidate it; “small noises” often can turn into a “big signal.”
Based on these data, three primary discussions define the first retreat: under- standing the data, formulating competitive logic and goals, and preparing for broader organizational involvement. Following introductions, agenda setting, and any educational inputs, the group discusses the prework data. This is best done as a total group where everyone can hear about all of the data. The philosophy of guided involvement suggests that inquiry—understanding what is known and what it means—is the most appropriate behavior during this discussion.
The second conversation is the most difficult. After hearing and discussing the data, the total group is then split into smaller breakout groups to develop a compet- itive logic for the organization. This creative assignment asks small groups to explore the organization and its environment and to discover or invent the best match between existing market opportunities and internal strengths. It allows parti- cipants to use their common knowledge and individual experiences to create content and develop a consensus strategy.
This small group dialogue is likely to be complex and uncertain; it represents an opportunity for guided involvement by the OD practitioner. Finding the right fit between the organization and its environment is a creative act. Companies have many internal strengths and external opportunities to consider, not all of which will match up. Participants should be encouraged to be broad enough in their think- ing to see a variety of possibilities, but focused enough to come to some agreement about the best opportunities.
Initial ideas for a rough draft of the competitive logic and goals from the small groups are reviewed in the total group and depending on the length of time available, a second round of small group discussions can be conducted. While desirable, it is not necessary to come to consensus. Some teams are able to complete a draft of the entire strategy statement at the first retreat, but this is rare, and the remaining elements, organization and action plans, are typically addressed in the second retreat.
The last discussion involves establishing procedures and timelines for gathering feedback on the draft logic and goals before the next retreat.
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3. Engaging stakeholders between the first and second retreats. Between the first and second retreats, senior managers reflect on their work and perform reality tests on the validity of assumptions in the statement. The primary method for this testing is through feedback on the draft statement from other stakeholders. During interim meetings, senior executives from the first retreat lead reviews of the draft on com- petitive logic and goals. Middle managers, frontline employees, and other relevant stakeholders provide feedback and comments. These meetings can be in person or virtual and extend the strategy-making process out to the larger workforce. In gen- eral, the meetings address four questions:
• Is the draft statement sufficiently realistic in its assumptions about the market? • Do we have the capabilities to pull it off? • Is it sufficiently inspirational, and will it win commitment? • What suggestions would improve it?
The reactions from these meetings are fed back to a designated member of the retreat team, who incorporates them into a redraft of the competitive logic and goals statement. These are presented at the second off-site retreat.
4. Holding the second retreat. The purpose of the second retreat is to review the feed- back, finalize the competitive logic and goal statements, and complete the statement of strategic direction. Initially, the total group reviews and discusses the input from stakeholders and builds consensus regarding the competitive logic and goals.
Then, subgroups are asked to identify alternative organization designs with pros and cons for each, keeping in mind the need to ensure a close fit between the pro- posed design and the competitive logic and goals. This involves specifying the design components at a high level first, and then describing specifics of the design through participation and involvement of organization members. Politics is inherent in any organization design discussion, especially if names are attached to positions, and OD practitioners must be careful that discussions do not derail. Best practice here sug- gests defining the design logic and recommending preferred alternatives to the CEO or senior manager. Following the second retreat or during a third retreat, the final organization design can be discussed.
The outcome of the second retreat is an outline and action plan for implement- ing the new strategy. At this time, only the key strategic initiatives are outlined; specific steps are postponed until a team is charted to own the initiative or a third off-site retreat is convened. Initiatives appear rather logically after reflecting back on the logic, goals, and high level design. They typically answer the following questions:
• What are the few priorities stemming from the competitive logic that will help us to move forward?
• What resources are needed for what goals? • Who will do what, when, and where?
5. Implementing actions. Following the second retreat, organizations have several options for moving forward. All of them involve putting effort into pursuing the state- ment of strategic direction. For example, a third retreat could finalize organization design changes, or provide details about initiative resources and action steps. Alterna- tively, the organization could establish task forces with charters to develop action plans and implement the initiatives and to report progress to the senior team.
In any case, it is important for the senior team to arrange for the statement of stra- tegic direction to be communicated and to be built into the organization’s performance management system. Dynamic strategy making requires exceptional leadership from all managers (not just senior executives). Strategic leaders must step forward and support the creation, execution, and refinement of the organization’s strategy. They must model
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the behaviors implied by the strategic statement and hold themselves accountable for it. It is also important to create systems to hold other managers accountable for results. This takes a good deal of vision, personal insight, and social acumen. Strategic leader- ship must ensure that strategy is enacted effectively at all levels on a daily basis. This often requires change, leaving behind traditional habits and replacing them with new strategy-oriented behavior.15 A good leader must assure that the dynamic strategy mak- ing process continues over time by periodically reassessing the statement of strategic direction and making changes in the statement and organization as needed. This might involve recycling through the application stages at periodic intervals to keep pace with a changing environment.
Application 19.1 describes a dynamic strategy-making intervention at Whitbread PLC. The organization leveraged a written statement of strategic intent to gather feed- back from the larger organization and to clarify and focus its strategy and organization. In using a deliberate, guided process, it also built a process for continuing to make strategic changes over time.16
19-2 Self-Designing Organizations A growing number of researchers and practitioners have called for organizations with a built-in capacity to transform continually and to achieve high levels of performance in today’s competitive and changing environments.17 Mohrman and Cummings developed the self-design intervention in response to a number of demands facing organizations in turbulent environments. It involves cycles of diagnosing, designing, and implementing activities that managers and employees at all levels of the firm can carry out.18 This sec- tion begins with a discussion of the demands of a turbulent environment and then describes the application stages of self-design.
19-2a The Demands of Turbulent Environments Turbulent environments are both complex and changing rapidly. To be effective in these situations requires a coordinated organization response. As a result, large-scale change needs to occur at multiple levels of the organization if new strategies are to result in changed behaviors throughout the system. Top executives must formulate a strategy and clarify a vision of what the organization needs to look like to support it. Middle and lower levels of the organization need to put those broad parameters into operation by creating structures, procedures, and behaviors to implement the strategy.19 Self-design processes help members change the organization systemically.
In turbulent environments, change is constant. Therefore, organization change is never totally finished, as new structures and processes will continually have to be modi- fied to fit new conditions. Thus, the change process needs to be dynamic and iterative, with organizations continually changing themselves.
In turbulent environments, the direction of change is unclear. Organizations need to learn how to translate general prescriptions of change, such as “be more nimble” and “go global,” into specific structures, processes, and behaviors appropriate to their situations. This generally requires considerable on-site innovation and learning by doing—trying out new structures and behaviors, assessing their effectiveness, and modifying them if necessary. Large-scale change in turbulent environments calls for constant organizational learning.20
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1 DYNAMIC STRATEGY MAKING AT WHITBREAD PLC
W hitbread PLC is one of Britain’s leading organizations, a member of the FTSE 100 with a strong brand presence in hotels (Premier Hotels) and restaurants (Costa
Coffee, Beefeater Grill). It also has a long his- tory of change and transformation, starting out in 1742 as a brewer and pub owner/operator. In 1800, it was arguably the largest brewer in Britain, and for most of its history operated as a vertically integrated brewer, owning the brewery, transportation, and retail outlets. But reg- ulatory changes in the early 1990s—specifically the “Beer Orders”—restricted pub ownership by brewers and greatly changed the industry’s dynamics. Whitbread diversified by entering into restaurants, hotels, and health clubs.
In June 1997, David Thomas was named CEO largely because of his success in building and growing these new ventures and he wanted to accelerate Whitbread’s changes. But in 1999, a large and public failure to acquire a number of pubs destroyed confidence in the company both internally and externally. The proposed acquisition painted a confusing pic- ture of corporate strategy. Was brewing a core part of the portfolio or not? The expansion into hotels, restaurants, and health clubs fol- lowed by the failed pub acquisitions left people wondering, “What is the strategy at Whit- bread?” Stock price plummeted and Whitbread fell out of the FTSE 100.
The company thought long and hard about this issue, and Thomas wondered if he had been clear enough or done enough to build an organization that could sustain the growth he thought was possible. In October 2000, he announced the “Future Whitbread” strategy, clarifying that the organization would focus on “lodging, eating out, and active leisure,” areas that were forecasted to grow more than 30% between 2001 and 2006. His group executive team had decided that brewing could no longer be its core business and Whitbread sold the beer operations, representing almost half of the workforce, in 2000.
At this time, Whitbread was best described as a multibrand, multidivisional organization.
