Theory E & Theory O

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Image Credit: 7shadows
Photo Credit: expectations by 7shadows

Source: Harvard Business Review May-June 2000

Why & How Changes are to be Made:-
Theory E: Based on Economic value
Theory O: Based on Organizational capability

Theory E
Main focus is on shareholder value involves:-
Economic incentives
Drastic layoffs, Downsizing, Restructuring

Theory O
Develop corporate culture & human capability through individual & organizational learning
Process of changing, obtaining feedback, reflecting & making further changes
Typically have strong, long-held, commitment-based contracts with their employees

E versus O
• E: Top-down approach with little involvement from managers/lower-levels
• O: Get all employees emotionally committed & focus on bottom-up

• E: Streamlining “hardware” – structures & systems
• O: Building up “Software” – culture, behavior & attitude of employees

• E: Viewpoint held that battle requires clear, comprehensive, common plan of action with specific deadlines
• O: Changes and more evolutionary & emergent; Using innovative work processes, values & culture changes adopted from one dpmt/plant to another

Reward System
• E: Primarily financial $$$
• O: Compensation supports goal of culture change & but does NOT drive these goals; E.g. Skills-based pay system, Profit-sharing plans

• E: Rely heavily on external consultants – E.g. To identify many painful cost-cutting initiatives
• O: Rely far less on consultants – E.g. To help managers & workers analyze their own solutions

Note: Click for larger view

Combining E & O
To build a company that can adapt, survive & prosper over the years, both E & O strategies must be combined
CAUTION: Mixing E & O techniques can destabilize the company
E.g. FEW exceptions like Jack Welsh, GE’s CEO by imposing E-type restructuring demanding all GE businesses be 1st or 2nd in their industry, else sold off
After laying off > 100k employees, switch to O strategy by initiative to change GE culture to be boundary-less with open feedback & communication
Note: Also very difficult to implement O before E as employees will distrust the company

Strategies for Combining E & O
Focus on both Hard (Economic value) + Soft (Transforming culture) – E.g. Freeze pay-rises; Less hierarchy & more transparency
Plan for Spontaneity to allow real experimentation without penalizing for failures – E.g. Actively promote new ideas/testing to drive innovation
Incentive to reinforce but NOT drive change: To apply Theory E incentives in an O way – E.g. Pay to reward commitment (stock options) & employees pay based on corporate & personal performance
Consultants as Expert Resources to Empower: To provide specialized knowledge & technical skills company lacking especially in early stages of change

Are you in a Theory E or Theory O company? Which works better?
(Also are these ‘Rat Race’ posts interesting to you guys? ;))