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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

588 PART 6 STRATEGIC CHANGE INTERVENTIONS

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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interventions address how organizations can be designed to promote effective learning processes and how those learning processes themselves can be improved. An organization designed to promote learning can create a continuous stream of valuable knowledge. Knowledge management focuses on how that knowledge can be orga- nized and used to improve organization performance.

Built-to-change organizations are designed for change, not stability. They are based on design guide- lines that promote change capability in the firm’s strat- egy, design, and leadership. In a rapidly changing environment, this change capability can help the orga- nization transition from one competitive advantage to another.

NOTES

1. R. Wiggins and T. Ruefli, “Schumpeter’s Ghost: Is Hyper- competition Making the Best of Times Shorter?” Strategic Management Journal 26 (2005): 887–911.

2. I. Barreto, “Dynamic Capabilities: A Review of Past Research and an Agenda for the Future,” Journal of Man- agement 36 (2010): 256–80; D. Teece, G. Pisano, and A. Shuen, “Dynamic Capabilities and Strategic Manage- ment,” Strategic Management Journal 18 (1997): 509–33.

3. T. Lawrence, B. Dyck, S. Maitlis, and M. Mauws, “The Underlying Structure of Continuous Change,” Sloan Management Review 47 (2006): 59–66; E. Lawler and C. Worley, Built to Change (San Francisco: Jossey-Bass, 2006).

4. L. Greiner and T. Cummings, Dynamic Strategy Making: A Real-Time Approach for the 21st Century Leader (San Francisco: Jossey-Bass, 2009).

5. L. Greiner and A. Bhambri, “New CEO Intervention and the Dynamics of Strategic Change,” Strategic Management Journal 10 (1989): 67–87; M. Beer, “Transforming Organi- zations: Embrace the Paradox of E and O,” in Handbook of Organization Development, ed. T. Cummings (Thousand Oaks, CA: Sage Publications, 2008); M. Beer, “Developing an Effective Organization: Intervention Method, Empirical Evidence, and Theory,” in Research in Organizational Change and Development, vol. 19, ed. W. Pasmore, A. Shani, and R. Woodman (Bingley, UK: Emerald Group Publishing, 2011), 1–54.

6. Greiner and Cummings, Dynamic Strategy Making. 7. C. Worley, D. Hitchin, and W. Ross, Integrated Strategic

Change: How Organization Development Builds Competi- tive Advantage (Reading, MA: Addison-Wesley, 1996); M. Jelinek and J. Litterer, “Why OD Must Become Stra- tegic,” Organizational Change and Development, vol. 2, ed. W. Pasmore and R. Woodman (Greenwich, CT: JAI Press, 1988), 135–62; A. Bhambri and L. Pate, “Introduction—The Strategic Change Agenda: Stimuli, Processes, and Outcomes,” Journal of Organization Change Management 4 (1991): 4–6.

8. Greiner and Cummings, Dynamic Strategy Making.

9. D. Collis and M. Rukstad, “Can You Say What Your Strategy Is?” Harvard Business Review (April 2008): 1–11.

10. M. Porter, Competitive Strategy (New York: The Free Press, 1980).

11. A. Slywotsky, Value Migration: How to Think Several Moves Ahead of the Competition (Cambridge, MA: Harvard Busi- ness School Press, 1995); J. Barney, Gaining and Sustaining Competitive Advantage, 4th ed. (New York: Prentice Hall, 2010); W. Kim and R. Mauborgne, Blue Ocean Strategy (Cambridge, MA: Harvard Business School Press, 2005).

12. A. Colbert, A. Kirstof-Brown, B. Bradley, and M. Barrick, “CEO Transformational Leadership: The Role of Goal Importance Congruence in Top Management Teams,” Academy of Management Journal 51 (2008): 81–96.

13. J. Collins and J. Porras, Built to Last (New York: Harper- Collins, 1996).

14. Greiner and Cummings, Dynamic Strategy Making. 15. D. Ready and J. Conger, “Make Your Company a Talent

Factory,” Harvard Business Review (June 2007): 1–12. 16. This application was adapted from material found in

M. Beer and J. Weber, “Whitbread PLC (A),” Case 9-406-007, Harvard Business School, 2005; M. Beer and J. Weber, “Whitbread PLC (B),” Case 9-406-008, Harvard Business School, 2005; Whitbread’s corporate website, http://www.whitbread.co.uk/whitbread/aboutus .html.

17. B. Hedberg, P. Nystrom, and W. Starbuck, “Camping on Seesaws: Prescriptions for a Self-Designing Organi- zation,” Administrative Science Quarterly 21 (1976): 41–65; K. Weick, “Organization Design: Organizations as Self-Designing Systems,” Organizational Dynamics 6 (1977): 30–46.

18. S. Mohrman and T. Cummings, Self-Designing Organiza- tions: Learning How to Create High Performance (Read- ing, MA: Addison-Wesley, 1989); T. Cummings and S. Mohrman, “Self-Designing Organizations: Towards Implementing Quality-of-Work-Life Innovations,” in Research in Organizational Change and Development,

602 PART 6 STRATEGIC CHANGE INTERVENTIONS

vol. 1, ed. R. Woodman and W. Pasmore (Greenwich, CT: JAI Press, 1987), 275–310.

19. D. Miller and P. Friesen, Organizations: A Quantum View (Englewood Cliffs, NJ: Prentice Hall, 1984).

20. C. Argyris, R. Putnam, and D. Smith, Action Science (San Francisco: Jossey-Bass, 1985); C. Lundberg, “On Organizational Learning: Implications and Opportunities for Expanding Organizational Development,” in Research on Organizational Change and Development, vol. 3, ed. R. Woodman and W. Pasmore (Greenwich, CT: JAI Press, 1989), 61–82; P. Senge, The Fifth Discipline (New York: Doubleday, 1990).

21. T. Lant, “Organization Learning: Creating, Retaining, and Transferring Knowledge,” Administrative Science Quar- terly (Winter, 2000): 622–43; M. Crossan, H. Lane, and R. White, “An Organizational Learning Framework: From Intuition to Institution,” Academy of Management Review 24 (1999): 522–37; J. C. Spender, “Making Knowl- edge the Basis of a Dynamic Theory of the Firm,” Strate- gic Management Journal 17 (1996): 45–62; R. Strata, “Organizational Learning: The Key to Management Inno- vation,” Sloan Management Review 30 (1989): 63–74.

22. D. Teece, “Capturing Value from Knowledge Assets: The New Economy, Market for Know-How, and Intangible Assets,” California Management Review 40 (Spring 1998): 55–79.

23. G. Roth, “The Order and Chaos of the Learning Orga- nization,” in Handbook of Organization Development, ed. T. Cummings (Thousand Oaks, CA: Sage Publica- tions, 2008), 475–97; B. Sugarman, “Organizational Learning–Dynamic, Integrative: A Concept Returns, Older and Wiser,” in Research in Organizational Change and Development, vol. 20, ed. W. Pasmore, A. Shani, and R. Woodman (Bingley, UK: Emerald Group Publishing, 2012), 91–143.

24. D. Bray, “Literature Review—Knowledge Management Research at the Organizational Level” (May 2007), accessed from http://ssrn.com/abstract=991169.

25. C. Argyris and D. Schon, Organizational Learning: A Theory of Action Perspective (Reading, MA: Addison- Wesley, 1978); C. Argyris and D. Schon, Organizational Learning II: Theory, Method, and Practice (Reading, MA: Addison-Wesley, 1996); Senge, Fifth Discipline.

26. P. Adler and R. Cole, “Designed for Learning: A Tale of Two Auto Plants,” Sloan Management Review 34 (1993): 85–94; S. Cook and D. Yanow, “Culture and Organiza- tional Learning,” Journal of Management Inquiry 2 (1993): 373–90; G. Huber, “The Nontraditional Quality of Organizational Learning,” Organization Science 2 (1991): 88–115.

27. W. Snyder, “Organization Learning and Performance: An Exploration of the Linkages Between Organizational

Learning, Knowledge, and Performance” (unpublished Ph.D. diss., University of Southern California, Los Angeles, 1996).

28. A. B. Shani and P. Docherty, Learning by Design: Building Sustainable Organizations (London: Blackwell, 2003); A. B. Shani and P. Docherty, “Learning by Design: Key Mechanisms in Organization Development,” in Hand- book of Organization Development, ed. T. Cummings (Thousand Oaks, CA: Sage Publications, 2008), 499–518; S. Hauschild, T. Licht, and W. Stein, “Creating a Knowledge Culture,” McKinsey Quarterly 1 (2001): 74–81; B. Choi, S. Poon, and J. Davis, “Effects of Knowl- edge Management Strategy on Organizational Perfor- mance: A Complementarity Theory-Based Approach,” Omega 36 (2008): 235–51; B. Ya-Hui Lien, R. Hung, and G. McLean, “Organizational Learning as an Organization Development Intervention in Six High-Technology Firms in Taiwan: An Exploratory Case Study,” Human Resource Development Quarterly 18 (2007): 211–28.

29. This framework draws heavily on the work of W. Snyder and T. Cummings, “Organization Learning Disorders: Conceptual Model and Intervention Hypotheses,” Human Relations 51 (1998): 873–95.

30. Argyris and Schon, Organizational Learning II. 31. Argyris and Schon, Organizational Learning II;

C. Argyris, Intervention Theory and Method (Reading, MA: Addison-Wesley, 1970).

32. D. Garvin, Learning in Action (Cambridge, MA: Harvard Business School Press, 2000).

33. M. McGill, J. Slocum, and D. Lei, “Management Practices in Learning Organizations,” Organizational Dynamics (Autumn 1993): 5–17; E. Nevis, A. DiBella, and J. Gould, “Understanding Organizations as Learning Systems,” Sloan Management Review (Winter 1995): 73–85.

34. J. Dewey, How We Think (Boston: D.C. Heath, 1933). 35. Argyris and Schon, Organizational Learning; Argyris and

Schon, Organizational Learning II; Senge, Fifth Discipline. 36. Argyris and Schon, Organizational Learning II; Senge,

Fifth Discipline; P. Senge, C. Roberts, R. Ross, B. Smith, and A. Kleiner, The Fifth Discipline Fieldbook: Strategies for Building a Learning Organization (New York: Doubleday, 1995).

37. Argyris and Schon, Organizational Learning II. 38. Senge, Fifth Discipline. 39. Ibid. 40. Argyris and Schon, Organizational Learning II. 41. Senge, Fifth Discipline. 42. Argyris and Schon, Organizational Learning II; Senge

et al., Fifth Discipline Fieldbook; B. Dumaine, “Mr. Learning Organization,” Fortune, October 17, 1994, 147–57.

43. Senge et al., Fifth Discipline Fieldbook.

CHAPTER 19 CONTINUOUS CHANGE 603

44. Argyris and Schon, Organizational Learning II; Argyris, Intervention Theory and Method.

45. M. Polanyi, The Tacit Dimension (New York: Doubleday, 1966); I. Nonaka and H. Takeuchi, The Knowledge- Creating Company: How Japanese Companies Foster Creativity and Innovation for Competitive Advantage (New York: Oxford University Press, 1995).

46. D. Leonard-Barton, Wellsprings of Knowledge: Building and Sustaining the Sources of Innovation (Boston: Harvard Business School Press, 1995); Nonaka and Takeuchi, Knowledge Creating; C. Prahalad and G. Hamel, “The Core Competencies of the Corporation,” Harvard Busi- ness Review 68 (1990): 79–91; H. Itami, Mobilizing for Invisible Assets (Cambridge, MA: Harvard University Press, 1987); L. Edvinsson and M. Malone, Intellectual Capital: Realizing Your Company’s True Value by Finding Its Hidden Brainpower (New York: Harper Business, 1997); T. Stewart, Intellectual Capital: The New Wealth of Organi- zations (New York: Doubleday, 1997); J. Nahapiet and S. Ghoshal, “Social Capital, Intellectual Capital, and the Organizational Advantage,” Academy of Management Review 23 (1998): 242–66.

47. V. Anand, C. Manz, and W. Glick, “An Organizational Memory Approach to Information Management,” Acad- emy of Management Review 23 (1998): 796–809.

48. E. Wenger, Communities of Practice: Learning, Meaning, and Identity (Cambridge: Cambridge University Press, 1999); J. Brown and P. Duguid, “Organizational Learning and Communities of Practice: Towards a Unified View of Working, Learning, and Innovation,” Organization Sci- ence 2 (1991): 40–57.

49. M. Hansen, N. Nohria, and T. Tierney, “What’s Your Strategy for Managing Knowledge?” Harvard Business Review (March–April 1999): 106–16; C. O’Dell and C. Grayson, If Only We Knew What We Know (New York: Free Press, 1998).

50. L. Thomson, J. Schneider, and N. Wright, “Developing Communities of Practice to Support the Implementation of Research into Clinical Practice,” Leadership in Health Services 26 (2013), date online September 29, 2012, accessed December 5, 2012.

51. This application was adapted from the case study and evaluation of dialogue and organization learning pre- sented in F. van Eijnatten, M. van Galen, and L. Fitzgerald, “Learning Dialogically: The Art of Chaos-Informed Transformation,” Learning Organization 10 (2003): 36–367.

52. E. Lawler and C. Worley, Built to Change: How to Achieve Sustained Organizational Effectiveness (San Francisco: Jossey-Bass, 2006); C. Worley and E. Lawler, “Designing Organizations That Are Built to Change,” Sloane Manage- ment Review 48 (2006): 19–23.

53. K. van der Heijden, Scenarios: The Art of Strategic Conversation (New York: Wiley, 2007); M. Lindgren and H. Bandhold, Scenario Planning (New York: Palgrave Macmillan, 2009); M. Weisbord, Productive Workplaces (San Francisco: Jossey-Bass, 1987).

54. C. Worley and E. Lawler, “Agility and Organization Design: A Diagnostic Framework,” Organizational Dynamics 39 (2010): 194–204.

55. J. Kotter and J. Heskett, Corporate Culture and Perfor- mance (New York: Free Press, 1992); J. Amis, T. Slack, and C. Hinings, “Values and Organizational Change,” Journal of Applied Behavioral Science 38 (2002): 436–465.

56. Lawler and Worley, Built to Change. 57. E. Lawler and C. Worley, “Winning Support for Organi-

zational Change: Designing Employee Reward Systems That Keep on Working,” Ivey Business Journal (March– April 2006): 1–5.

58. C. Worley and E. Lawler, “Building a Change Capability at Capital One Financial,” Organizational Dynamics 38 (2009): 245–51; T. Fredberg, F. Norrgren, and A. Shani, “Developing and Sustaining Change Capability via Learn- ing Mechanisms: A Longitudinal Perspective on Trans- formation,” in Research in Organizational Change and Development, vol. 19, ed. W. Pasmore, A. Shani, and R. Woodman (Bingley, UK: Emerald Group Publishing, 2011), 117–61; M. Beer and R. Eisenstat, “Developing an Organization Capable of Implementing Strategy and Learning,” Human Relations 49 (1996): 597–619.

59. Worley and Lawler, “Building a Change Capability.”

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Transorganizational Change

learning objectives

Explain the rationale and logic behind organization collaboration.

Describe and apply organization development (OD) interventions that enable mergers and acquisitions.

Discuss and apply the OD process to alliance formation and development.

Describe the process of network formation and transorganizational development as well as how networks change.

T he focus of this chapter is OD interventions that move beyond the single organization to include merging, allying, or networking with

other organizations. These multiorganizational change programs are becoming more prevalent in OD as organizations extend their boundaries to keep pace with highly complex and rapidly changing environ- ments. Under these conditions, organizations may merge with or acquire other firms to gain essential capabilities and resources, to operate at a larger scale, and to enter new markets. They may form stra- tegic alliances with other organizations to share costs and expertise and to manage their exchanges more efficiently. They may join with other organizations to tackle complex problems and projects that single organizations cannot accomplish.

Mergers, alliances, and transorganizational change helps organizations create and sustain such multiorganizational linkages. It helps them transcend the perspective of a single organization and address the needs and concerns of all involved stakeholders. This represents a fundamental shift in strategic orientation because the strategies, goals, structures, and processes of two or more organizations become

interdependent and must be coordinated and aligned. This raises the scope and complexity of change processes; it increases the chances that conflicts and misunderstandings will occur. Multiorganizational change calls for OD practitioners to move to a higher diagnostic and intervention level to straddle the boundaries of different organizations, attend to their unique and often conflicting needs, and bring structure to what is frequently an underorganized and highly uncertain process. Practitioners must develop new concepts, skills, and expertise for implementing these change interventions.

Because transorganizational change is relatively new to OD, this chapter starts with an explanation of the rationale underlying multiorganizational arrangements. Then, three kinds of interventions are described: mergers and acquisitions (M&As), strategic alliances, and networks.

M&As leverage the strengths (or shore up the weaknesses) of one organization by combining with another organization. This transorganizational change involves integrating many of the interventions previously discussed in this text, including human process, technostructural, and human resources

605

management interventions. Research and practice in M&As strongly suggest that OD practices can contribute to implementation success.

Alliance interventions, including joint ventures, franchising, and long-term contracts, help to develop the relationship between two organizations that believe the benefits of cooperation outweigh the costs of lowered autonomy and control. These increasingly common arrangements require each organization to understand its goals and strategy in the relationship, build and leverage trust, and ensure that it is receiving the expected benefits.

Finally—and building on the knowledge of alliances—network interventions are concerned with

helping a group or system of organizations to engage in relationships that perform tasks or solve problems that are too complex and multifaceted for a single organization to resolve. These multiorganizational systems abound in today’s environment and include research and development consortia, public–private partnerships, nonprofit coalitions, and constellations of profit-seeking organizations. They tend to be loosely coupled and nonhierarchical, and consequently they require methods different from most traditional OD interventions that are geared to single organizations. These methods help organizations recognize the need for transorganizational partnerships and develop coordinating structures to support their networks.

20-1 Transorganizational Rationale More and more, organizations are linking with other organizations to achieve their objectives. These transorganizational strategies can provide additional resources for large-scale research and development; spread the risks of innovation; apply diverse expertise to complex problems and tasks; make information or technology available to learn and develop new capabilities; position the organization to achieve economies of scale or scope; build collaborative relationships to advance social or environmental issues; and gain access to new, especially international, marketplaces.1 For example, pharmaceutical firms form strategic alliances to distribute noncompeting medications and to avoid the high costs of establishing sales organizations; firms from different coun- tries form joint ventures to overcome restrictive trade barriers; and high-technology firms form research consortia to undertake significant and costly research and develop- ment for their industries.

More generally, however, transorganizational strategies allow organizations to per- form tasks that are too costly and complicated for single organizations to perform.2

These tasks include the full range of organizational activities, including purchasing raw materials, hiring and compensating organization members, manufacturing and service delivery, obtaining investment capital, marketing and distribution, and strategic plan- ning. The key to understanding transorganizational strategies is recognizing that these individual tasks must be coordinated with each other. Whenever a good or service from one of these tasks is exchanged between two units (individuals, departments, or organi- zations), a transaction occurs. Transactions can be designed and managed internally within the organization’s structure, or externally between organizations. For example, organizations can acquire a raw materials provider and operate these tasks as part of internal operations or they can collaborate with a raw material supplier through long- term contracts in an alliance.

Economists and organization theorists have spent considerable effort investigating when transorganizational strategies work best. They have developed frameworks, primar- ily transaction cost theory and agency theory, that are useful for understanding these interventions.3 As a rule, transorganizational strategies work well when transactions occur frequently and are well understood. Many organizations, for example, outsource their payroll tasks because the inputs, such as hours worked, pay rates, and employment status; the throughputs, such as tax rates and withholdings; and the outputs, such as

606 PART 6 STRATEGIC CHANGE INTERVENTIONS

issuing paychecks, occur regularly and are governed by well-known laws and regulations. Moreover, if transactions involve people, equipment, or other assets that are unique to the task, then transorganizational linkage is the preferred approach. For example, Micro- soft works with a variety of value-added resellers, independent software vendors, and small and large consulting businesses to bring their products to customers ranging in size from individual consumers to the largest business enterprises in the world. An inter- nal sales and service department to handle the unique demands of each customer seg- ment would be much more expensive to implement and would not deliver the same level of quality as the partner organizations. In general, relationships between and among organizations become more formalized as the frequency of interaction increases, the type of information and other resources that are exchanged become more proprie- tary, and the number of different types of exchanges increases.4

Cummings has referred to groups of organizations that have joined together for a common purpose as transorganizational systems (TSs).5 TSs are functional social systems existing intermediately between single organizations on the one hand and societal sys- tems on the other. These multiorganizational systems can make decisions and perform tasks on behalf of their member organizations, although members maintain their sepa- rate organizational identities and goals. This separation distinguishes TSs from M&As.

In contrast to most organizational systems, TSs tend to be underorganized. Relation- ships among member organizations are loosely coupled; leadership and power are dis- persed among autonomous organizations, rather than hierarchically centralized; and commitment and membership are constantly being assessed as member organizations act to maintain their autonomy while jointly performing. These characteristics make cre- ating and managing TSs difficult.6 Potential member organizations may not perceive the need to join with other organizations. They may be concerned with maintaining their autonomy or have trouble identifying potential partners. U.S. firms, for example, are tra- ditionally “rugged individualists” preferring to work alone rather than to join with other organizations. Even if organizations decide to join together, they may have problems managing their relationships and controlling joint operations and decisions. Because members typically are accustomed to hierarchical forms of control, they may have diffi- culty managing lateral relations among independent organizations. They also may have difficulty managing different levels of commitment and motivation among members and sustaining membership over time. The network interventions described in this chapter can help TSs understand and address these problems.

20-2 Mergers and Acquisitions M&As involve the combination of two organizations. The term merger refers to the inte- gration of two previously independent organizations into a completely new organization; acquisition involves the purchase of one organization by another for integration into the acquiring organization. M&As are distinct from the interventions described later in this chapter because at least one of the organizations ceases to exist. The stressful dynamics associated with M&As led one researcher to call them the “ultimate change management challenge.”7

Organizations have a number of reasons for wanting to acquire or merge with other firms, including diversification or vertical integration; gaining access to global markets, tech- nology, or other resources; and achieving operational efficiencies, improved innovation, or resource sharing.8 As a result, M&As have become a preferred method for rapid growth and strategic change. In 2011, for example, the announced value of M&As worldwide

CHAPTER 20 TRANSORGANIZATIONAL CHANGE 607

reached $3.1 trillion, a 7% increase over 2010 but far below the all-time high of $6.4 trillion in 2007.9 Recent large transactions include financial integrations resulting from the eco- nomic crisis in 2008 (e.g., Wells Fargo and Wachovia, Bank of America and Countrywide Financial) and other industries (e.g., Microsoft-Skype, United-Continental, Sanofi-Genzyme, Southwest-AirTran, and Oracle and Sun Microsystems). There have been more than a few failed announcements as well, including AT&T and T-Mobile, Microsoft and Yahoo, and BEA and EADs.

Despite the popularity of M&As, they have a questionable record of success.10

Among the reasons commonly cited for merger failure are inadequate due diligence pro- cesses, lack of a compelling strategic rationale, unrealistic expectations of synergy, paying too much for the transaction, conflicting corporate cultures, and failure to move quickly.

M&A interventions typically are preceded by an examination of the organization’s strategy. Executives must decide whether their strategic goals should be achieved by either an internal change or a multiorganizational arrangement, such as an M&A, strate- gic alliance, or network. M&As are preferred when internal development is considered too slow or when strategic alliances or networks do not offer sufficient control over key resources to meet the firm’s objectives.

In addition to the OD issues described here, M&As are complex changes that involve legal and financial knowledge beyond the scope of this text. OD practitioners are encouraged to seek out and work with specialists in these other relevant disciplines. The focus here is on how OD can contribute to M&A success.

20-2a Application Stages M&As involve three major phases as shown in Table 20.1: precombination, legal combina- tion, and operational combination.11 OD practitioners can make substantive contributions to the precombination and operational combination phases as described below.

Precombination Phase This first phase consists of planning activities designed to ensure the success of the combined organization. Organizations pursuing the M&A option must identify a candidate organization, gather and reveal information about each other, and plan the implementation and integration activities. Research shows that precombination activities are critical to M&A success.12 These include the following:

1. Search for and select candidate. This involves developing screening criteria to assess and narrow the field of candidate organizations, agreeing on a first-choice candidate, assessing regulatory compliance, establishing initial contacts, and formu- lating a letter of intent. Criteria for choosing an M&A partner can include leadership and management characteristics, market access resources, technical or financial capabilities, physical facilities, and so on. OD practitioners can add value at this stage of the process by encouraging screening criteria that include managerial, orga- nizational, and cultural components as well as technical and financial aspects. In practice, financial issues tend to receive greater attention at this stage, with the goal of maximizing shareholder value. Failure to attend to cultural and organizational issues, however, can result in diminished shareholder value during the operational combination phase.13

Identifying potential candidates, narrowing the field, agreeing on a first choice, and checking regulatory compliance are relatively straightforward activities. They generally involve investment brokers and other outside parties who have access to databases of organizational, financial, and technical information. The final two

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activities, making initial contacts and creating a letter of intent, are aimed at deter- mining the candidate’s interest in the proposed merger or acquisition.

2. Create an M&A team. Once there is initial agreement between the two organiza- tions to pursue a merger or acquisition, senior leaders from the respective organiza- tions appoint an M&A team to establish the business case, to oversee the due diligence process, and to develop a merger integration plan.14 This team typically comprises senior executives and experts in such areas as business valuation, technol- ogy, organization, and marketing. OD practitioners can facilitate formation of this team through human process interventions, such as team building and process con- sultation, and help the team establish clear goals and action strategies. They can also help members define a leadership structure, apply relevant skills and knowledge, and ensure that both organizations are represented appropriately. The group’s leadership structure, or who will be accountable for the team’s accomplishments, is especially critical. In an acquisition, an executive from the acquiring firm is typically the team’s leader. In a merger of equals, the choice of a single individual to lead the team is more difficult, but essential. The outcome of this decision and the process used to make it are the first outward symbols of how this transorganizational change will be conducted.

3. Establish the business case. The purpose of this activity is to develop a prima facie case that combining the two organizations will result in a competitive advantage that exceeds their separate advantages.15 It includes specifying the strategic vision,

TABLE 20.1

Major Phases and Activities in Mergers and Acquisitions

Major M&A Phases Key Steps OD and Change Management Issues

Precombination • Search for and select candidate • Create M&A team • Establish business case • Perform due diligence assessment • Develop merger integration plans

• Ensure that candidates are screened for cultural as well as financial, technical, and physical asset criteria

• Define a clear leadership structure • Establish a clear strategic vision,

competitive strategy, and systems integration potential

• Specify the desirable organization design features

• Specify an integration action plan

Legal combination

• Complete financial negotiations • Close the deal • Announce the combination

Operational combination

• Day 1 activities • Organizational and technical

integration activities • Cultural integration activities

• Implement changes quickly • Communicate • Solve problems together and focus on

the customer • Conduct an evaluation to learn and identify

further areas of integration planning

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competitive strategy, and systems integration potential for the M&A. OD practitioners can facilitate this discussion to ensure that each issue is fully explored. If the business case cannot be justified on strategic, financial, or operational grounds, the M&A should be revisited, terminated, or another candidate should be considered.

A strategic vision or goal represents a description of the organizations’ combined capabilities. It synthesizes the strengths of the two organizations into a viable new organization. For example, AT&T had a clear picture of its intentions in acquiring T-Mobile. They believed that their common network equipment provider and Global Mobile System (GSM) operating system and the difficulty in acquiring additional spec- trum would bring better coverage, better quality, and better functionality to its more than 250 million customers.

Competitive strategy describes how the combined organization will add value in a particular product market or segment of the value chain, how the value proposi- tion is best performed by the combined organization (compared with competitors), and how it will be difficult to imitate. The purpose of this activity is to force the two organizations to go beyond the rhetoric of “these two organizations should merge because it’s a good fit.” AT&T’s acquisition of T-Mobile eventually failed, in part, because their competitive strategy arguments could not dispel regulatory concerns of monopoly power.

Systems integration specifies how the two organizations will be combined. It addresses how and if they can work together. It includes such key questions as: Will one firm be acquired and operated as a wholly owned subsidiary? Does the transaction imply a merger of equals? Are layoffs implied, and if so, where? On what basis can promised synergies or cost savings be achieved?

4. Perform a due diligence assessment. This involves evaluating whether the two organizations actually have the managerial, technical, and financial resources that each assumes the other possesses. It includes a comprehensive review of each orga- nization’s articles of incorporation, stock option plans, organization charts, and so on. Financial, operational, technical, logistical, and human resources inventories are evaluated along with other legally binding issues. The discovery of previously unknown or unfavorable information can halt the M&A process.

Although due diligence assessment traditionally emphasizes the financial aspects of M&As, this focus is increasingly being challenged by evidence that culture clashes between two organizations can ruin expected financial gains.16 Thus, attention to the cultural features of M&As is becoming more prevalent in due diligence assessment. For example, Microsoft’s venture integration team applies cultural and talent screens as part of its due diligence activities along with financial and operational criteria. The process identifies the fit between Microsoft’s values and those of possible merger can- didates. Human resource assessments like these contribute heavily to the success of the merger. OD expertise can contribute significantly to M&A cultural assessment; it can help organizations carry out cultural due diligence systematically and objectively.