Reporting to the CEO were the managing direc- tors of the different brands and divisions (e.g., hotels, restaurants, health clubs) and cor- porate functional heads (e.g., finance, human resources, legal counsel). To encourage organic growth and operational efficiency, traditional hallmarks of the Whitbread organization, each division had a full complement of functions reporting directly to the managing directors, and only “dotted line” responsibility to the cor- porate function. Corporate functions were expected to formulate and implement cross- business initiatives that would bring synergies to the brands and make Whitbread more than the sum of its parts. In reality, the managing directors acted like and were referred to as “barons.” There was little room for collabora- tion. Career paths and loyalty were clearly asso- ciated with a particular division; there were few stories of cross-division transfers. As a result, Whitbread found it difficult to balance brand building and brand identity with corporate iden- tity and coordination, and a “nice” culture emerged. Reflecting to some extent the larger British culture, there was little confronting of people or holding them accountable for results. This description applied well to Thomas. He was seen generally as easy and good to work for.
The “Future Whitbread” strategy challenged this organization. It clearly implied that correct executive behavior involved putting shareholders ahead of management empire building, shifted the organization from an operations-driven to a brand-driven orientation, and would hold execu- tives more accountable for their performance. To this last point, Thomas announced increased transparency of Whitbread’s results to the finan- cial community. No longer could a managing director hide from scrutiny in results that were buried in corporate statements.
To back up these commitments, Thomas held a series of workshops with his executive team. The hotel group managing director had read Collins’ Good to Great and suggested it would be good basis for discussions about how to change and manage Whitbread. Initial meetings among the executive team, facilitated
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by OD practitioners, were later expanded to include the top 40 managers. They discussed and debated their core purpose and values, the things the organi- zation was passionate about, the economic engine of the corporation, and how success should be measured. At the end of the process, the hotel group managing director thought it would be impor- tant to get feedback from the rest of the organi- zation: “What do other people at Whitbread think of our work?”
Despite some resistance from the executives, including Thomas himself, the idea was eventually endorsed. To get the process started, Thomas and Whitbread’s corporate human resources officer drafted a “statement of strategic and organizational intent.” It was a two-page summary of the Good to Great sessions and listed out Whitbread’s intended core and enduring purpose, passions, ambitions, values, measures, and economic engine. The group executive team also commissioned a “strate- gic fitness” task force that consisted of eight upper level managers. With the OD consultant’s support, the task force’s mandate was to interview 100 man- agers from different functions, businesses, and levels around three questions: “What do you think of the statement of strategic intent?” and “What are the organizational strengths and weaknesses with respect to implementing this intent?”
Prior to a two-day meeting of Thomas’ group executive team, the task force members gathered to prepare their feedback and presentation. The members were generally struck by the level of dis- appointment in the data. Most managers expressed a great amount of loyalty to the organi- zation but were concerned that it was not achiev- ing everything that it could. The task force members tried to figure out how to convey that feeling. Ultimately, they decided to present the data along five themes:
• Why Whitbread? Managers were confused about the overall purpose of the organization. Why, for example, were they better off as one organization rather than independent busi- nesses? What was the role of the corporate functions? Why were executives not pursuing obvious synergies, such as selling Costa Coffee in Whitbread hotels or locating Whitbread health clubs in Whitbread hotels?
• Brand management. If Whitbread was going to focus on brands, then a lot of attention needed to be paid to building brand manage- ment skills and processes into the organization.
• Culture. The task force members captured this category by describing Whitbread’s cul- ture as “institutionalized underperformance.”
• Leadership. The interviews suggested that many people talked about the “New Whitbread, Old Executives.” Nearly every executive had been with the company more than ten years. To a person, and despite large and obvious mis- takes, they were never held accountable. They received a sizeable bonus, visibly announced every year in the annual report. Moreover, the team noted consistent agreement among the interviewees that the group executive team did not work well together, did not speak with one voice, and could not articulate a consistent corporate direction.
• Statement of intent. The overall feeling was that the statement, as written, was “mother- hood and apple pie.”
The task force presented its findings to the group executive team. Although anxious about the content of the feedback, the task force described the meeting as direct, professional, and businesslike. The day after the feedback, the group executive team discussed and reflected on the data, discussed and debated the organization’s business and corporate strategy, and addressed the role of the corporate center in response to the feedback about “Why Whitbread.”
In the weeks following the feedback meeting, Thomas and the human resources officer, sup- ported by input from other members of the group executive team, developed an action plan to address the feedback. They also called the task force back to a meeting to present their plan.
During the combined group executive/task force meeting, Thomas presented the plan. Following the presentation, the group executives left and the task force prepared a response. The task force members believed that the executives had not heard them and failed to grasp the depth of the problems facing the organization. They debated whether it was because the executives weren’t listening, whether they had sugarcoated the information, and what they were
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These demands strongly suggest the need for a self-design process. In contrast, more traditional and programmed approaches to large-scale change emphasize rigid timelines, see change as a periodic event, and rely on consulting expertise. That is, traditional change management practices are often guided by the values of control and certainty and do not emphasize the OD values of learning and participation. The self-design process suggests that the way the organization thinks about and prepares for change determines, to a large extent, whether the change will be implemented expediently and successfully.
19-2b Application Stages The self-design intervention focuses on all features of the organization (for example, structure, human resources practices, and work design) and designs them to support the strategy. It is a dynamic and an iterative process aimed at providing organizations with the built-in capacity to change and redesign themselves continually as the circum- stances demand. The approach promotes organizational learning among multiple stake- holders at all levels of the firm, providing them with the knowledge and skills needed to continuously change and improve the organization.
going to do about it. They decided to confront the very culture they were trying to change.
When the two groups reconvened, the task force made a short but powerful statement. After restating the themes of their findings, they made several bold recommendations for inclusion in the action plan, including reorganization of the divisions into brands with a direct reporting relationship to the CEO, a radical overhaul of the leadership group by identifying who was “on the bus” and who wasn’t, and the need to invest in the capabilities required to build and manage brands. The task force went so far as to say they wondered whether the group executives were the able to lead the change.
Although the group executive response was polite at the time, Thomas later reflected what was obvious to everyone: The plan and the strate- gic intent it was built on was “crap.” The task force was clearly saying that they were not being bold and not taking risks. It was clear that just being more transparent to the financial market was not leadership.
Thomas and his group executive team were finally feeling the urgency and met numerous times to develop a new plan. Eventually dubbed the “11-point plan,” it spelled out specific initiatives and the executive who would be responsible and accountable for its execution. The 11-point plan
included significant commitments to restructuring the organization, in particular the restaurant and hotel divisions; the development of a “master class” in brand management and the commitment to build brand skills; and a personal development program for the top 100 leaders in the organization.
The 11-point plan received a positive response from the task force and was presented to the orga- nization. By 2004, much of the 11-point plan had been implemented. An outside firm had implemen- ted a rigorous personal development program and helped the organization manage a radical change in its talent management policies. Following the implementation of the program, it was announced that the top 100 managers were to be “owned” by the CEO and not the brands. Their development and assignments were to be handled by the group executive team. Similarly, the brand man- agement capability building initiatives had begun. Finally, there was some movement in reorganizing the brands, but the process was less than com- plete. The hotel division successfully split into two groups with each director reporting to the president. The restaurant division, however, had not reorganized even though the managing director was seen as a potential successor to Thomas. Eventually, the hotel managing director was named CEO.
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Figure 19.2 outlines the self-design approach. In the typical case, a “design team” (Chapter 10, microcosm groups) guides the intervention. It can be the top management team or a cross-functional or cross-level group made up of formal and informal leaders, high-potential managers, or selected employees and staff. Experience suggests that if the top management team is not the design team, then at least one to two members from the top management team should be on the design team, represent senior management’s perspectives, and serve as liaisons between the two groups.
Although the process is described in five stages, in practice the stages merge and interact iteratively over time. Each stage is described below:
1. Clarifying the strategy. This initial stage involves making the organization’s strategy clear. Most organizations have a strategy but often do not share or write it in ways that are clear to members. This stage clarifies the organization’s strategic objectives, translates the strategy into descriptions of breadth, aggressiveness, and differentia- tion, and explains how they are changing. The self-design process assumes that an unclear strategy will result in an unfocused organization design. As one OD practi- tioner put it, “if the strategy is unclear, then any organization design will work.”
2. Laying the foundation. This stage provides the design team with the basic know- ledge and information needed to get large-scale change started. It involves three kinds of activities. The first activity involves valuing—determining the beliefs and values that will guide the change process. These values represent those performance outcomes and organizational conditions that will be needed to implement the strat- egy. They are typically written in a values statement that is discussed and negotiated among multiple stakeholders at all levels of the organization. For example, the valuing process might result in statements that emphasize “delivering value to the customer,” “employee engagement,” or “maintaining gross margins.”
FIGURE 19.2
The Self-Design Change Process
SOURCE: Adapted from Mohrman and Cummings, 1989.
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The second activity is acquiring knowledge about how organizations function, about organizing principles for achieving high performance, and about the self- design process. This information is generally gained through reading relevant material, attending in-house workshops, and visiting other organizations with a history of suc- cessful continuous change. This learning typically starts with senior executives or with the design team but can cascade to lower organizational levels as the change process unfolds. The third activity is diagnosing the current organization to determine what needs to be changed to enact the strategy and values. The design team generally assesses the different features of the organization’s design, describes the organization’s culture, and draws linkages to the current levels of performance. They look for incon- gruities between its functioning and its valued performances and conditions.
