Profitably Healthy Companies: Principles of Organizational Growth and Development

HERACLITUS’S APHORISM THAT the only constant is change rings true for organizations. With the increasingly quick introductions of new technologies and radical changes in markets, the shelf lives of both CEOs and their companies have become increasingly short. Although living forever is too much to ask of any institution, dying before one’s time is senselessly tragic. Given the ubiquitous need for organizational change in today’s turbulent business climate, mastery of the change management process is a significant contributor to competitive advantage and a necessity for survival.

Many companies reach a point in their histories in which their growth stalls.¹ Some are able to reinvigorate themselves and some of these companies succumb. The specific reasons for a company’s premature death may be as plentiful as the number of companies afflicted. It seems, however, that some companies carry within their DNA the requisite ability to revitalize themselves and to produce and implement solutions in response to environmental conditions.² This chapter is about that transformation: about how some companies are able to regroup and profitably carry on in the face of market challenges, and how other companies flail and flame out.

A great number of organizational theories metaphorically conceive of companies as organic entities that grow and, over time, lose function and fitness, and then die.3 The life spans of organizations can vary by company; however, many follow a similar arc of birth, growth, maturity, and death.⁴ The number and sequences of passages theoretically proposed may differ slightly, but like all living systems, organizations grow and they die. Hambrick and associates, for example, traced the death spiral of bankrupt companies from initial impairment to death struggle to end—a process enacted over ten years interspersed with false hopes of recovery.⁵

The precise onset and course of organizational decline is difficult to decipher. Decline that appears to be abrupt may have been festering unnoticed for years. Take Mayan culture as an example. The Mayans experienced many periodic droughts to their agrarian lifestyle. The 175-year drought from 760 to 930, however, gradually thinned the population through emigration until those remaining met a precipitous end. As the drought persisted, “the food and water ran out—and they died.”⁶ Death came swiftly, but the Mayan demise was many decades in the making.

Given that the specific trajectories of organizational aging can vary, we can say that all change is precipitated by alterations in the external environment and that the effects can vary in nature, size, and rate.⁷ Change can involve different goals and purposes, scopes, intensities, durations, and issues, with the latter ranging from singular, isolated concerns to multifaceted matters. It may suffice, and be more accurate, to think of change as having ebbs and flows, but as always in motion. Indeed, even the seemingly discontinuous pattern of change described as punctuated equilibrium may look that way only on the surface. Punctuated equilibrium is defined as a process with periods of quiescence interrupted by periods of extreme volatility. The staircase depiction of this effect (sometimes called the Devil’s Staircase), however, can be replicated by continuous change with the frequencies of disruptions differentially aggregated in time: low-frequency events within a given period form the plateaus and high-frequency events form the inclines.⁸ Something always is happening.

Although organizational devolution may be fast or slow, once the environment is no longer able to sustain all competitors and companies’ states have weakened, the end usually comes quickly for the incurably feeble. As death unknowingly approaches, decline catastrophically accelerates and survival becomes untenable. This abrupt end was famously described by Malcolm Gladwell as the tipping point in which change is nonlinear—moving slowly and gradually until reaching a juncture at which the slightest nudge will throw an organization off balance.9 As companies’ hardships mount and organizations lose their ability to mobilize an effective response, even tiny disturbances (butterfly effect) can push them over the edge.

In general, people speak nonchalantly about change in organizations. But think about the scale of many organizational changes, and you will get a sense of some of the obstacles faced by managers. First, the transaction costs associated with change can be substantial. Systemic changes intended to strategically reorient a company can be very costly in terms of time and expense. Second, one person will not know everything that has to be done. All possible problems and solutions cannot be neatly lined up and methodically addressed. Still, that one person, through others, must get corporate behemoths to move in a new direction. Third, the issue of timing calls for the delicacy of Goldilocks—not too fast, not too slow, but just right.¹⁰ Indeed, change agents have to find a rhythm that works and have to sequence and pace change in a way that is palatable to others.

The best solution for institutional survival is to forestall decline before it becomes too severe to rectify, and little problems become big, intransigent ones. That is not easy, as a recent study of twenty-two thousand companies showed that only a handful of the hardiest were able to withstand the gravitational pull of mediocrity over time.¹¹ Once decline commences, it is difficult to stop. Even if managers fully knew their true strategic direction, a crippled organization has several obstacles with which to contend as they struggle to recover. First, managers are forced to improve performance with dwindling resources, increased internal stakeholder strife, and, frequently, less managerial discretion because of the overriding wishes of debt holders, equity investors, and such.¹² Second, companies with dire liquidity needs often must take culturally damaging actions, such as layoffs. Unless handled prudently, these actions may hasten the subsequent exits of the best performers and impair productivity among the surviving workforce. P. C. Nutt has referred to this degenerative process as de-developing in which, through shrinkage, companies progressively lose the capabilities that could have made a rebound possible.¹³

During periods of decline, poorly managed workforces often see their best performers flee, leaving the least qualified to dictate the future. Arthur Bedeain and Achilles Armenakis liken this process to a dysfunctional cesspool in which the dreck rises to the top and fills with sludge below.14 Joel Brockner and colleagues at Columbia University also showed in a series of studies that unfairly treated victims of layoffs impaired the productivity of survivors. These studies showed that the better departing employees were treated, the more productivity levels within the organization were sustained.¹⁵ Treating others fairly satisfies survivors’ sense of justice and reduces lingering feelings of survivor guilt. Therefore, if “cutback management” or “rightsizing” is pursued haphazardly and without empathy, the company in all likelihood will make themselves worse off and lower their chances of a comeback.