The scope and detail of due diligence assessment depend on knowledge of the candidate’s business, the complexity of its industry, the relative size and risk of the transaction, and the available resources. Due diligence activities must reflect symbol- ically the vision and values of the combined organizations. An overly zealous assess- ment, for example, can contradict promises of openness and trust made earlier in the transaction. Missteps at this stage can lower or destroy opportunities for synergy, cost savings, and improved shareholder value.17

5. Develop merger integration plans. This stage specifies how the two organizations will be combined. It defines integration objectives; the scope and timing of

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integration activities; organization design criteria; Day 1 requirements; and who does what, where, and when. The scope of these plans depends on how integrated the organizations will be. If the candidate organization will operate as an independent subsidiary with an “arm’s-length” relationship to the parent, such as Microsoft’s ini- tial decision with Skype, merger integration planning need only specify those sys- tems that will be common to both organizations. A full integration of the two organizations requires a more extensive plan.

Merger integration planning starts with the business case conducted earlier and involves more detailed analyses of the strategic vision, competitive strategy, and sys- tems integration for the M&A. For example, assessment of the organizations’ mar- kets and suppliers can reveal opportunities to serve customers better and to capture purchasing economies of scale. Examination of business processes can identify best operating practices; which physical facilities should be combined, left alone, or shut down; and which systems and procedures are redundant. Capital budgeting pro- cesses can show which investments should be continued or dropped. Typically, the M&A team charters subgroups composed of members from both organizations to perform these analyses. OD practitioners can conduct team-building and process- consultation interventions to improve how those groups function.

Next, plans for designing the combined organization are developed. They include the organization’s structure, reporting relationships, human resources policies, infor- mation and control systems, operating logistics, work designs, and customer-focused activities. Applying large-scale change interventions are most appropriate here.

The final task of integration planning involves developing an action plan for implementing the M&A. This specifies tasks to be performed, decision-making authority and responsibility, and timelines for achievement. It also includes a pro- cess for addressing conflicts and problems that will invariably arise during the implementation process.

Legal Combination Phase This phase of the M&A process involves the legal and financial aspects of the transaction. The two organizations settle on the terms of the deal, register the transaction with and gain approval from appropriate regulatory agen- cies, communicate with and gain approval from shareholders, and file appropriate legal documents. In some cases, an OD practitioner can provide advice on negotiating a fair agreement, but this phase generally requires knowledge and expertise beyond that typi- cally found in OD practice.

Operational Combination Phase This final phase involves implementing the merger integration plan. In practice, it begins during due diligence assessment and may continue for months or years following the legal combination phase. M&A implementation includes the three kinds of activities described below.

1. Day 1 activities. These include communications and actions that officially start the implementation process. For example, announcements may be made about key executives of the combined organization, the location of corporate headquarters, the structure of tasks, and areas and functions where layoffs will occur. Special attention is paid to sending important symbolic messages to organization members, investors, and regulators about the soundness of the merger plans and the changes that are critical to accomplishing strategic and operational objectives.18

2. Operational and technical integration activities. These involve the physical moves, structural changes, work designs, and procedures that will be implemented to

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accomplish the strategic objectives and expected cost savings of the M&A. The merger integration plan lists these activities, which can be large in number and range in scope from seemingly trivial to quite critical. For example, United Airlines’s acquisition of Continental involved changing employee uniforms, the signage at all airports, marketing and public relations campaigns, repainting airplanes, and inte- grating the route structures, among others. When these integration activities are not executed properly, the M&A process can be set back.

Application 20.1 describes some of the operational, technical, and cultural inte- gration activities associated with the United–Continental merger.19

3. Cultural integration activities. These tasks are aimed at building new values and norms in the combined organization. Successful implementation melds both the technical and cultural aspects of the combined organization. For example, members from both organizations can be encouraged to solve business problems together, thus addressing operational and cultural integration issues simultaneously.20

The M&A literature contains several practical suggestions for managing the operational combination phase.21 First, the merger integration plan should be imple- mented sooner rather than later, and quickly rather than slowly. Integration of two organizations generally involves aggressive financial targets, short timelines, and intense public scrutiny. Moreover, the change process is often plagued by culture clashes and political fighting. Consequently, organizations need to make as many changes as possible in the first hundred days following the legal combination phase. Quick movement in key areas has several advantages. It preempts unantici- pated organization changes that might thwart momentum in the desired direction; it reduces organization members’ uncertainty about when things will happen; and it lessens members’ anxiety about the M&A’s impact on their personal situation. All three of these conditions work against desired collaboration and other benefits.

Second, integration activities must be communicated clearly and promptly to a variety of stakeholders, including shareholders, regulators, customers, and organiza- tion members. M&As can increase uncertainty and anxiety about the future, espe- cially for members of the involved organizations who often inquire: Will I have a job? Will my job change? Will I have a new boss? These kinds of questions can dominate conversations, reduce productive work, and spoil opportunities for collab- oration. To reduce ambiguity, organizations can provide concrete answers through a variety of channels including company newsletters, email and intranet postings, press releases, video, podcasts, and in-person presentations, one-on-one interaction with managers, and so on.

Third, members from both organizations need to work together to solve imple- mentation problems and to address customer needs. Such coordinated tasks can clarify work roles and relationships and contribute to member commitment and motivation. Moreover, when coordinated activity is directed at customer service, it can assure customers that their interests will be considered and satisfied during the merger.

Fourth, organizations need to assess the implementation process continually to identify integration problems and needs. The following questions can guide the assessment process:22

• Have savings estimated during precombination planning been confirmed or exceeded?

• Has the new entity identified and implemented shared strategies or opportunities? • Has the new organization been implemented without loss of key personnel? • Was the merger and integration process seen as fair and objective? • Is the combined company operating efficiently?

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1 PLANNING THE UNITED–CONTINENTAL MERGER

U nited Airlines is one of the oldest and most recognized brands in the world. But like most of the older airlines, it has struggled over the years. Beset by a weak industry

structure—overcapacity, easy entry, and a per- ishable product (empty seats can never be resold)—few airlines make money. Financial analysts have, for years, called on the airlines to restructure, lower costs, and consolidate. Following the widespread bankruptcies in the wake of 9/11, consolidation has slowly set in, leading to the mergers of US Airways and America West; Delta and Northwest; South- west and AirTran; and, most recently, United and Continental. With consolidation comes an opportunity for organization development.

The announcement of the United and Con- tinental merger in May 2010 was the ultimate event in a long string of strategic decisions by both organizations. Before actually coming together as merger partners, United and Conti- nental had discussed the possibility of a formal merger. But United’s merger talks with US Air- ways, United’s and Continental’s own journeys through bankruptcies, their “virtual” merger through the Star Alliance, and Continental’s equity relationship with Northwest prevented consummation of the deal.

When the path to a merger opened up, the rationale for the deal went beyond simple eco- nomics. Important organizational reasons included Continental’s superior management capabilities and reputation as well as United’s scale and scope. These issues were apparent even as the deal was announced: Former Continental head, Jeff Smisek, was named CEO of the new company and many if not most top management positions were to be filled with former Continental executives, but the company would be called United and its headquarters would be in Chicago.

Combining two airlines is tremendously difficult, largely because of the number of things they can do differently. For example, choices have to be made on boarding pro- cesses (Continental’s traditional back to front process or United’s window, middle, then

aisle seat process); baggage and loading poli- cies (should all dog crates be loaded back- wards into the cargo hold so frightened dogs don’t tip the crate off the conveyor belt); uni- forms (male Continental employees could choose from three different shirts and a few ties, United only has the one); how to identify unaccompanied minors (bracelet or a button); and whether to serve nuts in a bag or a heated dish in first class.

The planning and integration efforts utilized “functional integration teams”—Continental employees working alongside United employ- ees in months of meetings—to make things happen. For example, 33 functional integration teams in the fourth quarter of 2011 spent $170 million on everything from technology training and severance to repainting airplanes in an attempt to balance safety, cost, space, style, reliability, convenience, speed, and comfort.

Simple choices could become incredibly complicated. For example, a 14-member func- tional integration beverage team composed of members from procurement, flight operations, finance, food services, and marketing was chartered with, among other things, choosing a coffee supplier. Continental and United had different coffee providers, and it made no sense to have two contracts. Buying from one source offered the possibility of bigger vol- ume discounts and the kinds of savings Wall Street was expecting. The taste test winner was cheaper and it was approved by collea- gues outside the beverage committee, the new CEO, and company officers at a general meeting. Just to be sure, the new blend was tested on flight attendants in Washington Dulles, Chicago O’Hare, Denver, Los Angeles, and San Francisco. Out of the 1,100 who did, all but eight approved.

On July 1, the new United introduced its new coffee, and the protests came flying in. Flight attendants reported a barrage of com- plaints, and the beverage committee and the CEO received angry emails from customers. The coffee was “watery.” When the beverage committee looked into it, they discovered that it

CHAPTER 20 TRANSORGANIZATIONAL CHANGE 613

wasn’t the coffee: The coffee makers on United air- craft were different from Continental’s, and the differences—the height of the brew basket above the pot—determined whether excess water flowed into the pot (watering down the coffee) or not.

One of the biggest challenges was planning the integration of the flight information and passenger information systems. As CEO Smisek put it, “It’s akin to changing the engine while the airplane’s in flight.” The flight information system tracks every- thing related to a particular flight, including the type of plane, departure and arrival times, flight number, air speed, altitude, and current location. The system is monitored by employees in the network opera- tions center. Merging Continental’s and United’s operations centers was handled by the operations center’s functional integration team and took more than 18 months. The team had to determine the hardware and software platforms that would best handle the volume and complexity of activity as well as the system’s operation. For example, every airline has a set of rules to determine when a plane will go faster to make up for a late departure and when it will not—the so-called “speedup- slowdown calculation.” Flying faster is costly because more fuel is used, but being late costs money in terms of missed connections, rebooking costs, putting stranded customers up in hotels, and paying extra time for flight crews and ground crews. United’s and Continental’s calculations didn’t always agree and the functional integration team had to marry the best of both.

Moreover, the functional integration team had to plan the exhaustive list of tests and contingency plans to ensure that the data could be combined without breaking the system. When the team thought it had an integration solution in place, they tested the system by flying an empty Continental 737 from Houston to El Paso and back just to make sure the operations center could track it. Then they had the pilots pretend to have a mechan- ical problem and return to the gate, and then they had the pilots change the flight number and reroute the plane to Austin to see if that showed up.

Integrating the flight information system involved more than 500 employees reducing 440 manuals down to 260. When the new system came online, the only glitch was that the few planes that had crossed the international dateline

had an extra 24 hours added to their arrival times. The FAA awarded the new United a single operat- ing certificate on November 30, 2011.

The second technical integration challenge, the passenger information system, proved more troublesome. The system hosts the website and reservation system, tracks schedules and schedule changes, records frequent flyer information, con- nects ticket counters to airport kiosks to gates, and prints boarding passes. Until the passenger information system is integrated, the organization looks to customers and really acts like separate air- lines, with separate websites, gates, ticketing pro- cesses, and so on. United customers who want help from a Continental agent cannot get it.

As with the flight system integration, there are technical issues to address but the real layer of complexity is that this system is used by customers and employees alike. The new United adopted Con- tinental’s passenger services system, a Hewlett- Packard program called Shares that is more flexible than United’s old Apollo system. Although it pro- vides a more customizable customer experience, it is also less intuitive and therefore required a lot of training. There was some fear among the agents. “It’s a little challenging at the moment. We just get this on-the-job training a couple hours here and there,” said a 20-year United employee.

Although United began planning this inte- gration early on, the complexity of the data interactions—and an independent and unrelated decision to change a few of the elements of the frequent flyer programs at the same time—was too much to handle. The lack of training, the inevi- table technical glitches, and the increased call loads from frequent flyers asking questions over- whelmed the system and employees. Initially, the system operated poorly and there were loud com- plaints from both customers and employees.

Integrating labor practices, talent, and culture is one of the biggest issues in most mergers, and integrating United’s and Continental’s human capi- tal practices and culture was expected to be a par- ticular challenge. Continental had a strong reputation as an employee- and customer-focused organization. Like other carriers, it had to deal with high fuel prices, natural disasters (such as the volcanic eruption in Iceland), and the recession, but it had managed to retain its positive culture.

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• Have major problems with stakeholders been avoided? • Did the process proceed according to schedule? • Were substantive integration issues resolved? • Are people highly motivated (more so than before)?

M&As are among the most complex and challenging interventions facing organiza- tions and OD practitioners.

Continental was consistently at the top of cus- tomer satisfaction surveys and the country’s 100 best employers. Labor relations and customer ser- vice reputations at United, however, were just the opposite. Its 2002–2006 bankruptcy involved lay- offs and salary cuts, increased customer com- plaints, and pilot “sick outs.” Although these were the most proximate causes of mistrust, there was a legacy of hostility.

Like the technical processes, United adopted the functional integration team idea to address its human capital and culture strategies. All of them had to work together to build a coordinated work- force. For example, getting alignment among the labor agreements was as much a social issue as a financial one. Looking like one airline to consu- mers means that employees have to feel like one airline. Integrating contracts meant reconciling rules regarding schedules, routes, seniority, and pay. Despite its importance, this was a difficult pro- cess because United and Continental had similar groups of employees that were represented by dif- ferent collective bargaining agreements, as well as employee groups that were covered by a union in one organization that were not covered by a union in the other. Sequencing union votes, talent selec- tion processes, and HR systems integration were a big part of the HR functional integration of team’s responsibilities.

Fortunately, the team had a lot of help from the top. The new United management saw the merger as a rare opportunity to get things right. CEO Smisek noted, “My management team and I are spending a lot of time on developing the new culture. It won’t be precisely Continental’s culture, and it sure won’t be United’s old culture. It’ll be something that takes what I hope to be the best of both. We’re very focused on that because you

do run the risk in any integration of ending up with mediocrity.”

In the first days after the merger was closed, Smisek did 16 “CEO exchanges” in the United States. Standing up in front of employees, he answered any question they wanted. This was something the Continental employees under- stood, but the United workers had never seen. The tough questions came quickly. "When are you going to snap me back to the wages I had in the year 2000?" The answer was “never,” and Smisek had to explain that today’s airline industry was different than it was in 2000; that the business had changed because low-cost carriers were now an important part of the way business was done. The exchanges were continued in Europe, Asia, and Latin America before more were conducted in the United States

The new management team was also hoping to use the new strategy to align people to the busi- ness. The new United adopted the “Go Forward Plan” process from Continental. Once a year, the Go Forward Plan was a short, simple, and easy to understand statement, no more than one-page long, of marketing, finance, operations, and employee objectives. As a pilot, ticket agent, or operations person, it focused everybody on the things that mattered most. Smisek tells people that “if you’re doing something and you can’t trace it back to the Go Forward Plan, stop what you’re doing and do something else.”

Although there were some bumps along the way and the culture and labor integration pro- cesses continue, the use of functional integration teams to address the important operational chal- lenges and senior management’s visible commit- ment to the merger have helped United manage the change.

CHAPTER 20 TRANSORGANIZATIONAL CHANGE 615

20-3 Strategic Alliance Interventions A strategic alliance is a formal agreement between two or more organizations to pursue a set of private and common goals through the sharing, exchange, or codevelopment of resources, including intellectual property, people, capital, technology, capabilities, or physical assets.23 It is an important strategy for such organizations as Microsoft, Eli Lilly, Corning Glass, DOW, Federal Express, IBM, Starbucks, Cisco Systems, and Oracle. The term strategic alliance generally refers to any collaborative effort between two or more organizations, including licensing agreements, franchises, long-term contracts, and joint ventures. Franchising is a common collaborative strategy.24 Companies such as McDonald’s, Subway, or Holiday Inn license their name and know-how to independent organizations that deliver the service and leverage the brand name for marketing. A joint venture is a special type of strategic alliance where a third organization, jointly owned and operated by two (or more) organizations, is created.25 Joint ventures between domestic and foreign firms, such as Equate, a joint venture between DOW and Petrochemical Industries Companies KSC to produce value-added che- micals and plastics, or Fuji–Xerox, a long-term collaboration that began with Fuji selling Xerox copying machines in Japan, can help overcome trade barriers and facilitate technology transfer across nations. The New United Motor Manufacturing, Inc., in Fremont, California, for example, was a successful, long-term joint venture between General Motors and Toyota to produce automobiles using Japanese teamwork methods that was just recently dissolved.

20-3a Application Stages The development of effective strategic alliances generally follows a process of strategy formulation, partner selection, alliance structuring and start-up, and alliance operation and adjustment.

1. Alliance strategy formulation. The first step in developing strategic alliances is to clarify the business strategy and understand why an alliance is an appropriate method to implement it. About one-half to two-thirds of alliances fail to meet their financial objectives, and the number one reason for that failure is the lack of a clear strategy.26

For example, Collins found that alliance success was heavily influenced by the alignment of the partner to the company’s “hedgehog concept” or what it is best at doing.27 If the organization understood its passion, distinctive capabilities, and economic drivers, it was more likely to develop alliances that supported its strategy. Thus, it is important to pur- sue alliances according to a “collaboration logic.”28 The alliance must be seen as a more effective way of organizing and operating than developing new capabilities to perform the work in-house; acquiring or merging with another organization; or buying the capabilities from another organization in a transactional relationship.

2. Partner selection. Once the reasons for a strategic alliance are clear, the search for an appropriate partner or partners begins. Alliances always involve a cost–benefit trade- off; while the organization typically gains access to new markets or new capabilities, it does so at the cost of yielding some autonomy and control over its activities.

Similar to identifying merger and acquisition candidates discussed previously, this step involves developing screening criteria, agreeing on candidates, establishing initial contacts, and formulating a letter of intent. A good alliance partnership will leverage both similarities and differences to create competitive advantage. Compatible commit- ment levels, management styles, cultures, goals, information technologies, or operations are important similarities that can smooth alliance formation and implementation.29

However, different perspectives, technologies, capabilities, and other resources can complement existing ones and be good sources of learning and value in the part- nership. These differences can also be a source of frustration for the alliance.

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OD practitioners can add value at this stage of the process by helping potential alliance partners explore and understand their similarities and differences. In addition, the way the alliance begins and proceeds is an important ingredient in building trust, a charac- teristic of successful alliances explored more fully in the next step.

3. Alliance structuring and start-up. Following agreement to enter into an alliance, the focus shifts to how to structure the partnership and build and leverage trust in the relationship. First, an appropriate governance structure must be chosen and can include medium- to long-term contracts, minority equity investments, equal equity partnerships, or majority equity investments. As the proportion of equity investment increases, the costs, risk, and amount of required management attention also increase.30 In general, partners need to know how expenses, profits, risk, and knowl- edge will be shared.

Second, research increasingly points to “relational quality” as a key success fac- tor of long-term alliances.31 Strategic alliances shift the nature of the relationship from the simple exchange of goods, services, or resources with no necessary expec- tation of a future relationship to one where there is a clear expectation of future exchange. The organizations in the relationship must act in good faith to ensure the future. This requires trust, “a psychological state comprising the intention to accept vulnerability based upon positive expectations of the intentions or behavior” of another firm or individual representing the organization. It implies an expectation that the organization will subordinate its self-interest to the “joint interest” of the alliance under most conditions.32

Trust can increase or decrease over the life of the alliance. Early in the alliance formation process, it can serve as an initial reservoir of comfort and confidence based on perceptions of the organizations’ reputation, prior success, and other sources. These same factors can also contribute to a lack of initial trust. Trust can be increased or decreased by new assessments of the others’ capabilities, compe- tence, and ethical behavior. OD practitioners can assist in this initial start-up phase by making implicit perceptions of trust explicit and getting the involved parties to set appropriate expectations.33 During the structuring and start-up phase, trust can increase through direct activities as a function of the number, frequency, and impor- tance of interactions; differences between expectations and reality; the nature of mis- takes and how they are resolved; and attributions made about partners’ behavior.

4. Alliance operation and adjustment. Once the strategic alliance is functioning, the full range of OD interventions described in this text can be applied. Team building, conflict resolution, large-group interventions, work design, employee involvement, dynamic strategy making, and culture change efforts have all been reported in alliance work.34

OD practitioners should pay particular attention to helping each partner in the alliance clarify the capabilities contributed, the lessons learned, and the benefits received.

Diagnosing the state of the strategic alliance and making the appropriate adjust- ments is a function of understanding whether the environment has changed in ways that make transorganizational linkage unnecessary, whether partner goals and capa- bilities have changed the nature of the relationship and interdependence, and whether the alliance is successfully generating outcomes. The long-term success of the Fuji-Xerox joint venture, for example, has been due to the willingness and ability of the two organizations to adjust the relationship in terms of ownership, profit sharing, new product development responsibilities, and market access.35

Application 20.2 describes an alliance-building intervention between two firms in India.36 It shows how, despite good intentions, OD projects can encounter vexing problems, especially in cross-cultural alliance contexts.

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2 BUILDING ALLIANCE RELATIONSHIPS

M aharashtra Hybrid Seeds Company Lim- ited (MAHYCO), the leading producer and marketer of hybrid seeds in India, formed a strategic alliance with Monsanto to

expand and extend its business. Founded in 1964 by B. R. Barwale, the father of the Green Revolution in India, MAHYCO was fam- ily owned and run. Mr. Barwale’s son was the firm’s managing director (MD) and several fam- ily members played critical roles in its daily management. In 1998, the company opened a state-of-the-art research and development complex, the same year that B. R. Barwale received the World Food Prize for his work on hybrid seed development.

In the early 1990s, MAHYCO first made contact with Monsanto India Private Limited as a potential business partner with comple- mentary capabilities. Monsanto India was part of the Monsanto Company, a publicly held mul- tinational corporation based in the United States, and a leading global developer of trans- genic plants using biotechnology. Monsanto’s focus on biotechnology, part of the firm’s larger transformation from chemicals to bio- technology, gave it the lead in introducing insect- and herbicide-resistant genetic traits in plants. With a presence in India since 1947, Monsanto India had a sales and marketing organization with a research facility and formu- lation plant.

During the next few years, the two compa- nies explored a strategic alliance primarily through personal relationships among MAHYCO’s MD and two key executives from Monsanto India, an Indian operations manager and an expatri- ate from the United States. The MD had strong interest in progressive business practices; the Monsanto operations manager possessed a keen business savvy and local knowledge; and the expatriate had tremendous technical knowledge and cultural sensitivity. These qual- ities helped the three executives forge a strong personal bond based on respect, friendship, and trust.

In 1998, Monsanto made an equity invest- ment in MAHYCO. The two companies believed

that their complementary resources and cap- abilities could be leveraged to develop competi- tive advantage for the alliance. For example, MAHYCO could apply Monsanto’s biotechnolog- ical know-how to its vast germ plasma inventory to create plants that would support the food production and fiber needs of South Asia. Even with Monsanto’s long-term presence in India, MAHYCO could provide it with better access to India’s markets, government officials, and regulatory agencies.

In moving the alliance forward, however, both firms recognized that their different cor- porate cultures posed a special challenge. MAHYCO’s culture was characterized by high levels of loyalty and commitment, owing to its family background and close connection to the noble effort of bringing biotechnology to India. The firm’s management–employee relationship was highly formal, with little employee involve- ment in decisions and low comfort with change. Monsanto, on the other hand, was nearly oppo- site on all of these dimensions. It was a large fast-paced organization undergoing consider- able change. Its people were in constant flux as its business models and plans were chang- ing. Many were new to the organization and just learning their positions, while the experienced people were leading the company’s conversion from chemicals to biotechnology.

Given these organizational differences and the fact that neither partner could know in advance how long the alliance would last, MAHYCO employees were fearful that Monsanto would buy out or consume MAHYCO and thereby threaten their careers. Adding to the ambiguity and stress, MAHYCO’s MD openly expressed hope that the alliance would help the firm become more profes- sionally managed and malleable, and less patriarchal and rigid.

Building on the strong personal bond between the three executives at the top of the two firms, an alliance-building intervention was considered to develop trust and collaboration at lower organizational levels. In preparing for the change program, an OD team interviewed

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44 people from Monsanto India and MAHYCO. Numerous opportunities and obstacles to alliance success were identified. Members of both organiza- tions wanted to learn more about their partner’s business and culture. They expressed excitement about combining their resources in the alliance and cited the importance of collaboration and mutual understanding to make it work. Four critical success factors emerged from the interviews: clear vision and mission for the alliance, key initiatives and goals, mutual trust and operating norms, and sup- port for each firm’s internal change plans.

The OD team then met with the top leaders at MAHYCO and Monsanto India and proposed an appreciative inquiry (AI) process for the alliance- building program. It would involve multiple organi- zational levels and include all relevant alliance stakeholders. AI would help participants create common ground, discover each other’s capabili- ties, and envision the alliance’s future. The pro- posed intervention was approved by Monsanto India but surprisingly rejected by MAHYCO, which was uncomfortable with the AI process. Specifically, MAHYCO’s leaders believed they did not know enough about Monsanto India to engage in an open, loosely structured process for developing rela- tionships and setting alliance direction and strategy. Moreover, they felt that AI would give too much decision-making power to middle managers, take too much time, and be seen as too childish for grown men with many years of experience. As a compromise, MAHYCO agreed that its R&D people would engage in AI with their Monsanto India coun- terparts, but the MAHYCO executive team would only participate in a more formal management edu- cation session to learn more about the alliance and their partner. Thus, two different alliance-building interventions were conducted in late 1998.

The AI session was attended by 32 participants representing four cross-alliance R&D teams. One of those teams—the Cotton team—had already been formed and was actively working on a joint project. An opening exercise encouraged participants to build relationships that go beyond name tags. It was followed by an information session where par- ticipants learned about the alliance partners and the purpose for the alliance. They gained insight about each firm’s core strengths and the synergies that could be derived from the alliance. In fact, this exer- cise had such a strong impact that the design of the

subsequent management education session was modified to include it. The AI session then moved from learning to envisioning. Participants were asked to imagine how the alliance would be publicly recognized by the year 2005. They imagined an alli- ance that would increase the nutrient content of pulse crops, create nitrogen-fixating plants, develop new insect-resistant crops, and spawn a “gene revo- lution” (a playful allusion to the Green Revolution). Moreover, the alliance would create plants that pro- duce hydrocarbons and new color fibers and ensure the Asian food supply. Many participants experi- enced the envisioning process as energizing; others, mostly from the Cotton team, however, were skep- tical and viewed it as “waste of our time.” Despite this criticism, the subsequent dialogue revealed pro- ductive ways to address the alliance vision and to create action plans. For example, one R&D team that had not met prior to the session developed sev- eral recommendations on how to improve informa- tion sharing between the two companies.

The management education session was con- ducted in a more traditional presentation format than the AI session and included MAHYCO’s top-30 man- agers and Monsanto India’s top 10. It was geared to providing participants with better understanding of the alliance partners—their history, current business, future opportunities, and expectations for the alliance. After formal introductions, the session involved pre- sentations on alliance management and Monsanto’s biotechnology strategy. The latter was mainly for the benefit of MAHYCO’s executives. Then, partici- pants learned about each firm’s core competencies and how they translated into alliance benefits. Interestingly, this part of the session evolved into a somewhat awkward discussion about “professional- ism” in the MAHYCO organization. The ensuing dialogue about changing from a family business to a more professional firm raised issues of trust, loyalty, respect, and so on, all topics difficult to address in this formal setting.

With facilitation from the OD team, the edu- cation session shifted to question-and-answer discussions geared to increase cross-firm communi- cation and understanding. The session ended with discussion of the top executives’ role in making the alliance successful. Participants generated ideas for the next steps in developing the alliance and posi- tioning it and biotechnology in India. They assumed no further responsibility, however, for implementing

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20-4 Network Interventions Network interventions help organizations join together for a common purpose; their use is growing rapidly in today’s highly competitive, global environment.37 In the private sector, research and development consortia, for example, allow companies to share resources and risks associated with large-scale research efforts. Networks among airlines with regional specializations combine to provide worldwide coverage; Japanese keiretsu, Korean chaeobols, or Mexican grupos enable different organizations to take advantage of

them, leaving it up to the Director of Monsanto India and the MAHYCO MD to determine the next steps and to make them happen.

In sum, the AI and ME alliance-building inter- ventions differed considerably in their respective purposes, participants, processes, and outcomes. The AI session encouraged learning, relationship building, and cocreation of future alliance plans, whereas the management education session was intended to convey information about the alliance and its partner organizations. To assess interven- tion results, the OD team administered question- naires to all participants at the beginning and end of both sessions. In addition, a follow-up survey was administered to all participants via email four months later to explore any longitudinal effects of the interventions. Seventy-two percent of AI parti- cipants returned the email survey, while only half of the management education participants did. Par- ticipants in the AI session reported significantly greater levels of relationship building, collaboration, and follow-through in alliance project development than did the education session participants. Man- agement education participants indicated that they missed the opportunity to build relationships. Parti- cipants in both sessions reported increased levels of mutual understanding, thereby laying the foun- dation for future alliance development.

Over the next six years, many of the same issues that showed up in the alliance-building ses- sions still persisted, to the dismay of the OD team. These included concerns over trust and collabora- tion, unwillingness to change, and inequalities in compensation and available equipment between the two partners. People who were roadblocks in 1998 were still roadblocks in 2003. Aspects of cor- porate control and decision making were still frus- trating the alliance, making it difficult to chart its

own future and success. The inherent differences between the two partner organizations continued to challenge alliance leadership.