3. Creating design criteria. In this stage, the design team develops the principles and standards that will guide the new organization design. While the valuing process in the laying the foundation stage specifies what is important to the organization, the design criteria are more concrete. They describe any new organization capabilities required by the strategy, what the new organization will need to be able to do to support the strategy, and how the organization is expected to operate. Organization design criteria do not specify particular features or solutions, however. Design crite- ria would not specify that the organization needed to implement a matrix structure or suggest that 5% of the workforce needed to be laid off. Rather, design criteria are action oriented, specific and measureable, future oriented, and linked to creating a strategic advantage. Examples of design criteria include the following:
• Facilitate fast reaction to market changes. • Increase coordination across the organization around key customers. • Move decision making out to those interfacing with customers. • Enable and encourage process efficiencies and repeatable processes. • Optimize resource leverage and utilization—people and systems. • Eliminate redundant work.
Design criteria are an important milestone in the self-design process. As the process moves to the designing stage, design criteria are an effective and objective standard for evaluating alternative design options. Moreover, clearly stated and agreed to design criteria reduce the likelihood of covert political processes derailing the change.
4. Designing. In this fourth stage of self-design, the design team generates alternative organization designs and innovations to reflect the strategy, values, and design crite- ria. Members of the design team describe the work design, structures, HR practices, and management processes that will support the strategy. This process usually starts with a broad outline of how the organization should be designed at the highest level and how the design components should fit together. Senior executives responsible for the overall direction of the organization typically participate in creating this overarching design.
Only the broad parameters of the new organization are specified. This enables the design team to assess the extent to which alternative designs meet the strategy and design criteria, to test the design criteria for completeness, and to build commit- ment to a design approach before getting into specifics. This also allows other groups and levels in the organization to detail and tailor the design according to local conditions. This process recognizes that designs need to be refined and modi- fied as they are implemented throughout the firm.
Next, the design process addresses the specific details of the organization design components, which involve generating alternatives and making specific design
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choices. A broader set of organizational members often participates in these deci- sions, relying on its own as well as experts’ experience and know-how, knowledge of best practices, and information gained from visits to other organizations willing to share design experience. This stage results in an overall design for the organiza- tion, detailed designs for the components, and preliminary implementation plans for how everything will fit together.
5. Implementing and assessing. This last stage involves making the new design hap- pen by putting into place the new structures, practices, and systems. It draws heavily on the methods for leading and managing change discussed in Chapter 8 and applies them to the entire organization or subunit, and not just limited parts. It also includes an ongoing cycle of action learning: changing structures and behaviors, assessing progress, and making necessary modifications. Information about how well implementation is progressing and how well the new organizational design is work- ing is collected and used to clarify design and implementation issues and to make necessary adjustments. This learning process continues not only during implementa- tion but also indefinitely as members periodically assess and improve the design and alter it to fit changing conditions. The feedback loops shown in Figure 19.2 suggest that the implementing and assessing activities may lead back to affect subsequent activities of designing, diagnosing, valuing, and acquiring knowledge. This iterative sequence of activities provides organizations with the capacity to transform and improve continually.
The self-design intervention has been applied successfully to whole organizations or major subunits in a wide variety of situations. Experience suggests that organizations may not always work through the process as described above but that attending to all of the parts and stages increases the effectiveness of the change and the quality of the learning. The self-design approach is quite flexible and can be used in both evolutionary and revolutionary change contexts. For example, the process can be accelerated with the use of large-group interventions at any stage of the process or by dedicating a design team to work on the project full time. Application 19.2 describes how Healthways used the self-design process to design and implement a new structure.
19-3 Learning Organizations The third continuous change intervention is aimed at helping organizations develop and use knowledge to change and improve themselves constantly. Like self-design, organiza- tion learning (OL) enhances an organization’s capability to acquire and develop new knowledge. It differs from self-design in its attention to the cognitive aspects of learning and how members can become more effective learners. Whereas self-design changes behaviors by changing organization design, OL focuses on changing behaviors by chang- ing the way people solve problems and address opportunities.
OL is crucial in today’s complex, rapidly changing environments. It can be a source of strategic renewal, and it can enable organizations to acquire and apply knowledge more quickly and effectively than competitors, thus establishing a potentially long-term competitive advantage.21 Moreover, when learning and knowledge are translated into new products and services, they can become a key source of wealth creation for organi- zations.22 OL remains one of the most widespread interventions in OD. It is the focus of an expanding body of research and practice, and has been applied in such diverse firms as McKinsey, L.L. Bean, Saudi Aramco, Shell, the Canadian Broadcasting Corporation, Wells Fargo, Telefonica, Boeing, Microsoft, and the U.S. Army.
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2 SELF-DESIGN AT HEALTHWAYS CORPORATION
T he senior leaders at Healthways (HMC) clearly sensed a need to look at the organi- zation’s design in the context of the expected rapid growth of its health plan
business. HMC had identified an important and growing niche (proactive disease manage- ment) in the growing health care industry. They had crafted an impressive strategy but recog- nized that the current structure was insufficient to the task.
A university-based OD practitioner initially recommended a task force and a series of work- shops to choose an appropriate organization design for the company. The task force and workshop idea was guided by a self-design phi- losophy. The organization knew its structure was inadequate and that it needed a new way of operating, but it did not have a broad range of skills or experience in operating a large organiza- tion. This led the OD practitioner to believe that the self-design model would be the best approach. As the organization considered what structure to implement, it also needed to learn and build the capacity to change itself.
Three organization design and develop- ment (ODD) task forces were guided by the self-design strategy. The first ODD task force was dedicated to laying the foundation; their output was the recommendation to pursue a process-based structure. The second ODD task force was responsible for designing; they were charged with putting “meat on the bones” of the approved structure. The third ODD task force began implementing the new design as well as developing more sophisti- cated long-term implementation templates.
“Laying the foundation” activities domi- nated the first ODD task force. Members of the task force, representing most of the organi- zation’s key functional areas, read extensively on organization design, interviewed other orga- nizations who had adopted different structures, and studied alternative change processes. As a result of the knowledge acquired through this process, the task force became aware that the organization lacked a clear vision and “big hairy audacious goal” (BHAG) that most change
management frameworks listed as a key suc- cess factor. This insight led the task force to instigate a vision and strategy effort to clarify the organization’s purpose, to forecast reven- ues, and to understand the organization’s stra- tegic intent. Within the context of a clearer strategy, the task force was able to examine the pros and cons of alternative structures and to ground their recommendation in business terms. The first ODD task force also engaged in diagnostic activities. This process allowed the group to better understand the current organiza- tion’s strengths and weaknesses, to test the initial draft of the BHAG, to alert the organization to the task force’s activities, and to ensure that the new organization aligned with the organiza- tion’s culture. Finally, the task force spent a con- siderable amount of time discussing and debating the values that would guide the new organization. A culture initiative was proceeding concomitantly with the ODD task force and the outputs of their work were an important input to these discussions.
The first ODD task force used the knowl- edge and information generated in the laying- the-foundation phase to design three alternative structures that they believed would meet the needs of the future organization. Each of the alternative structures was formalized with high-level charts, pros and cons, and a business case rationale. The group discussed the struc- tures and debated their relative strengths and weaknesses in the context of the diagnostic information, values, and strategy of the organi- zation. The design phase concluded with a rec- ommendation to senior management to adopt the process-based structure. The recommenda- tion of the first ODD task force was debated and approved by members of HMC’s senior management team, several of whom had been on the task force. The senior team recom- mended that another task force be created to expand on the recommended structure.
Design phase activities dominated the second ODD task force. In addition to a few original task force members, the second task force consisted of organization members
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19-3a Conceptual Framework Like many new interventions in OD, there is some ambiguity about the concepts under- lying OL.23 For example, practitioners often use the term “organization learning” synon- ymously with “knowledge management” to describe the broad set of activities through which organizations learn and organize knowledge. Other times, they are used separately to emphasize different aspects of learning and managing knowledge. This confusion
representing a broader range of functions and levels in the organization. This ensured that knowl- edge and understanding of the process-based structure generated in the first task force would be passed along to a larger set of managers in the organization. More importantly, the second task force was expected to model the type of cross-functional team that would be the center- piece of the new structure. As a result, the laying-the-foundation phase of the second task force included acquiring knowledge about cross- functional and self-managed teams and continuous improvement processes. The team reviewed the rationale for the process-based structure and dis- cussed the values guiding the structural choice. However, the primary work of the second ODD task force was to add detail to each of the core processes, conceptualize and define the corporate office organization, create design principles to aid managers in understanding why functions and pro- cesses were assigned in certain ways, create financial statements reflecting expected operating expenses in the new design, and create additional timelines and implementation templates to guide execution of the new structure. The second task force ended with a presentation of roles, reporting relationships, metrics, and control and reward mechanisms to the senior management team.
