Rebuilding Behavioral Context: A Blueprint for Corporate Renewal

Few companies around the world have not tried to reinvent themselves — some more than once —during the past decade. Yet, for every successful corporate transformation, there is at least one equally prominent failure. GE’s dramatic performance improvement starkly contrasts with the string of disappointments and crises that have plagued Westinghouse. ABB’s ascendance to global leadership in power equipment only emphasizes Hitachi’s inability to reverse its declining fortunes in that business. And Philips’s successful revitalization since 1990 only highlights its own agonizingly slow turnaround in the preceding ten years.

What accounts for the success of some corporations and the failure of so many others? How did some organizations turn around transformation processes that had clearly stalled? In the course of five years of research into the nature and implications of the radically different organization and management models that have begun to emerge during the past decade, we studied more than a dozen companies as they implemented a succession of programs designed to rationalize their inefficient operations, revitalize their ineffective strategies, and renew their tired organizations. In the process, we have gained some insight into the reasons that some made recognizable progress in their transformational change process while others only replaced the dead weight of their bureaucracies with change program overload.

In observing how the successful corporate transformation processes have differed from those that struggled or failed outright, we were struck by two distinctions. First, successful transformation processes almost always followed a carefully phased approach that focused on developing particular organizational capabilities in appropriate sequence. Second, the managers of the successful companies recognized that transformation is as much a function of individuals’ behaviors as it is of the strategies, structures, and systems that top management introduces. As a result, rather than becoming preoccupied with downsizing and reengineering programs, they focused much attention on the changes required to fundamentally reshape what we described in our previous article as a company’s behavioral context.1

A Phased Sequence of Change

The problem with most companies that have failed in their transformation efforts is not that they tried to change too little, but that they tried to change too much. Faced with the extraordinary demands of their highly competitive, rapidly changing operating environments, managers have eagerly embraced the flood of prescriptive advice that consultants and academics have offered as solutions — typically in the random sequence of a supply-driven market for management fads. According to a recent survey, between 1990 and 1994, the average company had committed itself to 11.8 of 25 such currently popular management tools and techniques — from corporate visioning and TQM programs to empowerment and re-engineering processes.2 Despite this widespread frenzy of activity, the study found no correlation between the number of tools a company used and its satisfaction with its financial performance. The authors did conclude, however, that most tools could be helpful “if the right ones were chosen at the right time and implemented in the right way.”3

While such a generalization borders on the self-evident, we would endorse the importance that the conclusion gives to sequencing and implementing activities in a change process. In many companies, we have seen front-line managers bewildered when faced with multiple, inconsistent priorities. In contrast, we observed that the companies that were most successful in transforming themselves into more flexible, responsive organizations pursued a much simpler, more focused sequence of actions.

One widely recognized phased transformation process has been Jack Welch’s revitalization of General Electric. From his emphasis on downsizing, delayering, and portfolio pruning in the early and mid-1980s, Welch shifted his focus to more developmental, integrative activities in the late 1980s. By the early 1990s, he had begun to create what he called a “boundaryless and self-renewing organization.” Although he has faulted himself for not moving faster, Welch has remained firmly convinced of the logic in the sequence of his actions and of the need to make substantial progress at each stage before moving to the next.4

Our study results suggest that, as a model for corporate transformation, the GE example has broad applicability. It rests on the simple recognition that any company’s performance depends on two core capabilities: the strength of each of its component units and the effectiveness of their integration. This is true of the integration of individually strong functional groups along an organization’s value chain as well as of the synergistic linking of a company’s portfolio of business units or the global networking of its different national subsidiaries. This assumption defines the two axes of the corporate renewal model represented in Figure 1.

As they face the renewal challenge, most companies find themselves with a portfolio of operations (represented by the circles in Figure 1): a few strong but independent units and activities (the tightly defined but separate circles in quadrant 2), another cluster of better integrated operations that, despite their better integration, are not performing well individually (the looser, overlapping circles in quadrant 3), and a group of business units, country subsidiaries, or functional entities that don’t perform well individually and are also ineffective in linking and leveraging each others’ resources and capabilities (the ill-defined, unconnected circles in quadrant 1).

The overall objective of the transformation process is to move the entire portfolio into quadrant 4 and find ways to prevent the units from returning to their old modes of operation. But while the goal of developing an organization built on well-integrated, efficient operating entities is clear, the path to this organizational nirvana is not well defined. Yet it matters immensely.

Some companies — General Motors during the 1980s, for instance — tried to take the direct route represented by the diagonal path A in the figure. While intellectually and emotionally appealing, this bold approach of trying to improve performance on both dimensions simultaneously has typically ended in failure due to the complex, often contradictory demands that overload the organization. GM discovered this during the 1980s when it pressured its five auto divisions to boost their individual market share and profitability while simultaneously improving cross-unit synergies. It turned out that the demands of coordinating body styling and chassis design often conflicted with each division’s ability to respond to the needs and opportunities of its own particular market segment. Like GM, IBM’s attempt in the late 1980s to improve both unit performance and corporate integration also caused that company’s transformation program to stumble.