On reflection, members of the OD team learned from their alliance experience. They real- ized that their original views about the AI and edu- cation interventions were overly optimistic, even naive. What they observed during the AI session was only surface-level dialogue, the result of a design that minimized tension and fostered collab- oration. They concluded that alliance partners as well as OD professionals need to enhance their business and cultural knowledge prior to participat- ing in a cross-cultural alliance intervention. From a business perspective, for example, it would be helpful for participants to diagnose their own orga- nization prior to the alliance-building activities. This would provide valuable insight into the firm’s col- laborative orientation and alliance capability, provid- ing a realistic basis for determining how best to create and develop the alliance. From a cultural perspective, it would be helpful to appreciate the diverse ways in which people from different cul- tures are likely to react to alliance interventions such as AI and management education. In inter- group encounters, for example, people from more implicit cultures (such as India) tend to share only a shade of what they believe and feel. In contrast, people from more explicit cultures (such as the United States) tend to be more open and forward in such interactions. Such understanding would be invaluable in designing how best to build alliance relationships. Finally, the OD team concluded that alliance building is not a one-time event but an ongoing process. It needs continuous organiza- tional support and attention to the structures and processes that sustain optimal levels of collabora- tion and trust among alliance partners.

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complementary capabilities among them. In the public sector, partnerships between gov- ernment and business provide the resources and initiative to undertake complex urban renewal projects, such as Cleveland’s Cuyahoga River, Baltimore’s Inner Harbor Project, and Lyon’s zones de redynamisation urbaines (urban renewal zones), or improve health care, including Sweden’s “Bring a Friend” program that increases cancer screenings or Britain’s National Health Service (NHS) sustainability project. Other networks of business, labor, government, education, finance, community organizations, and economic develop- ment agencies, such as China’s Low Carbon City Initiative, are helping to identify exem- plary efforts related to building and energy efficiency, public awareness, and low carbon development that can help coordinate services and promote more responsible growth.38

Managing the development of multiorganizational networks involves two types of change: (1) creating the initial network and (2) managing change within an established network. Both change processes are complex and not well understood. First, the initial cre- ation of networks recognizes their underorganized nature. Forming them into a more coherent, operating whole involves understanding the relationships among the participat- ing organizations and their roles in the system, as well as the implications and conse- quences of organizations leaving the network, changing roles, or increasing their influence. Second, change within existing networks must account for the relationships among member organizations as a whole system.39 The multiple and complex relationships involved in networks produce emergent phenomena that cannot be fully explained by sim- ply knowing the parts. Each organization in the network has goals that are partly related to the good of the network and partly focused on self-interest. How the network reacts over time is even more difficult to capture and is part of the emerging science of complexity.40

20-4a Creating the Network OD practitioners have evolved a unique form of planned change aimed at creating net- works and improving their effectiveness.41 In laying out the conceptual boundaries of network development, also known as transorganizational development, Cummings described the practice as following the phases of planned change appropriate for underor- ganized systems (Chapter 2).42 The four stages are shown in Figure 20.1 along with key issues that need to be addressed at each stage. The stages and issues are described below.

1. Identification stage. This initial stage of network development involves identifying exist- ing and potential member organizations best suited to achieving their collective objectives. Identifying potential members can be difficult because organizations may not perceive the need to join together or may not know enough about each other to make membership choices. These problems are typical when trying to create a new network. Relationships among potential members may be loosely coupled or nonexistent; thus, even if organiza- tions see the need to form a network, they may be unsure about who should be included.

The identification stage is generally carried out by one or a few organizations interested in exploring the possibility of creating a network. OD practitioners work with these initiating organizations to clarify their own goals, such as product or technology exchange, learning, or market access, and to understand the trade-off between the loss of autonomy and the value of collaboration. Change agents also help specify criteria for network membership and identify organizations meeting those standards. Because networks are intended to address particular problems or opportunities, a practical criterion for membership is how much organizations can contribute to this work. Potential members can be identified and judged in terms of the skills, knowledge, and resources that they bring to bear on the network task. Practitioners warn, however, that identifying potential members also should take

CHAPTER 20 TRANSORGANIZATIONAL CHANGE 621

into account the political realities of the situation.43 Consequently, key stakeholders who can affect the creation and subsequent performance of the network are identi- fied as possible members.

An important difficulty at this stage can be insufficient leadership and cohesion among participants to choose potential members. In these situations, OD practi- tioners may need to play a more activist role in creating the network.44 They may need to bring structure to a group of autonomous organizations that do not see the need to join together or may not know how to form relationships. In several cases of network development, change agents helped members create a special leadership group that could make decisions on behalf of the participating organizations.45

This leadership group comprised a small cadre of committed members and was able to develop enough cohesion among members to carry out the identification stage. The OD activist role requires a good deal of leadership and direction. For example, change agents may need to educate potential network members about the benefits of joining together. They may need to structure face-to-face encounters aimed at sharing information and exploring interaction possibilities.

2. Convention stage. Once potential network members are identified, the convention stage is concerned with bringing them together to assess whether formalizing the network is desirable and feasible. This face-to-face meeting enables potential mem- bers to explore mutually their motivations for joining and their perceptions of the activities they might have to perform together. They work to establish sufficient levels of motivation and task consensus to form the network.

Like the identification stage, this phase of network creation generally requires considerable direction and facilitation by OD practitioners. Existing stakeholders may not have the legitimacy or skills to perform the convening function, and practi- tioners can serve as conveners if they are perceived as legitimate and credible by the attending organizations. This necessitates that change agents maintain a neutral role, treating all members alike.46 They need to be seen by members as working on behalf of the total system, rather than as being aligned with particular organizations or views. When practitioners are perceived as neutral, network members are more likely to share information with them and to listen to their inputs. Such neutrality

FIGURE 20.1

Application Stages for Transorganizational Development

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622 PART 6 STRATEGIC CHANGE INTERVENTIONS

can enhance change agents’ ability to mediate conflicts among members. It can help them uncover diverse views and interests and forge agreements among stakeholders. OD practitioners, for example, can act as mediators, ensuring that members’ views receive a fair hearing and that disputes are equitably resolved. They can help to bridge the different views and interests and achieve integrative solutions. In many cases, practitioners come from research centers or universities with reputations for neutrality and expertise in networks. Because participating organizations tend to have diverse motives and views and limited means for resolving differences, change agents may need to structure and manage interactions to facilitate airing of differ- ences and arriving at consensus about forming the network. They may need to help organizations work through differences and reconcile self-interests with those of the larger network.

Research and practice suggest that the movement from convention into organi- zation is facilitated by agreement among TS members as to the problem/opportunity to be address, the interdependence of network members required to address the issue, and the likelihood that concerted effort will result in positive outcomes.47

Known as a “negotiated order,” TS members’ realization of the potential power of a network is key to the network moving forward. Nathan and Mitroff demonstrated how a negotiated order among business, government, and nonprofit organizations concerned with crisis management emerged and facilitated action.48 Worley and Parker’s study of the Cuyahoga River Valley’s government-led initiative showed how the lack of a clear negotiated order can hinder network development.49

3. Organization stage. When the convention stage results in a decision to create a network, members then begin to organize themselves for task performance. This involves develop- ing the structures and mechanisms that promote communication and interaction among members and that direct joint efforts on the activities required to achieve TS objectives.50

It includes the organizations to be involved in the network and the roles each will play; the communication and relationships among them; and the control system that will guide decision making and provide a mechanism for monitoring performance. For example, members may create a coordinating council to manage the network and a powerful leader to head it.51 They might choose to formalize exchanges among members by developing rules, policies, and formal operating procedures. When members are required to invest large amounts of resources in the network, such as might occur in an industry-based research consortium, the organizing stage typically includes voluminous contracting and negotiating about members’ contributions and returns. Here, corporate lawyers and financial analysts play key roles in specifying the network structure. They determine how costs and benefits will be allocated among member organizations as well as the legal obligations, decision-making responsibilities, and contractual rights of members. OD practitioners can help members define competitive advantage for the network as well as the structural requirements necessary to support achievement of its goals.

4. Evaluation stage. This final stage of creating a network involves assessing how the network is performing. Members need feedback so they can identify problems and begin to resolve them. This generally includes information about performance out- comes and member satisfaction, as well as indicators of how well members are inter- acting jointly. Change agents can periodically interview or survey member organizations about various outcomes and features of the network and feed that data back to network leaders. Such information enables network leaders to make necessary operational modifications and adjustments. It may signal the need to return to previous stages in the process to make necessary corrections, as shown by the feedback arrows in Figure 20.1.

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20-4b Managing Network Change In addition to developing new networks, OD practitioners may need to facilitate change within established networks. Planned change in existing networks derives from an under- standing of the “new sciences,” including complexity, nonlinear systems, catastrophe, and chaos theories. From these perspectives, organization networks are viewed as com- plex systems displaying the following properties:52

1. The behavior of a network is sensitive to small differences in its initial conditions. How the network was established and formed—the depth and nature of trust among the partners, who was selected (and not selected) to be in the network, and how the network was organized—play a key role in its willingness and ability to change.

2. Networks display “emergent” properties or characteristics that cannot be explained through an analysis of the parts: “Given the properties of the parts and the laws of their interaction, it is not a trivial matter to infer the properties of the whole.”53 The tools of systems thinking and the understanding of emergence in complex systems are still being developed and applied.54

3. A variety of network behaviors and patterns, both expected and unexpected, can emerge from members performing tasks and making decisions according to simple rules to which everyone agreed. This is amply demonstrated in Senge’s “beer game” simulation where a retailer, a wholesaler, and a brewery each acts according to the simple rule of maximizing its own profit. Participants in the simulation routinely end up with enormous inventories of poor-selling beer, delayed deliveries, excess capacity, and other problems. Without an understanding of the “whole” system, the nature of interdependencies within the system, and timely and complete information, each part, acting in its own self-interest, destroys itself.55 Apparently random changes in networks may simply be chaotic patterns that are not understood. These patterns cannot be known in advance but represent potential paths of change that are the result of the complex interactions among members in the network.

The process of change in complex systems such as networks involves creating instabil- ity, managing the tipping point, and relying on self-organization. These phases roughly fol- low Lewin’s model of planned change described in Chapter 2. Change in a network requires an unfreezing process where the system becomes unstable. Movement in the sys- tem is described by the metaphor of a “tipping point” where changes occur rapidly as a result of information processing. Finally, refreezing involves self-organization. The descrip- tions below represent rudimentary applications of these concepts to networks; research and practice in changing networks are still in a formative stage.

1. Create instability in the network. Before change in a network can occur, relation- ships among member organizations must become unstable. A network’s susceptibil- ity to instability is a function of members’ motivations for structure versus agency.56

Structure refers to the organization’s expected role in the network and represents a source of stability. All things being equal, network members tend to behave and perform according to their agreed-upon roles. For example, most routine communi- cations among the network members are geared toward increasing stability and working together. A manufacturing plant in Nike’s network is expected to produce a certain number of shoes at a certain cost with certain features. Nike headquarters in Beaverton, Oregon, plans on the plant behaving this way. On the other hand, agency involves self-interest which can create instability in the network. Each mem- ber of the network is trying to maximize its own performance in the context of the network. Changes in member goals and strategies, the ratio of costs and benefits in network membership, and so on, can affect the willingness and ability of members to contribute to network performance. When a plant in Nike’s network grows to

624 PART 6 STRATEGIC CHANGE INTERVENTIONS

a sufficient size or develops a sufficient range of capabilities, it may consider altering its role in the network to perform a broader set of activities or dedicate capacity to its own products. As the ratio of agency to structure increases, the instability of the network rises, thus enabling change to occur.

OD practitioners can facilitate instability in a network by changing the pattern of communication among members. They can, for example, encourage organizations to share information. Technology breakthroughs, new product introductions, changes in net- work membership, or changes in the strategy or capability of a network member all repre- sent fluctuations that can increase the susceptibility of the network to change. Another important aspect of changing the pattern of information is to ask who should get the information. Understanding and creating instability is difficult because the nature of members’ connectedness also influences the system’s susceptibility. Some organizations are more connected than others; most organizations are closely connected to several others, but relatively unconnected to many. This makes creating a sense of urgency for change difficult. Diagnosis of the relationships among member organizations can provide important information about organizations that are central to network communications.57

2. Manage the tipping point. Although instability provides the impetus and opportu- nity for change, the direction, type, and process of change are yet to be determined. An unstable network can move to a new state of organization and performance, return to its old condition, or simply cease to exist. At this point, network members, individually and collectively, make choices about what to do. OD practitioners can help them through this change period. Recent studies suggest the following guides for facilitating network change:58

a. The law of the few. A new idea, practice, or other change spreads because of a relatively few but important roles in the network. Connectors, mavens, and salespeople help an innovation achieve sufficient awareness and credibility throughout the network to be considered viable. Connectors are individuals who occupy central positions in the network and are able to tap into many dif- ferent network audiences. They have “Rolodex” power; they are quickly able to alert and connect with a wide variety of people in many organizations. Mavens are “information sinks.” They passionately pursue knowledge about a particular subject and are altruistically willing to tell anyone who is interested everything they know about it. The key to the maven’s role is trust. People who speak to mavens know that they are getting unbiased information—that there is no “hid- den agenda,” just good data. Finally, salespeople are the champions of change and are able to influence others to try new ideas, do new things, or consider new options. Thus, the first key factor in changing a network is the presence of communication channels occupied by connectors, mavens, and salespeople.

OD practitioners can fill any of these roles. They can, if appropriate, be mavens on a particular subject and act as a source of unbiased information about a new network practice, aspects of interpersonal relationships that network members agree is slowing network response, or ideas about information systems that can speed communication. Less frequently, OD practitioners can be connec- tors, ensuring that any given message is seeded throughout the network. This is especially true if the change agent was part of the network’s formation. In this case, the practitioner might have extensive relationships with organizations in the network. Thus, networking skills, such as the ability to manage lateral rela- tions among autonomous organizations in the relative absence of hierarchical control, are indispensable to practitioners of network change. Change agents must be able to span the boundaries of diverse organizations, link them together, and facilitate exchanges among them.59 OD practitioners can also play the role of

CHAPTER 20 TRANSORGANIZATIONAL CHANGE 625

salesperson. Although it is in line with the “activist” role described earlier in the practice of network creation, it is not a traditional aspect of OD practice. The wis- dom of having a change agent as the champion of an idea rather than a key player in the organization network is debatable. The change agent and network members must understand the trade-offs in sacrificing the OD practitioner’s neu- trality for influence. If that trade-off is made, the change agent will need the polit- ical competence to understand and resolve the conflicts of interest and value dilemmas inherent in systems made up of multiple organizations, each seeking to maintain autonomy while jointly interacting. Political savvy can help change agents manage their own roles and values in respect to those power dynamics.

b. Stickiness. The second ingredient in network change is stickiness. For a new idea or practice to take hold, the message communicated by the connectors, mavens, and salespeople must be memorable. A memorable or sticky message is not a function of typical communication variables, such as frequency of the message, loudness, or saliency. Stickiness is often a function of small and seemingly insignif- icant characteristics of the message, such as its structure, format, and syntax, as well as its emotional content, practicality, or sequencing with other messages. OD practitioners can help network members develop sticky messages for communicat- ing about network change. Brainstorming alternative phrases, using metaphors to symbolize meaning, or enlisting the help of marketing and communications spe- cialists can increase the chance of developing a sticky message. Since the ingredi- ents of stickiness are often not obvious, several iterations of a message’s structure may be necessary to create memorable communication about network change.

c. The power of context. Finally, a message must be meaningful and relevant to network members. Meaning derives from the context of the network. When network members are feeling pressure to innovate or move quickly in response to external demands, for example, messages about new cost-cutting initiatives or a new financial reporting system may be uninteresting and easily neglected. On the other hand, a message link- ing these changes to expected improvements in network performance may be seen as relevant. OD practitioners can help members understand the network’s current climate or “conversation”; they can help members determine the appropriate timing and relevance of proposed communications about network change.60

When the right people communicate a network change, present and pack- age it appropriately, and distribute it in a timely fashion, implementation is likely to move forward swiftly. When there is insufficient information, interest, or relevance, network change is likely to stall.

3. Rely on self-organization. Networks tend to exhibit “self-organizing” behavior. Network members seek to reduce uncertainty in their environment, while the network as a whole drives to establish more order in how it functions. OD practitioners can rely on this self-organizing feature to refreeze change. Once change has occurred in the network, a variety of controls can be leveraged to institutionalize it. For example, communication systems can spread stories about how the change is affecting different members, diffusing throughout the network, or contributing to network effectiveness. This increases the forces for stability in the network. Individual organizations can communicate their commitment to the change in an effort to lower agency forces that can contribute to instability. Each of these messages signifies constraint and shows that the different parts of the network are not independent of each other.

Application 20.3 describes the formation of the Alaskan Workforce Coalition.61 The shortage of adequate health care workers in Alaska became a critical issue that only a network of organizations could address. The case reflects the complex issues of identify- ing, convening, and organizing a TS.

626 PART 6 STRATEGIC CHANGE INTERVENTIONS

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3 THE ALASKA WORKFORCE COALITION

T he low supply of health care workers in Alaska was constraining the industry’s abil- ity to deliver care. In addition to the usual forces driving change in the industry,

including health care reform, aging workforces, rapidly changing technologies, and new deliv- ery models, Alaska’s remoteness, harsh cli- mates, vast geography, and small population complicated the challenges of developing, recruiting, and retaining an adequate and quali- fied health care workforce.

As an industry, health care accounted for 8% of total employment and around 16% of the state’s economy. Moreover, health and social service jobs in Alaska were projected to increase 31% between 2010 and 2020, driven in large part by a projected 89% increase for the population age 65 and older over the same time period. But the lack of health care workers left many rural communities without access to health care services and resulted in health care costs that were among the highest in the nation.

Most health care organizations felt the pinch of too few workers, but had limited expe- rience working in a coordinated manner to address them. For more than a decade, individ- ual health care organizations worked on solu- tions they could advance on their own. Some of these efforts worked, such as the University of Alaska’s initiative to double the number of nurses educated in state; but the breadth and depth of health care industry demands vastly outpaced such efforts. While other industries, such as construction, were gaining statewide visibility and investments, the health care industry was making only incremental gains.

Individual solutions might have helped individual firms, but it did little to help the state’s problems. Although various surveys had provided episodic data describing point in time needs, sometimes for a subset of health care workers, data sources were typically used in isolation and were difficult to assess holisti- cally due to inconsistent terminology. Inte- grated and accurate health care workforce data was not available to focus industry efforts. In the early 2000s, a promising coalition

emerged among three public sector entities to build a behavioral health workforce, how- ever no one had ever developed an industry wide projection with occupational priorities that would enable greater focus of efforts. Absent a collective effort, policy makers and funders lacked a complete understanding of health care workforce issues, resulting in lim- ited investment and influence.

One catalyst for change occurred in 2009 with the passage of the American Recovery and Reinvestment Act (ARRA). This federal program included funding opportunities to states for workforce development in high- demand industries. However, without a state- wide plan, a coordinated set of priorities, and an appropriate entity to guide the work, access to such funds was unlikely. The ARRA funding opportunity served as a trigger that brought individual groups together quickly.

At the same time, the Alaska Workforce Investment Board (AWIB) had long recognized health care as an important and growing indus- try, and they called for a statewide health care workforce plan. The AWIB’s call was motivated by its prior involvement with industry coalitions. For example, the oil, gas, and mining industry’s Alaska Process Industry Careers Consortium (APICC) had addressed a variety cross-industry needs and attracted new investments. A work- force plan specifically for the development of a natural gas pipeline was an important comple- ment to their work. The construction industry also formed a nonprofit foundation, implemen- ted new programs, and attracted additional resources from the state. These industries modeled the value of partnering to define industry workforce priorities, identifying skill standards, and attracting targeted investments in selected workforce development programs and strategies to meet their needs. Similarly, a joint effort by public sector partners had been established to build a qualified behavioral health workforce, led by the Alaska Mental Health Trust Authority (AMHTA), the Alaska Depart- ment of Health and Social Services (DHSS), and the University of Alaska.

CHAPTER 20 TRANSORGANIZATIONAL CHANGE 627

The Alaska Health Workforce Coalition (AHWC) was formed in 2009 to ensure an ade- quate and qualified health care workforce for hos- pitals, nursing homes, clinics, and public health service throughout Alaska.

THE COALITION’S BEGINNINGS

In response to these triggers, a leader at Provi- dence, the state’s largest health care system, who had previous experience leading Alaska’s workforce development through roles in both industry and key state agencies, invited several key stakeholders to exploratory conversations about collaboration. Her experience suggested that industry needed to take a lead role and she had existing relationships with many of the stake- holders. Thanks to corporate support, personal experience, and reputation, initial meeting invita- tions were well received.

She targeted these invitations at the formal organizational leaders representing health care employers, educators, policy makers, and funders. They included the Alaska State Hospital and Nursing Home Association (ASHNHA), representing the state’s largest private sector health employers; AWIB, through its private sector chair who happened to also be the Chief Financial Officer for Fairbanks Memorial Hospital; the University of Alaska as the state’s leading health educator; and Alaska’s DHSS, which served a dual role as a significant public sector health employer and a key player in shaping state health policy. Each of these organizations had worked together in the past. In the relatively small population of Alaska, individuals can readily identify the key partners required to move quickly into action.

The initial meetings and conversations explored the opportunity and confirmed interest in creating a statewide health care workforce plan. The concept of an organization to sustain the work was acknowledged, but the general feeling was that the first priorities should be to use the existing people and resources to develop a plan and to submit a proposal for funding to an ARRA grant opportunity.

Additional partners were soon engaged based on their ability to enhance the plan’s development. New partners included the AMHTA, the Alaska Native Tribal Health Consortium, and the Alaska Pri- mary Care Association. The group also increased its

level of commitment by shifting from teleconfer- ences to face-to-face meetings every month or two. This required partners to travel at their own expense and commit to full days of work to guide development of the plan and proposal.

Early meetings benefited from good cross- sector attendance and rich, respectful conversa- tions that deepened collective understandings of current issues as well as specific opportunities that interested individual partners. However, with so many needs in the industry, there were too many options and it was clear the participants had to prioritize to gain traction. They elected to focus on strategies and actions that could be best achieved because a coalition existed versus actions that individual entities could accomplish under the status quo. The term “net new” emerged in the dialogue to distinguish new or expanded value-added strategies and actions that were unlikely to be achieved without a collabora- tive effort and which benefited multiple partners.

Still, some topics were inherently more difficult to advance due to the innate competitive issues among employers. Collaboration on statewide recruiting was seen as an opportunity, but had been a challenge to implement. Each employer invested a great deal to attract potential employees from outside Alaska to fill critical vacancies, but large employers with more resources could lever- age their relative advantage in recruiting. However, partners knew from the success of the Alaska Sea- food Marketing Institute and the Alaska tourism industry that they could be more effective and effi- cient in marketing a concept versus a company. For example, the Alaskan quality of life is appealing to many medical professionals and the coalition saw the merits of a statewide, coordinated campaign that could be more impactful than what individual firms could achieve. This approach is gradually gaining momentum with a shared website, www. alaskaphysicianjobs.net. In addition, one of the coa- lition’s key successes in the first two years was the funding of a new loan reimbursement and incentive program that benefited multiple employers in their most critical shortages.

FORMATION

To guide, reflect, and reinforce the positive group norms that began to emerge, an organizational

628 PART 6 STRATEGIC CHANGE INTERVENTIONS

charter was developed to ensure clarity for its diverse members on the purpose, principles, and intended outcomes of the coalition. For example, the group’s operating style did not involve formal leadership roles, such as a chair or officers. At the heart of the coalition’s success was an adaptive process guided by six principles: inclusive, coordi- nated, cooperative, strategic, adaptive, and results focused.

A core team emerged consisting of roughly 15 people from nine organizations. This group developed an overarching four-part framework to organize and develop the workforce plan: engage, train, recruit, and retain. For each theme, a set of potential strategies was identified, although they lacked specificity in the early stages. Occupa- tional priorities were also developed with avail- able data. They were organized into three tiers representing the relative priorities. The upper tier included more than 15 occupations, and the coalition worked to define the top six occupa- tional priorities. They included primary care provi- ders, nurses, direct care workers, behavioral health clinicians, physical therapists, and pharma- cists. The occupations were both highly needed and there were pertinent strategies that the coalition could advance.

BUILDING THE COALITION

A significant opportunity to engage more stake- holders in prioritizing and organizing the plan was offered by ASHNHA. They had begun to plan a workforce summit for their hospital and nursing home members. With the plan frame- work and high-level set of strategies and priorities established, the summit was an ideal time and place for the core group to share information and gather input from a much wider audience. It was also a good place to begin discussions about the kind of organization needed to sustain efforts in the future.

More than 60 participants at the summit heard plenary presentations about similar efforts and entities working on health care workforce issues in others states, and from other industries in Alaska. They provided tangible evidence of what was possible. The core group members shared

the plan’s framework and initial data about work- force gaps. Participants contributed to the develop- ment of initial strategies through small group and round table discussions. Core group members aligned the topics with the framework and then used a modified Open Space approach that allowed people to refine ideas in strategies about which they were most passionate. Core team members facilitated each table, gathered informa- tion and insights, and presented the results in a plenary session using simple planning templates. The overall feedback from the summit was very positive and supported the idea of continuing the effort to develop a statewide plan and a new cor- responding entity/organization to guide the efforts.

Following the summit, the core team worked diligently on outreach. Over several months, they engaged as many stakeholders as possible from the health care industry, policy makers, and fun- ders as well as education and training providers. Nearly a dozen presentations were made, always by at least two members from the core team to demonstrate shared ownership. A subteam led by the University of Alaska worked closely with the Research & Analysis Section of the Department of Labor and Workforce Development to refine occupational priorities through presentations with diverse audiences and with an online survey. The core team created a website and a contact list to communicate with the wider coalition of interested stakeholders.

In parallel with the outreach process, core team members continued to meet monthly. They discussed and integrated what they were learning from stakeholders, and strengthened their resolve to produce a well-written strategic plan summariz- ing the compelling and complex workforce needs of the health care industry focusing not only on occupational priorities but also on systems change and capacity-building strategies. Funding offered by three of the larger partners was pooled to hire contract resources to assist with writing and print- ing the plan. The AWIB endorsed the Health Work- force Plan in early 2010—making it the first significant product from the AHWC.

The plan was well received and helped to achieve significant visibility for health care industry issues, priorities, and possible actions. However, it

CHAPTER 20 TRANSORGANIZATIONAL CHANGE 629

was not specific enough to drive collective action. The group’s logical next step was to follow up the plan with a targeted, four-year Action Agenda. They also recognized the need to address organiza- tion development and sustainability issues. The founding individuals and organizations had devel- oped the initial plan through informal processes and volunteer contributions of time and resources. To sustain the effort and reap the benefits of the plan would require a more formal approach and organization.

CONTINUED COALITION DEVELOPMENT

Over the next year, the AHWC became larger and more formal. In part, this was enabled by a plan- ning grant from the Health Resources and Services Administration (HRSA). This grant provided one year’s worth of funding to support the research and development of a four-year Action Agenda, greater alignment of health care workforce data, and contractual support for staff, organization development, and sustainability efforts. During this time, the AHWC welcomed the opportunity to join forces with related groups where their goals were aligned and they could support one another’s efforts to go further together than either might achieve alone. For example, the Alaska Health Care Commission (HCC) recognized work- force shortages as a priority when they were initially formed, and rather than conducting inde- pendent research and developing their own recom- mendations, the HCC aligned their direction with the AHWC, endorsing the work of the coalition as their own. Similarly, the AMHTA had several years of experience advancing their Workforce Focus Area focused on home and community based behavioral health services. They realized that sustaining their efforts and participation in the AHWC could be aligned with the Focus Area to create a single, unified approach. As a result, the two efforts merged in 2011 to unite health care workforce planning and action for Alaska, inclusive of the distinct needs of the AMHTA and its beneficiaries.

The coalition researched alternative approaches to forming a sustainable organization to advance their goals around health care workforce issues.

A number of models were identified and explored using the principles from the initial charter to guide the process. The core group determined that con- tinuing their loose collaboration without formally establishing a new nonprofit entity was preferred. The individual who provided support to the Work- force Focus Area on behalf of the AMTHA, DHSS, and the University, had her scope of work extended to include AHWC activities in late 2011, bridging the staff needs from the planning grant to full operations. Organization development consult- ing support has continued to provide additional resource and continuity with coalition and core meetings and activities.

EVALUATION

The creation of the Alaska Health Workforce Coali- tion has resulted in several benefits to its members and to the Alaskan health care system as a whole. These include:

• An industry-led workforce plan with tangible ac- tions, accountabilities, and committed resources

• The use and integration of data to establish occupational priorities

• Actions focused on occupational and systems change priorities that drive health care work- force activities and investments by members and other stakeholders

• A unified approach to advocacy for policy changes and funding opportunities

• Increased resource commitments, actions, and emerging results that all serve to build the Alaska health care workforce

In 2012, the coalition documented a retrospec- tive of early achievements by AHWC in response to requests by other industry groups. The coalition also elected to undergo a “strategic refresh” pro- cess in recognition of the completion of several Action Agenda objectives and the actual or planned transition of several leaders. The AHWC coordina- tor and OD consultant interviewed each core team member to gather feedback on the greatest achievements to date, alignment with each organi- zation’s priorities, update to occupational and sys- tems change priorities given the changes to the health care industry, and suggestions that would

630 PART 6 STRATEGIC CHANGE INTERVENTIONS

SUMMARY

In this chapter, we describe merger, alliance, and trans- organizational change interventions that move beyond the single organization. These multiorganizational change programs enable organizations to extend their boundaries to keep pace with highly complex and rapidly changing environments. They help organizations create and sustain multiorganizational linkages. Because transorganizational interventions transcend a single orga- nization, attention is directed at the strategies, objectives, structures, and processes of two or more interdependent organizations. This raises the scope and complexity of change and requires OD practitioners to develop new concepts, skills, and expertise.