The organization applied what they learned from the first two task forces as they debated how to implement the structure. That is, both groups had developed important insights about the operation of a process-based organization and recommended that the next group to manage the change process had to be the senior management team itself. As a result, the COO appointed the senior management team to be the third ODD task force. The primary focus of this group would
be implementation, the third phase of the self- design strategy. Despite several senior managers’ participation on the first two task forces, the entire senior management team was not intimately famil- iar with the logic and operation of the process-based organization, nor had this group operated as a cross- functional team. By having the COO’s direct reports operate as a cross-functional team, ownership for the new structure would be placed squarely on the shoulders of those who would guide its imple- mentation and an important symbol of the new organization structure would be established. Early in the life of the third task force, and based on its recommendation, the COO and CEO renamed and replaced the old senior management team with the executive leadership group structure that would be responsible for operating the new organization. In addition, several key process owners were named to begin the implementation. The third ODD task force also developed more detailed implementation guidelines, including a variety of measures to moni- tor the success of the structure’s implementation and methods to keep the organization’s focus on meeting customer needs during the transition.
The logic of the self-design intervention drove the development and implementation of the process-based structure at HMC. It produced important insights and changes in the way man- agers at the organization viewed its strategy, cul- ture, and operations. Most importantly, the process itself built capacity and knowledge into the system. A variety of managers in different organizational functions and levels gained a deeper understanding of the structure’s rationale and valu- able experience working on cross-functional teams. This knowledge and experience served the organization well as it implemented the process-based structure.
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derives in part from the different disciplines and applications traditionally associated with OL and knowledge management.24
OL interventions emphasize the organizational structures and social processes that enable organization members and teams to learn and to share knowledge. They draw heavily on the social sciences for conceptual grounding and on OD interventions, such as team building, structural design, and employee involvement, for practical guidance. In organizations, OL change processes are typically associated with the human resources function and may be assigned to a special leadership role, such as chief learning officer.
Knowledge management, on the other hand, focuses on the tools and techniques that enable organizations to collect, organize, and translate information into useful knowledge. They are rooted conceptually in the information and computer sciences and, in practice, emphasize electronic forms of knowledge storage and transmission, such as intranets, data warehousing, and knowledge repositories. As a result, knowledge management applications often are located in the information systems function, may be under the direction of a chief information or technology officer, and are rightly seen as a part of the management processes component of organization design. Nevertheless, knowledge management is an important part of OL.
There is also confusion about the concept of organization learning itself, about whether it is an individual- or organization-level process. Some researchers and practi- tioners describe OL as individual learning that occurs within an organization context; thus, it is the aggregate of individual learning processes occurring within an organiza- tion.25 Others characterize it in terms of organization processes and structures; they emphasize how learning is embedded in structures, routines, policies, and organization cultures.26 Snyder has proposed an integration of the two perspectives that treats organi- zation learning as a relative concept.27 Individuals do learn in organizations but that learning may or may not contribute to OL. Learning is organizational to the extent that
• It is done to achieve organization purposes. • It is shared or distributed among members of the organization. • Learning outcomes are embedded in the organization’s systems, structures, and
culture.
To the extent that these criteria are met, organization learning is distinct from indi- vidual learning. It is possible for individual members to learn while the organization does not. For example, a member may learn to serve the customer better without ever sharing such learning with other members. Conversely, it is possible for the organization to learn without individual members learning. Improvements in equipment design or work pro- cedures, for example, reflect OL, even if these changes are not understood by individual members. Moreover, because OL serves the organization’s purposes and is embedded in its structures, it stays with the organization, even if members leave.
A key premise underlying much of the literature on OL is that such interventions will lead to higher organization performance, and there is some evidence to support that view.28 However, the mechanisms through which OL and knowledge management translate into performance improvements are rarely identified or explained. Successfully applying OD interventions in organizations requires a better understanding of those mechanisms.
Based on existing research and practice, Figure 19.3 provides an integrative frame- work for understanding OL and knowledge management interventions,29 summarizing the elements of these change processes and showing how they combine to affect organi- zation performance. This framework suggests that specific organization characteristics, such as structure and human resources systems, influence how well organization learning
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processes are carried out. These learning processes affect the amount and kind of knowl- edge that an organization possesses; that knowledge, in turn, directly influences perfor- mance outcomes, such as product quality and customer service. As depicted in Figure 19.3, the linkage between organization knowledge and performance depends on the organization’s competitive strategy. Organization knowledge will lead to high perfor- mance to the extent that it is both relevant and applied effectively to the strategy. For example, customer-driven organizations require timely and relevant information about customer needs. Their success relies heavily on members having that knowledge and applying it effectively in their work with customers.
Figure 19.3 also shows how OL and knowledge management are interrelated. OL interventions address how organizations can be designed to promote effective learning processes, and how those learning processes themselves can be improved. Knowledge management practices operate on the outcomes of learning processes; on how strategi- cally relevant knowledge can be effectively organized and used throughout the organiza- tion. Each of the key elements of OL—organization characteristics and organization learning processes—are described below along with the interventions typically associated with them.
19-3b Organization Learning Interventions As shown in Figure 19.3, OL interventions consist of change programs designed to alter organization design features and OL processes. Changes in organization design are intended to create a learning organization that promotes effective OL processes. In turn, these processes can affect the organization’s knowledge management and performance.
Learning Organizations The designs of most traditional organizations are ineffective at learning and may even intensify errors. Referred to as Model I learning, it includes structures and management processes as well as values and norms that emphasize uni- lateral control of environments and tasks, and protection of oneself and others from
FIGURE 19.3
How Organization Learning Affects Performance
SOURCE: Reprinted with permission of Sage Publications Ltd. From W. Snyder and T. Cummings, “Organization Learning Disor- ders: Conceptual Model and Intervention Hypotheses,” Human Relations 51 (1998): 873–95. © The Tavistock Institute, 1998.
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information that may be hurtful.30 These structures and norms result in a variety of defensive routines that inhibit learning, such as withholding information and feelings, competition and rivalry, and little public testing of norms and the assumptions underly- ing them. Model I is limited to learning that improves the status quo.
A more effective approach to learning, called Model II learning, is based on values promoting valid information, free and informed choice, internal commitment and own- ership to courses of action, and continuous improvement of learning processes.31 These values provide the underlying social support needed for successful learning. They result in an organization characterized by minimal defensiveness, greater openness to informa- tion and feedback, personal mastery and collaboration with others, and public testing of norms. Model II learning enables organizations to significantly change themselves and to improve the learning process itself. It encourages members to acquire, process, and share information, to nurture innovation and provide the freedom to try new things, and to risk failure and learn from mistakes.
OL practitioners have linked the characteristics of Model II learning to the features of organization design. The “learning organization” is “skilled at creating, acquiring, interpreting, transferring, and retaining knowledge, and at purposefully modifying its behavior to reflect new knowledge and insights.”32 Much of the literature on the learning organization is prescriptive and proposes how organizations should be designed and managed to promote effective learning. Although relatively little systematic research sup- ports these premises, there is growing consensus among researchers and practitioners about specific organizational features that characterize the learning organization.33
These qualities are mutually reinforcing and fall into the four categories of organization design:
• Structure. Organization structures emphasize teamwork, fewer layers, strong lateral relations, and networking across organizational boundaries both internal and exter- nal to the firm.
• Work design. Learning organizations tend to favor enriched jobs and self-managed teams. These work designs support the sharing of information and the continuous development of new skills, knowledge, and competencies.
• Human resources practices. Recruitment practices in learning organizations favor people with high needs for achievement, expectations for change, and relative com- fort with ambiguity. Performance appraisal, rewards, and training are designed to account for long-term performance and knowledge development; they reinforce the acquisition and sharing of new skills and knowledge. Finally, like most large-scale change interventions, the leaders of learning organizations must actively model the openness, risk taking, and reflection necessary for learning. They must communicate a compelling vision of the learning organization and provide the empathy, support, and personal advocacy needed to lead others in that direction.
• Management processes. Organization learning involves gathering and processing information, and consequently, the information systems of learning organizations provide an infrastructure for OL. These systems facilitate rapid acquisition, proces- sing, and sharing of rich, complex information and enable people to manage knowl- edge for competitive advantage. Together, these organization design features promote information sharing, involvement in decision making, systems thinking, and empowerment.
Learning organizations generally are designed and implemented using organization design interventions like those described in Chapter 18. OD practitioners help members diagnose how well their organization’s current design promotes learning. Then, necessary
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changes are made to bring the organization’s design components more in line with those just described.
Organization Learning Processes Figure 19.3 suggests that OL processes consist of four interrelated activities: discovery, invention, production, and generalization.34 Learn- ing starts with discovery when errors or gaps between desired and actual conditions are detected. For example, sales managers may discover that revenues are falling below pro- jected levels and set out to solve the problem. Invention is aimed at devising solutions to close the gap between desired and current conditions; it includes diagnosing the causes of the gap and creating appropriate solutions to reduce it. The sales managers may learn that poor advertising is contributing to the revenue problem and may devise a new cam- paign to improve sales. Production processes involve implementing solutions, and gener- alization includes drawing conclusions about the effects of the solutions and extending that knowledge to other relevant situations. For instance, if the new advertising program is implemented and successful, the managers might use variations of it with other prod- uct lines. Thus, these four learning processes enable members to generate the knowledge necessary to change and improve the organization.