Other companies — Philips in the late 1980s, for example — followed a more focused path, pushing first for integration on the assumption that better synergies among units would help each improve its individual performance. However, this change model, represented by path B, has also proved unsuccessful. In a bold reorganization, company president Cor van der Klugt declared Philips’s consumer electronics, professional electronics, components, and lighting businesses the company’s “core interdependent” operations and tried to create structures and processes that would help them manage their perceived interdependencies. As the company soon discovered, however, it was extremely difficult to integrate operations that were themselves struggling with enormous internal difficulties. And even where they succeeded, the linkages connecting uncompetitive individual businesses served mostly to emphasize and reinforce the liabilities of each. As corporate performance continued to decline and a new CEO was appointed to try another approach, Philips managers concluded, with classic gallows humor, that “four drunks do not make an effective team.” It was a lesson that unfortunately was lost on Daimler Benz, which continued its efforts to integrate its diverse, overstaffed operations until a new top management team signaled a change in direction for the struggling transformation program in 1995.

The third option, path C in our model, defines the most effective sequence of transformational change processes. This is the path Jack Welch followed as he steered GE through an ongoing series of change processes that he initiated in the early 1980s. As we reviewed this much-admired transformation of one of the world’s largest corporations, three distinct phases of activity were evident — phases we define as simplification, integration, and regeneration. In the simplification phase, Welch focused on strengthening the performance of each of the company’s businesses, attempting to make each “number one or number two in its industry.” During the next five years, he sold or closed operations valued at almost $10 billion and acquired new businesses worth $18 billion. He stripped away the heavy superstructure of sectors and groups that had long burdened front-line units and made drastic cuts in the size and responsibilities of corporate staffs. While this streamlining cost the company some ability to integrate and coordinate activities across units, Welch’s primary concern was to give the managers of the core businesses the freedom to develop new strategies and to control their operations. By creating a sense of organizational clarity and managerial simplicity, he felt more able to hold them accountable for the results.

By the mid-1980s, with most of the acquisitions and divestitures completed, Welch evolved into a second phase, which we call integration. With thirteen businesses running strongly at the company’s core, he began to look for ways he could link them to exploit potential scale economies, leverage their individual resources, and capture opportunities for cross-unit learning. Beginning with his top-level corporate executive committee meetings, he worked to develop an environment for interunit collaboration that would demonstrate the concrete benefits of cooperation. He urged his senior executives to accept some high-visibility, symbolic proposals — putting sixteen pounds of GE plastics into every GE refrigerator, for example, or having the engineers from the locomotive division resolve a serious design problem in the appliance business. During the next several years, he pushed collaboration deeper into the organization through programs designed to open minds, clear communications channels, and eliminate the parochial attitudes that had insulated functions, isolated businesses, and separated operating units from each other.

A decade after he began, Welch had simplified GE’s organization and integrated its businesses, but he realized he had not yet created the kind of organization that he hoped to leave to his successor — one that continually replenished and renewed itself. So he initiated actions that moved GE into the third transformation phase, one that would imbue GE with a capability that we call self-regeneration. As he challenges employees with notions of “boundarylessness,” Welch is trying to develop an organization with the ability to balance the tensions and management paradoxes implicit in the drive to achieve superior unit performance while simultaneously collaborating with other units to leverage the organization-wide benefits of integration. Like the first two phases, this one is also demanding profound behavioral change among the people who make up General Electric.

A New Behavioral Context

The major constraint in any corporate transformational process — and the explanation behind the need for the carefully sequenced stages — lies in people’s capacity to accommodate change. Indeed, the most successful companies in our study were those that recognized behavioral change as not just an outcome of the transformation but as its driving engine. As a result, they focused their attention beyond the conventional concern about restructuring the hierarchy and reengineering its processes, and devoted most of their attention to the more subtle, demanding task of changing individual attitudes, assumptions, and behaviors.

This realization struck Jack Welch in the mid-1980s, a few years after he had initiated his bold, effective delay-ering and downsizing program that had eliminated several layers of GE’s hierarchy and reduced its payroll by 70,000 employees. Although he had been extraordinarily successful at meeting his initial objectives, Welch understood that he could not achieve his long-term goals unless he won the minds and changed the behaviors of many front-line employees who were suspicious and even cynical about the motivations of a man they had begun to call “Neutron Jack.” In 1985, he acknowledged to a group of employees, “A company can boost productivity by restructuring, removing bureaucracy, and down-sizing, but it cannot sustain high productivity without cultural change.”5

Successful corporate transformation, as Welch recognized, could not simply be imposed from the top through macro change programs. It also had to be built from the bottom through activities designed to ensure that everyone understood and supported the change. An effective change process needs to focus simultaneously on the company’s “hardware” — its business configuration and organization structure — and on its “software” — the motivations, values, and commitments of the company’s employees. In other words, together with the changes in structure and systems, managers also need to change what we described in our previous article as the behavioral context of the company.6

