Beer, M. and N. Nohria. 2000. Cracking the code of change.

Harvard Business Review

(May-June): 133-141.
Installing new technology, downsizing, restructuring, or trying to change corporate culture has startling
low success rates. The brutal fact is that 70% of all change initiatives fail. The reason for these failures is
that in their rush to change their organizations, managers end up immersing themselves in an alphabet
soup of initiatives. They lose focus and become mesmerized by all the advice available in print and online about why companies should change, what they should accomplish, and how they should do it. This
proliferation of recommendations often leads to muddle when change is attempted. The result is that most
change efforts exert a heavy toll, both human and economic.
Each business change is unique but each change is a variant of one of two archetypes. These archetypes
are based on different and unconscious assumptions by senior executives and the consultants and
academics advising them. The two theories are Theory E and Theory O. Theory E is change based on
economic value. Theory O is change based on organizational capability.
Theory E change strategies are ones that make all the headlines. In this hard approach to change,
shareholder value is the only legitimate concern. Change usually involves heavy use of economic
incentives, drastic layoffs, downsizing, and restructuring. E change strategies are more common than O
change strategies among companies in the United States.
Managers using Theory O believe if they focus exclusively on the price of their stock, they might harm
their organizations. In this soft approach to change, the goal is to develop corporate culture and human
capability through individual and organizational learning. This theory is the process of changing,
obtaining feedback, reflecting, and making further changes. Companies that enact this strategy have a
strong, long-held, commitment-based psychological contract with their employees.
Dimension
of Change

Theory E

Theory O

Theories E and
O Combined

Goals

Maximize shareholder
value

Develop organizational
capabilities

Explicitly embrace the paradox between

economic value and organizational
capability.

Leadership

Manage from the top

down

Encourage participation from Set direction from the top and engage
the bottom up
the people below

Focus

Build up corporate culture;

Emphasize structure and
employees behavior and
systems
attitudes

Focus simultaneously on the hard

(structures and systems) and the soft
(corporate culture)

Process

Plan and establish

programs

Plan for spontaneity

Experiment and evolve

Reward
system

Motivate through
financial incentives

Motivate through commitment Use incentives to reinforce change but

use pay as fair exchange
not to drive it

Use of
Consultants

Consultants analyze
problems and shape
solutions

Consultants support
management in shaping their
own solutions

Consultants are expert resources who

empower employees

The key differences between Theory E and Theory O are:

The problem is that companies cannot enact just one of these theories when trying to change their
organization. Rather, companies combine the theories and lose focus. Because the theories are so
different, managers cannot juggle them simultaneously and the resulting mess leaves the company no
better off. Worse, the employees lose any trust for the company and management whatsoever.
Equally said, a company who enacts only Theory E ignores the feelings and attitudes of their employees.
These companies lose the commitment, the coordination, the communication, and the creativity needed
for sustained competitive advantage. Companies who only enact Theory O never have the impetus to
make hard and bitter decisions. Therefore, these companies hope their rising gains in productivity
outdistance their business situation. This is a losing situation because however high the gain in
productivity a company experiences cannot overcome losing market share and consumers. Additionally,
the company enacting Theory O gains productivity but does not gain economic value beyond the gains in
performance measures.
Companies can enact Theory O and Theory E in sequence. For example, a company can first lay-off
employees (Theory E) and then cut down organizational hierarchy and improve communication (Theory
O). However, it is often too hard to manage even this circumstance because it takes years to fully
implement. Additionally, if there is a change in senior management during the process the program of
sequencing may lose momentum and direction. This lack of speed and possible loss of direction can cause
doubt and disillusionment with the process. Finally, if the entire strategy is not well thought out it may
cause more trouble than it is worth. For example, if Theory E (Employees last policy) follows Theory O
(Employees first policy) policies, employees and managers may feel betrayed.
Instead of using only one theory or sequencing both theories, a company should implement both Theory E
and Theory O at the same time. The simultaneous use of both theories is more likely to be the source of
sustainable competitive advantage. The company should explicitly confront the tension between E and O
goals and embrace the paradox between the two theories. This should become a balancing act between
initiating actions that follow one theory and then contradict that theory.
The company should be lead by a leader at the top who clearly sets and organizes company changes. At
the same time, this leader should listen and look for input from the lower levels of the company by
shifting power from the companys headquarters to where the company does business. Additionally, the
company may want to have divergent personalities within senior management. For example, the CEO is
reserved and quiet while the COO is personable and loud.
The company should focus on simultaneous hard and soft changes. Hard changes such as corporate
structure and systems should be changed while making soft changes to the dynamic of the corporate
workplace and its culture. The goal should be to make the company a sound financially and a great place
to work.