Organizations can apply the learning processes described above to three types of learning.35 First, single-loop learning or adaptive learning is focused on improving the status quo. Consistent with Model I learning, it is the most prevalent learning process in organizations and enables members to reduce errors or gaps between desired and existing conditions. It can produce incremental change in how organizations function. The sales managers described above engaged in single-loop learning when they looked for ways to reduce the difference between current and desired levels of sales.
Second, double-loop learning or generative learning is aimed at changing the status quo. More in line with Model II learning, it operates at a more abstract level than single-loop learning because members learn how to change the existing assumptions and conditions within which single-loop learning operates. This level of learning can lead to transformational change, where the status quo itself is radically altered. For example, the sales managers may learn that sales projections are based on faulty assump- tions and models about future market conditions. This knowledge may result in an entirely new conception of future markets, with corresponding changes in sales projec- tions and product development plans. It may lead the managers to drop some products that had previously appeared promising, develop new ones that were not considered before, and alter advertising and promotional campaigns to fit the new conditions.
The third type of learning is called deutero-learning, which involves learning how to learn. It is the highest form of Model II learning; it is directed at the learning process itself and seeks to improve how organizations perform single- and double-loop learning. For example, the sales managers might periodically examine how well they perform the processes of discovery, invention, production, and generalization. This could lead to improvements and efficiencies in how learning is conducted throughout the organiza- tion. Most OL interventions are intended to initiate this type of learning.
OD practitioners have developed interventions specifically for organization learning processes. In describing these change strategies, we draw heavily on the work of Argyris and Schön and of Senge and his colleagues because it is the most developed and articu- lated work in OL practice.36
From this perspective, organization learning is not concerned with the organization as a static entity but as an active process of sense making and organizing. Based on the interpretive model of change (Chapter 2), members socially construct the organization as they continually act and interact with each other and learn from those actions how to
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organize themselves for productive achievement. This active learning process enables members to develop, test, and modify mental models or maps of organizational reality. Called theories in use, these cognitive maps inform member behavior and organizing.37
They guide how members make decisions, perform work, and organize themselves. Unfortunately, members’ theories in use can be faulty, resulting in ineffective behaviors and organizing efforts. They can be too narrow and fail to account for important aspects of the environment; they can include erroneous assumptions that lead to unexpected negative consequences. Effective OL can help members resolve these problems. It can provide them with the skills and tools to detect and correct errors in their mental maps, and thus promote more effective organizing efforts.
OL interventions help organization members change from Model I to Model II learn- ing and become more capable of single-loop learning, double-loop learning, and deutero- learning. Like all learning, this change approach includes discovery, invention, production, and generalization processes. Although the application phases are described linearly below, in practice they form a recurrent cycle of four overlapping learning activities:
1. Discover theories in use and their consequences. This first step involves uncover- ing members’ mental models or theories in use and the consequences that follow from behaving and organizing according to them. Depending on the size of the cli- ent system, this may involve the executive team, a microcosm group that includes representatives from the system, or all members through a large-group intervention (Chapter 10).
OL practitioners have developed a variety of techniques to help members iden- tify their theories in use. Similar to the deep assumptions of organization culture, these theories generally are taken for granted and rarely examined; members need to generate and analyze data to infer the theories’ underlying assumptions. One approach is called dialogue, a variant of the human process interventions described in Chapter 10.38 It involves members in exchanges about how they currently address problems, make decisions, and interact with each other and relevant stakeholders, such as suppliers, customers, and competitors. By asking members to suspend assumptions about what is “right,” OD practitioners encourage participants to inquire into their own and others’ ways of thinking, to advocate for certain beliefs, and to reflect on the assumptions that lead to those beliefs. Dialogue can result in a clearer understanding of existing theories in use and their behavioral consequences and enable members to uncover faulty assumptions that lead to ineffective behaviors and organizing efforts.
A second method of identifying theories in use involves the application of sys- tems thinking.39 It is a set of concepts and tools for detecting subtle but powerful structures that underlie complex situations. Learning to see such structures can help members understand previously unknown forces operating in the organization and their behavioral consequences.40 This information is essential for developing effective theories for organizing, particularly in today’s complex, changing world. OL practitioners typically interview members about recurrent problems in the orga- nization, why they are occurring, actions that are taken to resolve them, and out- comes of those behaviors. Based on this information, a map is constructed showing interrelationships among the values underlying theories in use, the action strategies that follow from them, and the results of those actions. Such information is fed back to members so that they can test the validity of the map, assess the effectiveness of their theories in use, and identify factors that contribute to functional and dysfunc- tional learning in the organization.41 Systems thinking helps members make radical
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shifts in their view of the world: from seeing parts to seeing wholes; from seeing lin- ear cause–effect chains to seeing interrelationships; and from seeing static entities to seeing processes of change.
A third technique for identifying theories in use and revealing assumptions is called the left-hand, right-hand column.42 It starts with a member selecting a specific situation where he or she was interacting with others in a way that produced inef- fective results. The situation is described in the form of a screenplay or movie script and is written on the right side of a page. For instance, the story might begin with a statement such as, “I told Joyce that I was offering her a special assignment.” Then the rest of the conversation would be written down: “Joyce said to me that she did not want to take the assignment because her workload was too heavy,” and “I responded that it was a real chance to get some extra and useful skills,” and so on. After the example is finished, the left-hand side of the page is used to write down what he or she was thinking but not saying at each phase of the exchange. For example, “When I told Joyce about the assignment, what I was really thinking is that she is always taking long lunch breaks and seems overly concerned with busy work. I thought she should help out the group by pitching in more.” “When Joyce said she didn’t want to take the assignment because her workload is too heavy, that just proved my suspicion.” This simple yet powerful exercise reveals hidden assump- tions that guide behavior and can make members aware of how erroneous or untested assumptions can undermine work relationships.
A fourth method that helps members discover their mental models and theories in use is called the ladder of inference, as shown in Figure 19.4.43 It is a tool that aids in understanding how concrete experiences are connected to the assumptions and beliefs that guide behavior. The ladder shows vividly how members’ theories in use can be faulty and lead to ineffective actions. People may draw invalid conclusions from limited experience; their cultural and personal biases may distort meaning attributed to selected data. The ladder of inference can help members understand why their theories in use may be invalid and why their behaviors and organizing efforts are ineffective. Members can start with descriptions of actions that are not producing intended results and then work back down the ladder to discover the rea- sons underlying those ineffective behaviors. For example, a service technician might withhold from management valuable yet negative customer feedback about product quality, resulting in eventual loss of business. Backing down the ladder, the techni- cian could discover an untested belief that upper management does not react favor- ably to negative information and may even “shoot the messenger.” This belief may have resulted from assumptions and conclusions that the technician drew from observing periodic layoffs and from hearing widespread rumors that the company is out to get troublemakers and people who speak up too much. The ladder of infer- ence can help members understand the underlying reasons for their behaviors and help them confront the possibility that erroneous assumptions are contributing to ineffective actions.
2. Invent and produce more effective theories in use. Based on what is discovered in the first step of the change process, members invent and produce theories in use that lead to more effective actions and that are more closely aligned with Model II learning. Many of the interventions described in this book can help to support more effective learning capabilities. Human resource management interventions— performance appraisal, reward systems, and career planning and development—can reinforce members’ motivation to gain new skills and knowledge. Technostructural interventions, such as process-based and network structures, self-managing work
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teams, and reengineering, can provide the kinds of lateral linkages and teamwork needed to process, develop, and share diverse information and knowledge. Human process changes, including team building, search conferences, and intergroup rela- tions interventions, can help members develop the kinds of healthy interpersonal relationships that underlie effective OL. Strategic interventions, such as dynamic strategy making and alliances, can help organizations gain knowledge about their environments and develop values and norms that promote OL.
Making changes in organization learning processes involves double-loop learn- ing as members try to create and enact new theories in use. In essence, members learn by doing; they learn from their invention and production actions how to invent and produce more effective theories in use. As might be expected, learning how to change theories in use can be extremely difficult. There is a strong tendency for members to revert to habitual behaviors and modes of learning. They may have trouble breaking out of existing mindsets and seeing new realities and possibilities.
OD practitioners can help members apply the values underlying Model II learning—valid information, free choice, and internal commitment—to question their experience of trying to behave more consistently with Model II.44 They can encourage members to confront and talk openly about how habitual actions and learning methods prevent them from creating and enacting more effective theories.
FIGURE 19.4
The Ladder of Inference
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Once these barriers to change are discussed openly, members typically discover that they are changeable. This shared insight often leads to the invention of more effec- tive theories for behaving, organizing, and learning. Subsequent experimentation with trying to enact those theories in the workplace is likely to produce more effec- tive change because the errors that invariably occur when trying new things now can be discussed and hence corrected.