When we contemplate organizations’ aptitude for change, we think of the change process as under the decisional control of the actors. That is, companies do not randomly walk into or out of messes. Although change is prompted by external factors, such as new competitive products that largely are outside the control of companies, responses are guided by sociopolitical factors that influence decisions made and actions taken.¹⁶ People make choices that make a difference on the future performance of the firm, and these decisions determine whether or not a company can sustain its desirable activities and meet its goals.

We also think of change as developmental. After all, this is a book on organization development. Change and development are not the same things. For example, when we say we want our children to develop, we are hoping they will do more than simply change.¹⁷ Therefore, we like to think that organizations undergoing material changes are making themselves stronger and more resistant to future shocks by the choices they make. In the parlance of Nassim Taleb, the institution becomes increasingly antifragile by recurrently fending off challenges and successfully handling critical environmental threats.¹⁸ Therefore, we think of meaningful change as lasting rather than as partial or temporary patches to cosmetically brighten balance sheets and income statements. Through development, the company becomes a wiser, more durable organization. (Although we use the word “change,” whenever used in the context of organizational improvement, we are assuming change that is volitional and developmental.)

An intelligent organization is one that is adaptive. To appropriate a definition from the psychological literature on intelligence, adaptation is the ability to remain successful in one’s environment.19 Adaptation refers to an organization’s ability to gather, filter, and organize information; to store, study, and learn from it; and to disseminate and use the information in the decision-making process.²⁰ In essence, intelligent companies are able to coalesce the brain power of the entire organization and keep themselves moving and changing to fend off decay that afflicts all systems.²¹ Intelligence involves an integrative capacity that we often associate with expertise: awareness of the key issues and knowledge of the facts as well as the ability to renew and update information, to understand the relevance of incoming information and its potential application, and to ask penetrating questions to elucidate complex problems. Conversely, functionally stupid companies make poor decisions.²² These companies are noteworthy for their lack of reflexivity, justification, and substantive reasoning, which, respectively, involves an unwillingness or inability to question claims and practices, excessive laxity in requiring evidence and reasons for decisions, and a myopic and parochial view of business issues and problems.

The various ways companies use the information at their disposal are diagnostic of their intelligence. First, companies can change themselves to accommodate what is occurring in their environments. This is the customary way people think about change: as organizations that must modify their product and service offerings to meet emerging needs. Second, organizations can direct the markets to comply with their offerings. For example, Henry Ford had cars, but he needed roads. Therefore, he lobbied for the expansion of highways. Advertising also is a strategy whose purpose is to alter consumer behavior and to direct consumers to the products the company wants them to purchase or use. Third, companies that feel they can no longer compete in a particular environment may decide to leave the field. This was the strategy General Electric took during the Jack Welch years. If a line of business could not be first or second in their respective markets, they were divested. In other words, if a business could not succeed, as defined, the adaptative decision was to exit that business. Finally, companies can adaptively do nothing and take a wait-and-see approach. Rather than rushing headlong into a potential technological arena, for example, a company may choose to wait out the technology’s evolution before taking more active steps. For example, before there was Facebook, there was Geocities, SixDegrees, Blogger, Friendster, and MySpace.

By most accounts, organizations are not adept at change. Many researchers have reported the rampant failures of change efforts, reporting failure rates as high as 70 percent.23 This frequently cited figure may be overstated. First, the percentage likely pertains only to changes that are planned and ignores the host of unplanned changes that occur in organizations. Second, the figure does not account for the myriad types of changes, and it is doubtful they all would have the same success and failure rates. Third, some change efforts truly are stymied by influences outside the company’s control. For example, Western Union gamely tried to convert from a telegraph company to a data information hub, but their efforts were impeded by worn regulatory rules and by companies that prodded regulators to keep the rules in place to keep Western Union out. By the time regulatory constraints were loosened, the competition already had a firm foothold on the market.²⁴ Despite these caveats, however, most practitioners would agree that the failure rate of change efforts is woefully high and, managed poorly, has negative financial consequences.²⁵

When it comes to change, employees often are portrayed as the villains for poor outcomes.²⁶ A company’s inability to change often is attributed to the unreadiness or resistance of employees under the presumption that change is hostile to them. Contrary to people’s survival instincts and pliancy in other areas of their lives, change agents frequently self-servingly attribute lackluster results to those “others” who rejected the seemingly sensible rationales for the changes.²⁷ People certainly vary in their appetite for change. Look around at friends and associates, and you will see those who always seem to seek out something new and different as well as those who enjoy the status quo. Nonetheless, although personality traits may play a role in change outcomes, we need to look for more uniform reasons as to why change initiatives succeed or fail.