M&As interventions involve combining two or more organizations to achieve strategic and financial objectives. They generally involve three phases: pre- combination, legal combination, and operational combination. The M&A process has been dominated

by financial and technical concerns, but experience and research strongly support the contribution that OD practitioners can make to M&A success.

Strategic alliance interventions help organizations create partnerships with other organizations to share resources and capabilities for competitive advantage. They include licensing agreements, franchises, long- term contracts, and joint ventures. The development of strategic alliances generally follows a process of strategy formulation, partner selection, alliance struc- turing and start-up, and alliance operation and adjustment.

Network interventions must address two types of change. First, because multiorganizational systems tend to be underorganized, the initial development of the network follows the stages of planned change relevant to underorganized systems: identification, convention, organization, and evaluation. Second, the management

enhance the effectiveness, relevance, and impact of the coalition going forward.

The data suggested that success has been achieved through the attention and balance of two equally important aspects:

• Content, action, and results. The coalition convened on the premise of shared need and the desire to take collective action. This was achieved through a strategic plan that defined the workforce goals to engage, train, recruit, and retain a qualified health care workforce for Alaska. The coalition developed a correspond- ing Action Agenda with objectives to drive action in six occupational priorities and six sys- tems change and capacity-building efforts.

• Process, relationships, and respect. The coalition emerged through relationships and shared need. Individuals with loose relationships

agreed to begin exploring the merits of common- goals and collaborative action. The processes have been thoughtfully guided and intentionally nurtured throughout the first three years to build respect and strengthen relationships across the organizations and individual leaders.

The results also helped the core team to update the Action Agenda priorities as well as refine their processes of engaging with one another. The pro- cess of evaluation and continuous improvement confirmed the need to retain and nurture strong rela- tionships among key partners—particularly when decisions and direction are needed. It also con- firmed the need for dynamic strategy and priority setting processes given the uncertainty faced by the health care industry and the resulting changes in care models that lead to new demands for the health care workforce of the future.

CHAPTER 20 TRANSORGANIZATIONAL CHANGE 631

of change within a network also must acknowledge the distributed nature of influence and adopt methods of

change that rely on the Law of the Few, the power of context, and the stickiness factor.

NOTES

1. R. Gulati, D. Lavie, and R. Madhavan, “How Do Net- works Matter? The Performanace Effects of Interorgani- zational Networks,” in Research in Organizational Behavior, vol. 31, ed. B. Staw and A. Brief (Kidlington, Oxford, UK: Elsevier, 2011), 207–24; A. Inkpen and E. Tsang, “Social Capital, Networks, and Knowledge Transfer,” Academy of Management Review 30 (2005): 146–65; B. Teng, “Corporate Entrepreneurship Activities Through Strategic Alliances: A Resource-Based Approach Toward Competitive Advantage,” Journal of Management Studies 44 (2007): 119–42; F. Kuglin with J. Hook, Build- ing, Leading, and Managing Strategic Alliances (New York: Amacom, 2006).

2. H. Aldrich, Organizations and Environments (New York: Prentice-Hall, 1979).

3. O. Williamson, Markets and Hierarchies (New York: Free Press, 1975); M. Jensen and W. Meckling, “A Theory of Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics 3 (1976): 305–60; O. Williamson, The Economic Institutions of Capitalism (New York: Free Press, 1985); J. Barney and W. Ouchi, Organizational Economics (San Francisco: Jossey-Bass, 1986); K. Eisenhardt, “Agency Theory: An Assessment and Review,” Academy of Management Review 14 (1989): 57–74.

4. P. Kenis and D. Knoke, “How Organizational Field Net- works Shape Interorganizational Tie-Formation Rates,” Academy of Management Review 27 (2002): 275–93.

5. T. Cummings, “Transorganizational Development,” in Research in Organizational Behavior, vol. 6, ed. B. Staw and L. Cummings (Greenwich, CT: JAI Press, 1984), 367–422.

6. B. Gray, “Conditions Facilitating Interorganizational Collaboration,” Human Relations 38 (1985): 911–36; K. Harrigan and W. Newman, “Bases of Interorgani- zation Co-operation: Propensity, Power, Persistence,” Journal of Management Studies 27 (1990): 417–34; Cummings, “Transorganizational Development”; R. Chisholm, Developing Network Organizations: Learning from Practice and Theory (Reading, MA: Addison- Wesley, 1998).

7. T. Galpin and D. Robinson, “Merger Integration: The Ultimate Change Management Challenge,” Mergers and Acquisitions 31 (1997): 24–29.

8. M. Marks and P. Mirvis, Joining Forces: Making One Plus One Equal Three in Mergers, Acquisitions, and Alliances, 2nd ed. (San Francisco: Jossey-Bass, 2010); A. Sherman and M. Hart, Mergers and Acquisitions from A to Z, 2nd ed. (New York: Amacom, 2006).

9. Data on M&A value accessed from http://www.imaa- institute.org/statistics-mergers-acquisitions.html#Mergers Acquisitions_Worldwide on October 22, 2012.

10. A variety of studies have questioned whether merger and acquisition activity actually generates benefits to the orga- nization or its shareholders, including M. Porter, “From Competitive Advantage to Corporate Strategy,” Harvard Business Review (May–June 1978): 43–59; T. Brush, “Predicted Change in Operational Synergy and Post- Acquisition Performance of Acquired Businesses,” Strate- gic Management Journal 17 (1996): 1–24; P. Zweig with J.Perlman, S. Anderson, and K. Gudridge, “The Case Against Mergers,” BusinessWeek, October 30, 1995, 122–30. The research includes an A. T. Kearney study of 115 multibillion-dollar global mergers between 1993 and 1996 where 58% failed to create “substantial returns for shareholders,” measured by tangible returns in the form of dividends and stock price appreciation; a Mercer Management Consulting study of all mergers from 1990 to 1996 where nearly half “destroyed” shareholder value; a PriceWaterhouseCoopers study of 97 acquirers that completed deals worth $500 million or more from 1994 to 1997 and where two-thirds of the buyer’s stocks dropped on announcement of the transaction and “a year later” a third of the losers still were lagging the levels of peer-company shares or the stock market in general; and a European study of 300 companies that found that planning for restructuring was poorly thought out and underfunded. Similarly, despite the large amount of writing on the subject, a large propor- tion of firms involved in mergers have not gotten the message that postmerger integration is the key to suc- cess. For example, in the A. T. Kearny study, only 39% of the cases had set up a management team in the first hundred days and only 28% had a clear vision of corpo- rate goals when the acquisition began.

11. T. Galpin and M. Herndon, The Complete Guide to Mergers and Acquisitions: Process Tools to Support M&A Integration

632 PART 6 STRATEGIC CHANGE INTERVENTIONS

at Every Level (San Francisco: Jossey-Bass, 2007); Sherman and Hart, Mergers and Acquisitions; Marks and Mirvis, Joining Forces; R. Ashkenas, L. DeMonaco, and S. Francis, “Making the Deal Real: How GE Capital Integrates Acqui- sitions,” Harvard Business Review (January–February 1998); D. Jemison and S. Sitkin, “Corporate Acquisitions: A Process Perspective,” Academy of Management Review 11 (1986): 145–63.

12. R. Palter and D. Srinivasan, “Habits of the Busiest Acquirers,” McKinsey on Finance 20 (Summer 2006): 8–13; Ashkenas, DeMonaco, and Francis, “Making the Deal Real.”

13. M. Epstein, “The Drivers of Success in Post-merger Integration,” Organizational Dynamics 33 (2004): 174–89; J. Perry and T. Herd, “Mergers and Acquisitions: Reducing M&A Risk Through Improved Due Diligence,” Strategy and Leadership 32 (2004): 12–19; A. Buono, J. Bowditch, and J. Lewis, “When Cultures Collide: The Anatomy of a Merger,” Human Relations 38 (1985): 477–500; D. Tipton, “Understanding Employee Views Regarding Impending Mergers to Minimize Integration Turmoil” (unpublished master’s thesis, Pepperdine Uni- versity, 1998).

14. Palter and Srinivasan, “Habits of the Busiest Acquirers”; Marks and Mirvis, Joining Forces; Ashkenas, DeMonaco, and Francis, “Making the Deal Real.”

15. D. Harding and S. Rovit, “Building Deal on Bedrock,” Harvard Business Review (September 2004): 1–8; B. Brunsman, S. Sanderson, and M. Van de Voorde, “How to Achieve Value Behind the Deal During Merger Integration,” Oil and Gas Journal 96 (1998): 21–30; M. Sirower, “Constructing a Synergistic Base for Premier Deals,” Mergers and Acquisitions 32 (1998): 42–50.

16. Perry and Herd, “Mergers and Acquisitions.” 17. S. Elias, “Due Diligence,” 1998. 18. Ashkenas, DeMonaco, and Francis, “Making the Deal

Real”; Brunsman, Sanderson, and Van de Voorde, “How to Achieve Value.”

19. This application was developed from information found in G. Colvin, “Jeff Smisek: United-Continental’s King of the Skies,” Fortune, April 21, 2011; D. Bennett, “Making the World’s Largest Airline Fly,” BusinessWeek, February 2, 2012; “United Airlines Merger Integration: 10 Questions,” June 2012, accessed from http://www. towerswatson.com/en/Insights/Newsletters/Global/strategy- at-work/2012/10-questions-for-doug-rose-vice-president- human-resources-united-airlines on October 24, 2012; United and Continental’s website, http://www.united.com.

20. Galpin and Robinson, “Merger Integration.” 21. R. Chanmugam, W. Schill, and D. Mann, “Mastering the

Art of Value-Capture in Mergers and Acquisitions,”

Outlook Journal (February 2005): 1–4; D. Harding, S. Romit, and A. Corbett, “Avoid Merger Meltdown: Les- sons from Mergers and Acquisitions Leaders,” Strategy and Innovation (2004): 3–5; A. Burt, T. MacDonald, and T. Herd, “Two Merger Integration Imperatives: Urgency and Execution,” Strategy and Leadership 31 (2003): 42–49; Galpin and Robinson, “Merger Integra- tion”; Galpin and Herndon, The Complete Guide; Sher- man and Hart, Mergers and Acquisitions; Vantrappan and Kilefors, “A Users Guide”; Ashkenas, DeMonaco, and Francis, “Making the Deal Real”; K. Kostuch, R. Malchione, and I. Marten, “Post-Merger Integration: Creating or Destroying Value?” Corporate Board 19 (1998): 7–11.

22. Kostuch, Malchione, and Marten, “Post-Merger Integration.” 23. J. Child, D. Faulkner, and S. Tallman, Strategies of Cooper-

ation: Managing Alliances, Networks, and Joint Ventures, 2nd ed. (New York: Oxford University Press, 2005); O. Shenkar and J. Reuer, eds., Handbook of Strategic Alliances (Thousand Oaks, CA: Sage Publications, 2005); J. Reuer, ed., Strategic Alliances: Theory and Evidence (New York: Oxford University Press, 2004); A. Arino, J. de la Torre, and P. Ring, “Relational Quality: Managing Trust in Corporate Alliances,” California Management Review 44 (2001): 109–31; M. Hitt, R. Ireland, and R. Hoskisson, Strategic Management (Cincinnati, OH: South-Western College Publishing, 1999).

24. R. Blair and F. Lafontaine, The Economics of Franchising (New York: Oxford University Press, 2005).

25. K. Harrigan, Joint Ventures, Alliances, and Corporate Strategy (New York: Beard Books, 2003).

26. J. Bamford, B. Gomes-Casseres, and M. Robinson, Mastering Alliance Strategy (New York: John Wiley and Sons, 2002).

27. J. Collins, Good to Great (New York: Harper-Collins, 2001).

28. B. Gomes-Casseres, Managing International Alliances: Conceptual Framework, Case 9-793-133 (Harvard Business School, 1993); J. Child and D. Faulkner, Strategies of Coop- eration: Managing Alliances, Networks, and Joint Ventures (New York: Oxford University Press, 1998).

29. R. Shah and V. Swaminathan, “Factors Influencing Part- ner Selection in Strategic Alliances: The Moderating Role of Alliance Context,” Strategic Management Journal 42 (2008): 471–94.

30. Bamford, Gomes-Casseres, and Robinson, Mastering Alliance Strategy.

31. Arino, de la Torre, and Ring, “Relational Quality”; Y. Zhang and C. Huxham, “Identity Construction and Trust Building in Developing International Collaborations,” Journal of Applied Behavioral Science 45 (2009): 186–211.

CHAPTER 20 TRANSORGANIZATIONAL CHANGE 633

32. C. Rousseau, S. Sitkin, R. Burt, and C. Camerer, “Not So Different After All: A Cross-Discipline View of Trust,” Academy of Management Review 23 (1998): 395; P. Kale and H. Singh, “Managing Strategic Alliances: What Do We Know Now and Where Do We Go from Here?” Academy of Management Perspectives 23 (2009): 45–62.

33. M. Hutt, E. Stafford, B. Walker, and P. Reingen, “Case Study Defining the Social Network of a Strategic Alliance,” Sloan Management Review 41 (Winter 2000): 51–62.

34. Marks and Mirvis, Joining Forces; Child and Faulkner, Strategies of Cooperation.

35. K. McQuade and B. Gomes-Casseres, “Xerox and Fuji- Xerox,” Case 9-391-156 (Harvard Business School, 1991).

36. This application was adapted from M. Miller, S. Fitzgerald, K. Murrell, J. Preston, and R. Ambekar, “Appreciative Inquiry in Building a Transcultural Strategic Alliance: The Case of a Biotech Alliance Between a U.S. Multi- national and an Indian Family Business,” Journal of Applied Behavioral Science 41 (2005): 91–111.

37. C. Huxham and S. Vangen, Managing to Collaborate: The Theory and Practice of Collaborative Advantage (London: Routledge, 2005); R. Chisholm, “Developing Interorganiza- tional Networks,” in Handbook of Organization Develop- ment, ed. T. Cummings (Thousand Oaks, CA: Sage Publication, 2008), 629–50; S. Klein and A. Poulymenakou, eds., Managing Dynamic Networks: Organizational Perspec- tives of Technology Enabled Inter-Firm Collaboration (New York: Springer, 2006).

38. Information on the Low Carbon City Initiative accessed from http://en.wwfchina.org/en/what_we_do/climate___ energy/mitigation/lcci.

39. D. Watts, Six Degrees (New York: W. W. Norton and Co., 2003).

40. S. Strogatz, “Exploring Complex Networks,” Nature 410 (March 2001): 268–76.

41. Cummings, “Transorganizational Development”; C. Raben, “Building Strategic Partnerships: Creating and Managing Effective Joint Ventures,” in Organizational Architecture, ed. Nadler et al. (San Francisco: Jossey-Bass, 1992), 81–109; B. Gray, Collaborating: Finding Common Ground for Multiparty Problems (San Francisco: Jossey-Bass, 1989); Harrigan and Newman, “Bases of Interorganization Co- operation”; P. Lorange and J. Roos, “Analytical Steps in the Formation of Strategic Alliances,” Journal of Organizational Change Management 4 (1991): 60–72; Gomes-Casseres, “Managing International Alliances”; D. Boje and M. Hillon, “Transorganizational Development,” in Handbook of Orga- nization Development, ed. T. Cummings (Thousand Oaks, CA: Sage Publication, 2008), 651–63.

42. Cummings, “Transorganizational Development.”

43. T. Williams, “The Search Conference in Active Adaptive Planning,” Journal of Applied Behavioral Science 16 (1980): 470–83; B. Gray and T. Hay, “Political Limits to Interorganizational Consensus and Change,” Journal of Applied Behavioral Science 22 (1986): 95–112.

44. Cummings, “Transorganizational Development.” 45. E. Trist, “Referent Organizations and the Development of

Inter-organizational Domains,” Human Relations, 36 (1983): 269–85.

46. Cummings, “Transorganizational Development.” 47. M. Nathan and I. Mitroff, “The Use of Negotiated Order

Theory as a Tool for Analysis and Development of an Inter-organizational Field,” Journal of Applied Behav- ioral Science 27 (1991): 163–80; H. Bradbury, B. Lich- tenstein, J. Carroll, and P. Senge, “Relational Space and Learning Experiments: The Heart of Sustainability Col- laborations,” in Research in Organizational Change and Development, vol. 18, ed. W. Pasmore, A. Shani, and R. Woodman (Bingley, UK: Emerald Group Publishing, 2010), 109–48.

48. Nathan and Mitroff, “The Use of Negotiated Order Theory.”

49. C. Worley and S. Parker, “Building Multi-stakeholder Sustainability Networks: The Cuyahoga River Valley Ini- tiative,” Organizing for Sustainable Effectiveness, vol. 1., ed. S. Mohrman, A. Shani, and P. Docherty (East Sussex, UK: Emerald Group Publishing, 2011), 187–214.

50. Raben, “Building Strategic Partnerships”; C. Baldwin and K. Clark, “Managing in an Age of Modularity,” in Manag- ing in the Modular Age, ed. R. Garud, A. Kumaraswamy, and R. Langlois (Malden, MA: Blackwell Publishing Ltd., 2003), 149–60.

51. Trist, “Referent Organizations.” 52. P. Anderson, “Complexity Theory and Organization

Science,” Organization Science 10 (1999): 216–32. 53. H. Simon, “The Architecture of Complexity,” in Manag-

ing in the Modular Age, ed. R. Garud, A. Kumaraswamy, and R. Langlois (Malden, MA: Blackwell Publishing Ltd., 2003), 15–37.

54. P. Senge, The Fifth Discipline (New York: Doubleday, 1990); B. Lichtenstein, “Emergence as a Process of Self- Organizing: New Assumptions and Insights from the Study of Non-Linear Dynamic Systems,” Journal of Orga- nizational Change Management 13 (2000): 526–46.

55. Senge, The Fifth Discipline. 56. Watts, Six Degrees. 57. P. Monge and N. Contractor, Theories of Communication

Networks (New York: Oxford University Press, 2003). 58. This section relies on information in M. Gladwell, The

Tipping Point (Boston: Little, Brown, 2000).

634 PART 6 STRATEGIC CHANGE INTERVENTIONS

59. B. Gricar and D. Brown, “Conflict, Power, and Organiza- tion in a Changing Community,” Human Relations 34 (1981): 877–93.

60. P. Shaw, Changing Conversations in Organizations: A Complexity Approach to Change (London: Routledge, 2002).

61. This application was developed and written by Kitty Farnham, Owner, Catalyst Consulting in Fairbanks, Alaska. Her contribution to this chapter and to the state of Alaska is greatly appreciated.

CHAPTER 20 TRANSORGANIZATIONAL CHANGE 635

S elected

C a s e s

GLOBAL MOBILE CORPORATION*

“Damn it, he’s done it again!” Charlie Newburg had to get up and walk

around his office, he was so frustrated. He had been reviewing the most recent design, parts, and assembly specifications for Global Mobile’s latest smart phone (code named: Nonphixhun) that had been released for production the previ- ous Thursday. The files had just come back to Charlie’s engineering services department with a caustic note that began, “This one can’t be produced, either…” It was the fourth time pro- duction had returned the design.

Newburg, director of engineering for the Global Mobile Corporation, was normally a quiet person. But the Nonphixhun project was stretching his patience; it was beginning to appear like several other new products that had hit delays and problems in the transition from design to production during the eight months Charlie had worked for Global Mobile. These pro- blems were nothing new at Global Mobile’s Asian factory; Charlie’s predecessor in the engi- neering job had run afoul of them, too, and had finally been fired for protesting too vehemently about the other departments. But the Nonphix- hun phone should have been different. Charlie and the firm’s president, Hannah Hoover, had video-conferenced two months earlier (on July 3, 2006) with the factory superintendent, Tyson Wang, to smooth the way for the new phone’s design. He thought back to the meeting …

“Now, we all know there’s a tight deadline on the Nonphixhun,” Hannah Hoover said, “and Charlie’s done well to ask us to talk about its introduction. I’m counting on both of you to find any snags in the system, and to work together to get that first production run out by October 2. Can you do it?”

“We can do it in production if we get a clean design two weeks from now, as scheduled,” answered Tyson Wang, the factory manager. “Charlie and I have already talked about that, of course. I’ve

spoken with our circuit board and other parts suppliers and scheduled assembly capacity, and we’ll be ready. If the design goes over schedule, though, I’ll have to fill in with other runs, and it will cost us a bun- dle to break in for the Nonphixhun. How does it look in engineering, Charlie?”

“I’ve just reviewed the design for the second time,” Charlie replied. “If Marianne Price can keep the salespeople out of our hair, and avoid any more last minute changes, we’ve got a shot. I’ve pulled my technical support people off of three other overdue jobs to get this one out. But, Tyson, that means we can’t spring engi- neers loose to confer with your production people on other manufacturing problems.”

“Well Charlie, most of those problems are caused by the engineers, and we need them to resolve the difficulties. We’ve all agreed that production problems come from both of us bowing to sales pressure, and put- ting equipment into production before the designs are really ready. That’s just what we’re trying to avoid on the Nonphixhun. But I can’t have 500 people sitting on their hands waiting for an answer from your people. We’ll have to have some engineering support.”

Hannah Hoover broke in, “So long as you two can talk calmly about the problem I’m confident you can resolve it. What a relief it is, Charlie, to hear the way you’re approaching this. With Brady (the previous director of engineering), this conversation would have been a shouting match. Right, Tyson?” Tyson nodded and smiled.

“Now there’s one other thing you should both be aware of,” Hoover contin- ued. “Doc Brown and I talked last night about a new battery-charging technique, one that might reduce the charging time of the Nonphixhun by 25%. There’s a chance Doc can come up with it before the Nonphix- hun reaches production, and if it’s possible, I’d like to use the new process. That would give us a real jump on the competition and quiet the environmentalists.”

*This case is an adaptation and revision of Rondell Data Corporation, by John A. Seeger, Professor of Manage- ment at Bentley College, Waltham, MA, 1981.

636 PART 6 STRATEGIC CHANGE INTERVENTIONS

Four days after that meeting, Charlie found that two of his key people on the Nonphixhun project had been called to an emergency video consultation about a problem in final assembly: The two halves of the new smartphone interface wouldn’t fit together because recent changes in the face required a differ- ent chassis design for the rear end.

One week later, Doc Brown proudly walked into Charlie’s office with the new battery casing. “This won’t affect the other modules of the Non- phixhun much,” Doc had said. “Look, it takes three new pins, a new connector, and some new shield- ing, and that’s all.”

Charlie had tried to resist the last-minute design changes, but Hannah Hoover had stood firm. With considerable overtime by the engineers and technical support staff, engineering services should still be able to finish documenting the parts and specifications in time.

Two hardware engineers and three support staff went into 12-hour days to get the Nonphixhun ready, but the specifications were still five days late reaching Tyson Wang. Two days later, the files came back to Charlie, heavily commented in red. Wang worked all day Saturday to review the job and found more than a dozen discrepancies in the specifications—most of them caused by the new battery-charging process and insufficient checking time before release. Correction of these design faults gave rise to a new generation of dis- crepancies: Wang’s cover note on the second return of the prints indicated that he had had to release the assembly capacity reserved for the Nonphixhun. On the third iteration, Wang commit- ted other production capacity to another rush job. The Nonphixhun would be at least one month late getting into production. Marianne Price, the vice- president for sales, was furious. Her customer needed units now. Global Mobile was the custo- mer’s only supplier not to come out with a new model this quarter.

“Here we go again,” thought Newburg.

COMPANY HISTORY

Global Mobile Corporation traced its lineage through several generations of electronics technol- ogy. Its original founder, Bob Murray, launched the firm in 1960 as Global Electronics & Equipment Co. to manufacture several electronic testing devices

he had invented as an engineering faculty member at a large university. The firm entered communica- tions equipment in 1980. A well-established corps of direct sales representatives, mostly engineers, called on industrial, scientific, and government accounts but concentrated heavily on original equipment manufacturers. Using their technical know-how, they entered the mobile phone market in the mid-to-late 1980s and changed their name to Global Mobile Corporation. In this market, Global Mobile had developed a reputation as a source of high-quality, innovative designs. The firm’s sales- people fed a continual stream of challenging pro- blems into the engineering department, where the creative genius of Doc Brown and several dozen other engineers “converted problems to solutions” (as the sales brochure bragged). Product design, especially hardware and structural design, formed the spearhead of Global Mobile’s growth.

By 2010, Global Mobile offered a wide range of products in two major lines. Mobile phone sales had benefited from the phenomenal growth of cell phones. However, the shift from analog to digital technology and the emergence of smart phones mean that mobile phones only accounted for 35% of company sales. Smart phone sales, on the other hand, had blossomed and, with the rapid technological changes and Global Mobile’s reputation, there was an increasing demand for phones with unique features, ranging from special- ized screen displays, functions, applications, and novel form factors.

The company had grown from 100 employees in 1980 to more than 2,000 in 2010. (Figure 1 shows the current organization chart.) Hannah Hoover, who had been a student of the company’s founder, had presided over most of that growth and took great pride in preserving the family spirit of the old organization. Informal relationships between Global Mobile’s veteran employees formed the backbone of the firm’s day-to-day operations; all managers relied on personal con- tact, and Hoover often insisted that the absence of bureaucratic red tape was a key factor in recruit- ing outstanding engineering talent. This personal approach to management extended throughout the organization. All exempt employees were paid a straight salary and a share of the profits. Global Mobile boasted an extremely loyal group of senior

SELECTED CASES 637

employees, and very low turnover in nearly all areas of the company.

The highest turnover job in the firm was direc- tor of engineering services. Newburg had joined Global Mobile in January 2010, replacing Jim Brady, who had lasted only ten months. Brady, in turn, had replaced Tom Swanson, a talented engi- neer who had made a promising start but had taken to drinking after a year in the job. Swanson’s predecessor had been a genial old-timer, who retired at 70 after 25 years in charge of engineer- ing. (Doc Brown had refused the directorship in each of the recent changes, saying, “Hell, that’s no promotion for a bench man like me. I’m no administrator.”)

For several years, the firm had experienced a steadily increasing number of disputes between product development, engineering, sales, and production people that generally centered on

the problem of new-product introduction. Quarrels between departments became more numerous under Swanson, Brady, and Newburg. Some managers associated these disputes with the company’s recent decline in profitability—a decline that, despite higher sales and gross revenues, was beginning to bother people. Hoover commented:

Better cooperation, I’m sure, could increase our output by 5 to 10%. I’d hoped Brady could solve the problems, but pretty obviously he was too young—too arrogant. People like him—that conflict type of personality—bother me. I don’t like strife, and with him it seemed I spent all my time smoothing out arguments. Brady tried to tell everyone else how to run their departments, without having his own house in order. That approach just wouldn’t

FIGURE 1

Global Mobil Corporation—Organizational Chart (Partial), 2006

638 PART 6 STRATEGIC CHANGE INTERVENTIONS

work, here at Global Mobile. Charlie Newburg, now, seems much more in tune with our style of organization. I’m really hopeful now.

Still, we have just as many problems now as we did last year. Maybe even more. I hope Charlie can get a handle on engineering ser- vices soon.

ENGINEERING DEPARTMENT: PRODUCT DEVELOPMENT

According to the organization chart Newburg was in charge of both product development (the applied research and design function) and engineering ser- vices (engineering support). To Newburg, however, the relationship with design was not so clear-cut:

Doc Brown is one of the world’s unique people, and none of us would have it any other way. He’s a creative genius. Sure, the chart says he works for me, but we all know Doc does his own thing. He’s not the least bit interested in management routines, and I can’t count on him to take any responsibility in scheduling projects, or checking budgets, or what-have you. But as long as Doc is director of product development, you can bet this company will keep on leading the field. He has more ideas per hour than most people have per year, and he keeps the whole engineering staff fired up. Everybody loves Doc—and you can count me in on that, too. In a way, he works for me, sure. But that’s not what’s important.

Doc Brown—unhurried, contemplative, casual, and candid—tipped his stool back against the wall of his research cubicle and talked about what was important:

Hardware and structural design engineering. That’s where the company’s future rests. Either we have it there, or we don’t have it.

There’s no kidding ourselves that we’re anything but a bunch of Rube Goldbergs here. But that’s where the biggest kicks come from—from solving development problems and dreaming up new ways of doing things. That’s why I so look forward to the new designs we get involved in. We accept them not for the revenue they represent but because they subsidize the basic development

work that goes into all our basic mobile phone products.

This is a fantastic place to work. I have a great crew and they can really deliver when the chips are down. Why, Hannah Hoover and I (he gestured toward the neighboring cubicle, where the president’s name hung over the door) are likely to find as many people here at work at 10 P.M. as at 3 P.M. The important thing here is the relationships between people; they’re based on mutual respect, not on policies and procedures. Administrative red tape is a pain. It takes away from development time.

Problems? Sure, there are problems now and then. There are power interests in produc- tion, where they sometimes resist change. But I’m not a fighting man you know. I suppose if I were, I might go in there and push my weight around a little. But I’m an engineer, and can do more for Global Mobile sitting right here, or working with my own people. That’s what brings results.

Other members of the product development department echoed these views and added addi- tional sources of satisfaction from their work. They were proud of the personal contacts built with customers’ technical staffs—contacts that increasingly involved project work as expert advi- sors in thinking through operational problems like international compatibility, interoperability issues between carriers, next generation technologies, and so on. The engineers were also delighted with the department’s encouragement of their per- sonal development, continuing education, and independence on the job.