As we observed GE and other companies evolve through the long, painful process of transforming bureaucratic hierarchies into self-renewing organizations, we became aware of the importance not only of the sequencing of macro processes — simplification, integration, and regeneration — but also of the changes to individuals’ behaviors that supported those broader initiatives. The performance-driven actions implicit in Welch’s call for speed, simplicity, and self-confidence, for example, were different from the more collaborative behaviors he was trying to elicit in his subsequent emphasis on “a boundaryless organization.” Our observations suggest that discipline, support, stretch, and trust — the four vital elements of the transformational behavioral context — were most effectively developed sequentially in a way that supported the three stages of renewal. Instilling discipline and support, for example, is crucial to managing the company through the simplification phase; instilling stretch and trust is essential to effective cross-unit integration; and balancing all four dimensions is the key to moving to a state of continuous regeneration.

Simplification: Building Front-Line Initiative

Of all the companies we studied, the one that faced the most daunting transformation challenge was AT&T. Forced to divest 70 percent of its assets in an antitrust settlement, compelled to confront formidable global competitors in a suddenly deregulated business, and confronted with an industry fundamentally restructured by the converging technologies of computers and telecommunications, AT&T was a dinosaur on the brink of extinction for the first few years after the company’s 1984 breakup. Within four years, its near monopoly of long distance service had been reduced to a 68 percent share, its once highly profitable equipment business was staggering under the attack of aggressive competition, and its computer business was floundering in a struggling partnership with Olivetti. At this time, Bob Allen became CEO and initiated a series of initiatives that illustrate the actions most effective in the first stage of transforming a classic bureaucracy into a self-renewing organization.

In a series of early moves, Allen signaled a radical departure from the previous integrative activities that management described as AT&T’s “single enterprise” strategy. By deemphasizing cross-unit coordination, he was able to focus attention on simplifying the company’s large, unwieldy organization, breaking it into twenty-one business units, each responsible for developing its own business model and for delivering its own results. To reinforce this message, he implemented a rigorous economic value-added (EVA) system that recorded and reported the return on capital employed for the newly created business units, each of which was required to manage not only its profit and loss account but also its own balance sheet. The business unit managers, in turn, created more than 100 focused product groups, each with its own profit and loss account, thereby fragmenting AT&T into more than 100 distinct management units. According to Allen, the dramatic improvement in AT&T’s performance during the next five years, reflected in the 200 percent increase in the company’s market value, would not have been possible without the restructuring that allowed front-line managers to simplify their tasks and focus their attention.

But simplifying the structure and systems was not enough to change the behavior of individuals who had spent their whole careers in an environment driven by directives, policies, and constraints. In an organization demotivated by several years of competitive defeats, operating losses, and personnel cuts, Allen saw his main objective as “helping our people learn how to win again.” This required him to replace the context of imposed compliance and control with a more internalized model of behavior. While stripping out structural overhead, AT&T’s top management was also focused on the huge task of establishing strong norms of self-discipline and building a context of support and encouragement.

Building Discipline

Over several years, Allen and his top management team designed numerous initiatives to shift the internal cultural norm of compliance to a context that encouraged self-discipline. Among these, the three that seemed the most influential — and common to other successful change processes we observed — were their attention to unambiguous performance standards, their commitment to feedback, and their process of clear, consistently applied rewards and sanctions.7

From his first day, one of Allen’s strongest and most consistent messages was that financial success could no longer be negotiated in Washington in discussions among lobbyists, lawyers, and regulators, but instead would have to be won in the marketplace through the actions of front-line managers. Central to this communication effort was his introduction of the EVA concept. As a result of management’s relentless insistence that each business prove its economic viability and strategic potential, business heads were motivated to translate their broad EVA objectives into a much richer set of internal performance benchmarks that, in turn, were reflected in clearly defined individual targets right down to the front lines of their operations. Supported by intense communication that helped managers understand the performance impact of their business decisions, EVA became more than just a mechanical control system; it became the basis of a behavioral context that resulted in a norm of fulfilling commitments and meeting tough standards — a discipline not widely observed in the predivestiture AT&T.

After focusing the organization on unambiguous performance standards, Allen and his top team worked on developing an effective feedback process so that individuals could see exactly how they were measuring up to the standards. AT&T accomplished this with a new accounting system that provided frequent, detailed, and disaggregated feedback to each unit and was designed to “ruthlessly expose the truth about performance.” Again, it was not so much the system as the way senior management used it that was key to shaping the desired behavioral context. Through their practice of conducting open reviews within each unit and between business units and corporate staff, Allen and his top team did more than just define standards and clarify expectations. They used these exchanges to educate management to a new way of thinking and to provide honest, timely performance evaluations against the new expectations. The intensity and quality of this review process greatly contributed to the institutionalization of discipline as an established behavioral norm.