For one, people have to believe in the necessity and appropriateness of change, and that requires leaders who can build a consensus of meaning and action.²⁸ Leaders must translate what is happening into reasons and direction. As always, leaders are responsible for building the case for change, for creating a positive mindset for change, and for convincing others of the value and legitimacy of the change efforts.²⁹ Change readiness, then, may be conceived as a set of preconditions that includes attitudes pertaining to whether the change is needed, the degree of agreement with the suggested changes, the extent to which the planned changes can be successfully made, and the degree of institutional support for the changes.30 Taken together, readiness, or intentions to act, can be summarized as depending on three general factors: attitudes, norms, and perceived control.³¹

Attitudes are the beliefs that people hold and the positive or negative consequences of those beliefs; thus, attitudes are emotionally valanced beliefs. For example, an attitude about the desirability of change will hinge on both the perceived factual necessity of the change as well as well as on how individuals view the effects of those changes on themselves and on those within their affinity group. Change processes, such as appreciative inquiry, may ease attitudinal acceptance for change by directing the institution’s attention to what it does well and using that as the platform for transformation—versus recounting the many ways the company has screwed up. Thus, the “discovery” phase of change using appreciative inquiry partly involves identifying positive facets of the organization that may be beneficially employed during the change process. This starting attitudinal position is one that is more accepting of the organization’s abilities and of its aptitude to change.³² Indeed, of the many functions assigned to management, being the chief facilitator of generative dialog may be most central to identifying organizational needs, building a case, and producing ideas for change.³³

Norms concern the standards of a group and the general expectations that members of a group have for one another.³⁴ Norms are consensual beliefs about group behavior regarding what to do and what not to do. Consequently, part of the change effort necessarily involves the shaping of norms or of a culture that is conducive to change. Studies have specified the requisite cultural conditions for change. These include maintaining a positive attitude toward the value of change, emphasizing an action orientation that espouses openness to change, fostering a belief in the organization’s ability to change, and encouraging employee empowerment.³⁵

Perceived control refers to the actions required for change and the ability of the group to execute them. This belief in the power of the group to perform well and effect change is called collective efficacy. People within groups hold beliefs about the group’s capabilities to fulfill assigned tasks. Meta-analyses have found that collective, or team, efficacy consistently relates to performance: the greater the group’s confidence in its abilities to be successful, the greater the performance.36 Regardless of the perceived personal utility of change (benefits minus costs), therefore, change will not be pursued unless the goal state is expected to be attained. This anticipated success is the crux of the well-founded expectancy-value theory.³⁷ The potential value of an initiative piques interest and coaxes people to take a few steps forward. Enduring behavior, however, requires the reasonable probability that actors ultimately will be successful.

A second set of systemic explanations for the success or failure of change initiatives pertains to structural barriers. One barrier that companies may inadvertently erect concerns “innovation fatigue” or “burnout syndrome.” Employees become too worn out to take aggressive actions when faced with too frequent and too intense change efforts.³⁸ They are physically and emotionally too depleted to undertake round after round of change. A truism in organization development is that the only good forms of change are those that do not reduce an organization’s future capacity to change. Endless calls for change can subvert the long-term interests of the company. Indeed, conditions for burnout are ripe when change is constant and uncontrolled, for example, repeated reorganizations that are autocratically directed.³⁹

A second structural impediment concerns the futility of change. This situation may occur when urgent requests are preempted by other disasters in-waiting. Essentially, every change initiative is aborted so that the efforts expended have no consequence. The company lacks what Deming has referred to as the “constancy of purpose”.⁴⁰ Actions that could be effective are not executed because they are believed to be useless endeavors. Therefore, inaction is not about perceived inability, but rather about pointlessness. For example, we have encountered many instances in which employees do not take corporate course changes seriously because management is unable to stay centered and persist. Management announces many new starts but seldom finishes. Employees, being astute forecasters of behavioral payoffs, realize that repeated efforts in worthless pursuits are unwise and unfulfilling. Consequently, employees’ best efforts are applied to acting, feigning zealous support to the executives’ grand causes, while waiting for the ship to run aground or the clock to run out.

What becomes clear with the aid of hindsight is that organizations with clear needs for some form of change frequently do not make the changes needed in a timely fashion. One of the foundational elements of organization development is an emphasis on context in understanding change and human behavior more generally. Indeed, one of the most celebrated articles in organization development was written in 1948 by Lester Coch and John French titled, “Overcoming Resistance to Change.”41 Their article partly was based on their experiences at Harwood Manufacturing under the oversight of Kurt Lewin and at the request of Alfred Marrow, a descendent of the company’s founders. Lewin’s basic thesis for change was grounded on field theory in physics and Gestalt psychology that maintained that behavior was regulated by surrounding contextual forces and that the route for change was (a) to discover these regulatory mechanisms, (b) to decrease the restraining power of these forces, and (c) to free up the opportunity for change. The mechanisms for change relied heavily on democratic principles and participatory management, a conjecture since found to affect the success of change efforts.⁴² Thus, change was a matter of describing the complex web of regulatory factors that prohibits or enables behaviors and of finding ways to free people to take appropriate action.