3. Attend to the knowledge management practices that support learning. Because organization knowledge plays a crucial role in linking organization learning pro- cesses to organization performance, an effective OL application process must attend to the systems for generating, organizing, and distributing knowledge. Knowledge includes what members know about organizational processes, pro- ducts, customers, and competitive environments. Such knowledge may be explicit and exist in codified forms, such as documents, manuals, and databases, or it may be tacit and reside mainly in members’ skills, memories, and intuitions.45 In any form, these knowledge assets can represent important contributions to perfor- mance.46 Because tacit knowledge is difficult if not impossible to codify, OD prac- titioners direct attention to how members can share such knowledge among themselves and between organizational units.
Generating knowledge starts from an understanding of the organization’s strat- egy and then identifies the kinds of knowledge that will create the most value for the organization and creates mechanisms for increasing that stock of knowledge. For example, corporate strategies that emphasize customer service, such as those found at Booz & Co. and Nordstrom, place a premium on knowledge about customer needs, preferences, and behavior. Strategies favoring product development, like those at Apple and Bristol-Myers-Squibb, benefit from knowledge about technology and research and development.
Once the knowledge required for organization strategy is identified, mechan- isms for acquiring or creating that knowledge need to be created. Externally, organi- zations can acquire other companies that possess the needed knowledge, or they can rent it from knowledge sources, such as consultants and university researchers.47
Internally, organizations can facilitate communities of practice—informal networks among employees performing similar work to share expertise and to solve problems together.48 They can also create more formal groups for knowledge generation, such as R&D departments, corporate universities, and centers of excellence. Organizations can bring together people with different skills, ideas, and values to generate new pro- ducts or services.
Organizing knowledge involves putting it into a form that organizational mem- bers can use readily. Two broad strategies for organizing knowledge include codifi- cation and personalization.49 Codification relies on information technology and the development of databases where knowledge can be accessed and used by appropriate members. This strategy works best for explicit forms of knowledge that can be extracted from people, reports, and other data sources, and then organized into meaningful categories called “knowledge objects” that can be reused for various pur- poses. Personalization strategies for organizing knowledge focus on the people who develop knowledge and on how they can share it person-to-person. Tacit knowledge is typically accessed through personal conversations, direct contact, and ongoing dialogue with the people who possess it. For example, most professional service firms foster networking among their employees by transferring people across offices, encouraging the prompt return of phone calls from colleagues, and using cross- functional project teams.
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Distributing knowledge involves developing mechanisms that enable members to gain access to needed knowledge. It overlaps with the previous phase of knowledge management and involves making knowledge easy for people to find and encourag- ing its use and reuse. For example, organizations can develop databases for storing articles, reports, customer data, best practices, or other knowledge as well as locator systems for helping members find what they want. Databases can include such diverse information as articles, analytical reports, customer data, and best practices. Organizations can also create knowledge services (e.g., help desks or specific organi- zation units) and networks (e.g., intranet portals, informal “brown bag” presenta- tions) to promote knowledge transfer. Finally, organizations can create specific roles to facilitate the transfer of organization knowledge and encourage knowledge distribution. For example, Britain’s Collaboration for Leadership in Applied Health Research and Care for Nottinghamshire, Derbyshire, and Lincolnshire (CLAHRC- NDL) uses “Diffusion Fellows,” senior managers, and clinicians assigned from the National Health Service to provide best-practice, evidence-based clinical practice to physicians and nurses in the system.50
4. Continuously monitor and improve the learning process. This final stage involves deutero-learning—learning how to learn. It includes assessing OL strategies and the organizational structures and processes that contribute to them. Members assess periodically how well these elements facilitate single- and double-loop learning. They generalize positive findings to new or changing situations and make appropri- ate modifications to improve OL. Because these activities reflect the highest and most difficult level of OL, they depend heavily on members’ willingness to question openly their theories in use about OL and to test publicly the effectiveness of both their learning strategies and those of the wider organization.
Application 19.3 describes a long-term, comprehensive organization learning inter- vention.51 The initial intervention was primarily a dialogue process among senior man- agers but was extended to the larger organizational community. The application also demonstrates how systemic many OL and strategic change interventions can be.
19-4 Built-to-Change Organizations One of the newest continuous change interventions involves intentionally designing an entire organization for change and not stability. Lawler and Worley’s built-to-change (B2C) approach to designing organizations is based on the simple fact that most organi- zations are designed for stability and dependable operations.52 Traditional organization design components and managerial practices aim to reinforce predictable behaviors for sustaining a particular competitive advantage. Lawler and Worley argue that many change efforts are unsuccessful, not because of human resistance or lack of visionary leadership, but because most organization design features assume that stability leads to effectiveness. Such built-in assumptions can be a recipe for failure in rapidly changing environments, where the ability to change constantly is the best sustainable source of competitive advantage. The B2C intervention helps organizations design themselves for change.
19-4a Design Guidelines As shown in Table 19.1, the B2C intervention includes the following design guidelines and challenges the assumption of stability in the specification of design components.
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3 DIALOGUE AND ORGANIZATION LEARNING AT DMT
D MT is a small but global business that designs, builds, and installs sophisticated food processing systems. It has a global market share of over 50% and employs
about 800 people. Roughly two-thirds of the employees are in the primary office and manufacturing plant in the Netherlands while the other third, consisting of sales and engi- neering, works in the field to market and install the systems.
In the late 1980s, DMT adopted a socio- technical systems philosophy and introduced self-managing teams and other empowering structures into most of the operations function. After ten years, and despite continued success in both market share and profitability, the socio-tech initiatives had lost focus.
The heir apparent to the founder of DMT had been reading and thinking about the con- cepts of complexity and learning. He asked an OD consultant familiar with these ideas for help in translating them into action. The future CEO and consultant handpicked a set of managers in the company to be on a change leadership team and the initial intervention focused on the trans- formation of DMT’s leaders through dialogue.
Facilitated by the OD consultant, the change leadership team spent significant time over an 18-month period in heavy dialogue ses- sions. Early sessions were spent learning about the dialogue process while later ses- sions explored assumptions about the market, DMT’s current and future strategies, and most importantly, the predominant styles of commu- nicating, leading, and operating.
The result was a close-knit team that had explored and confronted their theories of action. However, none of the rest of the organization knew what was happening. The OD consultant described a variety of emergent “water cooler” conversations among organization members with respect to: “What’s happened to them?” and “Why are they acting so strange?”
The change leadership team and the OD consultant worked together to craft a series of organization learning interventions that would
involve a broader and broader segment of the population. These interventions, like the overall change strategy, sound more complete and thought out than they were. In general, the orga- nization tried some things out and if they worked, they were refined. If they didn’t work, they moved onto another idea. Eventually, however, nearly two-thirds of the organization members participated in the following learning activities:
Complexity Concepts Workshop. This intensive one-day workshop represented an introduction to the concepts and organiz- ing principles associated with complexity, learning, and dialogue. It offered the partici- pant an opportunity to look at themselves, their organization, and their world. The work- shop compared the assumptions of a “sci- entific” worldview with the assumptions of complexity. The session ended with an introduction to dialogue and a facilitated con- versation to help participants apply the con- cepts in their work. Overall, the session was designed to help members become aware of an alternative way of organizing that held the possibility of changing the entire organi- zation by an order of magnitude.
Dialogue Training. After completing the Complexity workshop, groups of 10 to 15 people were introduced to dialogue as a communication process that supported the principles of complexity and the prac- tice of organization learning. Through mostly applied experiences in dialogue, par- ticipants were shown how this form of communication differed from hierarchically constrained and competitive discussion. In contrast, dialogue allowed meaning and influence to flow freely and emerge. The workshop also tried to integrate concepts from the complexity workshop and to pre- pare participants for “dolphin training.”
“Dolphin” Training. A leadership meta- phor based on the “strategy of the dolphin” (e.g., do what works and forget the rest) was introduced as a set of empowerment
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guidelines for action and decision making. The goal of this workshop was to enable every member of DMT to step forward and assume responsibility for the greater whole. That is, when the situation demands it, DMTers are to be ready.
The Visioning Conference. The final interven- tion was the visioning conference and involved as many as 50 people at a time. Building on the principles of a learning organization and personal mastery, a one-day dialogue-based workshop suggested that a company’s true “vision” incor- porates the personal visions of each member. This approach was contrasted with the standard visioning process where senior leaders formu- late and then impose a vision on the system. The workshop asked individuals to elaborate on their personal visions through statements, actions, or drawings and to specify what they needed from the organization and their fellow participants. As a result of the visioning confer- ences, groups of DMT members representing a cross-section of the company spent entire days engaged in deep dialogue around the question: “How must DMT be in order to realize the col- lective vision of all its members?”
