Managing Organizational Change

Chapter 3Why Organizations Change

The Risks Associated With Change• Risks in undertaking change• Risks in NOT undertaking change• “Up to 84 percent of U.S. firms are involved in a major

organizational change, although many are deemed not successful.”

• Often shareholders demand change• Organizational learning perspective assumes that

organizations and human systems of all sorts are complex and evolving and therefore cannot be reduced to a single, linear objective of maximizing shareholder value

Complex Role of Managers

• “Managers are called upon to stabilize the unstable and destabilize the rigid, adapt to the present and anticipate the future; improve what is and invent what is to be; lead a renaissance while preserving tradition, the possibilities for which are grounded in the belief that progress is possible and that managers can make a difference.”

Environmental Pressures for Change

1. Pressures to carry out fashionable management changes

2. Pressures that are forced or mandated on the organization from outside agencies

3. Broad changes in geopolitical relationships necessitating changes in organizational operations

4. Pressures associated with declining markets5. Hypercompetitive business pressures6. Pressure to maintain corporate reputation and

credibility with stakeholders

1. Pressures to carry out fashionable management changes

• Mimetic isomorphism – when organizations imitate the structures and practices of other organizations in their field or industry, usually ones that they consider as legitimate or successful

• Eg. Boeing copying elements from GE• Such pressures may lead organizations to adopt

fashionable ideas but often with little critical assessment of the need for the change and without having clear information about the performance effects of making the change

2. Mandated Pressures

• Eg. Texaco, Coca-Cola, and Denny’s Restaurants being under court order to improve their record on diversity management

• Led to major company changes in policies and cultural practices – eg. diversity training, minorities targeted for new hires, etc.

• Eg. asbestos-related disease fund• Coercive-isomorphism – organizations are forced to take on

activities similar to those of other organizations because of outside demands placed on them to do so

• Formal and informal coercive pressures

3. Geopolitical Pressures

• May be in the form of immediate crises or longer-term geographic realignments

• Eg. cost control through layoffs, escalation of mergers and acquisitions

• World events – eg. 9/11, Berlin Wall

Global Environmental Forces for Change (Kotter, 1996)

1. Technological, which requires more globally connected people and faster communication and transportation

2. Greater economic integration of currencies and international capital flows

3. Maturation and slowdown of domestic markets, leading to greater emphasis on exports and deregulation

4. Fall of socialist countries and their reorientation toward capitalist economies

4. Market Decline Pressures

• Declining markets for products and services place organizations under pressure to remain relevant

• Eg. Steve Jobs returning to Apple, Verizon Communications choosing to focus on wireless

5. Hypercompetition Pressures

• Eg. Dell vs. Gateway and Dell vs. HP and Lenovo

• Organizations are forced to deliver goods and services more quickly, more customized, and more flexibly.

• Eg. YouTube and Netflix disrupting television

6. Reputation and Credibility Pressures

• Eg. Mattel and toy recall, Johnson & Johnson and the Tylenol recall

• Eg. Enron, Tyco, Worldcom scandals• Change is associated with maintaining proper

corporate governance mechanisms to ensure a positive corporate reputation

• One common change, meant to signal “a new era,” is the symbolic exiting of a high-profile organizational person such as the CEO

Why Organizations May Not Change in the Face of External Environmental Pressures

1. Organizational Learning vs. Threat-Rigidity2. Environment as Objective Entity vs.

Environment as Cognitive Construction3. Forces for Change vs. Forces for Stability4. Bridging (Adapting) vs. Buffering (Shielding)

1. Organizational Learning vs. Threat-Rigidity

• Organizational learning theorists argue that environmental pressures such as market decline will lead to innovative organizational adaptation and change as managers learn from the problems and try to close the gap between performance and aspirations

• Threat-rigidity theorists argue that such pressures will inhibit innovative change as managers’ cognitive and decision-making processes become restricted when confronted with threatening problems

Discontinuous Change

• An organization faces discontinuous change – where it faces new, fundamentally different trends in its operating environment

• Gilbert (2006) points out that “it is not that one set of capabilities suddenly becomes obsolete, to be replaced with another – rather the path from one capability to the other is not continuous.”