Lewin’s tripart process of unfreezing behavior, exhorting appropriate movement, and refreezing behavior to capture gains is typically the schema used for change within organization development circles, although Lewin viewed the process as more dynamic, complex, and nonlinear than commonly portrayed in textbooks.⁴³ Other theories of change offer similar steps. For example, evolutionary approaches to change entail variation, natural selection, and retention.⁴⁴ Human creativity and diversity produce the variety; iterated learning, tinkering, and trial and error reduce the choice set; and the selected option is reinforced by habits, routines, schema, and cognitive frames to establish new behavioral repertoires. Theories of this ilk emphasize an important point. It is the fittest that survive, not necessarily the best. Thus, companies often overburden themselves by an endless search for perfection when “just good enough” or “satisficing” will do. (“Satisficing” means accepting a solution that meets minimum standards or criteria; e.g., if you are looking for a piece of jewelry in a tourist town while on vacation, you can visit every store and then circle back and buy the best one you saw—if it is still there—or satisfice by purchasing the first piece you like that has the color, shape, and size of what you are looking for.) The theory of dynamic capabilities similarly views change as involving sensing, seizing, and reconfiguring, respectively, recognizing the need for change, mustering the requisite resources and taking action, and harnessing gains by introducing new operating procedures.45 Many other formal change models exist, several of which are named in table 2.1.⁴⁶

As it happens, the seemingly simple matter of noticing a need to change is not so simple. Many of us fail to notice events that require our attention and necessitate corrective or evasive action. Foremost, then, the inauguration of positive change encompasses a firm’s sense-making abilities: a firm’s ability to scan the environment, take in and interpret relevant information, and determine what actions might be required. This practice requires hypervigilance and sensitivity to potential competitive threats (recall Andy Grove’s [former CEO of Intel] credo that only the paranoid survive as explained in his book with that credo’s title). That said, companies frequently do not recognize the need to change when subsequent events clearly indicate they should have. This occurs when novel events are obscured by complex technologies or the company is ill-equipped to notice because it lacks awareness or has a worldview that cannot make sense of impending threats.47 Much of what we observe are social constructions based on our storehouse of knowledge and the way in which we have organized it. Therefore, people act upon and shape incoming information in ways that often certify the status quo. As Kuhn has argued, if your conception of the world is that it is flat, you will see things one way; if your conception is that it is round, you will see things in quite other ways. But you cannot see the implications of roundness until you suspend belief in flatness.⁴⁸

The worldviews held by two one-time premier retailers may have obstructed them from seeing other market possibilities. Some ideas are simply incompatible with existing worldviews and it may be difficult to see the possibilities of an electronic marketplace when surrounded by brick and mortar. Both Borders, once the number-two bookseller in the United States, and Blockbuster, once the number-one video retailer, had opportunities to ride the wave of new technology but foreclosed on the alternatives. Netflix had approached Blockbuster about a partnership, which Blockbuster rejected.⁴⁹ Borders was spun off from Kmart in an initial public offering (IPO) in 1995 when Amazon was still in its infancy. At first, Borders sold books and music online through its own web, but found it was too expensive to keep up and too costly to the bottom line and ended up outsourcing their web services to Amazon from 2001 to 2008. During this period, Borders opened new stores and redesigned others. By the time they recognized the momentous changes occurring in consumer purchasing habits, it was far too late. It took Borders two years to rebuild their online presence; in the meantime, they lost eight years of learning about the new online marketplace. Borders declared bankruptcy in 2011.⁵⁰

Therefore, the ability to notice is highly regulated by our perceptual and interpretative apparatuses that either point us in the right direction or lead us astray. The mechanisms can be psychological (e.g., too disturbing to think about), judgmental (e.g., not viewed as important), or conceptual (e.g., cannot fathom it). Thus, we can choose to ignore important signals that should alert us to danger; we can queue or delay certain interruptions in favor of others; we can filter information, selectively attending to less important aspects over more important ones; we can be dismissive of details and overgeneralize, thereby missing the core of a problem; or we can avoid information that contradicts our preconceptions by screening out inconsistent data. Indeed, the latter bias involves a common prejudice of seeking out and seeing only evidence that supports our position and ignoring that which can disconfirm our beliefs (see box 2.1). More formally, the confirmation bias refers to people’s inclination to seek out and interpret information that is consonant with preexisting beliefs or expectations.⁵¹

Box 2.1
Confirmation Bias

You are presented with the following four cards:

A B 2 3

There is a letter on one side of each card and a number on the other side. I make the following claim: If a card has a letter A on one side, then it has the number 2 on the other side. Which cards do you need to turn over to decide the truth or falsity of my claim? Most people say the “A” and the “2” or just the “A.” In these cases, they are searching for confirming information, and not for information that would falsify the claim. This is the idea behind the confirmation bias: looking for information that only proves a thesis, or is consistent with expectations, ignoring information that would disprove. In this task, you would need to turn over the “3.” This task also demonstrates a second logical fallacy of affirming the consequent. By turning over the “2,” people infer that if an “A” is on the other side, they will have their truth. But that is wrong. If we said, “If the object is round, it is red,” we could not conclude that anything red is round.