In addition to these formal workshops, DMT’s transformation also involved a great many “hallway dialogues” about the meaning and/or applicability of a complexity principle and “retreats” to think about the implications of the emerging culture. Moreover, the change leadership team that had catalyzed the entire process continued to meet and dialogue on the transformation. The researchers found the DMT process interesting because its essential activities were more likely to emerge from the interaction of its members than to be planned or organized for them. Although the change leadership team had a vested interest in this process, the transformation of DMT was never “owned” by them exclusively but by every member of the firm—the essence of emergent leadership.
As the transformation progressed, the change leadership team recognized that the internal changes in communicating, thinking, and leading would need to be reflected in and embedded in the structure of the system. An evaluation of DMT’s design suggested that its long history of
success had resulted in structures, systems, and processes that were increasingly fixed and resistant to change. Managers who had been receptive to, if not enthusiastic about, the effort to bring about change in the culture suddenly balked at the notion of design changes. The change leadership team, however, remained resolute in seeing the change through.
More than two years into the change process, the change leadership team issued a call for people to participate in a “blank slate” design process; a whole-system architecture capable of realizing the visions of all its members and for thriving, not merely surviving, in the company’s increasingly complex and turbulent marketplace. Interesting, the change leader- ship team excluded managers and supervisors from the call. Even so, more than 50 individuals stepped forward to self-organize into an active network intent on producing the “New DMT.”
Only three constraints were placed on the newly formed design team: (1) the design had to follow the principles of complexity, learning, and dialogue, (2) each design team member had to act as a representative of every one of their collea- gues, and (3) the resulting design had to enable the personal visions of every member of the organiza- tion. The design team was supported with time, financial resources, the OD consultant, and any other expertise they needed.
The OD consultant kicked off the “New DMT” process with a workshop on organization design and whole system transformation. Following the training, the group, recognizing the scope and com- plexity of their task, self-organized into a configura- tion they dubbed the Design Network (DN). The DN revolved around a “hub” of nine people who were responsible for creating an architectural model for the New DMT based on “intelligence” relayed to it by the remaining members. These would comprise the “network” whose job it was to reach out into the system and involve more and more people as time passed. They were to convey information to and from the hub.
After nearly a year of effort, the DN announced its D(esign)-Day and invited the entire company, all 600-plus people, to join them for the “unveiling” of the architecture for the New DMT. Following the presentation, the team organized a process to allow people to translate the multiple dimensions
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From Strategy to Strategizing The stability assumption first shows up in the way organizations formulate strategy. Most strategy processes rely on relatively static and short-term views of the environment. Most environmental scanning tools, such as SWOT and industry attractiveness models, implicitly assume that the forces operating today will operate tomorrow and reinforce the pursuit of a single sustainable competitive advantage. Although most managers and organizations describe the environment as changing, they act and decide as if it is not. As a result, strategies are formulated, budgets and goals are set, and any successful competitive advantage is expected to last.
B2C organizations move from static to dynamic views of strategy, using interventions like dynamic strategy making described previously in this chapter. Instead of believing that any competitive advantage will last, they recognize that any particular advantage is fleeting. The development and reliance on strong and robust “futuring” processes supports this dynamic view of strategy.53 Managers in B2C organizations spend a lot of time thinking about alternative future environments and scenarios. Using these scenarios to sharpen their strategic thinking, they explore options, think about the capabilities that might be needed, and formulate the next likely competitive advantage they will have to pursue. Importantly, senior managers spend less time worrying about the execution of the current strategy; they see their role as worrying about the future strategy.
of its design into reality. DMT’s transformation is well on its way.
The organization learning process and each of the interventions represented a significant departure from the way DMT had operated in the past. The consistency and persistence of the interventions over a two-year period of time and the inclusiveness with which the interventions involved people in the
organization led to important behavioral changes. In particular, members began to see the organization in more systemic and complex terms rather than hier- archical and linear; dialogue replaced discussion as the primary communication process in the organiza- tion; and members engaged in emergent, shared leadership rather than viewing leadership as some- thing only senior managers did.
TABLE 19.1
Design Guidelines for B2C Organizations
From Traditional Principles… To Dynamic Principles
Strategy
Short-term, static environmental scans and industry analyses
Pursuit of a sustainable competitive advantage
Strategizing
Long-term, alternative scenarios and contingency planning
Pursuit of a series of momentary advantages
Design
Focus on efficiency over effectiveness What do we do well? Alignment as the key to performance
Designing
Focus on effectiveness over efficiency What do we need to learn? Change as the key to performance
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From Design to Designing Traditional organizations view organization design as a set of relatively stable features that only get better through continuous improvement. Rather than thinking about how structure, work, management processes, and HR systems need to change to increase effectiveness, traditional organizations become enam- ored with short-term efficiency and reliability initiatives. Such a focus tends to lock the organization into a way of operating that is very difficult to change.
B2C organizations recognize that change is never over and so focus more on effec- tiveness than efficiency. B2C organizations do work to improve existing systems and processes, but using change processes like self-designing organizations, they allocate significant resources to thinking about how organization design elements need to be changed. In fact, B2C organizations are wary of too much alignment that can result in rigidity. Instead, they focus on being able to change as the key to long-term performance. B2C organizations shift the conversation from “what do we do well?” to “what do we need to learn?” This orientation and mindset always keeps them open to changing organization design features as described below.
19-4b Application Stages Lawler and Worley stress that not all organizations should be built to change, though most could benefit from applying some B2C principles. This intervention is mainly for organizations having problems adapting to complex and rapidly changing environments. They require a change capability for success in the future. For them, and following a thorough diagnosis,54 the following three initiatives can help the transition to a B2C organization:
1. Reframe culture as a facilitator of change. This first stage addresses the organiza- tion’s culture—the established set of core values, norms, and beliefs shared by organization members. Culture is the most stable part of an organization—it is deep-seated, taken for granted, and guides decisions and behaviors like an invisible hand—but it does not need to be a constraint to changing. As described in Chapter 18, organization culture can promote or hinder organization change depending on whether it supports change or stability.55 In many traditionally designed organiza- tions, values and norms reinforce stability and predictability, thus making change difficult. To move toward a change-friendly culture requires surfacing existing values and norms, assessing their relevance to change, and making appropriate adjust- ments. This typically involves highly interactive sessions where relevant stakeholders openly discuss and debate questions about the organization’s culture and how it can be “reframed” to be more change friendly. Attention is directed at creating or redefining values and norms that focus behavior on the organization’s environment and help members see change as necessary and natural. To enhance member commitment to a new change-friendly culture, these new or reframed values and norms are placed in the context of important external pressures facing the organiza- tion and what these mean for its effectiveness. The organization’s existing design is also assessed in relation to the culture, and plans are made for changing specific components using the B2C guidelines outlined above.
2. Redefine organization design components for flexibility. Each feature of an organization’s design can be created under an assumption of stability or flexibility. The second step in moving to a B2C organization is to design and implement these components with flexibility in mind.
B2C designs emphasize a flat, lean, and flexible organization structure, such as pro- cess, matrix, and network designs. These structures can be reconfigured quickly when
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the circumstances demand. The key objective in most B2C structures is establishing what Lawler and Worley call “maximum surface area.”56 That is, as many roles in the organization as possible should be defined to include interaction with the external envi- ronment. Organization members are more likely to support change if they are in direct contact with customers, regulators, markets, and the community.
B2C human resource practices are geared to selecting, developing, and managing the right talent for change. Selection practices seek quick learners who want to take initiative, desire professional growth, and thrive on change. Employment contracts specify clearly that change is to be expected and support for change is a condition of employment and a path to success. Rather than specific job descriptions, mem- bers are encouraged to discover what needs to be done by frequent goal-setting reviews where tasks are constantly assessed and revised. Training and development are continuous and aimed at supporting change and gaining value-added skills and knowledge.
Because rewards play a key role in motivating and reinforcing change in B2C organizations, individual or team bonuses are tied directly to change goals, learning new things, and performing new tasks well.57 This establishes a clear line of sight between rewards and change activities. Bonuses can include one-time rewards given at the end of a particular change effort, or rewards targeted to different phases of the change process. B2C designs also shift the basis of rewards from jobs to peo- ple. Members are rewarded for what they can do, not for the particular job they per- form. Jobs and tasks are continually changing, and rewards can motivate people to learn new skills and knowledge, thus keeping pace with change and enhancing their long-term value to the organization.
In B2C organizations, management processes are moved throughout the organi- zation to wherever they are needed. This ensures that information is transparent and current and provides a clear picture of how the organization is performing relative to its competitors. It enables organizations to make timely and relevant decisions to keep pace with changing conditions.