• Eg. newspapers to digital content (both exist at the same time)

Paradox• The paradox suggests that companies in this situation

need to be able to have frames co-existing within it that focus on both opportunities and threats, one protecting the current business and the other helping to transition the company into new arenas.

• This can occur through structural differentiation of the company, separating it into different organizational units dominated by different cognitive frames and operations

• At the same time it is up to senior management to be able to strategically integrate these competing frames, ensuring that the company takes appropriate, timely actions across its operations

Trapped By Success• Companies that have a winning business formula

may become trapped by this when conditions change

• This view is fueled by their cognitive frames, which become blinkered by success; by routines that become embedded in the organization as correct ways of operating; by relationships to stakeholders that act as shackles and inhibit them from exploring new business ventures; and by shared beliefs that become company dogmas that they are proceeding in the right direction.

2. Environment as Objective Entity vs. Environment as Cognitive Construction

• Type 1 error occurs when the environment is (objectively) stable, but managers perceive it as turbulent and take (unnecessary) actions accordingly

• Type 2 error occurs when managers threaten the survival of their firms by failing to take actions as they perceive their environment as stable when it is (objectively) turbulent

Constructivist View

• The outside world is brought into existence through individuals’ perceptions of it – further questions the very status of the terms used in discussion about why organizations change – or don’t take actions to change

• “Success is based on a series of rapid and anticipatory actions that move industry to the next round of competition”

3. Forces for Change vs. Forces for Stability

• Whether environmental pressures will lead to innovative change will be affected by three factors (Mone, et al, (1998)):

1. The extent to which an organization’s mission is institutionalized in stakeholders and the external environment: the less institutionalized it is, the more flexibility the organization will have to respond to innovative change

Factors affecting whether environmental pressures will lead to innovative change – continued (Mone, et al, (1998)):

2. The extent of diffusion of power and resources throughout the organization: the more concentrated the power in the organization, the greater the ability to make decisions and allocate resources to achieve change

3. The rationale managers employ to explain decline: the more controllable or stable the causes, the more likely manages are to introduce innovative changes since the causes of decline are perceived to be permanent

4. Bridging (Adapting) vs. Buffering (Shielding)

• Bridging strategies are designed to keep the organization effective by adapting parts of it to changes happening in the outside environment

• Buffering strategies are designed to keep the organization efficient by avoiding change through shielding parts of it from the effects of the environment – eg. using public affairs techniques in order to alter public rules, perceptions, and expectations.

Buffering Strategies

• “By the time environmental shock waves reach the stability-sensitive technical core…they are diffused into manageable adjustments and innovations” (Lynn, 2005)

Organizational Pressures for Change

1. Growth Pressures2. Integration and Collaboration Pressures3. Identity Pressures4. New Broom Pressures5. Power and Political Pressures

1. Growth Pressures

• Change in the form of growth• Need for rules, policies, and procedures once

an organization reaches a certain size• Some managers resist the growth of their

organization beyond where they lose personal control of the day-to-day operations – beyond this point they lost job satisfaction

2. Integration and Collaboration Pressures

• Some changes are made in order to better integrate the organization or create economies of scale across different business units

• Goal is to have better coordination and collaboration across multiple business units of the company in order to produce a customer-oriented culture

3. Identity Pressures

• Employees might lack cultural identity with the organization and its name brand

• Goal is to enhance the identity and commitment of staff to the organization’s brand as well as to achieve service excellence

• Eg. the U.S. Mint – seen as a slow, inefficient organization – became more modern, customer-focused

4. New Broom Pressures

• When a new CEO arrives it can act as a signal that the old ways are about to change

• Not all new broom changes are necessarily the right changes

Advantages New CEOs Have1. Likely to be able to create energy for change 2. Unhampered by adherence to past organizational

practices (will not appear inconsistent if they change things)

3. Can focus on problems that may have been known but not able to be named in the past as they were organizational “sacred cows” that could not be brought into question

4. Likely to be able to tackle customer problems with credibility since they are not associated with previous problems

5. Power and Political Pressures

• Competition between CEOs when companies merge

• Ousting of CEOs by powerful investors• Sam Palmisano abolishing the IBM Executive

Management Team when he took over as CEO• Internal conflicts within organizations