Sources: Wason PC. On the failure to eliminate hypotheses in a conceptual task. Quarterly Journal of Experimental Psychology 1960; 12(3): 129–40; Johnson-Laird PN, Legrenzi P, Legrenzi MS. Reasoning and a sense of reality. British Journal of Psychology 1972; 63(3): 395–400.

Box 2.2
The Case of Hoover Vacuum Cleaner

Companies become stuck in different ways. The case of Hoover vacuum cleaners illustrates a trap in which the company’s institutionalized capabilities, along with myriad internal systems that anchored the design of a product geared toward dirt removal, prevented the company from changing when confronted with competitive pressures. All “innovations” during a period of ten years were “sustaining innovations” that simply added features to the company’s current offering.

Hoover was formed in 1907 and like most durables at the time was sold door to door. With increased electrification of households and labor-saving scientific household management, the vacuum cleaner, washing machine, and refrigerator found an increasingly eager and prosperous consumer. Hoover adopted a robust selling culture, implementing many of the practices pioneered by National Cash Register (NCR): quotas, clubs, training, motivational conventions, publications, and plenty of material and symbolic rewards. From inception, it lured potential salespeople with a hard-driving masculine sales culture to partly counter its identity (when compared with car sales) as feminine.

Systemic periodic troubles aside, Hoover was a top seller and remained one of the four major vacuum companies into the 1930s. This is when Electrolux introduced the cannister vacuum cleaner which was lighter, more powerful, and more versatile than upright vacuums, of which Hoover was one. Despite the success of the Electrolux, Hoover clung to its “dirt agitation” system and high-priced selling expense, a benefit that was of lesser interest to consumers and an expense that cut into margins. They continued to make and market the upright vacuum and mollified declining sales by hiring more salespeople, thus augmenting their cost problem. Sales and profits continued to slide. The company whose name remains associated with vacuum cleaners continues to sell the appliance, but long ago lost its privileged place among the elite producers.

The essence of herd behavior is acting on limited information, primarily on the opinions expressed by others without due regard to personal beliefs. In the absence of complete information and uncertain solutions, people often adopt the perspectives of referent others versus investing in a search for answers on their own. A glance into the sky to see the v-shaped formation of geese flying overhead shows the herd instinct in the animal kingdom at work. The formation of the flock is created by each member following the behavior of its nearest neighbor. It is no secret that we humans, too, follow the pack, buying what others buy, doing what others do, and thinking what others think. Rather than following lead birds, however, we look to authorities and experts, trendsetters, and social influencers.⁵⁴ In systems, herd behavior is the prime explanation for bubbles and crashes in which people who are following the actions of others drive up stock prices until those bubble-highs no longer can be supported by the fiction that produced them. Indeed, with such extreme interdependencies among actors, little shocks can produce large shifts, or consequences, in systems. Think of the formation fliers where the tiniest miscalculation of the lead jet can have awful consequences for everyone as occurred with the Thunderbirds in 1982.

Many forms of conformity exist in the psychological and economic literatures and many explanations have been posited for its existence. Regardless, our proclivity to embrace the beliefs of others produces a virulent form of singlemindedness in organizations called groupthink.⁵⁵ The observation that people form a consensus of opinion that may diverge from the beliefs that individuals may personally hold stretches back at least a century to the ideas of “social somnambulism” and “mental unity.”⁵⁶ All refer to the inclination of groups to form a unified, collective mind consistent with the prevailing norms of the group. Therefore, if the cultural norms underscore risk, the group’s decisions will migrate in a risky direction, adopting a riskier position than many individual members would have adopted alone. The prototypical example of groupthink is the ill-fated Bay of Pigs invasion of Cuba, an outcome attributed to the excessive hubris of groupthink. If, however, the norms underscore caution, group opinion will move in a conservative direction. In any case, the upshot of groupthink is to coalesce opinion without a complete vetting of alternatives. Instead, we rely on a heuristic akin to following the lead bird of a flock similar to the way in which purchase decisions are driven by five-star ratings on internet products.57

As coming-of-age movies convincingly show, people will go to great lengths to be included in groups that are important to them, and groups will exert tremendous pressure to ensure that their members adhere to group norms. Solomon Asch in the 1950s illustrated the power of group influence in a series of classic experiments.⁵⁸ In the most acclaimed experiment, the experimenter asked groups of six to eight people to compare the lengths of three lines to a target line of a given length. The task of the group was to say which of the three lines was closest in length to the target. In most instances, there was no question about the correct answer. All the people in the group were confederates of the experimenter except for one lone subject, who after hearing the answers of the confederates had to publicly state which answer he thought was correct. Each session involved eighteen matching trials with confederates giving the correct answers in only six trials. In the control condition, when answering alone, subjects said the incorrect answer less than 1 percent of the time—a small deviation from perfection that might be attributable to a mistaken report-out or other human error. When responding as part of a group, however, subjects gave an incorrect answer an average of 37 percent of the time. This experiment reveals the fine line between belonging and compliance. We often yield to the opinions of the group. We yield because we want to be liked, to be accepted, to fit in, to not be left out. The results of conformity experiments apply not only to physical stimuli, such as line lengths, but also moral questions. People will modify their opinions to follow group consensus on issues such as free speech, the use of torture, and other moral dilemmas.⁵⁹