The third common contextual element in organizations that develop a strong sense of individual discipline is a consistently applied set of rewards and sanctions, clearly linked to the performance standards. At AT&T, the EVA system had a strong, direct linkage to the compensation system, a characteristic that gave it credibility and teeth. Equally important, the linkage was reinforced by the way senior managers implemented the system, not only awarding performance-based bonuses of up to 50 percent of base salary but also replacing managers and even selling or merging units unable to meet their EVA targets. The replacement of a number of key nonperforming managers with outsiders from high-discipline organizations strongly reinforced the emerging norm that managers deliver on their commitments — a centerpiece in AT&T’s gradual shift in behavioral context from imposed compliance to internalized self-discipline.

Embedding Support

Over time, however, such unalloyed emphasis on results can become corrosive. In the course of our study, we found that the radical restructuring called for in the simplification stage was less likely to result in individual burnout or organizationwide rejection if the hard-edged tools of discipline were counterbalanced and complemented by management’s nurturing and support of those spurred to action by the rigorous demands of the discipline-based context.8 As AT&T discovered, a commitment to legitimate empowerment, access to resources, and a management style based on coaching and guidance proved most effective in creating such an environment of support.

One of Allen’s first objectives was to break the sense of control and dependence that often characterized the relationships between superiors and subordinates. While he was holding business units accountable for their performance, for example, he was also radically decentralizing responsibility by giving unit leaders the authority to fundamentally change their businesses’ strategy and operations. The new accounting system proved to be very important in this effort. Instead of being designed primarily around senior management’s control needs, reports were explicitly developed to provide disaggregated information to support the operating level managers’ activities and decisions. At the same time, however, the system provided AT&T senior managers an effective early warning tool that gave them confidence to loosen their control, knowing they had timely, reliable information so they could intervene before major problems developed.

Allen’s huge commitment to train new managers to use the data and accept the responsibilities they were given reinforced this systems change. Furthermore, Allen took personal responsibility for appointments to all key positions and ensured that his selections were individuals with reputations as delegators and developers. But his own personal management style provided the most powerful empowerment message. He described his philosophy: “I have never thought that I could be so knowledgeable about our businesses and markets that I could make the decisions. I have always been an advocate of shared decision making. In fact, I believe this is one of the reasons I am CEO.”

As most companies soon realize, empowerment is legitimized only when those given responsibility are also given access to the resources they need to implement their newly delegated decisions. Again, Allen initiated radical change by decentralizing many assets and resources traditionally controlled at the corporate level. In a major restructuring of Bell Labs, for example, he gave business units the authority to control the budgets of more than 80 percent of the lab’s employees, thereby giving them direct access to and influence over AT&T’s enormous technological resources. In middle-level managers’ view, this increased access to financial and technological resources was key to the company’s rapid transition from a highly centralized bureaucracy to a more flexible organization in which those deep in operations could initiate and drive action rather than just write proposals and await approvals.

To give substance to the norms of empowerment and to validate the redeployment of assets and resources, senior managers must be willing to move one stage further. They must retreat from their historic roles as chief planners and controllers and redefine their core responsibilities in more supportive terms. In the new environment of radically decentralized responsibility and authority, they must provide the coaching and guidance that separates legitimate empowerment from the knee-jerk version that often ends up as abdication. This third element of a supportive behavioral context has probably given Allen his most critical challenge. Starting with his own actions and those of his colleagues on the executive committee, he has tried to become a role model for the desired coaching and supporting relationship. When managers try to escalate issues for his decision, he is likely to tell them that his opinion is irrelevant and encourage them to solve the problem themselves.

To spread this management model, he has broadened the evaluation criteria for all senior managers to include a development measure that AT&T calls “people value-added” (PVA), which has the same weight as the well-established EVA measure. PVA is supported by a 360 degree assessment process in which each manager is evaluated not only by his or her boss but also by peers and subordinates. In typical fashion, Allen first applied the new process to himself and his top management team before introducing it to the company.

Through a broad array of such tools, programs, and individual actions, AT&T’s management team created a supportive environment that smoothed the hard edges of the highly discipline-oriented demands that they had placed on the organization. Indeed, it was this finely balanced change in the company’s behavioral context that management felt was central to AT&T’s turnaround from a loss of $1.2 billion in 1988 to a $4.6 billion profit in 1994.

Integration: Realigning Cross-Unit Relationships

For most companies, the initial tightening of ongoing operating performance is only the first stage in a long transformation process toward becoming a self-renewing organization. While this simplification phase can improve the productivity of a company’s resources, some very different efforts and abilities are required to restart its growth engine. For example, although AT&T’s fragmentation into disciplined business units allowed it to reduce waste and cut expense, it also led to the creation of twenty-one highly autonomous units run by what one manager described as “a bunch of independent business-unit cowboys.” Yet, to grow — whether by expansion into the dynamic new infocom business at the intersection of the computer, communications, consumer electronics, and entertainment industries or by exploiting the fabulous potential of the emerging Chinese market — the twenty-one entities would have to operate as one AT&T.

