# Organizational Change - Principles of Management

As we have just seen, organizations are characterized by considerable inertia forces that impede organizational adaptation to new competitive realities. According to many scholars, the failure of organizations to adapt rapidly to new market realities is a major cause of corporate decline.

This raises the question of what managers can do to implement organizational change quickly and successfully. Research on organizational change suggests that there are four steps in a successful organizational change process: leadership committed to change, unfreezing the organization, moving the organization toward a new strategic and organizational configuration, and refreezing the organization in its new configuration (see Figure below).

Organizations cannot change unless their leaders recognize the need for change and are committed to pushing it through. This is not as easy as it sounds. As we have seen, the shared cognitive schemata of a leadership group might be a source of inertia, causing failure to recognize the need for change. In many cases change is reactive instead of proactive because leaders are unable to recognize quickly enough that change is necessary and are pushed to accept reality by declining financial performance.

The Process of Organizational Change

When managers decide to institute radical change, they often turn to an outsider who does not share their ideas and cultural values. When IBM was in deep trouble during the early 1990s (IBM lost $14 billion between 1990 and 1993) the board of directors appointed an outsider, Lou Gerstner, to the CEO position. Similarly, when the board of 3M decided that it was time to shake up the company’s culture after a decade of mediocre performance, they hired Jim McNerney from General Electric, the first outsider ever to hold the CEO position at 3M. Alternatively, appointing an “outside–insider” to the leadership role—someone who is a manager in the firm but does not share the dominant cognitive schema and cultural values—can work. Jack Welch, who transformed GE, fits this description, as does Anne Mulcahy, who was the surprise pick of the Xerox board to lead that troubled company in 2001. A successful longtime Xerox executive, Mulcahy had never been considered CEO material. Not only was she a woman in a male-dominated organization, but she was also a salesperson in an engineering culture. Four years later, after guiding Xerox through an impressive turnaround, this “outside– insider” was being heralded as one of the best CEOs in America. A leader who is committed to organizational change not only recognizes the need for change and can communicate this eloquently to employees, motivating them to support the change effort, but must also “walk the talk.” Jack Welch worked as hard as he was asking his employees to, and he embodied the values he was asking managers at GE to adopt. Anne Mulcahy logged 100,000 miles visiting employee locations during her first year as CEO, spreading the gospel of change. When Lee Iacocca became CEO of the troubled Chrysler Corporation in the 1970s, he accepted pay of only$1 a year until Chrysler made money. These leaders showed through personal commitment that they were serious about change. They led by example.

UNFREEZING THE ORGANIZATION

Unfreezing an organization involves confronting all employees with the need for change and getting them to believe that change is necessary. Because organizations are by nature static, attempts at incremental or gradual change will usually be successfully resisted by those within the organization who stand to lose from the change effort. Thus many experts recommend bold, dramatic action to signal to employees that change is coming. What is needed, they say, is something akin to shock therapy.

Sometimes, as at IBM and Xerox, poor financial performance provides the necessary shock. In other cases leaders have to create a sense of crisis by warning that unless the organization changes its ways, decline is inevitable. Jack Welch commented that one of the biggest problems he faced early on at General Electric was convincing a company that was performing reasonably well that it was facing a crisis of competitiveness.

Managers have adopted some interesting tactics to push reluctant organizations to change. One CEO reportedly deliberately engineered the largest accounting loss in the company’s history to startle employees out of their comfort zone. Another manager commissioned the company’s first customer satisfaction survey, knowing that the results would be awful, and used those findings to push for change.

To convince employees of the need for change, leaders may have to draw on all their communication abilities. They need a compelling message that tells employees why change is necessary, along with a credible strategic vision for the firm; and they must deliver that message and vision in an eloquent manner so that it resonates among employees. Sometimes bold symbolic action may also help awaken employees to the need for change.

Frustrated by a lack of progress after four years of trying to change the culture at General Electric, Jack Welch fired 12 of the top 14 managers in a single day. Welch came to this decision after realizing that the inner circle of senior managers at GE was among those most resistant to change. This action sent an unmistakable signal to other GE managers that Welch was serious about changing the organization.

MOVING THE ORGANIZATION

Moving an organization entails changing management, strategy, organization architecture, and employee behavior. Movement requires action. At Xerox the action was decisive, as it needs to be in these situations because slow action is often successfully resisted. Anne Mulcahy quickly assembled her own management team, handpicking people from within and outside Xerox to work with her on the change effort.

These people shared loyalty to Mulcahy and to what she was trying to achieve (as opposed to the old Xerox). Indeed, building a top management team that is committed to the change effort is recognized as an important first step in the movement process. This helps consolidate power and authority in the key change agent, the leader.