But there were problems, too. Shawn Reynolds, of the structural design group, noted:

In the old days I really enjoyed the work—and the people I worked with. But now there’s a lot of irritation. I don’t like someone breathing down my neck. You can be hurried into jeopar- dizing the design.

Philip Sanchez, head of the hardware design section, was another designer with definite views:

Production engineering is almost nonexistent in this company. Very little is done by the pre- production section in engineering services.

SELECTED CASES 639

Charlie Newburg has been trying to get prepro- duction into the picture, but he won’t succeed because you can’t start from such an ambigu- ous position. There have been three directors of engineering in three years. Charlie can’t hold his own against the others in the com- pany. Brady was too aggressive. Perhaps no amount of tact would have succeeded.

Paul Hodgetts was head of special compo- nents in the R&D department. Like the rest of the department, he valued engineering design work. But he complained of engineering services:

The services don’t do things we want them to do. Instead, they tell us what they’re going to do. I should probably go to Charlie, but I don’t get any decisions there. I know I should go through Charlie, but this holds things up, so I often go direct.

ENGINEERING SERVICES DEPARTMENT

The engineering services department (ESD) pro- vided ancillary and support services to R&D and served as liaison between engineering and the other Global Mobile departments. Among its main functions were the maintenance of the design sys- tems, simple and advanced prototyping, manage- ment of the central technicians’ pool, scheduling and expediting engineering products, documenta- tion and publication of parts lists and engineering orders, preproduction engineering (consisting of the final integration of individual design compo- nents into mechanically compatible packages), and quality control (including inspection of incom- ing parts and materials, and final inspection of sub- assemblies and finished equipment). The original description of the department included the line, “ESD is responsible for maintaining cooperation with other departments, providing services to the design engineers, and freeing the more valuable people in R&D from essential activities that are diversions from their main focus.”

Many of the 75 ESD employees were located in other departments and locations. Quality control people, for example, were scattered through the manufacturing and receiving areas of the Asian plant, and technicians worked primarily in the research area or the prototype fabrication room.

The remaining ESD personnel were assigned to leftover nooks and crannies near the engineering sections. Newburg described his position:

My biggest problem is getting acceptance from the people I work with. I’ve moved slowly rather than risk antagonism. I saw what happened to Brady, and I want to avoid that. But although his decisiveness had won over a few of the younger R&D people, he cer- tainly didn’t have the department’s backing. Of course, it was the resentment of other depart- ments that eventually caused his discharge. People have been slow accepting me here. There’s nothing really overt, but I get a nega- tive reaction to my ideas.

My role in the company has never been well-defined, really. It’s complicated by Doc’s unique position, of course, and also by the fact that ESD sort of grew by itself over the years, as the design engineers concentrated more and more on the creative parts of product develop- ment. I wish I could be more involved in the technical side. That’s been my training, and it’s a lot of fun. But in our setup, the technical side is the least necessary for me to be involved in.

Wang is hard to get along with. Before I came and after Brady left, there were six months when no one was really doing any scheduling. No work loads were figured, and unrealistic promises were made about releases. This puts us in an awkward position. We’ve been scheduling way beyond our capacity to manufacture or engineer.

Certain people within R&D, for instance Philip Sanchez, understand scheduling well and meet project deadlines, but this is not gen- erally true of the rest of the R&D department, especially the design engineers, who won’t commit themselves. Most of the complaints come from sales and production department heads because new products, such as the Nonphixhun, are going to production before they are fully developed, under pressure from sales to get out the unit, and this snags the whole process. Somehow, engineering ser- vices should be able to intervene and resolve these complaints, but I haven’t made much headway so far.

640 PART 6 STRATEGIC CHANGE INTERVENTIONS

I should be able to go to Hoover for help, but she’s too busy most of the time, and her major interest is the design side of engineer- ing, where she got her own start. Sometimes she talks as though she’s the engineering director as well as president. I have to put my foot down; there are problems here that the front office just doesn’t understand.

Salespeople were often observed taking their problems directly to designers, while production frequently threw designs back at R&D, claiming they could not be produced and demanding the prompt attention of particular design engineers. The latter were frequently observed in video con- ference with production supervisors from the assembly floor. Charlie continued:

The designers seem to feel they’re losing some- thing when one of us tries to help. They feel it’s a reflection on them to have someone take over what they’ve been doing. They seem to want to carry a project right through to the final stages. Consequently, engineering services people are used below their capacity to contribute, and our department is denied functions it should be per- forming. There’s not as much use made of engi- neering services as there should be.

An ESD technician supervisor added his comments:

Production picks out the engineer who’ll be the “bum of the month.” They pick on every little detail instead of using their heads and making the minor changes that have to be made. The people with 15 to 20 years of experience shouldn’t have to prove their ability any more, but they spend four hours defending them- selves and four hours getting the job done. I have no one to go to when I need help. Charlie Newburg is afraid. I’m trying to help him but he can’t help me at this time. I’m responsible for 25 people and I’ve got to support them.

Roxanne Walsh, who Newburg had brought with him to the company as an assistant, gave another view of the situation:

I try to get our people in preproduction to take responsibility but they’re not used to it, and people in other departments don’t usually

see them as best qualified to solve the prob- lem. There’s a real barrier for a newcomer here. Gaining people’s confidence is hard. More and more, I’m wondering whether there really is a job for me here. [Walsh left Global Mobile a month later.]

Another subordinate of Newburg gave his view:

If Doc gets a new product idea, you can’t argue. But he’s too optimistic. He judges that others can do what he does—but there’s only one Doc Brown. We’ve had over 500 production change orders this year—they changed 2,500 docu- ments. If I were in Charlie’s shoes, I’d put my foot down on all this new development. I’d look at the reworking we’re doing and get produc- tion set up the way I wanted it. Brady was fired when he was doing a good job. He was getting some system in the company’s opera- tions. Of course, it hurt some people. There is no denying that Doc is the most important per- son in the company. What gets overlooked is that Hoover is a close second, not just politically but in terms of what she contributes technically and in customer relations.

Production personnel said that Brady had failed to show respect for old-timers and was always med- dling in other departments’ business. This was the reason for his being fired, they contended. Taylor Flores, in charge of quality control, commented:

I am now much more concerned with adminis- tration and less with work. It is one of the evils you get into. There is tremendous detail in this job. I listen to everyone’s opinion. Everybody is important. There shouldn’t be distinctions— distinctions between people. I’m not sure whether Charlie has to be a fireball like Brady. I think the real question is whether Charlie is getting the job done. I know my job is essential, I want to supply service to the more talented people and give them informa- tion so they can do their jobs better.

SALES DEPARTMENT

Marianne Price was angry. Her job was supposed to be selling, but instead it had turned into settling

SELECTED CASES 641

disputes and making excuses to waiting custo- mers. She pointed a finger toward her desk:

You see that telephone? I’m actually afraid now- adays to hear it ring. Three times out of five, it will be a customer who’s hurting because we’ve failed to deliver on schedule. The other two calls will be from production or ESD, telling me some schedule has slipped again.

The Nonphixhun is typical. Absolutely typ- ical. We padded the delivery date by six weeks to allow for contingencies. Within two months, the slack had evaporated. Now it looks like we’ll be lucky to ship it before Christmas. (It was now November 28.) We’re ruining our reputation in the market. Why, just last week one of our best customers—people we’ve worked with for 15 years—tried to hang a pen- alty clause on their latest order.

We shouldn’t have to be after the engi- neers all the time. They should be able to see what problems they create without our telling them.

Phil Klein, head of mobile phone sales under Price, noted that many sales decisions were made by top management. He thought that sales was understaffed and had never really been able to get on top of the job.

We have grown further and further away from engineering. The director of engineering does not pass on the information that we give him. We need better relationships there. It is very difficult for us to talk to customers about development problems without technical help. We need each other. The whole of engi- neering is now too isolated from the outside world. The morale of ESD is very low. They’re in a bad spot—they’re not well-organized.

People don’t take much to outsiders here. Much of this is because the expectation is built by top management that jobs will be filled from the bottom. So it’s really tough when an outsider like Charlie comes in.

Eric Norman, order and pricing coordinator for smart phones, talked about his relationships with the production department:

Actually, I get along with them fairly well. Oh, things could be better, of course, if they were

more cooperative generally. They always seem to say, “It’s my bat and my ball, and we’re playing by my rules.” People are afraid to make production mad; there’s a lot of power in there.

But you’ve got to understand that produc- tion has its own set of problems. And nobody in Global Mobile is working any harder than Tyson Wang to try to straighten things out.

PRODUCTION DEPARTMENT

Wang had joined Global Mobile just after the Iraq War where he had seen some combat and worked a stint in the intelligence organization. Both experi- ences had been useful in his first year of civilian employment at Global Mobile. The former factory superintendent and several middle managers had apparently been engaging in highly questionable side deals with Global Mobile’s suppliers. Wang gathered the evidence, revealed the situation to Hoover, and stood by the president as the accusa- tions and terminations ensued. Seven months after joining the company, Wang was named factory manager.

Wang’s first move had been to rebuild the fac- tory team with new people from outside the corpo- ration. This group did not share the traditional Global Mobile emphasis on informality and friendly personal relationships and had worked long and hard to install systematic manufacturing methods and procedures. Before the reorganization, produc- tion had controlled purchasing, stock control, and final quality control. Because of the scandal, man- agement decided on a check-and-balance system of organization and moved these three depart- ments from production to ESD. The new produc- tion managers felt they had been unjustly penalized by this reorganization, particularly since they had uncovered the behavior that was detri- mental to the company in the first place.

By 2007, the production department had grown to 500 employees, of whom 60% worked in the assembly area—an unusually pleasant envi- ronment that had been commended by Factory magazine for its colorful decoration, cleanliness, and low noise level. Another 30% of the work force, mostly skilled technicians, staffed various production support departments. The remaining employees performed scheduling, supervisory,

642 PART 6 STRATEGIC CHANGE INTERVENTIONS

and maintenance duties. Production workers were not union members, were paid by the hour, and participated in both the liberal profit-sharing pro- gram and the stock purchase plan. Morale in pro- duction was traditionally high and turnover was extremely low.

Wang commented:

To be efficient, production has to be a self- contained department. We have to control what comes into the department and what goes out. That’s why purchasing, inventory control, and quality ought to run out of this office. We’d elimi- nate a lot of problems with better control there. Why, even Taylor Flores of QC would rather work for me than for ESD; he’s said so himself. We understand his problems better.

The other departments should be self- contained, too. That’s why I always avoid the underlings, and go straight to the department heads with any questions. I always go down the line.

I have to protect my people from outside disturbances. Look what would happen if I let unfinished half-baked designs in here—there’d be chaos. The bugs have to be found before the designs go to parts manufacturers and into assembly, and it seems I’m the one who has to find them. Look at the Nonphixhun, for example. [Tyson had spent most of Thanksgiv- ing Day (it was now November 28) reviewing the latest set of specifications from the system.] ESD should have found every one of those discrepancies. They just don’t check the files properly. They change most of the things I flag, but then they fail to trace through the impact of those changes on the rest of the design. I shouldn’t have to do that.

And those engineers are tolerance crazy. They want everything manufactured and assembled to a thousandth of an inch. I’m the only one in the company who’s had any experience at that level. We make sure that the things that engineers say on their drawings actually have to be that way and whether they’re obtainable from the kind of raw materi- als and parts we use.

That shouldn’t be production’s responsibil- ity, but I have to do it. Accepting bad designs

and documentation wouldn’t let us ship the order any quicker. We’d only make a lot of junk that had to be reworked. And that would take even longer.

This way, I get to be known as the bad guy, but I guess that’s just part of the job. [Wang paused and smiled wryly.] Of course, what really gets them is that I don’t even have a degree.

Wang had fewer bones to pick with the sales department, because he said that they trusted him.

When we give Marianne Price a shipping date, she knows the equipment will be shipped then.

You’ve got to recognize, though, that all of our new product problems stem from sales making absurd commitments on equipment that hasn’t been fully developed. That always means trouble. Unfortunately, Hoover always backs sales up, even when they’re wrong. She always favors them over us.

Ralph Simon, executive vice-president of the company, had direct responsibility for Global Mobile’s production department. He said:

There shouldn’t really be a dividing of depart- ments among top management in the com- pany. The president should be czar over all. The production people ask me to do some- thing for them, and I really can’t do it. It creates bad feelings between engineering and produc- tion, this special attention that they [R&D] get from Hannah. But then Hoover likes to dabble in design. Wang feels that production is trea- ted like a poor relation.

PRODUCT RELEASE

At the executive committee meeting of December 6, it was duly recorded that Wang had accepted the prints and specifications for the Nonphixhun smart phone and had set December 29 as the shipping date for the first 100 phones. Hoover, as chairperson, shook her head and changed the subject quickly when Newburg tried to initiate a discussion of inter- departmental coordination.

About a week later, Hoover called Newburg into her office.

SELECTED CASES 643

Charlie, I didn’t know whether to tell you now, or after the holiday. But I figured you’d work right through Christmas Day if we didn’t have this talk, and that just wouldn’t have been fair to you. I can’t understand why we have such poor luck in the engineering director’s job lately. And I don’t think it’s entirely your fault. But….

Charlie only heard half of Hoover’s words, and said nothing in response. He’d be paid through June 30…. He should use the time for search- ing…. Hoover would help all she could…. Jim Brady was supposed to be doing well at his own new job, and might need more help.

Charlie cleaned out his desk and numbly started home. The electronic carillon near his

house was playing a Christmas carol. Charlie thought again of Hoover’s rationale: conflict still plagued Global Mobile—and Charlie had not made it go away. Maybe somebody else could do it.

Questions

1. What is your diagnosis of the strategy and organization design at Global Mobile? How well does Global Mobile’s strategic intent fit with its external environment?

2. How would you work with Hannah Hoover and the executive committee to bring about strategic change at Global Mobile?

644 PART 6 STRATEGIC CHANGE INTERVENTIONS

S el

ec te

d C

a s e s LEADING STRATEGIC CHANGE AT DAVITA: THE

INTEGRATION OF THE GAMBRO ACQUISITION

I n the summer of 2005, Kent Thiry, a 49-year-old Harvard MBA, ex-Bain consul- tant, and now the CEO of DaVita, thought about how he and his management team

should address a set of emerging and impor- tant challenges. DaVita (publicly traded on the New York Stock Exchange under the symbol DVA) was a $2.2 billion annual revenue opera- tor of free-standing and in-hospital kidney dialy- sis centers.

Thiry and his senior team were meeting to discuss the next steps the company should take to continue its organizational development and strategic evolution. They were especially focused on how to manage several looming challenges. DaVita was just in the process of completing a $3.1 billion purchase of Gambro, a large competitor. The acquisition would nearly double its size, from 700 to more than 1,200 dialysis centers and from 13,000 to 25,000 people. As such, it would cement its position as the second largest operator of kid- ney dialysis centers in the United States.

When Thiry came to lead the company in October 1999, the organization had been beset with financial, operational, regulatory, and morale difficulties. “The company was techni- cally bankrupt,” he said. “It was being investi- gated by the SEC, sued by shareholders, had turnover at over twice our current levels, was almost out of cash, and, in general, wasn’t the happiest of places.”1 By 2005, the new man- agement team had achieved a complete turn- around. The company’s market capitalization had grown from $200 million to more than $5 billion, the clinical outcomes had become the best in the industry, the company’s organic growth was the highest in the industry, and employee retention had improved dramatically, with a 50% reduction in turnover.

However, this had not been a typical turn- around. Instead, a closer look at DaVita’s cul- ture and leadership showed that the DaVita management team’s focus had been on

creating a strong and positive values-based organization where all levels of the organization had an emotional commitment to its success. The foundation was the Mission and Values, first created by 700 of the company’s man- agers in 2000 and now widely practiced throughout the company. To the management team, the company’s rebirth strategy was based on the belief that they had to create something larger than themselves in order to be successful. Thiry commented:

At Vivra [another kidney dialysis company where many of DaVita’s senior leaders had worked together], we implemented many people, team, and culture-friendly policies. They were consistent with my basic values, but the extra energy I brought to them was because they were a means to the end of having a successful company. This time it is different. This time the building of a suc- cessful company is a means to the end of building a healthy community. Because humans spend more waking hours at work than anywhere else, if you are a leader who purports to care about your team, it makes no sense to create a paradigm which con- cedes all that time needs to be spent in [a] relatively vanilla values or sterile emotional commitment environment.2

Because of this, Thiry and his team flagged several important challenges they believed needed to be addressed if DaVita was to con- tinue its successful evolution of both opera- tions and culture. The question was, How could they use the culture to achieve even greater operational excellence?

THE GAMBRO INTEGRATION

One immediate task entailed integrating Gam- bro into the DaVita way of managing and its culture. Gambro was significantly more hierar- chical and formal than DaVita, and did not have a strong people-oriented culture. Prior to the

1http://www.redcoatpublishing.com. 2Kent Thiry, email, November 27, 2005.

SELECTED CASES 645

merger, DaVita had been disparaged inside Gam- bro, with Thiry described as “a compliance maver- ick, reckless, and egotistical.” Ironically, Gambro had itself purchased Vivra in 1997, then a smaller, publicly traded dialysis company led and trans- formed by Thiry during the 1990s. As the leader of the combined organization, Thiry’s goal was to be respectful of Gambro, its people, and its capa- bilities, while maintaining DaVita’s unique culture and way of management.

PERSONAL TOUCH IN A GROWING ORGANIZATION

Prior to the Gambro integration, DaVita operated in 37 states. Its growth, size, and diverse locations made it increasingly difficult for Thiry to personally touch the many teammates on a regular basis. This presented a key challenge: How to personally impact teammates as he had during his first five years at the helm? Affectionately called “KT” by many teammates in the company, Thiry was, by everyone’s estimation, extremely charismatic and energetic. More than that, Thiry was the primary architect of and cheerleader for DaVita’s unique culture and values. The company reflected the vision shared by Thiry, Joe Mello, and a few others such as Doug Vlchek. Mello, DaVita’s COO, and Vlchek, DaVita’s chief wisdom officer, had worked with Thiry before and had joined DaVita in 1999 to help drive the organizational change initiative.

TEAMMATE MORALE AND COMPENSATION

Maintaining the culture and sense of community within DaVita was not easy, even before the acqui- sition of Gambro. Taking care of dialysis patients is a difficult job. One out of every five dialysis patients dies each year, creating not only a difficult work environment but also a lot of emotional strain. With the company’s turnaround receding into the past, numerous employees—or “team- mates” as all are called at DaVita—had rising expectations for wages and working conditions. The company’s ability to raise salaries was con- strained by the high volume of patients—about 79%3—who were covered by government pro- grams such as Medicare and Medicaid but whose

reimbursement rate did not cover the cost of treatment.

Because of financial constraints, dialysis provi- ders could not afford to pay high overtime rates. As a result, many of DaVita’s patient care technicians, who typically earned between $11 and $14 per hour, worked two jobs in order to generate suffi- cient income. One manifestation of the pay chal- lenge was the barrage of questions that Thiry and Mello would get as they traveled the country con- ducting “town hall meetings.” Town hall meetings were an opportunity for teammates to ask ques- tions of senior leadership, in person. It was quite common for teammates to ask why their wages were not higher and why productivity expectations were so high and always rising. Moreover, DaVita competed for nurses in labor markets with nursing shortages. Many other organizations had chosen to just throw money at the problem of attracting and keeping nurses, something DaVita could not afford to do.

OPERATIONAL EFFICIENCIES AND PRODUCTIVITY IMPROVEMENT

The fifth challenge was to continue to drive produc- tivity improvement and to think about ways to funda- mentally reengineer the business. As Mello noted, the company had made great strides in enhancing labor productivity over the past several years. But there was always the looming threat of reduced reimbursement from the government for dialysis ser- vices. This revenue stream represented approxi- mately 60% of total company revenue.4 Mello talked about the challenge of doing things that would materially and fundamentally enhance the company’s cost structure so DaVita could be largely impervious to what might happen in its environment.

As Thiry prepared for the meeting with his executive team, he thought about what the com- pany should do about these challenges and main- taining the culture his senior team had worked so hard to build. He wanted the team to come up with some ideas about how to address the challenges facing the company, and of course, to do so in a way that was consistent with its values and culture.

3From 2004 DaVita Annual Report, p. 4. 4From 2004 DaVita Annual Report, p. 4.

646 PART 6 STRATEGIC CHANGE INTERVENTIONS

A BRIEF HISTORY OF DAVITA (1994–1999)

DaVita was the new name given in 2000 to Total Renal Care (TRC), a company originally founded by Victor Chaltiel. Chaltiel had sold a former company for a good profit, with the business model of leveraging cost savings obtained through large- scale purchasing and distribution systems for drugs in the Medicare reimbursement program. Based on his success, he planned to do the same thing in the domain of kidney dialysis centers through roll-ups of smaller chains and individual cen- ters. One of Chaltiel’s strategies was to apply strict business principles and reap their rewards upon entering the traditionally not-for-profit domain of kid- ney dialysis centers (run by hospitals and physician specialists). He focused on growth through acquisi- tion through the 1990s. The Internet bubble focused many analysts on top-line revenue growth, which provided TRC with a high stock price that allowed it to continue making acquisitions at a fast pace.

Unfortunately, Chaltiel and his team failed to integrate their acquisitions, leading to some opera- tional incoherence in TRC. One example noted by Harlan Cleaver, DaVita’s chief information officer, was that there was no uniformity in a critical patient data form used to record and monitor patient care during dialysis, and little standardization in reporting and work methods across centers. This absence of standardization made routine management activities, such as transferring personnel and patients across centers, much more difficult if not impossible.

Cash flow issues created serious problems. Mello commented that another operational weakness of TRC was insurance reimburse-ment—a critical problem for a company whose revenue was entirely dependent on it. Insurers and the government would frequently question charges and demand additional documentation. They would occasionally unilaterally reduce the reimbursement amount, and delay pay- ment until they received answers to queries and requested documentation. Medical service providers such as DaVita needed to pay close attention to bill- ing and collections to avoid a cash crunch.

Finally, senior executives paid scant attention to the dialysis centers themselves, which were seen more as an avenue of corporate growth where patients and caregivers were economic units in a bigger financial structure. This head-quarter-centric, financially oriented operating culture did not win

friends among the health care practitioners who worked hard in the field to deliver quality care.

In 1999, Total Renal Care ran into severe financial difficulties, having just recently merged with another large competitor that had also been built in a rapid fashion. The board of directors turned to Thiry, who was in the process of leaving a private-equity–funded managed care company where he had been for two years post-Vivra in 1997. He was eagerly anticipating time off with his family. When headhunters called to see if he wanted to interview for another CEO position, he always replied, “No.” Thiry was within 90 days of his “retirement” when TRC called:

I still remember the call. After my assistant told me who was on the phone, I picked it up with the intention of giving the same ‘no’ answer. As I started to listen, all the positive memories of my first time in dialysis, at Vivra, came flooding back. It had been the most powerfully positive time of my professional life. I have no idea what I said in that phone conversation. All I know is I went home that night and asked my wife Denise if it was okay to interview. She was livid. What about my alleged interest in more time with the family? What about the fact that this was a turnaround located in another city [Thiry lived near San Francisco and TRC was headquartered in the Los Angeles area]? The difficulty of the decision felt like a terrible bur- den at the time. It turned out to be a gift. Never before did I have to think so deeply about why I wanted to do something. After agonizing for a few weeks, we decided I would give it a try. There is a saying I love—we use it at DaVita all the time: ‘Begin with the end in mind.’ I started at DaVita with more of an end in mind than any other beginning in my professional life.

Before accepting the job offer, Thiry reached out to a set of people who had been with him in his previous dialysis venture, people whom he trusted, liked, and respected. He recruited Harlan Cleaver, who was now living in Denver, to be the chief tech- nology officer and David Barry to be COO. He reached out to Doug Vlchek, whom he had hired into Vivra, to lead the organizational change and culture-building efforts. Thiry recalled, in reference to the musketeer imagery he loves, asking them something like, “Will you ride again?” They all

SELECTED CASES 647

accepted. When Barry left in the first year for per- sonal reasons, Thiry brought in Joe Mello, who had also been with him at Vivra.

When Thiry arrived at TRC in October 1999, the company was a mess. It could barely make payroll, was in default on its loan covenants, and was paying penalties to the banks. Highly lever- aged from its many acquisitions, it was essentially on the verge of bankruptcy. The stock had fallen from nearly $50 to $2 a share. Systems were non- existent or in chaos, and the organization’s employ- ees were dispirited and unhappy. It was not at all clear that financial survival was possible.

KEY SUCCESS FACTORS FOR A DIALYSIS COMPANY LIKE DAVITA

There were four critical factors for organizational success along both financial and clinical outcome dimensions.

Attention to Detail

The first factor was painstaking attention to opera- tional details and compliance with government regula- tions. For instance, a company that charged the government, through the Medicare program, for ser- vices that were not actually delivered and/or were not documented could face accusations of fraud and suf- fer financial penalties as well as delays in payment. Legal problems could also arise from actually deliver- ing care or medicines that patients did not need, as well as for improper relationships with drug compa- nies or physicians that might entail kickbacks for patient referrals or purchases of pharmaceutical sup- plies. Proper record keeping and ethical behavior were vital to the ongoing success of dialysis companies.

Managing Financial Outcomes

The opportunity to make a financial difference in operational results rested largely on small but important behaviors and decisions. One such activ- ity was carefully using supplies to avoid waste and maintaining appropriate stock levels so that inven- tory costs were not unnecessarily high, yet avoid- ing emergency ordering. Another activity was the reuse of dialysis filters and maintenance of the dial- ysis machines to ensure both long life of the equip- ment and lower cost per treatment.

Possibly even more important was the activity of efficient labor-hour management, given that the proportion of labor costs in the total cost structure

equaled one-third to one-half of the treatment cost. As Mello pointed out, in 2005 DaVita would do about 7,000,000 dialysis treatments. Each 0.01 savings in labor hours per treatment achieved across the company was worth about $1.8 million; this savings went directly to the bottom line.

Achieving Good Clinical Outcomes

Attention to detail during the dialysis visit and strong personal relationships among the DaVita staff and patients drove the achievement of good clinical out- comes. First, attention to detail also mattered a lot for obtaining good clinical outcomes. For example, it was important to take care while putting the patient on the machine, monitoring the treatment as it was occurring, and taking the patient off the machine at the end of the session. It was also critical to monitor the patient’s health status generally so that treatment issues could be foreseen and addressed. Good clinical outcomes also enabled DaVita teammates to take pride in work- ing in a company that provided the best care in the industry, an advantage in recruiting and retention.

Second, achieving good clinical outcomes depended not only on the patient’s commitment to treatment but on the emotional tone and bond between the center’s teammates and the patients. Patients sometimes missed their dialysis appoint- ments because they found the treatment unpleasant, the logistics of setting up appointments too difficult, or they became depressed by the likelihood of suc- cess. However, according to various DaVita clinic teammates, one important factor affecting patient compliance was the extent to which patients trusted and felt comfortable with the dialysis center and its staff. Emotions are contagious, and to the extent that DaVita could create positive, genuine emotions on the part of its workforce, those positive emotions might influence the attitude of patients. This could thereby improve the patients’ survival, not only through their positive mental attitudes but also by affecting their compliance with the difficult regimen of living with late-stage kidney disease. As one admin- istrator said, “It’s important that the teammates like their jobs and smile and relate in a compassionate way to patients, because that makes the patients feel better about being here.”

Employee Attraction and Retention

The final critical success factor was the attraction and retention of teammates. DaVita competed for

648 PART 6 STRATEGIC CHANGE INTERVENTIONS

nurses with hospitals, doctors’ offices, other health care providers, and, of course, with other dialysis companies, and the chronic nursing shortage in the United States meant there were always unfilled positions. Hospitals typically paid more per hour than DaVita or its competitors.

Patient care technicians (PCTs), the largest cat- egory of employees, typically earned less than $15 an hour. Many worked two jobs, with their second job often being for another provider of dialysis ser- vices. PCTs were often tempted to leave for better- paying opportunities, either with other health care providers or to find different occupations.

Retention of teammates was important because turnover was costly, entailing finding and training replacement people, and possibly paying overtime labor rates if a center was temporarily short-staffed. High turnover could also impair clini- cal outcomes, because a nurse’s or PCT’s experi- ence in doing dialysis and working in a team enhanced patient care outcomes. Being an employer of choice was not just part of DaVita’s mission, but was also important for business suc- cess and better patient care.

THE TURNAROUND (1999–2005)

With an acute awareness of these critical success factors, Thiry and his colleagues set about the task of turning the organization around. The first order of business was the business itself. Over the next four years, the organization worked to fix billing and cash flow problems, restructure outstanding debt, bring the information systems up to speed, hire people who could “get stuff done” (“GSD” remained a popular acronym in the company, and being “good at GSD” was a high compliment), and invest in con- tinuous improvement projects and training.

It was a difficult time for the company. For a time, the government stopped paying DaVita for laboratory tests because of issues in record mainte- nance and documentation. The company had to decide what to do with the patients whose lab tests were not being reimbursed. The team decided to continue performing tests that it felt were essen- tial in delivery of care and to appeal the decision to an administrative law judge to attempt to obtain the denied funds. Four years later, after winning six suc- cessive judgments, the government paid DaVita over $90 million. Harlan Cleaver, the chief information

officer, described the process of bringing order to the system and establishing common practices, measures, and information systems across the cen- ters. His first step was to standardize the paper- based system used to keep track of patient care in the various centers. As he pointed out, it made sense to start with that patient record system because the issues were of standardization, com- mon practices, and alignment, without the added complication of computers on top of everything else.