Between 1993 and 1995, AT&T struggled to turn around the momentum of its highly successful simplification process by creating the necessary coordinating mechanisms for the integration phase. Management initiated a number of structural measures, from building a new regional management group to coordinate the disparate international initiatives of the twenty-one business units, to creating project teams to address the emerging multi-media, data communication, and other cross-business-unit opportunities. To support the integrative behaviors required by these structural changes, the company made a huge effort to embed a shared vision that focused on how the different parts of AT&T could collectively allow people to communicate with one another “anytime, anywhere,” and to articulate shared values as a “common bond” to tie the whole organization together. Yet, after two years, the company was finally forced to abandon this effort and break up into three separate entities, demonstrating the enormous difficulties of managing the transition from the simplification process to the integration phase.

In contrast to AT&T’s difficulties in integrating the company by leveraging the interdependencies across its different businesses, ABB Asea Brown Boveri, the Swedish-Swiss electrotechnical giant is quite far along this path and illustrates some important requirements for managing the second phase of renewal. Within three months of his appointment as CEO of the $17 billion company formed through the merger of Asea and Brown Boveri, Percy Barnevik expressed his vision for the new organization as three dualities: “global and local, big and small, radically decentralized with central reporting and control.” For the first few years, however, Barnevik focused on only one part of each duality: he wanted to build the new company on a solid foundation of small, local, radically decentralized units. To break the back of the old bureaucracies and strip excess resources, Barnevik radically restructured the company into 1,300 legally separate companies, giving them control over most of ABB’s assets and resources. At the same time, he slashed the old hierarchies from eight or nine levels to a structure that had only three management levels between him and the front line. Although somewhat more radical, these early actions were very similar to those Allen took at AT&T.

By the early 1990s, however, Barnevik and his team began to pay more attention to the challenge of ensuring ABB’s long-term growth. This task needed the revitalization of activities in a mature set of business operations through the integration of the independent units and numerous acquisitions into a single company. At this stage, ABB’s managers began to focus on the other half of the dualities as they worked to capture the benefits of the company’s size and reach. By more effectively linking and leveraging the resources of the 1,300 local companies, ABB used its global scale and scope to build new capabilities in existing power-related businesses, to develop new business opportunities in areas like environmental engineering, and to enter new markets such as Eastern Europe, India, and China.

Just as the behavioral change in the simplification phase is facilitated through certain changes in structure and process — fragmenting the organization into smaller units and developing simple, rigorous, and transparent systems, for example — the behavioral context that supports integration also requires some changes in the organizational hardware. At ABB, the organizational structure designed to create the tension that drives cross-unit collaboration is provided by a carefully managed global matrix with a complementary overlay of boards, committees, and task forces at all organizational levels.

Beyond changes in the organizational hardware, just as the simplification phase needs the behavioral software of discipline and support for effective implementation, the integration phase needs a behavioral context of stretch and trust to motivate the vital cross-unit collaboration. ABB’s experiences are a good example of how these two attributes of behavioral context can be shaped to drive an organization through this second phase of corporate transformation.

Creating Stretch

Stretch is an attribute of an organization’s context that enhances people’s expectations of themselves and the company. Stretch is the antithesis of timidity and incrementalism and results in the boldness to strive for ambitious goals rather than settle for the safety of achievable targets. In observing the integration efforts at companies like General Electric, Intel, and ABB, we identified three elements at the core of the most successful efforts to create an environment of raised personal aspirations and extraordinary collaborative efforts. First was development of shared ambitions that energized the organization; second was the need to establish unifying values to reinforce an individual’s commitment to the organization; and third was an ability to give employees a sense of personal fulfillment by linking their individual contributions directly to the larger corporatewide agenda.9

To decouple individuals from the parochial interests that drive performance in the simplification stage, companies need to motivate them to collaborate. In most organizations, this implies creating a shared ambition that exceeds the company’s ability to achieve without cooperation: to stretch the organization’s collective reach beyond each unit’s individual grasp. At the broadest level, Barnevik did this by building a corporatewide commitment to making ABB “a global leader — the most competitive, competent, technologically advanced, and quality-minded electrical engineering company in our fields of activity.” But rather than leave this broadly framed vision statement unconnected to the organization’s day-to-day operations, he and his top team traveled 200 days a year to communicate and translate it so that each operating unit began to share the ambition and understand its implications for their own particular objectives.

While ambition can be highly energizing, only when the organization’s objectives connect with an individual’s basic belief system is the required personal commitment likely to endure. It takes a deeply embedded set of unifying values to create such an individual-level commitment to its corporate ambition. For example, ABB has a stated objective “to contribute to environmentally sound sustainable growth and make improved living standards a reality for all nations around the world.” Depending on management’s actions, such a statement has the potential to become a source either of unifying personal commitment or of organizational cynicism. At ABB, Barnevik ensured that the stated values were not just displayed in the annual report but were part of documented commitments in the company’s “Mission, Values, and Policies” book, which insiders referred to as “the policy bible.” More important, the values became the basis for face-to-face discussion between top management and employees at every level and, over the years, were confirmed by corporate leaders’ actions as they acquired environmental management capability and committed to massive investments in the developing world.

