Two Theories of Change (and a third one)

The world has never been so unpredictable, rapidly changing and complex. Organizations constantly battle to become more adaptable at an ever changing reality. Usually, their efforts can be classified as:

  1. Structural change: Merge & Acquisitions, Asset Disposals, Portfolio Initiatives are examples of this Top-Down, deterministic approach
  2. Cost Reductions: non-essential activities costs are reduced with lay-offs and downsizing
  3. Process Improvement: these programs are aimed at improving the “How” things are done, more than the “What” things are done
  4. Culture change: these are people-oriented efforts usually aimed at redefining the relationship between management and employees as well as the way organizations approach their markets. A typical example is trying to move from command and control to a more lean/agile and participative way of working

None of these Transformation types is easy to implement, and failure is quite common, with up to 70% of Change Initiatives failing, as asserted in a Famous Gallup study. Reasons for failure can be traced to the fact that Organizations should mix the different approaches in a multi-dimensional, systemic effort, rather than a single-dimension linear approach .

Theory E and Theory O

Any Change program can be viewed with the lenses of two different overall goals: the Theory E and Theory O. The two theories are described in Cracking the Code of Change , and are based on different and often unconscious assumptions by senior executives about why and how changes should be made.

Theory E is change based on economic value. Theory O is change based on organizational capability. Both are valid models, but both fail to consider the organization as a system, thus carrying on the related -often unexpected- costs . Theory E is a harder, top-down approach, based on layoffs and restructuring . The goal is increasing Shareholder value , as measured by free cash flow. Theory O followers are committed to creating a learning organization and building up the employees’ professional qualities. Individual and organizational learning is central here, and bottom-up decisions are promoted and encouraged.

The two approaches can’t work in isolation. Theory E can give financial results in the short term but easily creates low moral, demotivation and key people often fly away. What’s more, there is no guarantee of results and, once stalled, companies rarely can get back to profitability. Neither Theory O, is the perfect solution. Theory O transformation programs on the other hand, need time and are notoriously hard, with even less guarantee of results than Theory E.

DimensionTheory ETheory OMix of the two Theories
GoalsShareholder ValueLearning OrganizationEconomic Value and Organizational
LeadershipTop DownBottom UpVision from the Top and
Team self organization
FocusStructure and SystemsCulture, Behaviors, MotivationSimultaneously Hard and Soft
TimeframeShort termMedium and long termBoth short and long term

So, what’s best for your organization? Organizations should combine the hard and the soft approach, in an effective and systemic way.

The current Coronavirus Health and Economic crisis is just the last one showing us how much we live in a complex world, where the Chaos Theory and its Butterfly effect -far from being just a theory- can dramatically impact our lives. The crisis demonstrates how much the world we live in is an interconnected complex, adaptive system, and how much we -and our Organizations- should respond and adapt to the changing world with a systemic non-linear approach.

You should then consider your goals, the key points of the two Theories, and find the right balance of both of them. Leadership, Focus, and Timeframe with both Financial and Economics AND People and Learning. view. The world is constantly changing, and your Organization too. It’s a Journey with an ever-moving destination, be sure to enjoy it.

Marcello Del Bono is coaching and leading Agile Teams, supporting Transformation programs. He has multi-year experience as a Product Owner, Scrum Master and Agile Coach in e-commerce, IT, Marketing and Decision Support Systems in Media, Finance, Fashion industries.

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