Changing and Sustaining Performance: A Paradoxical Approach

One of two very different strategic approaches typically has guided the transformation of large-scale corporations:

• Theory E assumes economic value is dramatically and quickly enhanced through restructuring — tough, results-driven actions such as layoffs, closing facilities, and reshuffling the portfolio of businesses through spin-offs and acquisitions.
• Theory O, the less common approach focused more on the long term, assumes that developing organization capabilities and culture will ultimately produce sustained high performance.

Extensive research documents the strengths and limitations inherent in both approaches. Theory E leaders often achieve remarkable short-term results but, by short-changing capabilities, struggle to sustain results over time. Theory O leaders often build outstanding stakeholder commitment, but may fail to translate that into satisfactory performance gains that shareholders eventually demand. TruePoint’s Michael Beer offers the powerful notion — explored in-depth in a 2001 Organizational Dynamics article and in a current Harvard Business School working paper — that transforming organizations requires leaders to embrace the paradox inherent in two competing change strategies.

Mike warns, however, that “unless this is done carefully, integrating these theories is likely to yield the worst of both worlds. A typical failed approach to embracing the paradox is to compensate for E strategies that reduce commitment, trust, and teamwork by introducing top-down human resource management programs [that] foster cynicism when no real change occurs.”

However, the article and working paper explore successful case examples. They highlight Jack Welch’s staged use of first Theory E and then Theory O management approaches in his 20 years at the helm of GE. Mike then explores in-depth how the UK grocery chain Asda (now the UK brand for Wal-Mart) combined Theories E and O to achieve an eight-year transformation. Initially, Asda’s new leader, Archie Norman, had made rapid structural changes, including firings, to avert bankruptcy. But then he recruited and engaged leaders, teams, and task forces at all levels to foster innovation. He broke down hierarchies and listened to employees and customers. Asda regained its status as a retail leader and eventually was acquired by Wal-Mart at eight times its original market capitalization.

The article and working paper conclude that courageous leadership is essential to successfully combining Theories E and O for sustained organizational transformations.

“It takes courage by leaders at all levels to confront inadequate business results and behavior that is inconsistent with the business and organizational direction set. It takes courage to replace those that can’t or won’t learn. It takes courage to lead organizational learning, and at the same time to be open to learning about one’s own assumptions regarding business, organizational and leadership issues.”

Contact TruePoint to receive copies of “How to Develop an Organization Capable of Sustained High Performance: Embrace the Drive for Results-Capability Development Paradox,” by Michael Beer, Organizational Dynamics (Spring 2001) and “Transforming Organizations: Embrace the Paradox of E and O,” by Michael Beer, Harvard Business School Working Paper, 2005.

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