A second way to combat conformity is to build an irreverent, transparent culture. The Motley Fool, the investment advisory company, is named after Shakespeare’s professional jester, Touchstone, in As You Like It. Motley was a form of dress, typically a woolen fabric of mixed colors. That mode of dress lay outside the sumptuary laws of Elizabethan England, which restricted the wearing of certain luxury goods and essentially mandated that a person look the role he or she was assigned to in society. The licensed fool, however, was an individual of great wit who lived outside of society and who, because of that, could speak truthfully about society, even to royalty. We have thought that every CEO should have such a licensed fool by his or her side. Practically speaking, the founding brothers of The Motley Fool, Tom and David Gardner, dispensed with the fool and instead infused their corporate creation with Foolishness. The Motley Fool, which has no dress code other than “to not wear anything that would embarrass your parents,” has internalized the honesty of its investment insights in its workforce by enshrining honesty as one of its core values: always tell the truth—especially to “royalty,” which is an expectation for every Fool. In the absence of culture or an official jester, we have found that spouses are good foils to executive chutzpah.

If you have acquired baby ducks as pets that follow you everywhere, or have seen the old video footage of ducks marching behind ethologist Konrad Lorenz, you have a sense of what it means to imprint.62 Founding traits and procedures established at the inception of the organization become hardwired. The idea behind imprinting is that during a brief impressionistic period, the original blueprint for an organization is laid by the founders based on personal beliefs and values with due awareness of industry practices. These characteristics are subsequently reinforced and persist far into the future, if not indefinitely.⁶³ For example, a detailed case study of the Paris Opera House describes how it has maintained its hybrid character (part public institution, part academic institution) and attendant procedures for hundreds of years.⁶⁴ This is fine if circumstances have not dramatically changed and what worked in the past, still works.

An unchanging state of affairs, however, is highly unusual. And, often, the need for change is most dire in the industry occupied by the Paris Opera House: services. The Opera House is partially protected from market economics through state ownership, however, as Baumol and Bowen have argued, many services such as education, healthcare, performing arts, repair services, and restaurants, to name a few, are not.⁶⁵ These services are labor intensive and involve handicraft (a personal touch). They are susceptible to decline because of what the authors refer to as the cost disease. In contrast to manufacturing where increases in costs are offset by increases in productivity through improved processes and technologies (so, even though workers are paid more year after year, for example, the unit costs per worker remains relatively flat), this tends to be untrue in services where after hundreds of years of playing Beethoven’s String Quartet in C Minor the performance still takes nine minutes and four musicians. Symphony halls have to get really big, or the orchestra has to perform many more concerts to keep unit costs down. In essence, unless services find ways to increase productivity without compromising quality (e.g., unduly increasing faculty-student ratios; overreliance on inexpensive, adjunct faculty), the costs of operations and the prices people ultimately have to pay become too extreme to sustain. Indeed, without gracious donors or government sponsorship, the performing arts would collapse. We suspect that without handsome endowments many colleges will follow suit: unless they find a more efficient, consumer-acceptable method of delivering their product of education.

As opposed to imprinting that occurs with the inception of business creation, inertia occurs whenever companies find strategic and operational recipes that work.66 As companies grow, they seek greater efficiency in operations. These efficiencies entail the introduction of tighter standards of control and more explicit systems, policies, procedures, and everyday routines. These standards and associated processes, in turn, become more deeply ingrained with the company’s burgeoning success. Unfortunately, these structures solidify as history provides cumulative proof regarding what works, and people become increasingly familiar with the methods and technologies used. A lineage of success also may make companies increasingly susceptible to gain frame effects. According to Kahneman and Tversky’s prospect theory, people with accumulated wins become progressively risk averse, preferring to stay on a course that is producing predictable, incremental gains rather than chancing side adventures that risk losing what they have accumulated.⁶⁷ The harbingers of success become the preludes to failure.⁶⁸

Escalation of commitment refers to maintaining a course of action when that course should be abandoned or redirected. Rather than climb out of the hole one is digging, people dig deeper.⁶⁹ Concerns about self-presentation often are implicated in this disastrous pattern. Rather than admit a mistake and confess to being on a losing course of action that would make a leader appear foolish, managers harden their commitment to their chosen decision.70 To dispel the belief that one is the sort of person who makes bad decisions, the decision is rationalized as right and the self as uncanny. Although a mistake may have been made, the decision-maker persists at a course of action that piously magnifies the error.⁷¹ These self-presentational effects may be intensified by the ownership, or responsibility, a leader has assumed for a particular action. This sense of ownership over and the degree of effort expended on a course of action may also heighten the perceived value of the action, thus making it appear to be more personally desirable. (The relationships between perceived value and sense of ownership and amount of effort are called the endowment effect and the effort paradox⁷².)