Finally, management must deal with the fact that modern societies in general and large corporations in particular provide individuals with few opportunities to feel they are making a difference. To create a sense of stretch, companies need to counteract the pervasive meaninglessness that people feel about their contributions and replace it with a sense of personal fulfillment in their work. To do this, they must be able to link the macro agenda to each individual’s tasks and contributions. At ABB, a whole portfolio of new communication channels and decision-making forums was designed to give front-line managers access to and influence in the company’s vital decisions. Through these overlaid devices, ABB’s top managers were able to invite the heads of national companies to serve on the internal boards of other local units or even on their worldwide business boards. Similarly, local functional heads can serve on one of the many functional councils that the company uses to identify and transfer best practice worldwide. Through such service, these individuals can see firsthand how they fit into the larger objective and, more important, how their individual efforts contribute to a broader agenda. It has become a highly motivating characteristic of the company’s behavioral context.

Developing Trust

The ability to link resources and leverage capabilities is central to the integration process, and this intensively collaborative behavior cannot be induced solely by stretching people’s goals and expectations. Like discipline, stretch lends a hard edge to the behavioral context that gives rise to individual energy and enterprise but, in its raw form, can also lead to organizational exhaustion. In the second stage of the renewal process, the appropriate offsetting quality to stretch is trust, a contextual characteristic vital to the development and nurturing of the collaborative behavior that drives effective integration.10

Unfortunately, the level of trust in a company just emerging from the major restructuring implied by the simplification process is often quite low, with autonomous units intensely competing for scarce resources and once loyal employees feeling that their implicit contracts with the company have been violated by serial layoffs and cutbacks. Most of the companies we studied seemed to accept this erosion in individual and group relationships as an inevitable by-product of a necessary process. While they tried to minimize its impact during that phase, the task of rebuilding individual and intergroup trust was primarily left to the integration stage when frequent and spontaneous cooperation among individuals and across organizational units became vital. Clearly, trust is an organizational characteristic that is built only slowly, carefully, and with a great deal of time and effort. Among the most common behaviors exhibited by managers in organizations that succeeded in developing this vital contextual element were a bias toward inclusion and involvement, a sense of fairness and equity, and a belief in the competence of colleagues.

Involvement is a critical prerequisite of trust, allowing companies to build both organizational legitimacy and individual credibility. ABB’s integrative forums provided the infrastructure for routinely bringing managers together to discuss and decide on important issues. As we described earlier, local company managers were appointed to their business area boards where they participated in decisions affecting their business’s global strategy and operations, while their functional managers’ membership on worldwide functional councils gave them a major role in deciding the policies and developing the practices that governed their area of expertise.

This bias toward inclusion and participation extended beyond the formal boards and committees, however, and ABB’s senior managers made employee involvement integral to their daily operating style. For example, in one of ABB’s business areas that we studied, the new global strategy was formulated not by the global business manager and his staff or even by the more inclusive business area board. It was developed by a group of managers drawn from deep in the worldwide operations who were asked to define the business’s objectives, options, and priorities as perceived by those closest to the customers, the technologies, and competitive markets. The process of developing this strategy and top management’s subsequent approval created a strong bond among those on the team and trust in their superiors. The new relationship was reflected in and confirmed by the informal contract that developed around the strategic blueprint they had developed together.

Such widespread involvement in the activities and decisions relating to issues beyond their direct control created a vital openness for creating fairness and equity, the second component in a trust-building context. The formal matrix organization — the core design element that management believed allowed ABB to manage the dilemmas in its objective to be “local and global, big and small, radically decentralized with central control” — required the development of such an organizational norm to resolve the tension implicit in the structural dualities and to manage the conflicting demands in the strategic paradoxes they reflected. The function of the numerous boards, teams, and councils was not only to allow widespread involvement but also to create the channels and forums in which often conflicting views and objectives could surface and be debated and resolved openly and reasonably.

But fairness cannot simply be designed into the structure; it must be reinforced by managers’ words and actions, particularly at the most senior level. Backed by the “policy bible’s” commitment to build employee relations on the basis of “fairness, openness, and respect,” ABB’s senior management conducted the constant stream of decisions surrounding ongoing plant closing, employee layoffs, and management reassignments in an environment of transparency and rationality rather than through backroom political maneuvering. The resulting perception of fairness protected and, indeed, enhanced feelings of trust, despite the inherent tensions and painfulness of the decisions.

Finally, trust requires people to believe in the competence of their colleagues and particularly their leaders, because it is in these people that individuals place their confidence as they relinquish the traditional safety of incrementalism to achieve new stretch targets. At ABB, Barnevik set the tone in selecting his senior management team. Recognizing that their drastically delayered, radically decentralized organization placed a huge premium on high-level competence, he personally interviewed more than 400 executives from both Asea and Brown Boveri to ensure that ability assessment rather than horse trading dominated the selection for the top positions in the newly merged companies. His actions not only provided a model that influenced the whole selection and promotion process but also signaled that the identification and development of human resources was a vital management responsibility.

This integration process, supported by greater cross-unit collaboration, has allowed ABB to leverage the onetime productivity gains from the massive simplification program that radically restructured the company between 1988 and 1990. It helped the company develop new products and enter new markets during a recession that caused almost all its competitors to retrench in the first three or four years of the 1990s. It was a critical stage of the renewal process that was made possible by managers’ behavioral changes framed by an expectation of stretch and supported by a growing culture of trust.