3. Build an orchestration capability. This stage helps the organization leverage the flexibility built into the organization’s strategy and design. An orchestration capabil- ity enables the organization to implement changes in strategy and to execute design changes effectively over and over again.58 It first specifies the events and decisions necessary to make the strategy happen, including how new competencies will be developed, if necessary. Then, based on the B2C belief that the ability to change is the key to competitive advantage, attention is directed at building this change capa- bility into the organization. This involves three related activities. First, change man- agement skills are developed widely in the organization by hiring people with those skills and by training existing managers and employees to acquire those skills. Sec- ond, an organization effectiveness function is created with competencies in strategic planning, organization design, and change management. This center of excellence is usually staffed by professionals from the strategic planning and human resources functions; they provide advice and facilitation for planning and executing change in the organization. Third, organization members learn how to apply their change capability by engaging in organizational changes and reflecting on that experience. This so-called “learning by doing” is essential for building an orchestration capabil- ity. It provides members with the hands-on experience and reflective learning neces- sary to hone their change skills in action.
An important part of the orchestration capability is a redefinition of leadership. B2C designs stress the importance of shared leadership throughout the organization.
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4 CREATING A BUILT-TO-CHANGE ORGANIZATION ATCAPITAL ONE FINANCIAL
C apital One, a leading financial services firm and a top issuer of credit cards in the United States, has built an organization that does not view change as an unwanted
intruder or as an afterthought to get resistors to buy into a new initiative. Rather, change capability is integrated into every aspect of Capital One’s strategy, structure, and culture. This enables the firm to execute change routinely.
Capital One treats strategic planning as a continuous process of exploring alternative futures and gaining momentary advantages in a fast-paced competitive environment. According to Mike McDermott, former Direc- tor of Organization Effectiveness, “Strategic thinking goes pretty deep on two levels. On one level, the strategic planning department runs a variety of scenarios that look several years out.” As described by CEO and Founder Rich Fairbank, “Eighty percent of strategy is figuring out where the world is going, and 20% is figuring out what you are going to do in response. If you can figure out where the world is going, what you need to do usually becomes obvious.” For example, Capital One might explore the broader forces affecting interest rates or the impact of changes in China’s monetary policy. Each business line, in turn, would consider how these future trends might affect its particular business. “On another level,” notes McDermott, “the executive committee meets regularly to discuss and debate a set of annual ‘impera- tives’ or bold challenges. The imperatives are just that … they are things that must be done if we are to achieve our long-term vision.” They are intended to provide Capital One with a series of temporary competitive advantages.
This robust strategizing enables Capital One to “test and learn” how best to compete in a constantly changing environment. It combines educated guesses about how
the environment is changing with rigorous analysis of consumer behaviors to produce testable propositions about what credit ser- vices to offer specific consumer groups. When a consumer group and its associated service reach a certain threshold of business, a potential competitive advantage exists. The service is then broadened to a larger customer base. Because consumer profiles, competitor behaviors, and other market forces are constantly changing, however, any current advantage is fleeting and new ones must be identified to grow revenues. Moreover, to monetize a competitive advan- tage even in the short run, Capital One must often modify its human capital, resources, systems, and structures. Thus, it constantly renews itself as it moves from one competi- tive advantage to the next.
To adapt quickly to gain new competitive advantages, Capital One has developed a highly agile organization design. It begins with hiring people who have a passion for excellence, collaborate well with others, and thrive in a changing environment. Once hired, associates are given challenging work assign- ments and opportunities to develop new skills as business needs change. Compli- menting the selection process is a decentra- lized and fluid organization structure, with few layers of management and decision making pushed downward in the organization. Associates are allowed to take on a variety of tasks without having to worry about job descriptions and pay grades. An adaptable performance management system com- pletes Capital One’s flexible design. It focuses on both performance and develop- ment. Rewards are tied directly to current results as well as to developing competen- cies the organization believes are important for its future.
The final feature of Capital One’s built- to-change organization involves change capability.
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In the past, the firm’s aggressive growth often left associates feeling overwhelmed by the rapidly changing product/service offerings. Adding to the stress were frequent updates in associates’ knowl- edge base, reorganizations that tested their ability to remain flexible and to take on new assignments, and modifications in work processes and methods to maintain customer satisfaction. To make change manageable and even routine, Capital One charged McDermott with developing the firm’s change capability. With the help of a design team com- posed of HR generalists and line managers, he cre- ated a unique approach to change management.
Most organizations develop change capability by deploying HR generalists to facilitate change in business units or by creating a center of excel- lence in change management staffed mainly by OD professionals. Capital One created a more embedded strategy. It rooted change skills and responsibilities directly into the roles of line man- agers. This promised to radically shorten the cycle time of change because managers would have the expertise needed to carry out most changes on their own. But tasking managers with change management responsibilities raised important questions about Capital One’s commitment to change capability as a source of competitive advantage. Critics argued, “Shouldn’t the focus of line managers be on getting business results?” The design team answered affirmatively, of course, but then added that in fast changing envir- onments, this was not enough to succeed. Man- agers needed to be able to combine their business expertise with knowledge about change so that strategies to acquire new competitive advantages could be implemented faster and their benefits gained sooner.
Capital One’s embedded approach was based on a standardized change methodology that everyone shared and learned. Called ADKAR, it proposed that successful change fol- lowed a process of (1) creating awareness of the need for change, (2) having the desire to change, (3) possessing the knowledge to change, (4) having the ability to change, and (5) being rein- forced for change. The change model included a common language and mindset for thinking and communicating about organizational change; it
afforded Capital One a highly efficient approach to change management. For example, service changes often required cooperation among the credit card business, IT services, and the regula- tory compliance and HR departments. Because all parties were familiar and comfortable with the same change model, coordination costs and change cycle times were significantly reduced. This contrasted to earlier times when Capital One employed over 17 different change models and more than 160 different change tools throughout the firm.
To implement the new change method, McDermott’s team applied three action levers: knowledge/skill acquisition, visible demonstra- tions, and alignment with performance manage- ment. First, Capital One’s corporate university offered two courses to build people’s change knowledge and skill. One course, attended by both managers and staff, went deep into the change methodology and provided the opportu- nity to apply it to existing change projects. This helped participants learn by doing, while driving change in the organization. The second course was a one-day program designed for line man- agers. It provided an overview of the methodology and linked it to the organization’s values and lead- ership competencies. This helped managers see the connection between change capability and performance management.
Second, McDermott’s team targeted several large-scale change projects as visible demonstra- tions of the change model. This created an internal “buzz” for the methodology and encouraged people to learn how to apply it. For example, McDermott’s team highlighted change initiatives coming out of a strategic imperative called ACE (Achieving Corporate Excellence): a large-scale systems conversion project, an HR reengineering effort, and a workplace redesign process called the Future of Work.
Third, McDermott’s team worked closely with a group revising Capital One’s performance management system to ensure that it measured and rewarded change management competen- cies. Together, the two groups increased the number of change-related behaviors that were rated, assessed, and rewarded. This sent a clear
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Rather than having the organization rely on individuals and centralized sources of power and control, these designs spread leadership across multiple levels of the organization. Leadership shifts from an individual trait to an organization capacity. This speeds decision making and response rates because those lower in the organi- zation understand how to change and need not wait for top-down direction. It pro- vides leadership experience and skills to a broad array of members, thus developing a strong cadre of leadership talent. Shared leadership supports continuous change by spreading change expertise and commitment across the organization. It increases the chances that competent leaders will be there to keep the change process moving forward.
Application 19.4 describes how Capital One Financial created a B2C organization.59
It shows how change capability is built into the firm’s strategy, design features, and culture.
SUMMARY
In this chapter, we presented increasingly sophisticated interventions for helping organizations conduct strate- gic change. These change processes are particularly applicable for organizations facing turbulent environ- ments where traditional sources of competitive advan- tage erode quickly. Building change capabilities directly into the organization is essential to constantly renew forms of competitive advantage to keep pace with a rapidly shifting environment.
Dynamic strategy making involves specifying and implementing the four elements that comprise the backbone of a new strategic system, thereby charting an organization’s direction forward. It begins with defining a competitive logic, which derives from an analysis about how fitting the firm’s capabilities can be used to exploit environmental opportunities. Then the other three elements—goals, organization, and
action plan—are aligned closely with the competitive logic so as to support its implementation. They spell out exactly what is to be achieved, how the organiza- tion will be structured to accomplish it, and what steps are needed to make it happen. The combined effect is to position the firm in the market and tightly link its objectives, structure, and action to that strategy.
A self-design change strategy helps a firm gain the capacity to design and implement its own continuous change. Self-design involves multiple levels of the firm and multiple stakeholders and includes an iterative series of activities: acquiring knowledge, valuing, diag- nosing, designing, implementing, and assessing.
Organization learning interventions help organiza- tions develop and use knowledge to change and improve themselves continually. Organization learning
message about the importance of these beha- viors for the future.
Capital One’s built-to-change organization is widely accepted and firmly entrenched in the firm’s culture. Change capability is treated like a muscle that gets better with exercise. Not surpris- ingly, Capital One engages in lots of change and is
getting better and better at it. Its change capability is a key source of sustained competitive advantage. As one executive put it, “We can take on more change because with this new muscle, it doesn’t seem like we are changing all that much. It feels like we are changing less because we are capable of handling more change than our competitors.”
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- 19 Continuous Change