Conversely, people may simply believe that everything will work out for the best. People who are confident in their abilities frequently have an abundance of it. In a word, people tend to be overconfident. In fact, it is a common bias that we humans generally seem to have. Many people have watched enough courtroom dramas to be familiar with one form of overconfidence illustrated by the notoriously flawed testimonies of eyewitnesses.⁷³ Eyewitnesses can be off by a long shot, mistaking the race of a suspect and the color and make of the getaway car. Nevertheless, they are supremely confident in their testimony, which they decisively deliver as fact. This form of overconfidence is an over-precision bias in which the accuracy of people’s observations or judgments are off target. People also overestimate their performance expectations and abilities compared with a standard (overestimation bias) or to others (over-placement bias). Overall, people tend to think they are better than they really are, better than others when they are not, and surer of the truth than justified. Overconfidence in general is associated with exaggerated capabilities, greater imagined control over events, and underestimates of risk.⁷⁴ Thus, the majority of people believe they would survive a zombie apocalypse.⁷⁵ Business is a spectacular place to exercise overconfidence. We start businesses that we should not, roll out new products with tenuous markets, and engage in value-destroying mergers. Indeed, one study found that overconfident CEOs were more apt to merge their companies with other companies, falsely believing they could make serial mergers work. Overconfidence also has been implicated in miscalculations of research and development performance, misguided diversification strategies, overambitious international strategies, overreliance on growth through acquisition, and excessive debt financing.76

Despite the ominous drawbacks of overconfidence, humanity has not survived by rationality alone. In fact, we would not have Hershey’s chocolate, Disneyland, or Ford cars had the founders given up after repeated failures and ceased investing in ambiguous futures. Plenty of evidence demonstrates that we are not rational homo economicus but irrational hominem brutis. Overconfidence is an asset that provides benefits for individuals and groups.⁷⁷ Thus, it may be a bias that has been naturally selected. In game play, overconfident players win at a disproportionate rate; overconfidence also may help underdogs win battles.⁷⁸ In a world of uncertainty (e.g., not knowing the exact capabilities of a competitor), overconfidence keeps people from walking away from contests or opportunities in which they might prevail and allows them to claim prizes they otherwise would not win. Confident bluffers also may keep competitors who might be superior players at bay. In one research study, participants were asked if they would be willing to compete against another participant on an intelligence test. The winner would get a cash payout and the loser would get nothing. Alternatively, participants could opt out and receive a nominal guaranteed payment. Before participants made their choice, they exchanged self-estimates of their percentile rank on intelligence. Decisions on whether to engage in the competition were primarily driven by a participant’s relative ranking of intelligence compared with the other participant. The relatively high estimates of players discouraged others from competing. Whether from audacity or an actual rendering of perceived intellect, self-confident players give others pause.⁷⁹

We recently visited several companies that regularly appear on one of a number of “best companies” lists. Most of the companies we toured were still in their youth, less than fifteen years in existence, but had grown to be midsize companies (i.e., between $250 million and $1 billion in revenues). We asked if they worried about losing their mojo, and they were not. The reason for their aplomb lies in the culture they created. They avoided what Michael Beer has referred to as the fallacy of programmatic change.80 Beer specifically is referring to change initiatives that must be authorized by management before they are undertaken. This slow, top-down change process that centralizes thinking is bound to fail.⁸¹ Innovation is not driven by flipping on a creativity switch. If companies solely depend on announced changes, they are in trouble. Making change something a company does every now and then is tantamount to the atrophying of a muscle. Companies lose their creative strength without enough exercise.

Companies that are unafraid of the future embrace open innovation. Chesbrough proposed the idea of open innovation in which there is continuous circulation of new ideas internally and from the outside, inward. Not only does open innovation contribute to incidental organizational improvements but also may lead to transformations to an organization’s business model: in the way the company defines its value proposition to customers, defines its formula for profit, its organizational structure and processes, and key resources.⁸² Studies underscore the importance of open innovation to organizational performance. Research of 141 small to midsize manufacturers showed that firm performance was higher in firms that practiced open innovation.⁸³

Some forms of change are large-scale and resource rich. These are big bets placed on the future, and companies need to make these. Nevertheless, the continuous need for innovation is essential and includes a host of constraint-based innovations that go by a number of names: frugal innovation, grassroots innovation, and bottom of the pyramid innovation, to name only a few (see box 2.3 for a more complete list).⁸⁴ The distinguishing characteristics are that innovations emerge from the cumulative efforts of many, with some inventions remaining small in scale, whereas others may snowball in size as they gather internal support, resources, and markets.⁸⁵

Box 2.3
Types of Constraint-based Change Methods

• BOP Innovation

• Bricolage

• Catalytic Innovation

• Disruptive Innovation

• Frugal Engineering

• Frugal Innovation

• Gandhian Innovation

• Grassroots Innovation

• Indigenous Innovation

• Jugaad

• Reverse Innovation

• Resource-constrained Innovation

• Trickle-up Innovation

Source: Adapted from Agarwal N, Grottke M, Mishra S, Brem A. A systematic literature review of constraint-based innovations: State of the art and future perspectives. IEEE Transactions on Engineering Management 2017; 64(1): 3–15.