Regeneration: Ensuring Continuous Learning

The hardest challenge for companies that have reconfigured their structures and realigned behaviors through the simplification and integration processes is to maintain momentum in the ongoing transformation process. This is particularly difficult for companies that have been through two successive processes and are striving to maintain an internal context to support both the individual initiative for driving the ongoing performance of front-line operations and the collaborative team-based behaviors for supporting resource linkages and best-practice transfers across individual entities. The final stage of self-renewal is when organizations are able to free themselves from the embedded practices and conventional wisdom of their past and continually regenerate from within.

As in the earlier transformation stages, the challenge of the regeneration phase is not just in changing the structure or the processes but, rather, in fundamentally altering the way managers think and act. As ABB executive vice president Göran Lindahl saw it, this final stage would be achieved only when he had succeeded in a long, intense development process he described as “human engineering,” through which he hoped to change engineers into capable managers, and capable managers into effective leaders. “When we have developed all our managers into leaders,” he explained, “we will have a self-driven, self-renewing organization.”

Top executives at GE and ABB would readily acknowledge, however, that they have not yet achieved this stage of self-generated continuous renewal. Indeed, of the many companies that have undertaken organizational transformation programs during the past decade, few have moved beyond the rationalization of the simplification stage, and even fewer have successfully revitalized their businesses in the manner we have described in the integration process. Nonetheless, in our study, we observed a handful of companies that had reached the stage of constantly regenerating themselves by developing new capabilities and creating new businesses on an ongoing basis.

In most of these companies, like 3M in the United States or ISS, the Danish cleaning-services company, this elusive self-regenerative capability is based on long-established, deeply embedded corporate values and organizational norms, often linking back to the influence of the founder or other early leaders. But we observed a few companies in which a more recent transformation process led to the creation of this impressive organizational capability. A good example is Kao, the Tokyo-based consumer packaged goods company.

For its first fifty years, Kao had been a family-run soap manufacturer, eventually expanding into detergents in the 1940s as the company modernized by unabashedly copying leading foreign companies (even Kao’s corporate logo was amazingly similar to Procter & Gamble’s famous moon and stars symbol). Only after Yashio Maruta took over as president in 1971 did the company gradually develop a self-regenerative capability. As Maruta stated, “Distinct creativity became a policy objective, supporting our determination to explore and develop our own fields of activity.” By 1990, after it had expanded into personal care products, hygiene products, cosmetics, and even floppy disks, Kao was ranked by Nikkei Business as one of Japan’s top ten companies along with Honda, Sony, and NEC, and ahead of such icons as Toyota, Fuji-Xerox, Nomura Securities, and Canon.

In our analysis of Kao and other successful self-regenerating companies like 3M, ISS, Intel, and Canon, we developed some notions about two management tasks that inevitably played a central role in the development of such capabilities. The first was an ability to integrate the entrepreneurial performance-driving behavior shaped by the contextual elements of discipline and support with the equally vital cross-unit integrative learning framed by the managerial characteristics of stretch and trust. The second was the somewhat counterintuitive task of ensuring that these basic contextual elements were kept in a state of dynamic disequilibrium to ensure that the system never became locked into a static mode of reinforcing and defending its past.

Integrating the Contextual Frame

Maruta always introduced himself first as a Buddhist scholar and second as president of Kao; he saw these two roles as inextricably linked. Over the years, he embedded two strong Buddhist values and beliefs into Kao as a basis for its self-regenerating capability. The first core principle is an absolute respect for and belief in the individual, a value supported by an explicit rejection of elitism and authoritarianism and an active encouragement of individual creativity and initiative. The other pervasive value is a commitment that the organization function as an educational institution in which everyone accepted dual roles as teacher and student. At this level of corporate philosophy and organizational values, the vital entrepreneurial and collaborative behaviors are legitimized and integrated.

Reflecting the strong belief that the ideas and initiatives of individual managers drove performance, Maruta created an organization in which all employees were encouraged to pursue their ideas and seek support for their proposals. Central to this environment was one of the most sophisticated corporate information systems in the world. Instead of designing it to support top management’s need for control, as most such systems were, Maruta had spent more than twenty years ensuring that its primary purpose was to stimulate operating-level creativity and innovation. For example, one internal network linked the company directly with thousands of retail stores, allowing marketing managers not only to monitor market activity and trends in a direct way, but also to give those retailers analyses of store-level data. Kao also developed an artificial intelligence-based market research system that processed huge volumes of market, product, and segment data to generate clues about customer needs, media effectiveness, and various other marketing questions. A third information gathering process, based on Kao’s consumer research laboratory, combined a traditional monitoring of product usage in a panel of households with an ongoing analysis of calls to customer service. Managers used the integrated output to define new product characteristics and fine-tune existing offerings.