While still recruiting senior managers, Mulcahy moved to change strategy, directing R&D resources toward accelerating Xerox’s development of digital copiers while simultaneously shutting down several of Xerox’s factories and selling others to third-party manufacturers. She even closed down the desktop copier division, a business she had created. Asset disposals like this are also characteristic of many organizational change efforts as the enterprise reconfigures itself to pursue a different strategy.

Layoffs are a tough but necessary aspect of many such disposals. To remove the uncertainty and adverse motivational consequences associated with not knowing where layoffs will strike next, it is suggested that managers move through any downsizing phase as rapidly as possible and then signal to the remaining employees when it is completed.

Along with changes in strategy, resource allocation, and asset disposals, significant reengineering of the organization architecture is a standard part of many change efforts. Often the idea is to clarify who is responsible for what within an organization and to push down responsibility and accountability, stripping away unnecessary layers of management. At General Electric Jack Welch reduced the number of management layers between himself and the lowest-level employees from as many as 11 to as few as 4.

At the same time he pushed responsibility for strategic and operational decision making further down in the organization. He also initiated sweeping changes in GE’s control and incentive systems, boosting incentive pay and linking it to output targets like division profitability. The message behind these organizational changes was clear:

## General Electric and Organizational Change

GE is now a performance-driven culture.” Changes in organization architecture also disturb the distribution of power and influence within a firm, breaking the hold of those who are trying to protect the status quo.

At the heart of many organizational change efforts is an attempt to shift the culture of the enterprise. To some extent this can be done by rewarding people who manage according to the new values, letting go those who do not, and hiring people who support the new values rather than the failed culture.

In addition, leaders often introduce systematic employee development programs aimed at socializing employees into the new culture. A classic example occurred in the 1980s when British Airways launched a cultural change effort. At the time customers often referred to the initials of the airline, BA, as standing for “bloody awful.” After deciding that British Airways was in the customer service business rather than the transportation business (a strategic shift), the CEO put the entire 37,000-strong workforce through a two-day cultural change program called “Putting People First.”

Almost all the 1,400 managers went through a five-day version titled “Managing People First.” To drive home the customer service message, BA also changed its control and incentive systems. In the new scheme managers were rewarded not only for howwell they performed, but also for how they behaved—and in particular whether that behavior was consistent with the new customer-centric focus of the airline.

Five years later British Airways had gone from registering massive losses to having the highest profit rate in the entire airline industry and was winning awards for customer service. A critical component of many change efforts is involving employees in the change process, thereby giving them a sense of ownership. At General Electric Jack Welch created a process known as “workout” to involve employees in his attempt to turn GE into a performance-driven culture.

Employees would meet for two to three days and come up with ideas for improving productivity in their work units. At the end they would make presentations to their managers, who had to approve or reject the suggestions on the spot. To put pressure on the managers, subordinates would be in the room, observing. If accepted, ideas had to be implemented.

The process placed real power in the hands of employees and was responsible for some of GE’s dramatic gains in productivity during the 1990s. To help cement employee empowerment Welch introduced 360-degree performance evaluations for all managers, enabling Welch, in his words, to identify “those who smiled up and kicked down.”

REFREEZING THE ORGANIZATION

Refreezing an organization involves trying to solidify the new strategy and architecture of an organization so that the desired employee behavior becomes second nature. This is not easy. In the 1980s the Scandinavian airline SAS went through a major organizational change effort similar to that adopted by British Airways.

Initially it seemed to work; but after a few years the CEO noticed that the old culture seemed to be trying to reassert itself, so he launched a second organizationwide training effort to try to solidify the new culture. Trying to alter an organization’s culture is difficult because culture includes deeply held and persistent shared values. Effecting a change may require years of effort.

Refreezing an enterprise in a new strategic and organizational configuration requires constant attention and pressure. Leaders within the organization must stay on message and embody the desired behavior persistently. Control and incentive systems have to foster the desired behavior and reward managers and employees who perform well while acting in a manner that is consistent with the values and norms of the new culture.

Ongoing attention is required for hiring and employee development policies. Some companies, for example, use extensive in-house management education programs to socialize managers into a new culture, explaining to them why it is important. At GE Jack Welch used the company’s Crontonville Management Education Center as a socialization mechanism. He taught in every class, constantly emphasizing the entrepreneurial, performance-oriented values that he wanted to see managers adopt at GE.

A striking feature of Jack Welch’s two-decade tenure at GE is that he never stopped pushing his change agenda. He kept thinking of new programs and initiatives to push the culture of the organization along the desired trajectory. That seems to be what is required to refreeze an organization in a new configuration.