The second order of business was getting the philosophy right. Thiry and his colleagues recog- nized that what they said and did in those first months would set the tone for the ensuing years at the company, so close attention to building the kind of culture and organization they wanted pro- ceeded in parallel with the business turnaround efforts. Thiry described early meetings of the exec- utive team in which they would spend time dis- cussing basic issues, such as whether they could make payroll and their ongoing negotiations with the banks, and then they would turn to talk about the core values, culture, and operating philosophy they wanted to instill. When Thiry and Vlchek would start talking about Mission and Values, many of the executives were very skeptical about the value and intent of this activity when the com- pany was in such dire straits. Thiry believed that without a clear statement of Mission and Values, the operational turnaround could not be sustained.

A big part of the new philosophy was to recognize that the centers, where patient care was delivered and where most DaVita teammates worked, were key to the company’s success. To emphasize the impor- tance of the centers, Thiry had all senior managers, himself included, “adopt” a center and drop by occa- sionally. Thiry’s center was in Hayward, California, and long after his last visit, people in the center were still commenting on his attention to them.

The company later replaced the adopt-a-center program with the practice of having everyone hired in or promoted to the vice president level or above go through “Reality 101,” which entailed spending a week in a center helping to do the day-to-day work. Executives participated in activities such as machine set-up prior to dialysis, machine teardown and disin- fection post treatment, helping with blood pressure monitoring, or whatever tasks they felt comfortable

SELECTED CASES 649

in actually performing. As Thiry explained, it was important not to push people to do things they felt uncomfortable or unskilled at doing, but it was also important for people to experience what it was like to get up at 4 A.M. to get to a center at 5 A.M. so it could be open for the first patients at 6 A.M., and to see what life in a center was about.

Thiry and the senior management group under- stood they needed the involvement, cooperation, energy, and ideas of the clinic managers, the front- line supervisors who make the centers work. In May of 2000, more than 400 clinic managers, plus people from corporate headquarters assembled in Phoenix, Arizona, for the first of what has now become annual corporate-wide meetings. The choice of loca- tion, Phoenix, was intentional, as the phoenix is a bird that rose from the ashes, just as the company was seeking to rise from its precarious condition. At this first meeting, suggestions for a new name for the company were presented. It was the company’s teammates, not the board or just the senior

management, collectively assembled at this off- site, who voted on and thereby chose the new name, DaVita, which is an approximate translation of the Italian phrases “to give life” or “he/she gives life.”5 Also at that meeting, groups discussed, debated, and voted on proposals for the core values. Figure 1 shows the mission statement that Thiry presented at the meeting and the core values decided upon by the Phoenix delegation. Over the years, the seventh value, “fun,” was added by another election.

For much of the first 18 months, Thiry and Mello would hold frequent conference calls with the top 800 or so people in the company to update them on progress. As part of each call, Thiry would say, “What is the incremental evidence that we are serious about our Mission and Values?” And then he would provide an answer to that question.

FIGURE 1

DaVita’s Mission Statement and Core Values

5”Total Renal Care Announces New Company Name,” Investor Relations–DaVita, June 5, 2000.

650 PART 6 STRATEGIC CHANGE INTERVENTIONS

Thiry commented, “There were many periods where, absent the pressure of knowing I had to ask and answer that simple question out loud in front of 800 people, in many instances I would not have launched another program, or policy, or communication. They would have been squeezed out by the harsh realities of normal business—like they normally are.”

With increased focus and attention to opera- tional details, the commitment of the company’s teammates, and the bank negotiations behind it, DaVita embarked on a remarkable transformation in its performance, achieving not only great financial results, as shown in Figure 2, but also

consistent, year-over-year improvements in clinical outcomes and reductions in turnover.

THE DAVITA WAY: VALUES AND ORGANIZATIONAL CULTURE

DaVita did not develop its culture by accident. The culture was a result of what Thiry calls “purposeful actions” that “articulated and demonstrated” what a company could be. First, Thiry created a clear, con- cise, easy-to-remember mission that was quickly turned into a song still sung today. Then, he asked 700 colleagues to come to a consensus on the core values. They also used the following question as a benchmark for their own development: What did

FIGURE 2

DaVita Financial Results

1999 2000 2001 2002 2003 2004

Revenues ($millions) 1,445.4 1,486.3 1,650.8 1,854.6 2,016.4 2,298.6

Operating margin 13.0% 19.6% 25.6% 24.6% 28.3% 27.8%

Net profit ($millions) ,56.4. 17.0 98.1 147.8 163.2 217.3

Earnings per share ,0.46. 0.13 0.76 1.23 1.69 2.11

Cash flow per share 0.46 1.06 1.59 2.33 2.46 3.08

SOURCE: Value Line Investment Survey.

DaVita Split-Adjusted Stock Price

SELECTED CASES 651

other great companies do to cultivate cultures— companies like Southwest and Disney?

Employees became teammates, and, if they “crossed the bridge” of believing the company could be special, they became “citizens” of the “village” (not a company), with Thiry as “mayor.” Hugs were common, as were high-fives and laugh- ter, even among the intense ex-consultants and MBAs who populated the business offices. Through what are called “tradi tions and symbols,” DaVita executives brought organizational change concepts to life and made them real.

Cathy Gelb, who ran the DaVita Academies as part of DaVita University and who had been with the company since 2001, commented that one of the things that distinguished DaVita from the Fortune 1000 companies where she had worked as a free- lance training consultant was the tremendous amount of strategic thought and intentionality that went into every single action and decision. She noted that, for instance, all meetings were carefully planned, even to thinking about the particular music that would be used, the sequencing of materials, seating arrangements (for instance, at Academies, should guests be put in the back?), and the specific words and terms that would be employed during presentations. All of this planning was an effort to create the right message and feelings and provide an optimal experience for those in attendance.

Evaluation data were collected about every- thing, including every meeting and class, and used to make educational activities and meetings more effective over time. Gelb also commented that Thiry did not like the word “culture” because of its association with the word “cult,” and there was already some joking about “drinking the Kool Aid” because of DaVita’s very strong, carefully managed, and inclusive set of management practices.

The DaVita Way of Managing was captured in a set of phrases—short and easily remembered—that encapsulated many of the values and operating prin- ciples of the company. These values, and the associ- ated behaviors, were also incorporated into interview schedules used to select new teammates, into all performance appraisals, and into the company employee attitude and satisfaction surveys.

New, Ours, Special

At DaVita meetings, executives always asked the assembled people to respond to three questions:

“What is this company? Whose company is it? What could it be?” The answers, literally shouted back, were “New,” “Ours,” and “Special.” The idea of “new” was not just that DaVita was a different organization after the 2000 turnaround, but with its ongoing acquisitions and new business ventures it was always a new place reinventing itself. “Ours” means that the company is the responsibility and under the control of the teammates who work for it, who have the opportunity to make the company what they would like it to be. This leads to the last question. Note that the executives do not ask what “is” the company, but rather, “What could it be?” The answer, “special,” captures in a word the aspirations for building an organization that is truly unique in its culture and its results for its patients, while “could” reflects the fact that the deve lopment of the organi- zation is a journey, and although it has achieved great things, its aspirations are for more, and that being spe- cial is something yet to be fully achieved.

We Said, We Did

Accountability is an important value at DaVita. So is measurement—the company measured not just clinical outcomes, costs, and labor utilization, but almost everything that was related to dimen- sions of performance. In addition, there is an emphasis on systematic, planned thinking and actions. All of this came together in the idea of follow-up, something that began at the very top of the organization. As Richard Fontaine, one of the directors on the com pany’s board, explained, at virtually every board meeting Thiry would pres- ent a list of issues and questions from the pre- ceding meeting, and then go through them one at a time and explain what the company and he had done about each. This included, for instance, progress on building a succession planning pro- cess and preparing back-up people ready for senior-level positions. Similarly, at DaVita Acade- mies, if the company had made assurances or pro mises to the workforce—to get an answer to some question, to address some concern or problem—Thiry would explain what had been done and end with, “We said, we did.”

The implication was that the company and each person in it was accountable for meeting its commitments—for addressing issues and explain- ing how another important value, continuous improvement, was occurring. As several people

652 PART 6 STRATEGIC CHANGE INTERVENTIONS

noted, if someone was in a position of often having to say, “We said, but we didn’t do,” that person would probably not last long at an organization that stressed accountability and getting stuff done.

One for All, All for One

This idea, from the Three Musketeers books and movies, was a prominent theme in the company. Thiry’s office at corporate headquarters in El Segundo, California, near the Los Angeles airport, had a movie poster from The Man with the Iron Mask, and has hanging in it the sword that Thiry brandishes—in full Musketeer uniform—at DaVita Academies and other meetings. The phrase repre- sents one way of understanding the idea of commu- nity and shared obligations and responsibility. “One for all” means that it is the obligation of every DaVita teammate to contribute what they can to the whole, to expend their best efforts on behalf of the collective, and to take responsibility for the company and each of its members. “All for one” means that just as the individual should devote him- self or herself to the group, the group has a respon- sibility to help that individual develop and succeed and surmount difficult setbacks and transitions.

An example of this care and community was a fund called the DaVita Village Network, to which DaVita teammates contributed to help others out with, for example, unexpected medical expenses or other financial needs. Teammate contributions to the DaVita Village Network were matched by contribu- tions made by the company out of its profits.

The Village—Not Just a Company, But a Community

Related to the idea of “one for all, all for one” was the idea of DaVita as a community—represented in the word “village.” Corporate headquarters in El Segundo was referred to as “Casa DaVita” (the house of DaVita), and village language and imagery were used in many ways. Joe Mello would tell a story from one of his favorite books about a man living on a hillside who sees other members of his village below in danger from an onrushing flood, and sets his own house on fire, so that when the people rush up the hill to put out the fire, they are saved from the flood. The word “worker” was never used and seldom was the word “employee”—instead, people were referred to as “teammates” or

“citizens” and, consistent with the village imagery, language that evoked the idea of “citizenship” and the mutual obligations of citizens and their commu- nity was emphasized. In the words of Gina Ran- dolph, a group vice president, “We think of ourselves as a village where each facility is a neighborhood.” When pressed on how important these distinctions were, she responded, “From the viewpoint of a career that spans several dec- ades, this is the first time I have had the privilege of working for a company whose Mission and Values are so completely alive and not hanging on the wall.”6

No Brag, Just Facts

DaVita was committed to a fact-based approach to management and decision making, to talking to peo- ple about the facts, and to using facts and evidence as much as possible for every decision and state- ment. So, when Thiry stood up at a DaVita Academy meeting and stated that DaVita provides the best care for dialysis patients in the industry—a statement that, on its surface, was not unlike the typical corporate claim about its quality, service, or leading edge technology—he then provided quantitative data showing how DaVita was doing on specific clinical outcome measures, ending with the phrase, “No brag, just facts.” It was a way of cementing the idea that people at the company should attempt to anchor their judgments, their statements, and their claims in quantitative data, not in hyperbole or wishes.

Fact-based decision making was reinforced in the company’s measurement system. Clinic man- agers received monthly, multipage reports showing how their performance compared to goals or bud- gets, to their own prior results, and to other facilities in their region, in their division, and in DaVita as a whole. Annual surveys of employees provided infor- mation on satisfaction and engagement, as well as perceptions about the extent to which people felt the company was living up to its Mission and Values.

But what was most interesting, and what really reinforced the commitment to a fact-based, measurement-rich culture, was what happened when the company was unable to measure some- thing of importance. Patients who did not show up for dialysis because they were in the hospital or on

6David Robbins, http://srarchitects.com/health%20care.htm.

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vacation made scheduling labor more difficult and affected labor productivity. But this indicator could not be captured systematically given current man- agement information systems. Therefore, the mea- sure was included in the monthly reports as a blank graph with the notation, “Not Available.” As Joe Mello explained, if there were some important crit- ical data that could not yet be assessed, the com- pany included them anyway on the reports, showing they were not available. This presentation of a missing measure, month after month, encour- aged people to figure out ways to measure what might have first been viewed and dismissed as “unmeasurable,” and therefore the availability of data useful for making decisions kept improving.

We Are Here

DaVita wanted to encourage its teammates to be fully involved and present in the company, not just physically but also emotionally. There were “We Are Here Awards,” which were $1,000 in vacation expenses given to randomly selected nonexempt (hourly paid) teammates who had perfect atten- dance (no unplanned absences) during a 90-day period. At DaVita meetings, teams would be asked if they were here, and would respond with a cheer, or chant, or yell, or some combination that indicated not only physical presence but also involvement and commitment. In Thiry’s office, painted on the wall was the saying, “This is not a dress rehearsal, this is my Life.” There was an emphasis on having people fully engaged in their work and with the company, so they could find meaning and fulfillment in their jobs and in their associations with teammates.

The Shining Star

The “i” in DaVita was dotted as a star, referred to as a “shining star.” Thiry would say that the star lived in a lush green valley and only came out to sit on top of the “i” when a DaVita teammate did something special for a patient or a fellow teammate. Because at any given moment there was always someone doing something special in the company, the star was always “out.” At the national awards cere- mony, the highest awards were called “Shining Star Awards,” for people who not only performed their jobs with exceptional proficiency, but who also exemplified the DaVita values and who contrib- uted to the well-being of the team.

DAVITA MANAGEMENT PRACTICES

Values and beliefs, ways of being, and the organi- zational culture had to be produced and reproduced every day to be real and meaningful. DaVita did a number of things to ensure that its Mission and Values would infuse the day-to-day behavior of its teammates and to help ensure that it operated in ways consistent with its aspirations. Many of its management practices seemed (and were) like common sense. All were products of extensive discussion by people inside the company, and all were talked about regularly, practiced, and were embedded in everything the company did.

The DaVita Way and the DaVita Way of Managing

DaVita thought that it was beliefs that drove beha- viors that, in turn, produced performance. As Thiry explained it, the “DaVita Way” was “what (who) we are: our Beliefs (which have been introduced and articulated over the past few years), as well as the consistently practiced Behaviors (which are derived from those beliefs).” The company articu- lated and lived its beliefs through talking about its history, its symbols and traditions, the idea of the village, communication, talking about the future, and caring and sharing for members of the commu- nity. The DaVita Way of Managing defined a set of behaviors and competencies that the company sought to promote and produce, and which formed the basis of all of its selection and performance management practices, and were reinforced in its educational activities. There were four beha- viors critical to the DaVita Way of Managing: It (1) gets the right stuff done, (2) fosters team, (3) stewards resources, and (4) builds relationships.

There was one other aspect to the DaVita man- agement approach—an emphasis on execution. When the leadership, including Mello, Vlchek, and Thiry, had been together at Vivra, they had noticed that even though they had an extremely talented executive team of about nine people who were all working hard, things were not happening. They went to an off-site meeting and concluded that there were four elements critical for effective execution: (1) absolute clarity of purpose, (2) absolute accountability, (3) relentless follow-up, and (4) celebrating successes. These principles and practices helped build opera- tional excellence and an ability to get things done at

654 PART 6 STRATEGIC CHANGE INTERVENTIONS

DaVita, where they were very much a part of the fabric of the management approach.

DaVita University

DaVita had many employees in a large number of centers, and although turnover had been reduced, it was still high enough that—coupled with corporate growth—a large number of new people were enter- ing the company each year. The Gambro acquisition would bring 12,000 new people into the organization. To achieve a higher level of uniformity in understand- ing, communication, and management practice, a lot of the DaVita way of managing was transmitted through DaVita University. This activity was started within a year of Thiry’s arrival in the company, even as the financial recovery was proceeding, and the programming has expanded significantly over time.

DaVita University was run out of the Wisdom Department, and the head of the department, who had been Doug Vlchek until mid-2005, was called the chief wisdom officer. Vlchek’s nickname was “Yoda,” after the Star Wars character, an appellation he had been given by Thiry shortly after they first met almost 12 years previously. The name for the depart- ment came from Joe Mello. At Vivra, they had a chief knowledge officer, but that was too conventional a name for the department and its head at DaVita. Wis- dom seemed to be what the company was trying to impart to its teammates and to continually develop.

DaVita University offered programs in continuous quality improvement (a two-day program required for newly hired facility administrators, managers, and vice presidents who had not taken the class previ- ously), presentation skills, leadership development, team skills, and programs for vice presidents. There were also numerous courses on clinical subjects. But two of the most important programs that reached the most people either directly or indirectly were the DaVita Academy (and more recently, a program called Academy II) and a program called FAST, which stood for Facility Administrator Survival Training.

FAST. FAST was a five-day program taken by all new clinic managers. The program consisted of train- ing in managerial skills such as time management, communication, providing coaching and feedback to team members, and interviewing, as well as material on the DaVita culture (the DaVita Way and One for All). On Thursday afternoons there was a town-hall

meeting with Thiry or Mello so that participants could express their opinions, ask questions, and interact in an informal way with senior executives. The course also consisted of specific technical knowledge and skills necessary for administrators of dialysis centers. Evenings were, with one excep- tion, devoted to organized social interaction, including group dinners and bowling, to help build friendships and a feeling of team spirit among the 25 to 30 peo- ple who typically took this class together.

DaVita Academy. DaVita Academy was a two-day program for all front-line teammates (for instance, patient care technicians, nurses, social workers, and the people who serviced the dialysis machines). Orig- inally offered on a voluntary basis to people who were interested in attending, the Academy was evolving to become an activity that facility administrators were encouraged to send new teammates to, preferably within the first 90 days of joining DaVita. Data showed that people who attended an Academy had a turnover rate of about 12% compared to 28% for those who had not, so attending an Academy was critical for both retention and also for engaging people fully in the DaVita spirit and way of relating to each other.

A typical Academy session consisted of a combination of lecture and experiential sessions on subjects such as communications, team dynam- ics, and conflict resolution. The evening activity between the first and second day was always the DaVita Olympics, where teams competed with each other in various indoor light physical activities and performed skits with songs and music that they developed. This informal social interaction, singing together, acting silly together, and working together to compete against other teams, helped break down barriers and build energy and spirit.

Academy II

Academy II was a newer program attended by all teammates from a specific region, designed to “take facility performance to the next level by fos- tering mutual accountability amongst the team.”7

Because the program involved all teammates from a region, centers were completely closed on that day, requiring that dialysis treatments be resched- uled. By emphasizing how to hold difficult and

7DVU Course Catalog, p. 3.

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honest conversations among the teammates to resolve interpersonal issues, the course fostered better and more productive interactions. The course also contained numerous activities designed to impart skills for team building and joint planning for operational improvement at the facilities.

There was every indication that the commitment to training and development at DaVita was increasing in scope and reach. Evaluation of all DaVita University activities was taken very seriously and the programs and materials were constantly being tweaked to make them better. In June 2005, Training (now Training & Coaching Today) awarded DaVita the “Training Top 100 Award,” which recognized the company’s com- mitment to learning and performance improvement.

Recognition and Communications

Another way in which people learned about the DaVita way, felt attached to the company, and learned what was going on was through communica- tions and recognition. There were bimonthly confer- ence calls with all of the facility administrators; more than ten different newsletters including DaVita News and Views, the overall company publication; an intra- net and email system, and voice mails and emails to celebrate special events and company milestones. Thiry personally answered every email he received from anyone in the company, and he received a number of them, particularly following his appear- ance at an Academy or training program or a visit to a facility. Facility administrators were encouraged to hold informal meetings with their teams on a reg- ular basis to check in with each other, engage in joint problem solving, and to share information about the facility and the company. It was a company-wide pol- icy that a “town-hall meeting” had to be held when- ever an executive at the level of vice president or director or higher visited with a group of teammates at a facility or business office. These meetings gave teammates the opportunity to interact informally with the executive and to ask questions about whatever was on their mind about the company.

Recruitment and Career Development

Although there were obviously a number of people who had been with the company prior to late 1999, at least some of those who had joined since its “rebirth” in Phoenix had been attracted by its rep- utation and unique style. For example, Cathy Gelb recalled,

In 2001, my husband was doing consulting with DaVita and he would come home and just rave about this company and they were so unique and the different things they were doing. I said, “Well find out if they need any trainers.” Lo and behold, they were running this two-day program called The Academy that they had just started in 2001 and they were looking for someone to run it for them. So, in November of 2001 I joined DaVita to be associate dean of the Academy.

Many, although not all, of the regional directors and the vice presidents (the people the regional directors reported to) had been nurses and then nurse administrators—they had worked their way up in administration. Of course, people in finance and some of the other staff functions had MBAs and other backgrounds. Recently, DaVita had expanded its recruiting efforts at business schools, including Harvard and Stanford. The intention was to hire people with MBAs who would go fairly quickly into general manager roles such as regional direc- tors, overseeing a number of facilities. Thiry noted that it was important to get general management talent into the company from numerous sources.

Benefits and Pay

DaVita offered a comprehensive benefits and pay package that was somewhat unusual for a company that had a reasonably large number of relatively low-paid, hourly employees. Pay was pegged against competitive benchmarks. At each Academy, Thiry would say, “With respect to wages and healthcare benefits, we intend to be fair and competitive. We must be consistent with the market. With respect to everything else, we want to be superior.” There was a broad-based profit-sharing program that cov- ered virtually all team members, based on the idea of sharing the village’s good times and success with all of its citizens. These cash bonuses meant a lot to those receiving them. One email to Thiry is reflective of the sentiments expressed:

Good Morning and Happy Holidays! I would like to say THANK YOU for the check I received this morning in homeroom. This was an unexpected gift from the Village. This will help with Christ- mas for my family. We have many to help and feed that day. I am almost in tears right now writing this to you thinking of the extra things

656 PART 6 STRATEGIC CHANGE INTERVENTIONS

that I will be able to get for my daughter and husband and the extended family that is living with me. This thank you comes from the heart and [I] wanted to express my gratitude for it.

There were also benefits that provided people an opportunity to invest in professional and personal growth. The brochure listing the benefits for team- mates was called “Because We Care: Davita Teammate Benefits.” Inside it said, “The strength of our team is the foundation of our company…. In our quest to be the Employer of Choice in the healthcare industry, we have developed a compre- hensive program of benefits that are focused on your health and welfare, investing in your future and special programs that are unique to the DaVita Village.” In describing this investment, Thiry noted that “it is not only in education for their jobs, but also in helping everyone advance their leadership skills and their own sense of self.”8

Health and welfare benefits included a com- prehensive package of medical, dental, and vision benefits, extended illness leave, both short-term and long-term disability insurance, life insurance, and a flexible spending account to set aside pre- tax dollars for health or child-care expenses, and an employee assistance program. Investing in the teammates’ future included a 401(k) retirement program, a teammate stock purchase program, profit sharing, the internal training the company provided, and various forms of educational assis- tance, including tuition reimbursement up to $3,000 per year, and an RN scholarship program that permitted people to work for DaVita while attending nursing school, with all tuition and fees paid up to a maximum of $5,000 per year.

Unique to the village were also two programs that provided tuition assistance for the children and grandchildren of teammates. The DaVita Children’s Foundation provided some college scholarships for children and grandchildren of teammates, selected on a competitive basis. And the KT Family Founda- tion, funded by Thiry and others, provided money to be used for educational expenses for the chil- dren and grandchildren of DaVita teammates attending grades 6 to 11, again selected on a com- petitive basis.

NEXT STEPS

Thiry was a person incapable of being complacent. If you talked to him about what DaVita was doing right, he seemed almost disengaged.

It was only when you brought out problems that he seemed really interested in the conversation. Although DaVita had enjoyed a remarkable transfor- mation and success along multiple dimensions since he and his colleagues had arrived in late 1999, he won- dered what else he and the company could be doing to make it even more successful and special. For instance, the team’s goal had been to make DaVita “The Greatest Dialysis Company the World Has Ever Seen,” an objective that it mentioned on its Website and repeated in virtually every gathering of DaVita people, whether executives or front-line caregivers.

It was clear that DaVita had gone a long way toward that goal in six years and was a unique organization with a distinct style and approach. DaVita had been largely successful in a quest to, at least for a time, eliminate the apparent conflicts between the interests of shareholders, team- mates, and patients. The company had created a management system in which the interests of each were coincident. Led by Thiry, Mello, Vlceck, and others, the company’s deliberate culture- building efforts had paid dividends in terms of reduced turnover and improved performance.

However, challenges remained, including inte- grating Gambro teammates, continuing to improve operating performance, ensuring continuity and growth into the future, managing governmental relations, and maintaining the commitment and passion of teammates doing difficult work in a very competitive labor market. At the top of Thiry’s “to do” list was the integration of Gambro’s 500 centers and 12,000 people.

Questions

1. How would you characterize DaVita’s strategy? 2. What advice would you give Kent Thiry in

terms of leading and managing the integration of the Gambro organization?

3. What would be included in your “first 100 days” action plan?

4. How could you preserve DaVita’s culture in the face of an acquisition that includes Thiry’s former organization, Vivra.8http://redcoatpublishing.com/spotlights/sl.

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INTEGRATIVE CASES

© Pixmann/Imagezoo/Getty Images

PART 7 SPECIAL APPLICATIONS OF ORGANIZATION DEVELOPMENT

21 Organization Development for Economic, Ecological,

and Social Outcomes

22 Organization Development in Nonindustrial Settings: Health Care,

School Systems, the Public Sector, and Family-Owned

23 Future Directions in Organization Development

B.R. Richardson Timber Products Corporation

Building the Cuyahoga River Valley Organization

The Transformation of MECK Insurance

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21

Organization Development for Economic, Ecological, and Social Outcomes

learning objectives

Describe organization development (OD) interventions that help organizations balance economic, social, and environmental objectives.

Describe sustainable management organizations (SMOs) and how OD can assist in their design and development.

Describe global social change organizations and how to adopt OD practices to develop them.

This chapter describes two relatively new inter-ventions in organization development (OD)aimed at enabling organizations to pursue “sustainable effectiveness.”1 They are still being developed and refined but are intended for the growing number of organizations seeking balance in the achievement of economic, social, and envi- ronmental outcomes.

The first intervention—sustainable management organizations (SMOs)—proposes that the central purpose of human systems should be sustainable effectiveness. These organizations are built to change and adapt in the service of positive economic, social, and environmental results. This intervention describes the elements of a sustainable strategy and provides

design and implementation guidelines for building these capabilities into the structures, processes, and behaviors of the organization.

Global social change organizations engage in activities that increase the social and environmental outcomes of predominantly economically oriented organizations. OD practitioners are using this intervention to facilitate the development of evolving countries, to change the practices of for-profit entities, to provide a voice to underrepresented social classes, and to bridge the gap between cultures facing similar social issues. The application of planned change processes in these settings requires a new set of OD practitioner skills.

21-1 Sustainable Management Organizations A recent, global survey found that 93% of CEOs believe sustainability issues are critical to the future success of their firms,2 and there is evidence they are acting on this belief. The second annual Sustainability and Innovation Global Executive study found that, despite the economic downturn in 2010, 59% of companies increased their investments in sustainability.3 Sustainability initiatives focus on the environmental impact of business operations, including travel reductions, two-sided printing, more environmentally

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sensitive product packaging, and recycling programs. Corporate social responsibility pro- grams also are increasingly common. More and more, however, firms are recognizing that these positive actions are relatively short sighted; they are taking bigger steps to build financial, social, and environmental performance into their organization.4 Loblaws, Canada’s largest grocery chain, not only has packaging initiatives and energy-saving programs, they are also developing policies, including a sustainable seafood policy, that extend their organization into supply chain relationships, coordinate with environmentally-concerned nongovernmental organizations, educate consumers, and contribute to financial performance.

A variety of OD-related approaches that promote sustainability are being developed, including the Coalition for Environmentally Responsible Economics principles, the Natural Step, ISO 14000, and natural and climate capitalism.5 These frameworks represent opportu- nities to make sustainability, especially ecological sustainability, a more deliberate and inten- tional value of OD. The SMO intervention asks a fundamentally different question about how to develop organizations compared to the strategic change interventions in Chapters 18–20. Those change programs asked, how can we develop organizations to improve their economic effectiveness—domestically or globally? SMO interventions ask, how can we develop organizations to achieve sustainable effectiveness? Based on action research at the University of Southern California’s Center for Effective Organizations, Mohrman, Lawler, and Worley have developed the features and processes for creating SMOs.6

SMOs are designed to achieve sustainable effectiveness. They can perform in three areas—people, planet, and profit—and are agile enough to remain effective over time. This capability follows closely from the United Nations World Commission on Environ- ment and Development’s description of sustainability: “meeting the needs of the present without compromising the ability of future generations to meet their own needs.”7 There are two important implications of this definition:

• First, the organization should generate sustainable outcomes. This means achieving a triple-bottom-line objective—positive economic, social, and ecological results.8 The organization must be clear about its purpose and consider the needs of all stakeholders—shareholders, customers, employees, business partners, governments, the ecology, local communities, and the public. The triple-bottom-line objective is also a normative value that guides how organizations should go about minimizing harm or maximizing benefits through their decisions and actions. This value is man- ifest in the day-to-day decisions that give social and ecological outcomes equal standing with economic concerns. SMOs are designed to do consistently well in all three of these areas.

• Second, SMOs should be able to sustain effectiveness over time. They must be adaptable, innovative, and agile. Traditional organizations equate stability and reli- ability with effectiveness9 and, in a world that is changing rapidly, they often find it difficult to maintain adequate levels of performance. SMOs assume that little about their environment will be stable even in the midterm. They are committed to having execution, innovation, and implementation capabilities that support change.

