Two and a half approaches to change

The nineties have become notorious for failed business theories, but for many leaders “bigger is best” was the catch cry that changed the business world. This was the period when industry consolidation was the main game, and mergers and acquisitions were seen as the path to business success. CEOs and executives were rewarded lavishly for pursuing mergers to achieve growth.

After the painful recession of the early 1990s, Australia saw enormous consolidation in the mining, media, banking, and retail industries. We are still living with the consequences of that dash for cash.
Dilbert by Scott Adams

While many management consultants were certainly active participants in the merger mania, by the end of the nineties it had become clear that many mergers were failing to deliver long term results. “Breaking the code of change” by Michael Beer and Nitin Nohria from the Harvard Business School became widely influential, examining the issues standing in the way of successful business transformations.

The core of their research was the insight that leaders can create change using one of 2 basic strategies – which they dubbed Theory E and Theory O. Clearly marketing wasn’t their strong point.

Theory E was the quintissential 1990’s business strategy – short term focus, dramatic change, everything measured by impact on short term shareholder return. The poster boy of Theory E strategists was Al “Chainsaw” Dunlap, famous for quickly pumping up share prices by dismantling large businesses, selling divisions, outsourcing, and sacking large segments of the workforce. Now not every leader following Theory E strategies was quite so short sighted, but they usually relied on rigid military style command and control management. Failure was not an option, and employee distrust of leadership was inevitable .

Theory O was not widespread amongst large businesses in the nineties, but was much more common amongst entrepreneurial organisations. Managers would typically try to enact change by improving organisational capability and flexibility over a longer time frame, while putting high value on employee retention. Many of the most successful IT firms in the 1990s followed aspects of Theory O change management – including Microsoft and Intel. Experimentation and innovation are encouraged at a grass roots level, with focus on developing appropriate attitudes and skills amongst employees.

So after Beer and Nohria analysed long term performance for changes carried out via Theory E and Theory O, it became clear that both were flawed, and that a combination of the two strategies was the most likely to achieve long term value.

In other words, the best outcomes occur when leaders mobilise employee energy and commitment, and articulate a clear set of understandable goals. Instead of micromanaging, flexibility and adaption should be encouraged throughout the organisation. Employees need to be given leeway to solve problems themselves, and the confidence to act.

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