The idea of bricolage is to fill observed needs by putting idle resources to productive use. Levi-Strauss juxtaposed the spontaneity and resourcefulness of bricolage from large-scale, planned, and resource-rich undertakings of engineers and the like. He was not dismissing this big form of innovation, only pointing out that a lot of creativity is built into the manipulation and application of everyday objects. We submit that these cultural undercurrents are critical for reinvention as long as proposed solutions are connected back to the organization for further development and implementation. That is, the innovations must be practical. Once adopted, innovations have to be “refrozen” by routines and operating procedures to become new parts of everyday practice.88 Again, this appears to be a simple thing that follows the hard part: enact new procedures. Yet, many companies suffer from initiative decay by which the gains from change are lost because new practices are abandoned.⁸⁹ Indeed, retaining the hard-won advantages are so slippery that one organization gave this phenomenon a name: the improvement evaporation effect.⁹⁰ All of the things that go into making the change have to be sustained after the change. The persistence of the plans must be championed by leaders, new methods must be adopted and reinforced, people must be trained and retrained on new technologies and procedures, and so on. In essence, there is no mysterious red line of organizational change that, once crossed, suggests no further effort is required.

An extreme example of open innovation takes place at the Valve Corporation.⁹¹ If you have ever used the digital platform, Steam, to download games, you have been introduced to Valve. The company was formed by two former Microsoft employees with a discrete emphasis on employee self-determination. The company gives employees the latitude to self-initiate projects, products, and platform, and to recruit their own teams for development. Encouraged to think about what they could do to produce the greatest value and what they can work on where they would derive the greatest sense of fulfillment, people ultimately vote with their feet, moving to projects that are the most satisfying and that are perceived to have the greatest potential. Steam was born in precisely this way when enterprising employees noticed that the video software they were working on could have broader applicability. Valve calls this process, “social proofs.” In realty, it is an iterative decision process akin to quorum sensing in the animal world and the Delphi technique among us humans. Altogether, it is a fluid groundswell that relies on expertise to sense opportunities and to give shape and substance to airy nothing.

In 1626, William Harvey described the circular flow of blood through our systems, noting how blood nourished our systems while replenishing itself. We renew and reuse what we have and, thankfully, only need to refill our nine pints on rare occasions. Soon after Harvey and colleagues’ publications, economists began to write about the circular flows of money through households. Thus, in its rawest form, the circular economy is one in which money circulates but leaves the house one lives in unscathed.92 Like Harvey’s discovery of blood flows, the economy would be circular if in the process of creating value, the system was restorative and regenerative: that value would be created without destroying the land or using up the resources on which we depend.

Increasingly, companies will have to rethink their money-making logic and change in environmentally preservative ways. The reasons are becoming increasingly obvious, and we need not review them here except to say that we have our work cut out for us—and we do not have much time. Currently, more than 60 percent of the materials used in the production process are nonrenewable and the products that are produced have life spans of less than a year. These end up in oceans, waterways, scrap yards, and landfills.⁹³ Therefore, organizations are becoming more attentive to the four R’s throughout the production cycle: reduce, reuse, recycle/remanufacture, and recover/replenish. Some changes may be relatively straightforward from a manufacturing perspective. For example, cell phones could be more readily reused if they were easier to dissemble and incentives were offered to consumers to turn in their phones. Other changes may be more difficult because of upstream or downstream dependencies.

Systems in the interconnected world are getting larger and larger and, with supply chains the way they are, organizations now are embedded in planet-wide endeavors. It is difficult to contemplate a company acting in isolation of global economic, social, and environmental concerns. Business clearly is aware of the size and urgency of the extant needs. Additionally, new reporting requirements, third-party ratings and performance indices, and a growing tranche of conscientious investors have inched businesses toward a more secure future. But the problems are immense, and much more will be needed as we convert our economy from a carbon- to non-carbon-based one.

These problems are by no means confined to the mining industry. Energy, textiles, consumer products, and other industries have their unique issues regarding the sourcing, processing, and production of goods and services. The issues confronted belie easy solution, however, organization development can play a critical part by helping to shape organizational activities that incorporate all actors within an organization’s sphere of operations into the calculous of profitability, and reward financial returns in the context of social and environmental progress: that is, evaluate companies on a triple bottom line. True practitioners of organization development cannot count year over year gains in corporate profitability a “win” without due appreciation of the quality of life of all those who contributed. If the purpose of business is to improve lives through the marketplace, then it would seem perverted to promote that objective while degrading the lives and lifestyles of those involved in the process.

Companies are moving in the right directions, and some like Patagonia have been there for some time. For example, Patagonia recently introduced a new beer, Long Root Ale. This is the first beer made with Kernza wheat. Kernza’s deep roots need half the water of standard varieties of wheat, and because it is a perennial, it reduces erosion and captures more carbon from the atmosphere. Similarly, Patagonia recently introduced a new wetsuit made from the Havea plant. Patagonia extracts natural rubber from the plant using certified sustainable practices that are a cleaner alternative to the fabrication of the conventional neoprene wetsuit—a product made using petrochemicals and energy-intensive manufacturing processes.

Method	Associated Name
Planning	Lippett
“What” and “How”	Connor
PAR (Participatory Action Research)	French; Schein; Tichy
Integrative Change Model	Beckhard & Harris; Bullock & Batten
Six Step Change Management	Beer
Change Wheel	Galpin
Lean thinking	Womack & Jones
ERA (Evaluation, Re-evaluation, Action)	Chen
Total quality management (TQM)	Juran; Deming
Six Sigma	Motorola
Process Reengineering	Davenport