21-1a Design Guidelines Consistent with the definition of sustainable effectiveness, the design of SMOs follows broad guidelines that are still being developed and refined. These guides have to do with setting strategies that support sustainability, determining sustainable objectives, establishing an organization identity that is sustainability-friendly, and creating an agile organization.

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Strategies That Support Sustainable Effectiveness Sustainable effectiveness— being effective along financial, social, and environmental dimensions over a long period of time—requires an appropriately defined strategic intent. As described in Chapters 5, a stra- tegic intent consists of resource allocations that reflect choices of breadth, aggressiveness, and differentiation. Each of these dimensions can support sustainable effectiveness.

• Breadth. Participation in multiple countries, markets, technologies, or products and services increases the complexity of an organization’s carbon footprint and social impact. It makes it difficult to understand the impact of the organization on ecological and social outcomes. Over the years, Starbucks’ scope of domestic and international operations, its product mix, and ancillary services (e.g., music, Internet hot spots, food) have broadened dramatically. As it grew, the complexity of its operations required responses in its fair trade, water conservation, energy, and recycling policies and systems to maintain an appropriate balance. On the other hand, some breadth and diversification makes it easier to make strategic changes that insure reasonable profits over a long time frame. SMOs think hard about this balance.

• Aggressiveness. In fast-changing markets, there are many appropriate opportunities to pursue objectives aggressively, but in general SMOs are wary of too much aggres- siveness too often. While SMOs are effective competitors, their growth objectives are reasonable and reasoned. Tartan Yachts, a high-quality manufacturer of sailboats, faced this dilemma in the early 2000s. Its success resulted in more orders than its single plant could produce in a timely fashion, and the growing overall economy provided a tempting opportunity to support the increased demand with increased production capacity. In the end, Tartan Yachts decided not to increase capacity. The organization realized that a key differentiator was the special relationships it had built with customers and that quality was partly a function of keeping capacity sized appropriately. The wisdom of its conservative growth approach paid off hand- somely during the 2008–2010 economic downturn. Tartan Yachts did not have to go through the painful and disruptive downsizing that many of its competitors did, and it maintained its reputation for quality.

• Differentiation. Understanding why customers make purchasing decisions and how the organization’s product and service features align with those choices is critical to success. SMOs build features into their offerings that reflect all three outcomes. For example, Microsoft’s Windows 7 made big improvements over the ill-fated Vista operating system that were important for economic objectives, but its sustainability-friendly identity encouraged the firm to also incorporate a variety of power-saving features that contributed to energy conservation.

Objectives That Support Sustainable Effectiveness In SMOs, social and ecologi- cal outcomes have equal standing with economic results. This is easier said than done. Greenpeace revealed that Nestlé, a well-respected and responsible company, was pur- chasing large quantities of low-priced palm oil from firms that were destroying rain for- ests to build even larger palm plantations. The news that Nestlé may have favored economic over environmental objectives damaged its reputation and provoked a boycott of its products. SMOs deliberately integrate economic, social, and ecological objectives.

First, SMOs must create positive economic outcomes to survive. Organizations that cannot operate in a way that leads to revenues meeting or exceeding expenses cannot survive, let alone create other types of valued outcomes. The difference between SMOs and traditional organizations is how much profit they make, how they make a profit, and toward what end that profit is used.

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SMOs reject the goal of maximizing profit or shareholder returns and set sustainable goals for profitability and growth. Achieving social and environmental goals requires investment dollars that are unavailable under a profit maximizing philosophy. Former Johnson & Johnson CEO, William Weldon, argued that the firm had responsibilities to patients, customers, staff, and the community that may prevent it from providing the best possible return, at least in the short term. Organizations are increasingly realizing that maximizing profits by leveraging debt, incenting sales forces and executives to achieve “big hairy audacious goals,” or pursuing acquisitions to “gain important syner- gies” that rarely materialize is a distraction from sustainable effectiveness.

As suggested above, SMOs take a less aggressive approach to growth.10 Business strategies, in general, try to grow the organization along some dimension, including size, profits, revenues, market share, or influence. Aggressiveness that takes advantage of a short-term market opportunity is different from aggressiveness that consistently pursues organizational growth rates that greatly exceed the rate of market growth, the market’s capacity to sustain growth, or the organization’s capacity to support growth.

Align Technologies, for example, is the maker of Invisalign orthodontics, a series of customized mouthpieces that achieve the same results as metallic braces without the wires. Its technology challenges existing orthodontic suppliers as well as the skill sets and status of orthodontists. For Align Technologies to be successful, it must move aggressively to establish its position and technology as the incumbents defend their fran- chises. Nevertheless, Align Technologies must be careful to ensure that an aggressive growth strategy does not become its corporate identity. Expecting the firm to grow at the same rates after it has established its position in the market may not be reasonable.

Reasonable and sustainable profit and growth expectations mean that SMOs may never be the best performers in their industries at any particular point in time. Setting high, difficult-to-achieve economic goals requires dedicated resources and focus that can distract employees’ attention from other goals and the creation of other kinds of value. SMOs recognize that the cost of sustainable profit and growth is a lower return on immediate financial performance but a more stable, long-term profitability with the ability to pursue social and environmental objectives.

Second, SMOs create positive ecological outcomes. They are keenly aware of their carbon footprint and their overall contribution to the planet’s ecology. SMOs accept the logic of the Natural Step, i.e., that current economic models of growth cannot reconcile the increasing demand for and decreasing supply of finite and fundamental natural resources.11 This incompatibility is a central source of SMO strategies; how the organiza- tion generates economic and social value without compromising the natural environment differentiates SMO strategies from those of other organizations. Creating ecological value suggests that business strategies built around the productive use of natural resources can solve environmental problems at a profit.

Most organizations pursuing sustainable effectiveness start by setting an initial goal of not destroying the environment. When profit maximizing and growth-oriented world- wide organizations attempt to lower costs by placing activities in geographic areas with the lowest wage rates, such as Asia, large, complex sourcing and distribution supply chains are created. By some estimates, each of the largest tanker ships used in these sup- ply chains can emit as much as 5,000 tons of sulfur a year, the equivalent of 50 million typical automobiles.12 As regulatory changes are being sought by environmental groups, these operating costs will likely increase. Thus, when the cost of pollution is factored into the cost of manufacturing and supply chain activities, SMOs begin to rethink the low wage rate decision. Instead, they seek ways to not only lower overall costs but to reduce environmental damage as well.

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Third, SMOs create positive social outcomes. This goal mandates that organizations contribute to human and cultural well-being and recognizes the role social issues play in innovation and long-term adaptability. Social value includes the way an organization treats its workforce and the communities, cultures, governments, and countries in which it operates.

Organizations without a clear perspective on social issues are vulnerable to the profit maximization motive. McDonalds noted the growing numbers of automobiles in Beijing, the attendant increase in driving times and stresses on family life, and concluded that opening drive-thru restaurants would be a good idea. The initial drive-thru’s struggled because the concept was unfamiliar to the Chinese. If someone actually found the drive-thru lane, they didn’t know what to do at the ordering station, didn’t know they had to drive up to the next window to pay, and didn’t know they needed to drive to the next window to pick up their food. After they picked up their food, they usually drove to a parking space, got out of the car, and went into the restaurant to have their meal. In response, McDonalds made it easier to find the drive-thru lane and trained the workers to point cars to the next window, including holding the bag of food out of the last window to encourage drivers to move forward to get their meal.

When profit maximization overrides the creation—or even the maintenance—of social and cultural values, organizations can unwittingly contribute to cultural homoge- nization. McDonalds’ pursuit of economic growth may come at the expense of Chinese behaviors and culture. Does teaching them to behave like Westerners enhance cultural diversity?

Identities That Are Sustainability-Friendly SMOs’ long-term success derives from their organizational identity.13 Identity represents the “central and enduring attributes of an organization that distinguish it from other organizations” and answers the question, “Who are we as an organization?”14 SMO identities are closely aligned with sustainable effectiveness, with balancing economic, ecological, and social outcomes.

As shown in Figure 21.1, identity both flows from and helps to create an organiza- tion’s culture. Identity emerges from the values in use that define an organization’s cul- ture, and in turn identity gives meaning to culture through the stories told to members. Figure 21.1 also suggests that identity flows from and helps to create an organization’s brand, image, and reputation. Identity drives the brand promises and messages that organizations make to customers and the market. Because all organizations must com- pete for resources, they must proactively communicate their mission and brand—what they offer, what markets they serve, and what they stand for—to the marketplace. For example, Philips’ tag line in all of its media content, “Sense and Simplicity,” reflects a commitment to products that are easy to use and designed well for the task.

FIGURE 21.1

The Components of Organization Identity

SOURCE: Adapted from Hatch and Schultz, 2002.

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However, the image and reputation that external stakeholders hold about the orga- nization also influence identity. Customers and other stakeholders get to experience whether the organization generally lives up to its brand promises. Experiences using the product or service, encounters with after-sales support services, stories from the business press or websites, and other sources of information provide feedback about the align- ment between message and behaviors. For example, Citibank displayed advertisements in its offices that it was proud to be a part of programs that created jobs in America— and then announced it would cut 11,000 jobs. Over time, the organization builds up a reputation as reliable or unreliable, aggressive and litigious or relatively passive, a defender of human rights or a polluter, or a firm that stands behind its products or avoids publicity. Analysts, for example, have been skeptical about Philips’ ability to man- age its complex business portfolio. It dropped from #5 to #7 among the world’s most admired electronics firms (and did not make the Top 350 overall), but generally has a positive image among consumers (#41 among best global brands).

An SMO’s identity should meet the standard of “sustainability friendly.” A sustainability-friendly identity embraces the continuous pursuit of financial, social, and environmental values as a core part of who the organization believes it is. Thus, environ- mental initiatives and corporate social responsibility programs would not be “in addition to,” but rather central to strategic and operational decisions. When decisions and actions are oriented toward integrating financial, social, and environmental outcomes without the use of special incentives or projects, the organization makes important contributions to sustainable effectiveness as a matter of course. For example, Nokia and Unilever do not emphasize efforts to market and produce a particular “sustainable” product; rather they are developing product portfolios that are financially successful, environmentally friendly, and socially beneficial.

Agile Organization Designs That Support Sustainable Effectiveness The final design guideline for SMOs is the need to create an organization that can change and adapt routinely—an organization that is “built to change” (Chapter 19).15 Agility repre- sents a dynamic capability16 that enables timely and effective responses to changing environments and multiple stakeholder demands. Here we discuss the features of an agile organization, including work systems, structures, management processes, and human resource systems.

• Work systems. An SMO’s sustainability-friendly strategy and triple-bottom-line objectives are manifest in its work systems and processes. These work processes directly account for a large percentage of the organization’s economic, social, and environmental impact. To achieve current and long-term economic performance, the organization must design two types of work: (1) core and exploitive and (2) cre- ative and exploratory.17

Core work in SMOs supports the current strategic intent and must be reliable, predictable, and as efficient as practicable. Since the organization’s strategic intent can be subject to change, SMO core work may never be 100% efficient, but it must be reliable enough to support the differentiators, meet demand, and generate profit. It must also be designed to meet social and environmental objectives. For example, DaVita is a Fortune 500 kidney care and dialysis company. Its core work—delivering dialysis treatments to patients with kidney disease—is designed primarily for clinical quality and reliability. DaVita’s “we’re a village first and a company second” identity drives it to address the quality of its core work first because it believes that will gen- erate the best economic and social outcomes. Thus, work efficiency is not at the expense of workforce, customer, or community outcomes. Work processes are

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designed to generate positive work experiences for organization members and DaVita’s organization identity encourages members to build strong personal relationships with patients and the local community through its “wall of fame.” Moreover, a well-understood continuous improvement process works to increase efficiency and reduce the negative environmental by-products of dialysis.

Creative work in SMOs is designed to generate new projects, services, and other disruptive innovations; it can obsolete the current strategic intent and is fundamen- tally different than core work. Creative work is temporary and iterative; it is based on initiatives and activities not jobs, driven by shared goals, and performed by cross- functional teams. In addition to its core work, DaVita must also build future leaders, understand the likely changes and implications of health care reform, identify poten- tial acquisitions or perform due diligence activities, develop new business opportu- nities, and other nonroutine and innovative activities.

For any activity that warrants attention, DaVita leaders create teams consisting of multiple functions and often including external stakeholders, such as regulators, legislators, customers, physicians, and community representatives. These teams have clear goals and appropriate decision authority. Early in the team’s work, mem- bers are expected to report out frequently on progress or obstacles. This creative work system enables DaVita to develop its members, to gather and charter resources quickly, and to make resources available for other projects when a project is over.

Both core and creative work involve innovation. Core work must innovate to improve efficiency and effectiveness; creative work must innovate to develop future opportunities. Moreover, to achieve social and environmental outcomes, both types of work processes must carefully consider and adapt their input and throughput processes to insure appropriate output characteristics.

• Structures. Structures focus member attention and organization resources on the most important aspects of getting core and creative work accomplished. The unique feature of SMO structures is their external focus and “maximum surface area.”18 As described in Chapter 19, maximum surface area structures support core and creative work with roles that are directly connected to some aspect of the external environ- ment. To the extent possible, every role in an SMO should be a “boundary span- ning” role.19 Externally focused roles enable organization members to experience what is happening in professional, business, competitive, and regulatory environ- ments as well as community and environmental sectors and bring that information into the organization as meaningful inputs to strategy and operations.

The surface area of almost any structure can be increased. For example, IBM and Cisco have different structures but both have good external focus and surface area. In IBM’s case, a “front-back” structure puts cross-functional solution teams into direct contact with customers, and the back office groups must stay current in their technical expertise to support the requested solutions. Both the front and back of the organiza- tion work to support IBM’s “smarter planet” strategic intent. Cisco increases the sur- face area of its functional structure by creating cross-functional “councils and boards” that address specific segments. Organization members must stay connected to their own professional communities in addition to working with other functions to build and implement strategies for enterprise customers, emerging markets, or some other important business segment. For example, Cisco created its “eco-board” to achieve the “if it can be connected, it can be green” objective across the organization.

• Management processes. SMOs use flexible decision-making and resource allocation processes to leverage information gathered by the externally focused roles. An important feature here is transparency. In SMOs, information is transparent and

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moved throughout the organization to wherever it is needed and decision-making rights are assigned to the appropriate level and role in the organization. This ensures that the right information is available and provides a clear picture of how the organization is performing relative to triple-bottom-line objectives. It enables organizations to make timely and relevant decisions to keep pace with changing conditions.

• Human resource systems. SMOs rethink the way that people are attracted, retained, developed, motivated, and led. To attract the right kind of diverse workforce for the right period of time, SMOs use multiple employment deals and offer a wide variety of work arrangements, including contract labor, outsourcing, and longer term com- mitments to create the ability to treat employees as individuals. Individual treatment is necessary to match the skills, motives, and lifestyles of individuals with the work that needs to be done. Accenture and Deloitte have career customization programs that attract employees who want to choose and shape their own career tracks, life- styles, work hours, and work locations. Such systems mean that not everyone in the organization is a career employee, has job security, and can expect the organization to provide them with stable employment. While stable employment might seem like a reasonable social sustainability practice, it may not be cost effective or even desired by individuals who prefer the flexibility of contract employment.

SMOs assess the skills and competencies that individuals have, develop particu- lar skills in employees, and pay for the effective deployment of those skills in the service of triple-bottom-line objectives. IBM has developed a corporation-wide talent information system that helps make this possible. It provides information on open positions, career paths, and on the skills and competencies of employees. When IBM launched its “smarter planet” strategy, the talent information system helped to iden- tify who had the skills and experiences that would support the strategy and assisted in reallocating important talent.

Aligning financial and nonfinancial reward systems to support sustainable effec- tiveness is critical. In general, financial and nonfinancial rewards should be given based on the individual’s triple-bottom-line performance. Executives, for example, need to be rewarded and recognized for achieving reasonable profit levels, corporate social responsibility targets, lower carbon footprints, and healthy relationships with the communities and countries in which they operate. In many cases, it makes sense to stress group or team performance because of the interdependencies that exist in organizations committed to sustainable effectiveness. For organization members, SMOs shift the basis of rewards from jobs to people. Members are rewarded for what they can do with regard to sustainable effectiveness, not for the particular job they perform. Because jobs and tasks are continually changing, people are motivated to learn new skills and knowledge, thus keeping pace with change and enhancing their long-term value to the organization.

Rewards also play a role in motivating and reinforcing change in SMOs. Individ- ual or team bonuses are tied directly to change goals, learning new things, and performing new tasks well. This establishes a clear line of sight between rewards and change activities. Bonuses can include one-time rewards given at the end of a par- ticular change effort, or rewards targeted to different phases of the change process.

Finally, development and reward systems support the importance of a shared leadership philosophy; leadership in SMOs does not rest with jobs and is not restricted to executives. Rather than relying on centralized sources of power and control, SMOs spread leadership across multiple levels of the organization. This approach speeds decision making and response rates because those lower in the

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organization need not have to wait for top–down direction. It provides 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.

21-1b Application Stages Sustainable management design principles are being implemented in a growing number of organizations. Patagonia, The Body Shop, and Ben & Jerry’s are good examples of companies that were built from the ground up using SMO principles. UPS, Unilever, Gap Inc., GE, PepsiCo, and P&G are in the midst of making sustainable management an integral part of their identities. These companies are challenging long-held assump- tions and making significant changes in their strategies and organization designs. Like other strategic change interventions, SMO applications tend to involve systemic and rev- olutionary change processes driven by senior executives. Because these changes tend to be radical—they generally alter every feature of the organization’s design and challenge many of its long-held assumptions—they usually proceed at a quick pace, taking at least three years to implement. The following SMO application stages are broadly described; as OD practitioners gain more experience with this OD intervention, we can expect more detailed knowledge of how it works and produces results.

Identifying and Redefining Organization Identity Probably the biggest distinction between an SMO intervention and other strategic changes is the development of a new organization identity. Change initiatives are directed at redefining or changing the orga- nization’s identity to support sustainable effectiveness and agility. Identity change is both an outcome of the transformation process and a key measure of the change’s effective- ness. It indicates that the organization is applying new strategies and organization prin- ciples to achieving triple-bottom-line results. Once identity redefinition is underway, continuous change interventions, such as those described in Chapter 19, can facilitate the change process.

Redefining organization identity typically starts from a diagnosis of the organiza- tion’s existing identity. This involves assessing how well the organization’s values-in-use and brand promise and reputation support sustainable effectiveness and agility. OD practitioners can help organization members conduct a cultural diagnosis (Chapter 18) along with an analysis of the firm’s brand promises and reputation in the market. Then, change processes are directed at leveraging organization values and reputational elements that already support sustained effectiveness rather than trying to “fix” those values and brand images that are not aligned with it.

Repurposing the Board of Directors In contrast to boards of directors in tradi- tional organizations, SMO boards face more demanding roles, more complicated deci- sion making, and more intense discussions. Most U.S. and European boards are designed and staffed to serve investors, and this leads to a singular focus on economic performance. This also tends to be the case for nonprofit boards that are dominated by fundraising interests. OD practitioners can help boards address key issues that invariably arise when moving toward sustainable effectiveness.20

• The board may need to assess whether its membership reflects the most important sta- keholders, including investors and representatives of the community, workforce, and environment. This stakeholder approach to board membership differs significantly

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from the classic financial accountability-driven membership model. For example, less than 10% of large U.S. corporate boards have someone with an HR background,21

and it is unreasonable to expect boards to pursue sustainable effectiveness if they lack expertise with respect to the social and environmental impact of their business model. Membership diversity enables decisions that balance financial, social, and environmen- tal outcomes.

• The board also may need to consider changing its committee structure. In addition to traditional audit and compensation committees, the board may need to establish com- mittees for human capital, social responsibility, and environmental impact. Developing effective strategies and addressing the right set of decisions requires a committee structure that reflects the organization’s sustainable effectiveness objectives.

• Board members may need to create new goal-setting processes. These might include addressing how social and ecological goals can be integrated with economic objec- tives. It may involve adopting the Global Reporting Initiative (GRI), an effort to improve the measurement of the environmental impact of organizations that is sup- ported by Shell, Kimberly-Clark, and Cemex among others.22 The board may choose to highlight such traditional indicators as turnover rates and employee attitude data, and other measures such as job creation and charitable contributions, to increase awareness of social and human capital performance. In some cases, the board may explore reregistering the organization as a “benefit corporation,” which would allow the firm to pursue other objectives without fear of legal action by shareholders look- ing for a maximized return.23 Patagonia’s board pursued this approach to enable the company to set integrated triple-bottom-line goals.

• The board of directors needs to have effective decision-making skills and clear guidelines to make tough choices about sustainability, such as taking actions that may have a significant negative impact on financial performance but a significant positive impact on social and environmental outcomes, or holding executives accountable for triple-bottom-line achievements. For example, boards face problems promoting sustainable effectiveness when they consistently reward executives for financial performance at the expense of environmental and social performance. Human process interventions, such as team building and process consultation, can help boards become effective decision makers.

Building Capabilities Becoming an SMO involves identifying which existing organi- zation capabilities support sustainable effectiveness and determining which new abilities need to be built. Most organizations do not have sufficient resources to create all the necessary capabilities at once, so tough choices need to be made. These decisions are symbolically important; they signal to employees, owners, communities, and NGOs how much the organization actually supports a sustainability-friendly identity. Two capabili- ties that are essential to sustainability involve multistakeholder decision making and change management.

SMOs need to be good at multistakeholder decision making and take into account diverse perspectives in making choices.24 Organizations like Gap, Inc., GE, Social Accountability International, Loblaw’s, Unilever, and the World Wildlife Fund are work- ing hard to develop this capability. It may require making changes in both the organiza- tion and its external alliances and partnerships. First, training and development interventions can help organization members learn collaborative decision making and “systems thinking” skills that acknowledge the interdependencies and trade-offs neces- sary to meet triple-bottom-line objectives. Next, decision-making processes may need to be expanded to include nontraditional stakeholders, such as community and

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environmentally related NGOs. Team-building processes for developing trust, exploring alternatives, and integrating perspectives among diverse participants can be helpful.25

Lastly, organizational learning interventions can help the organization apply its new skills and decision processes. Early experiences in trying to apply multistakeholder deci- sion skills and systems are likely to be awkward and inefficient.26 Organization learning interventions can help members learn how to improve their multistakeholder decision- making capabilities.

SMOs also need to develop a change capability, which involves three related activi- ties.27 First, change management skills can be developed widely in the organization by hiring people with those skills and by training existing managers and employees to acquire them. Most organization members have a good understanding of technical and operational issues but are less familiar with managing change. Second, an organization effectiveness function can be designed with competencies in strategic planning, organiza- tion design, and change management. Some SMOs have created a center of excellence staffed by professionals from the strategic planning and human resources functions; they provide advice and facilitation for planning and executing change in the organiza- tion. Third, organization members can 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 a change capability. It provides members with the hands-on experience and reflective learning necessary to hone their change skills in action. Developing these change capabilities is likely to involve a significant investment in training and development.28

Sequencing the Changes Repurposing boards and building capabilities to support a sustainability-friendly identity are extensive and complex changes. The change to an SMO has to account for this complexity to positively move the organization’s identity. This involves a particular sequence of changes, starting with work system redesign. Then the strategy needs to be clarified and the organization redesigned to promote agil- ity. Large-group intervention (LGI) techniques, described in Chapter 11, are particularly helpful to accelerate the transformation process because they can support the organiza- tion’s development of multistakeholder and change capabilities.

Work Systems Redesign. Work is the primary driver of an organization’s carbon foot- print; it directly affects the workforce’s well-being and is most connected to the creation of economic value. Thus, redesigning work systems can have the most payoff to an SMO. Assessing how both standard and creative work get done and designing them for sustain- able effectiveness will likely make the biggest advance toward becoming an SMO. Rede- signing work to add economic value in environmentally and socially acceptable ways can provide a solid foundation for further change.

Focusing on work redesign first ensures that the organization’s future aspirations are aligned with its past and current behaviors. It shows concretely that the organiza- tion’s commitment to sustainability is real not just window-dressing. In many organi- zations today, there is growing pressure to “do something” about sustainability. Organizations that develop marketing campaigns proclaiming support for green issues and social concerns before thinking through how their work processes affect those outcomes run a serious risk. If intentions of sustainable effectiveness are announced too early and with too much fanfare, an organization’s reputation can be damaged if marketing promises are not backed up by tangible actions. The organization’s efforts will be seen as “greenwashing,” and its ability to change identity is set back, perhaps permanently. It may take the firm a long time to rebuild trust in corporate sustainability promises.

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Clarifying the Strategy. Early in the change process, the organization needs to meet with key stakeholders to clarify goals and to explore the implications of becoming an SMO on its capabilities and resources. This can be accomplished through a series of large-group interventions (LGIs) with key stakeholders. LGIs are well suited for this part of the SMO change process. They enable organization members to interact with multiple stakeholders, to learn new ways of behaving and deciding, and to gain clarity and commitment to becoming an SMO. The first LGI, typically led by the board and the executive team, is concerned with fleshing out the organization’s sustainability strat- egy and future state. The focus is on gaining stakeholder support, determining how the different stakeholders will work together, and clarifying the organization’s vision, mis- sion, and values. Subsequent LGIs address the design and implementation of particular aspects of strategy and organization design.

Building an Agile Design. To move further toward being an SMO, an organization needs to build an agile organization design that supports and reinforces the new sustainable-friendly work processes. Agile organization designs have a “maximum sur- face area” to support an external focus, strong collaboration capabilities, flexible resource allocation systems, and transparent decision-making processes. They also include a talent management system with goals, performance appraisals, and rewards that promote flexi- bility and sustainable effectiveness outcomes. In particular, people are retained or hired for their compatibility with an SMO; they are appraised and rewarded for sustainable behaviors. Performance management interventions (Chapter 15), talent management changes (Chapter 16), and organization design interventions (Chapter 18) can help the organization build an agile design.

Application 21.1 describes Interface Carpets, one of the most referenced cases of a transformation to an SMO.

21-2 Global Social Change Organization development applied to global social change is one of the boldest and most exciting developments in the field.29 This form of OD is generally practiced in global social change organizations (GSCOs), not-for-profit and nongovernmental entities that are created at the grassroots level to help communities and societies address such important problems as unemployment, race relations, sustainable development, homelessness, hunger, disease, water quality and conservation, and political instability. Globally, GSCOs are heavily involved in the developing nations. Examples include the World Conservation Union (IUCN), the Kids Global Outreach Foundation (United States–Africa), the Society of Entre- preneurs and Ecology (China), the Nature Conservancy (International), the Mountain Forum (Peru), International Physicians for the Prevention of Nuclear War, and the Asian Coalition for Agrarian Reform and Rural Development (ANGOC-Philippines). Many prac- titioners who help create and develop GSCOs come from OD backgrounds and have adapted their expertise to fit highly complex, political situations. This section describes GSCOs and how OD is used for social change.

21-2a Global Social Change Organizations GSCOs are part of a social innovation movement to foster the emergence of a global civilization.30 They exist under a variety of names, including development organizations (DOs), nongovernmental organizations (NGOs), social movement organizations, interna- tional private voluntary organizations, and bridging organizations. They address complex

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1 INTERFACE CARPET’S TRANSFORMATION TOSUSTAINABILITY

I nterface Flooring Systems was founded by Ray Anderson as a joint venture with Britain’s Carpets International in 1973 to make carpet tiles. Carpet tiles, an alternative

to long rolls of carpet, can be replaced piece by piece rather than all at once. Between 1978 and 1983, revenues grew from $11 million to $80 million as a result of building close relation- ships with commercial customers. Interface went public in 1983 and through 2008 grew revenues at an average annual rate of 11.5%.

Interface’s transformation to sustainable management began in 1994 when Anderson received a memo from a research division task force to speak about Interface’s environmental vision. The group had been formed in response to questions from customers, architects, and inte- rior designers about Interface’s environmental efforts. The task force’s operational review sug- gested that, in fact, Interface had very few environ- mental initiatives and was not doing much to be environmentally friendly. The memo made Anderson anxious over what he would say since there was no environmental policy other than “comply, comply, comply.” At the same time, Anderson received Paul Hawkin’s book, The Ecology of Commerce. The book’s message con- fronted his sense of responsibility and changed his attitudes about what a business should achieve.

In his speech to the task force, he declared that Interface would become a company that “could grow and prosper without doing harm to the earth.” He later said that he didn’t want his legacy to be that he dug up the earth, turned petroleum and other materials into pol- luting products, and dumped them in landfills. At the time, Interface was part of an industry that extracted and processed 1.2 billion pounds of material from the earth to produce $802 bil- lion worth of products. Of the 1.2 billion pounds, 800 million pounds was petroleum based and two-thirds of that was burned to convert the remaining third into product. As an industry, carpeting firms were depositing 4.5 billion pounds of material into landfills that would degrade over 20,000 years.

In January 1995, Interface convened a “green supply chain” conference with its sup- pliers to discuss its goals and to gain commit- ments from its business partners. The eventual sustainability strategy outlined seven goals, including eliminate waste (any measureable input that did not create value), limit toxic emis- sions from manufacturing plants, switch to renewable sources of energy, “close the loop” which meant using any waste or dis- carded carpet as inputs to new products, achieve resource-efficient transportation, and educate customers, suppliers, and even com- petitors. The seventh goal, to redesign com- merce, eventually resulted in what was called the “evergreen service agreement.” It was a radical innovation that attempted to shift Inter- face’s business model from “selling carpet” to “renting flooring systems.”