The company should look for spontaneity. Rather than strictly follow a pattern of reorganization or a
policy of experimentation, the company should look to learn. Managers should be encouraged to learn at
all costs. However, those who do not learn and cannot learn should be replaced. The idea should be
having the company use what it learns in order to remove the dead weight from the company.
The company should use a variety of incentives to encourage good work within the corporate structure.
Rather than only pay managers when they meet financial goals, the company should pay managers when
they meet performance goals as well. Additionally, employees should be rewarded for meeting
performance goals too. Rather than rely on a single form of incentives that concentrate on a single issue,
the company should tailor its incentives to get the managers and employees to be the best they can be.
Finally, consultants should get managers to think and not just blindly act on a set of procedures. Often the
presence of consultants can make managers abdicate any sense of leadership; rather, consultants should
help managers become better leaders. Managers should be encouraged to use consultants as a tool and
nothing else.
Theory E and Theory O can be successful when used together at the same time. To do so, requires great
skill and will to achieve adequate results. Companies should not shrink from this challenge.
Introduction
A critical review of Beer and Nohria (2000)s article. Cracking the Code of Change. Both
authors are professors at the Harvard Business School in Boston. This article appeared in the Harvard
Business School Press in October of 2000. The main aim of the study was the realization that
organizations need to adapt to change or they will die. Many companies attempt to change in various
ways, which include downsizing, restructuring and changing the corporate culture, but they arent
successful. According to research included in the article, seventy percent of all change initiatives will fail.
Why is that? This article suggests leaders must not only understand the process of change, they must
crack the code of change. Yet again, historically, few researches have been undertaken on change that
relates to entrepreneurial companies which are not necessarily large. The authors therefore set to bridge
this academic gap.
Synopsis
The authors major points were the emergence of two theories on corporate change Theory E
and Theory O. Theory E is a hard approach and is based on economic value and usually results in
economic incentives, layoffs, downsizing and restructuring. Theory O a soft approach, which is based on
organizational capability and focuses on developing corporate culture and human capability through
individual and organizational learning. This article explores each theory and how it has been implemented
on its own. Beer and Nohria (2000) then demonstrate how the theories can be combined to create
successful, lasting change.
In their methodology, they used a mixed method design including both qualitative and quantitative
data. Qualitative analysis consisted of semi structured interviews and survey comments, the quantitative
analysis consisted of survey descriptive statistics and correlation analysis based on survey result from the
three companies.
In conclusion, Beer and Nohria (2000) have presented lessons we can take away from this article.
One of them is companies should not rush to change instead they should try and find a balance between
Theory E and O approaches. This is because a combination of the two theories enables a company to
achieve a lasting change.

The writers recommend the use of the combined theories to other organizations to achieve lasting
change. They further realize that it can only be possible with continued monitoring and long-term
organization objectives. Another recommendation would be, further research be undertaken involving a
larger sample to validate the theories.
EVALUATION/ REVIEW
In order to examine the two theories of change, Beer and Nohria first needed to research each
theory on its own. They studied two companies, both in the paper production, and looked at how each
executive of the companies approached change. Scott Papers goal was to restructure the organization in
order to improve the shareholders return. The CEO at Scott Paper took a Theory E approach to achieve
its goal. Champion International Company paid attention on changing its corporate culture to improve
teamwork, communication and employee productivity, which was a Theory O approach. Next, they
studied a grocery store chain in the United Kingdom called ASDA. ASDA was able to utilize both Theory
E and Theory O in its change initiative. To show the differences between these hard and soft approaches,
Beer and Nohria devised a system to compare the three companies. They accomplished this by compiling
a list of key dimensions of change. By looking at different dimensions of each company, like its goals,
leadership and focus, Beer and Nohria (2000) were able to outline key differences between each theory on
its own and identify what would happen when the theories were used together. According to the authors,
the integration could attain lasting change in the organization
The researchers findings in ASDA which used both theories revealed that Archie Norman, the
CEO of ASDA managed to take the organization through a transformational change by integrating the
theories E and OD. He facilitated the creation of major payoffs that developed a sustained competitive
advantage in the competitive environment. However, in my view its application would be hard depending
on the life cycle of the firm. Those firms at maturity stage can apply both theories whereas those
companies at its decline stage may only concentrate on shareholders welfare as their survival technique
(Hayes 2010). The study also focused on three companies, this implies that the findings cannot be
generalized to other companies. A more general study with a comprehensive sample would be
recommended.
In addition, the alternativean arbitrary and halfhearted mixing of E and Ois extremely
confusing and debilitating to an organization. Instead of this halfhearted approach, managers are better off
picking a pure model: a clear Theory E or O approach with its benefits and costs. According to Jensen
(2000) an organization should have a single valued objective function that calls for purposeful behavior,
which may not be possible when there are multiple dimensions which may potentially lead to confusion
and complexity. Too many goals to please too many stakeholders eliminate an organizations competitive
edge. In my personal experience I worked for a bank that valued its employees too much and we took it
for granted that we were the most important component of the bank. This behavior hurt the economic
values of the bank as employees became lazy.
Gill (1999) in an empirical study observed that whilst most organizations espoused that employees
were valued as human assets; these organizations did not always espouse policies and practices that are
consistent to that especially during a change process. This implies that on paper every organizations
claims to using soft approach to change management but on the reality they use the hard approach.
In a summary, this empirical article by Beer and Nohria was interesting to read. It has provided
invaluable information on the theories of change. It is a good starting point for scholars including myself
to build upon and expand the knowledge on theory E and O using other key dimensions of change.