In 1996, Interface held its first “Eco Dream Team” conference of outside environmental experts and organization members to explore the strategy and organizational requirements necessary to achieve its sustainability goals. The conference recommendations led to changes in Interface’s product design and manufacturing, supply chain, and operations. Implementing the changes required the organi- zation to address a variety of issues.

First, as the new strategy was communi- cated, organization members expressed a vari- ety of concerns and resistance, including questions about what sustainability meant and how the organization was going to change. The depth of misunderstanding was particu- larly troublesome. After hearing about the sus- tainability goal, one employee asked “How many sheep are we planning to have, and where are they going to graze?” In particular, few people in the organization understood how ecologically unfriendly existing operations were. As a result, a large commitment to employee training about the environment and operations led to Interface being named one of the Best 100 Companies to Work for by Fortune magazine in 1997.

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social problems, including overpopulation, ecological degradation, the increasing concen- tration of wealth and power, the lack of management infrastructures to facilitate growth, and the lack of fundamental human rights. The early efforts of many GSCOs to raise awareness and mobilize resources toward solving these problems culminated in the United Nations’ Conference on Environment and Development in Rio de Janeiro in June 1992, where leaders from both industrialized and less-developed countries met to discuss sustainable development.31 Since then, a number of conferences and agreements have occurred. The most notable are the 1997 Kyoto Protocol that attempted to gain commitment from countries around the world to reduce greenhouse gas emissions and the Global Compact, a strategic policy initiative that asks businesses to align their opera- tions with ten universally accepted principles related to human rights, labor, environ- ment, and corruption. The Doha Climate Conference in December 2012 successfully extended the Kyoto protocol agreements to 2020 despite continued debates. The work of GSCO’s can be aided or constrained by these larger, governmental accords.

GSCOs have the following characteristics:32

• They assert, as their primary task, a commitment to serve as an agent of change in creating environmentally and socially sustainable world futures; their transforma- tional missions are articulated around the real needs of people and the earth.

Second, figuring out where to eliminate waste and toxicity or to use clean technology was a straightforward process of total quality management that was implemented under the acronym QUEST (Quality Utilizing Employee Suggestions and Team- work). However, figuring out how to do these things was a giant technical problem. The organization’s research group and its engineers had to redesign (or reinvent) almost every production process and product, including how to recycle nylon and how to make carpet using less petroleum.

Third, creating the evergreen services agree- ment required Interface to develop a leasing con- tract that would make financial sense in the context of existing rules and regulations. The idea of moving funds from capital expense (sale of car- pet) to operating expense (lease of carpet) was an easy sell, but getting a lease agreement written that met current tax and accounting standards was a lot more difficult. In addition, Interface had to work with customers because the price of the lease seemed very high to customers. Few custo- mers actually knew the full cost of their flooring because the amounts associated with carpet pur- chase, maintenance, and other services were sep- arated into different accounts.

By 2000, a variety of market and economy changes, including the Y2K threat, the dot.com bust, and other changes that reduced customer budgets, were hurting the industry. In January 2001, Interface held a leaders conference to address a 30% workforce reduction and other organization changes in response to business declines. At the conference, managers affirmed their commitment to sustainability saying that it was part of the organization’s DNA.

Interface’s transformation to sustainability is both remarkable and cautionary. The organization clearly made a radical change in its carbon foot- print, established clear benchmark and best prac- tice standards, and redefined the business model in carpet manufacturing, distribution, and sales. Economically, however, its stock price and profit- ability have varied considerably since the transfor- mation, although its annual growth rate is impressive. Socially, it has not been a stable employer, meeting most economic challenges with layoffs. Nonetheless, its tremendous accom- plishments in environmental matters represent an important social benefit. These highs and lows of effectiveness vis-à-vis the triple bottom line testify to the difficulties of the transformation to an SMO.

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• They have discovered and mobilized innovative social-organizational architectures that make possible human cooperation across previously polarizing or arbitrarily constraining boundaries.

• They hold values of empowerment, or people-centered forms of action, in the accomplishment of their global change mission, emphasizing the central role of peo- ple as both means and ends in any development process.

• They are globally and locally linked in structure, membership, or partnership and thereby exist, at least in identity and practice (maybe not yet legally), as entities beyond the nation-state.

• They are multiorganizational and often cross-sectorial. They can be business, gov- ernment, or not-for-profit organizations. Indeed, many of the most significant global change entities involve multiorganization partnerships bridging sectorial boundaries in new hybrid forms of business, government, and volunteerism.

GSCOs therefore differ from traditional for-profit firms on six dimensions.33 First, they typically advocate a mission of social change—the formation and development of better societies and communities. “Better” typically means more just (Amnesty Interna- tional, the Hunger Project, World Vision), peaceful (Peace Direct, International Physi- cians for the Prevention of Nuclear War), or ecologically conscious (Nature Conservancy, the Global Village of Beijing, the Mountain Forum, IUCN, World Wildlife Fund, Friends of the Earth).

Second, the mission is supported by a network structure. Most GSCO activity occurs at the boundary or periphery between two or more organizations.34 Unlike most indus- trial firms that focus on internal effectiveness, GSCOs are directed at changing their environmental context. For example, World Vision (www.worldvision.org) operates microfinance institutions in 43 countries to boost the economic status of entrepreneurs, create jobs, and develop local economies.

Third, GSCOs generally have strong values and ideologies that justify and motivate organization behavior. These “causes” provide intrinsic rewards to GSCO members and a blueprint for action.35 For example, the ideological position that basic human rights include shelter has directed Habitat for Humanity to erect low-cost homes in a wide variety of underdeveloped communities.

Fourth, GSCOs interact with a broad range of external and often conflicting consti- tuencies. To help the poor, GSCOs often must work with the rich; to save the ecology, they must work with the polluters; and to empower the masses, they must work with the powerful few. This places a great deal of pressure on GSCOs to reconcile pursuit of a noble cause with the political reality of power and wealth.

Fifth, managing these diverse external constituencies often creates significant organi- zational conflict. On the one hand, GSCOs often need to be organized into departments to serve and represent particular stakeholders; on the other, they are strongly averse to bureaucracy and desire collegial and consensus-seeking cultures. The conflicting perspec- tives of the stakeholders, the differentiated departments, and the ideological basis of the organization’s mission can produce a contentious internal environment. For example, the International Relief and Development Agency promotes grassroots development projects in developing countries using resources donated from developed countries. As the agency grew, departments were created to represent different stakeholders: a fundraising group handled donors, a projects department worked in the local offices, a public relations department directed media exposure, and a policy information department lobbied the government. Each department adapted to fit its role. Fundraisers and lobbyists dressed more formally, took more moderate political positions, and managed less participatively

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than did the projects departments. These differences were often interpreted in political and ideological terms, creating considerable internal conflict. OD practitioners designed a series of feedback meetings to increase the understanding and relevance of the different groups36 Finally, GSCO membership often is transitory. Many people are volunteers, and the extent and depth of their involvement varies over time and by issue. Turnover can be quite high.

21-2b Application Stages GSCOs are concerned with creating sustainable change in communities and societies. This requires a form of planned change in which the practitioner is heavily involved, many stakeholders are encouraged and expected to participate, and “technologies of empowerment” are used. Often referred to as “participatory action research,”37 planned change in GSCOs typically involves three types of activities: building local organization effectiveness, creating bridges and linkages with other relevant organizations, and devel- oping vertical linkages with policymakers.

Building the Local Organization Although GSCOs are concerned primarily with changing their environments, a critical issue in development projects is recognizing the potential problems inherent in the GSCO itself. Because the focus of change is their envi- ronment, members of GSCOs are often oblivious to the need for internal development. Moreover, the complex organizational arrangements of a network make planned change in GSCOs particularly challenging.

OD practitioners focus on three activities in helping GSCOs build themselves into viable organizations: using values to create the vision, recognizing that internal conflict is often a function of external conditions, and understanding the problems of success.

• Values to create vision. For leadership to function effectively, the broad purposes of the GSCO must be clear and closely aligned with the ideologies of its members. Sin- gleness of purpose can be gained from tapping into the compelling aspects of the values and principles that the GSCO represents. For example, the Latin American Division of the Nature Conservancy held annual two-day retreats. Each participant prepared a white paper concerning his or her area of responsibility: the issues, chal- lenges, major dilemmas or problems, and ideas for directions the division could take. Over the course of the retreat, participants actively discussed each paper. They had broad freedom to challenge the status quo and to question previous deci- sions. By the end of the retreat, discussions produced a clear statement about the course that the division would take for the following year. People left with increased clarity about and commitment to the purpose and vision of the division.38

Developing a shared vision can align individual and organizational values. Because most activities occur at the boundary of the organization, members are often spread out geographically and are not in communication with each other. A clearly crafted vision allows people in disparate regions and positions to coordinate their activities. For example, ACDI/VOCA (www.acdivoca.org) is a “nonprofit that means business.” The organization provides sustainable solutions that integrate approaches from agribusiness, community and enterprise development, financial services, and food security perspectives. Its vision, “A world in which people are empowered to suc- ceed in the global economy,” helps to coordinate the work of the people throughout the organization. “Our mission and a vision grow out of the farmer cooperative move- ment in the U.S. going back 45 years. We know something about how you bring food

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from the farm to the table.” As one member put it, “I’m part of helping a small farmer in a small village somewhere in the world be able to put food on their table and send their kids to school or to buy a net to protect themselves from malaria. I don’t know how that couldn’t impact you.” Another staff member noted, “It’s a privilege to have a job that is making a difference, and as a mom you feel that more. When I hear a story of a woman who’s saying, ‘I couldn’t feed my children,’ I think, oh my goodness. And now, because they got a loan, they got their business going, and they’re connected with people who wanted to buy their stuff, you can just see it in their eyes and their voices. They have hope for the future. It’s a fantastic thing.”

• Recognizing conflict. Because of the diverse perspectives of the different stake- holders, GSCOs often face multiple conflicts. In working through them, the organi- zational vision can be used as an important rallying point for discovering how each person’s role contributes to the GSCO’s purpose. The affective component of a GSCO vision gives purpose to members’ lives and work. Another way to manage conflict is to prevent its occurrence. At the Hunger Project, the “committed listener” and “breakthrough” processes give GSCO members an opportunity to seek help before conflict becomes dysfunctional. Every member of the organization has a des- ignated person who acts as a committed listener. When things are not going well, or someone is feeling frustrated in their ability to accomplish a goal, they can talk it out with this colleague. The role of the committed listener is to listen intently, to help the individual understand the issues, and to think about framing or approaching the problem in new ways. This new perspective is called a “breakthrough”—a crea- tive solution to a potentially conflictual situation.39

• Problem of success. Finally, a GSCO’s success can create a number of problems. The very accomplishment of its mission can take away its reason for existence, thus causing an identity crisis. For example, a GSCO that succeeds in creating jobs for underprivi- leged youth can be dissolved because its funding is redirected toward organizations that have not yet met their goals, because its goals change, or simply because it has accom- plished its purpose. During these times, the vital social role that these organizations play needs to be emphasized. GSCOs often represent bridges between the powerful and powerless, between the rich and poor, and between the elite and oppressed, and as such may need to be maintained as legitimate parts of the community.

Another problem can occur when GSCO success produces additional demands for greater formalization. New people must be hired and acculturated; greater control over income and expenditures has to be developed; new skills and behaviors have to be learned. The need for more formal systems often runs counter to ideological prin- ciples of autonomy and freedom and can produce a profound resistance to change. Employees’ participation during diagnosis and implementation can help them commit to the new systems. In addition, new employment opportunities, increased job respon- sibilities, and improved capabilities to carry out the GSCO’s mission can be used to encourage commitment and reduce resistance to the changes.

Supported by sponsors in industrialized countries, the International Child Spon- sorship Agency (ICSA) delivers services that enhance children’s welfare in developing countries. For many years, entrepreneurial leadership in the field led to growth in the number of programs and activities that were difficult to coordinate and monitor. The organization brought in a new “business-oriented” CEO to improve resource and pro- gram efficiencies. While everyone agreed that better coordination was necessary, they also believed that the new CEO’s implementation of new accounting and information systems was too top-down. Tensions between headquarters and the field increased and turnover among key staff members led to an OD intervention. It started with a

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diagnosis that showed that the focus on control and efficiency conflicted with ICSA’s traditional, entrepreneurial values. Changes were implemented to increase the involve- ment of the field in strategic planning, to increase and clarify the decisions that could be made in the field, and to reinforce the leadership and cultural styles that best repre- sented the vision. The changes were viewed as a rebalancing of the organization’s pri- orities, giving fundraising and program development relatively equal influence over strategy and operations.40

Alternatively, a GSCO can maintain its autonomy through structural arrange- ments. The Savings Development Movement (SDM) of Zimbabwe was a grassroots effort to organize savings clubs, the proceeds of which helped farmers buy seed in volume. Its success in creating clubs and helping farmers lower their costs caused the organization to grow very rapidly. Leaders chose to expand SDM not by add- ing staff but by working with the Ministry of Agriculture to provide technical sup- port to the clubs and with the Ministry of Community Development and Women’s Affairs to provide training. The savings clubs remained autonomous and locally managed. This reduced the need for formal systems to coordinate the clubs with government agencies. The SDM office staff did not grow, but the organization remained a catalyst, committed to expanding participation rather than providing direct services.41

Creating Horizontal Linkages Successful social change projects often require a net- work of local organizations with similar views and objectives. Such projects as creating a civil society in China, turning responsibility for maintenance and control over small irri- gation systems to local water users in Indonesia, or teaching leadership skills in South Africa require that multiple organizations interact. Consequently, an important planned change activity in GSCOs is creating strong horizontal linkages to organizations in the community or society where the development project is taking place. The formation of “support” organizations—value-added agencies that provide services to NGOs for their development—are an important part of these linkages.42 For example, CANGO, the China Association for NGOs (www.cango.org), is a government-sponsored NGO that provides capacity-building and project-execution services to support the emergence of a civil society in China. CANGO sponsors conferences and programs where like-minded NGOs can connect with each other and support common interests. Similarly, GSCOs aimed at job development not only must recruit, train, and market potential job appli- cants but also must develop relationships with local job providers and government authorities. The GSCO must help these organizations commit to the GSCO’s vision, mobilize resources, and create policies to support development efforts.

The ability of GSCOs to sustain themselves depends on establishing linkages with other organizations whose cooperation is essential to preserving and expanding their efforts. Unfortunately, members of GSCOs often view local government officials, com- munity leaders, or for-profit organizations as part of the problem. Rather than interact- ing with these stakeholders, GSCOs often “protect” themselves and their ideologies from contamination by these outsiders. Planned change efforts to overcome this myopia are similar to the transorganizational development interventions discussed in Chapter 20. GSCO members are helped to identify, convene, and organize these key external organi- zations. For example, hurricane Katrina in 2005 devastated many of New Orleans’ oldest, poorest, and culturally rich neighborhoods. The rebuilding of neighborhoods, such as Tremé or Holycross, was usually overseen by local NGOs, such as Esplanade Ridge/Tremé Neighborhood Association or Holy Cross Neighborhood Association. These groups connected with other NGOs, local and state government departments

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(other than Federal Emergency Management Agency [FEMA], which had lost credibility during the initial response), funding agencies, and volunteers. Local coordination of the NGO activities allowed each neighborhood to pursue locally relevant strategies for reha- bilitation, to bring the right resources to the right places, and to maintain local cultural and historical traditions.43

Developing Vertical Linkages GSCOs also must create channels of communication and influence upward to governmental and policy-level decision-making processes. These higher-level decisions often affect the creation and eventual success of GSCO activities. For example, the Global Village of Beijing (GVB) is a nongovernmental organization that raises the environmental consciousness of people in China. GVB leveraged its relationships with journalists and the government to produce a weekly television series on government channels to discuss and promote environmentally friendly practices, such as recycling, and to expose the Chinese people to environmental projects in different countries. When the Chinese government proposed new environmental regulations and policies as part of the World Trade Organization admission process, GVB helped assess the proposals.44 GVB’s success and visibility also contributed to its founder, Liao Xiaoyi, being invited to partici- pate in Beijing’s successful 2008 summer Olympics bid and the inclusion of a “green Olympics movement” proposal that addressed concerns about Beijing’s pollution.

Vertical linkages also can be developed by building on a strong record of success. The Institute of Cultural Affairs (ICA) is concerned with the “application of methods of human development to communities and organizations all around the world.” With more than 100 offices in 39 nations, ICA trains and consults with small groups, commu- nities, organizations, and voluntary associations, in addition to providing leadership training for village leaders, conducting community education programs, and running ecological preservation projects. Its reputation has led to recognition and credibility. It was given consultative status by the United Nations in 1985, and it has category II status with the Food and Agriculture Organization, working relation status with the World Health Organization, and consultative status with UNICEF.

For decades in Mali, a centralized one-party government that neglected teachers, schools, books, and materials, especially in the rural areas, had dominated the country’s educational system. When a new reformist government took control, a variety of GSCOs helped to organize grassroots groups to improve the schools. Supported by the GSCOs, local parent-teacher associations (PTAs) were organized, local members were elected, and the groups were given training on how to manage the school. Although there was local improvement, the overall educational system remained fragmented. In response, GSCO-organized conferences brought PTAs from different villages together for dialogue and decision making. As regional PTA federations were formed, the GSCOs provided policy analysis and advocacy training to help them speak with one voice in negotiations over policy formulation with the Ministry of Education. These collective efforts have resulted in increased attention, influence, and expenditures to rural schools.45

Application 21.2 describes how OD has contributed to the work of LDI Africa.46

The opening of its program provides important clues about the development of vertical and horizontal linkages and how GSCOs work within a clear vision.

21-2c Change-Agent Roles and Skills Planned global social change is a relatively new application of organization development. The number of practitioners is small but growing, and the skills and knowledge neces- sary to carry out OD in these situations are being developed. The grassroots, political,

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2 SOCIAL AND ENVIRONMENTAL CHANGE AT LDI AFRICA

L andmark Development Initiative Africa (LDI Africa) is a nonprofit social enterprise based in the United States. It builds the capacity of African corporations, small businesses,

and nonprofits to compete in the global market- place by recruiting skilled volunteers, especially young African professionals from outside of the continent. Through LDI Africa’s partner- ships with the Foundation Center in Nigeria and investors in five countries, African nonpro- fits and businesses can access funding and business development services. LDI Africa also plans to send young professionals in Africa to the United States and around the world for overseas fellowships with nonprofits and busi- nesses seeking an international perspective on the challenges they face.

As a young professional in Nigeria, Gbenga Ogunjimi, LDI Africa’s founder and CEO, had limited access to international management principles and professional development oppor- tunities. Gbenga saw an opportunity to address development challenges facing his country and other parts of the African continent while work- ing in the Washington, DC, headquarters of Atlas Corps, a nonprofit organization that spon- sors international fellowships. He believed that by matching organizational needs for globally competitive expertise with a rapidly growing local workforce, he could create a virtuous cycle of social and economic development. He was motivated to establish a social enterprise based on his own experiences and developed the initial concept for LDI Africa.

Through volunteer placement services administered by LDI Africa, young profes- sionals gain hands-on international experience helping African organizations launch and expand their operations. The youth fellows are able to hone their skills in a challenging work environment characterized by resource constraints, limited infrastructure, and uncer- tain policies. The African organizations benefit from access to international business practices and skills, such as business planning, finance,

marketing, and management. When the 3 to 12 month fellowship ends, LDI Africa also offers recruitment services for host organiza- tions interested in hiring fellows. Thus, what separates LDI Africa from other nonprofits is the fundamental goal of altering a status quo where African youth and organizations are struggling to obtain the capabilities needed to effectively compete in a global marketplace.

The organization development process at LDI Africa started with a chance meeting between Gbenga and an OD practitioner, Kimberley Jutze. Kimberley, a graduate of Pepperdine University’s Master of Science in Organization Development Program, was working to establish a consulting practice that addressed the resource and organization devel- opment needs of social enterprises. After exchanging contact information, Gbenga and Kimberley met to discuss opportunities to work together on securing start-up capital, set- ting up an office in Washington, DC, and devel- oping partnerships with organizations involved in work abroad programs.

Once the consulting relationship was for- malized, Kimberley conducted an informal assessment, which revealed that the planning documents in place were insufficiently detailed to prepare LDI Africa for a successful launch. Thus, before any of the initial requests for sup- port could be addressed, LDI Africa needed a strategic plan to clearly define its mission, pro- grams, and operations. A business planning approach pioneered by the nonprofit consulting firm Root Cause guided the development of a three-year strategy for launching and expand- ing LDI Africa. The plan described the social and financial returns that social impact inves- tors could expect.

Over the next five months, Kimberley worked closely with Gbenga to facilitate the development of a social impact strategy. The strategy develop- ment process consisted of a series of meetings where each section of the social impact strategy outline (Need and Opportunity, Social Impact

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Model, Implementation Strategy, and Action Plan) was reviewed and ideas were discussed. In between meetings, Gbenga prepared drafts of the social impact strategy.

Despite having a mutually agreed upon scope of work, differences in communication styles between Kimberley and Gbenga and expectations that were not clearly defined upfront posed chal- lenges to the consulting relationship. For example, both parties had different assumptions about what level of detail was sufficient for addressing each section of the social impact strategy. Gbenga, who wanted to make the most of his limited time in the United States to launch LDI Africa as soon as possible, preferred a moderately detailed plan where he could address questions from social impact investors as they came up. In contrast, Kimberley believed that investing more time up front in addressing anticipated questions in the plan itself would facilitate smoother implementation later on. A final agreement was reached through ongoing feedback on drafts of the plan and open discussions about the quality and quantity of infor- mation needed to complete it. Attention also was given to establishing a collaborative relationship characterized by open and honest communication between Kimberley and Gbenga. This greatly improved communication between them as well as their working relationship.

By the time the social impact strategy was completed, Gbenga gained greater insight into the essential steps needed to transition LDI Africa from a concept to an operational organization. He was better prepared to meet with prospective financial supporters and refer to details captured in the social impact strategy to fully explain LDI Africa’s model.

After the social impact strategy was com- pleted and LDI Africa was registered as a nonprofit organization, Gbenga asked Kimberley to help obtain seed funding. As a first step, they agreed to prepare a strategy to guide LDI Africa’s resource development efforts. This consisted of meetings to review each section of the strategy outline and dis- cuss ideas. Gbenga also drafted the strategy with support from Kimberley. After agreeing upon a funding target based on the organization’s annual

operating budget, Kimberley used a strengths- based approach to assess LDI Africa’s fundraising assets. She worked closely with Gbenga to deter- mine which sources of funding the organization was best prepared to cultivate as well as best and worst case scenarios for the amount of fund- ing that LDI Africa could anticipate receiving from each source. A contingency plan was also devel- oped that explained how LDI Africa would continue to operate in the event that the funding target was not fully reached during its first year of operation. The strategy also included an action plan with spe- cific tasks, timeline, and targets. Gbenga’s active participation in the strategic planning process led him to appreciate the importance of thinking through different options to obtain funding and deploy LDI Africa’s resources expediently rather than just pursuing whatever opportunities hap- pened to come along. With an action plan in place, Gbenga was also better prepared to begin seeking start-up capital.

Most recently, Gbenga began forming a board of directors for LDI Africa and invited Kimberley to join as an advisor for resource and organization development. Recognizing the importance of an effective board, Kimberley coached Gbenga on board development issues, such as defining mem- ber roles and responsibilities, enlisting their sup- port for fundraising activities, and facilitating board meetings. Through this informal consultation process, Gbenga is learning how to provide overall direction to the board and to obtain its support for LDI Africa’s work. He is also addressing the chal- lenge of board member engagement by managing expectations around each board member’s role and time commitments.

As LDI Africa prepares to launch its pilot fel- lowship program in June 2013, it has recognized the need to develop partnerships with African organizations that have expressed interest in hosting young professionals, but are unable to cover fellowship costs, such as housing, trans- portation, and insurance. Gbenga and Kimberley worked together to prepare a teaming agreement with an African foundation that provides micro investments and mentorship to start-up enter- prises. Their initial conversations with the African

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and ideological natures of many GSCOs require change-agent roles and skills that are quite different from those in more formal, for-profit settings.47 GSCO change agents typ- ically occupy stewardship and bridging roles. The steward role derives from the ideological and grassroots activities associated with GSCOs. It asks the change agent to be a colearner or coparticipant in achieving global social change. This type of change is “sustainable,” or ecologically, politically, culturally, and economically balanced. Change agents must, there- fore, work from an explicit value base that is aligned with GSCO activities. For example, change agents are not usually asked, “What are your credentials to carry out this project?” Instead, practitioners are asked, “Do you share our values?” or “What do you think of the plight of the people we are serving?” Stewardship implies an orientation toward the devel- opment of sustainable solutions to local and global problems.

The second role, bridging, derives from the grassroots and political activities of many GSCOs. Bridging is an appropriate title for this role because it metaphorically reflects the core activities of GSCOs and the change agents who work with them. Both are mainly concerned with connecting and integrating diverse elements of societies and communi- ties toward sustainable change, and with transferring ideas among individuals, groups, organizations, and societies.

Carrying out the steward and the bridging roles requires communication, negotia- tion, and networking skills. Communication and negotiation skills are essential for GSCO change agents because of the asymmetrical power bases that exist in grassroots development efforts. GSCOs are relatively powerless compared with governments, wealthy upper classes, and formal organizations. Given the diverse social systems involved, there often is only a loose consensus about a GSCO’s objectives. Moreover, dif- ferent constituencies may have different interests, and there may be histories of antago- nism among groups that make promulgation of the development project difficult. The steward and the bridging roles require persuasive articulation of the GSCO’s ideology and purpose at all times, under many conditions, and to everyone involved.

foundation involved explaining how the teaming process would work for preparing consortium grant applications to foundations, examining the pros and cons of joint fundraising before entering into an agreement, and drafting a teaming agree- ment for both parties to sign. As a result, Gbenga was better prepared to lead the partnership nego- tiation process. If LDI Africa is successful in obtaining grants for its pilot fellowship program, both organizations will benefit from the opportu- nity to contribute to the professional develop- ment of fellows and to the sustainability of newly formed African companies.

Throughout the process, Kimberley “led from behind” by working one-on-one with Gbenga to enhance his leadership capabilities and serving as

an observer in meetings so that he was consis- tently seen as leading LDI Africa’s partnership and resource development efforts. Over the past 18 months, LDI Africa has made tremendous strides in its internal development. It has grown from a concept to a registered nonprofit, hired four people to staff positions in Nigeria and the United States, and established an international board of directors. LDI Africa has also succeeded in obtaining an initial round of start-up capital that can help position the social enterprise to attract additional funding for its pilot program. Gbenga’s strong personal commitment to LDI Africa and his dedication to developing it in a systematic way has poised the organization for success within Nigeria and across Africa.

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The change agent must also be adept at political compromise and negotiation.48

Asymmetrical power contexts represent strong challenges for stewardship and bridging. To accomplish sustainable change, important trade-offs often are necessary. The effective change agent needs to understand the elements of the ideology that can and cannot be sacrificed and when to fight or walk away from a situation.

Networking skills represent a significant part of the action research process as applied in GSCO settings. Networking takes place at two levels. First, in the steward role, practitioners bring to the GSCO specific knowledge of problem solving, technolo- gies of empowerment using processes that socially construct and make sense of the sur- rounding conditions, and organization design.49 The participants bring local knowledge of political players, history, culture, and ecology. A “cogenerative dialogue” or “collective reflection” process emerges when these two frames of reference interact to produce new ideas, possibilities, and insights.50 When both the practitioner and the participants con- tribute to sustainable solutions, the stewardship role is satisfied.

Second, in the bridging role, networking skills create conditions that enable diverse stakeholders to interact and solve common problems or address common issues. Change agents must be able to find common ground so that different constituencies can work together. Networking requires the capability to tap multiple sources of information and perspective, often located in very different constituencies. Action becomes possible through these networks.

But bridging also implies making linkages among individual, group, GSCO, and social levels of thought. Ideas are powerful fuel in global grassroots development projects. Breakthrough thinking by individuals to see things in new ways can provide the impetus for change at the group, GSCO, social, and global levels. This was demonstrated by U2’s Bono and U.S. Treasury secretary Paul O’Neill during their 2002 visit to understand and develop solutions to poverty in Africa. The change agent in international GSCO settings must play a variety of roles and use many skills. Clearly, stewardship and bridging roles are important in facilitating GSCO accomplishment. Other roles and skills will likely emerge over time. Change agents, for example, are finding it increasingly important to develop “imaginal literacy” skills—the ability to see the possibilities, rather than the con- straints, and the ability to develop sustainable solutions by going outside the boxes to create new ideas.51

SUMMARY

In this chapter, we presented two interventions designed to help organizations generate positive social, environmental, and economic outcomes. These change processes are fundamentally different from other OD interventions that focus primarily on the achievement of economic objectives.

Sustainable management organization interven- tions are intended to achieve sustainable effectiveness. Organizations must be agile enough to sustain high levels of economic, social, and environmental perfor- mance. Achieving these triple-bottom-line objectives

relies on design guidelines that promote capabilities in change and multistakeholder decision making. The organization’s strategy must be realigned and clarified to support sustainability and the work systems, structure, management and information sys- tems, and human resource systems must be oriented appropriately.

Finally, applications of OD to global social change were discussed. Typically carried out in global social change organizations, these interventions pro- mote the establishment of a global civilization. Strong

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