In launching the company’s new Sofina cosmetics, the new-product team members used these and other data resources and intelligence systems to define a product-market strategy that defied the industry’s conventional wisdom. They developed a uniquely formulated product line based on technical data and scientific research rather than on new combinations of traditional ingredients; they positioned it as a skin care product, rather than on the more traditional image platform; they sold it through mass retail channels rather than through specialty outlets; and they priced it as a product for daily use rather than as a luxury item.

Although respect for individual initiative was central to Kao’s philosophy, so too was the commitment to organizationwide collaboration, particularly as a way to transfer knowledge and leverage expertise. Collaboration was aimed at achieving what Maruta described as “the power of collective accumulation of individual wisdom” and relied on an organization “designed to run as a flowing system.”

Throughout Kao, there was much evidence of this philosophy, but a most visible manifestation of its commitment to the sharing of knowledge and expertise was the open conference areas known as “decision spaces.” From the tenth floor corporate executive offices down, important issues were discussed in the decision spaces, and anyone interested, even a passerby, could join the debate. Likewise, R&D priorities were developed in weekly open meetings, and projects were shaped by laboratories hosting monthly conferences to which researchers could invite anyone from any part of the company. In all the forums, information was freely transferred, nobody “owned” an idea, and decision making was transparent.

Through such processes, individual knowledge in particular units was transferred to others, with the process becoming embedded in policies, practices, and routines that institutionalized learning as “the company way.” Similarly, isolated pockets of expertise were linked together and leveraged across other units, in the process developing into distinctive competencies and capabilities on which new strategies were developed.

The vital management role at this stage was to create and maintain an internal environment that not only stimulated the development of individual knowledge and expertise to drive the performance of each operating unit, but also supported the interunit interaction and group collaboration to embed knowledge and develop competencies through an organizational learning process. This demanded the creation of a delicately balanced behavioral context in which the hard-edged norms of stretch and discipline were counterbalanced by the softer values of trust and support to create an integrated system that Maruta likened to the functioning of the human body. In what he termed “biological self-control,” he expected the organization he had created to react as the body does when one limb experiences pain or infection: attention and support immediately flows there without being requested or directed.

At this stage, the organization becomes highly effective at developing, diffusing, and institutionalizing knowledge and expertise. But, while a context shaped by discipline, support, stretch, and trust is necessary for organizational regeneration, it is not sufficient. It needs a second force to ensure that the contextual frame itself remains dynamic.

Maintaining a Dynamic Imbalance

Less obvious than the task of creating a behavioral context that supports both individual unit performance and cross-unit collaboration is the complementary management challenge of preventing such a system from developing a comfortable level of “fit” that leads toward gradual deterioration. The great risk in a finely balanced system of biological self-control such as the one Kao developed is that it can become too effective at embedding expertise and institutionalizing knowledge. This capability risks becoming a liability when unquestioned conventional wisdom and tightly focused capabilities constrain organizational flexibility and strategic responsiveness, leading the system to atrophy over time.

Recently, the popular business press has been full of stories about once great companies that fell victim to their own deeply embedded beliefs and finely honed resources — the so-called “failure of success” syndrome. Digital Equipment’s early recognition of a market opportunity for minicomputers grew in its strong commitment to VAX computers that blinded managers to the fact that the segment they were serving was disappearing. There are similar stories in hundreds of other companies, from General Motors and Volkswagen to Philips and Matsushita. These stories underscore the role top managers must play to prevent the organizational context they create from settling into a static equilibrium. Despite the widely advocated notion of organizational fit, the top-level managers in the self-regenerating companies we studied were much more concerned about doing what one described as “putting a burr under the saddle of corporate self-satisfaction.”

Contrary to their historically assumed role of reinforcing embedded knowledge through policy statements of “the company way” and reaffirming well-established capabilities as core competencies, top managers in dynamic, regenerating companies perceive their task to be almost the opposite. While creating a context in which front-line and middle managers can generate, transfer, and embed knowledge and expertise, they see their role as counterbalancing and constraining that powerful process. By challenging conventional wisdom, questioning the data behind accumulating knowledge, and recombining expertise to create new capabilities, top managers at companies like Kao, Intel, ISS, and 3M created a dynamic imbalance that proved critical in the process of continuous regeneration.

Maruta and his colleagues at Kao maintained this state of slight organizational disequilibrium through two major devices: a micro process aimed at providing continuous challenge to individual thinking, and a macro process based on regular realignment of the organizational focus and priorities. With regard to the former, Maruta was explicit about his willingness to counterbalance the strong unifying force of Kao’s highly sophisticated knowledge-building process. He repeatedly told the organization, “Past wisdom must not be a constraint, but something to be challenged.” One approach that Maruta adopted to prevent his management team from too readily accepting deeply ingrained knowledge as conventional wisdom was his practice of discouraging managers from referring to historical achievements or established practices in their discussion of future plans. As one senior manager reported, “If we talk about the past, the top management immediately becomes unpleasant.” Instead, Maruta constantly challenged his managers to tell him what new learning they had acquired that would be valuable in the future. “Yesterday’s success formula is often today’s obsolete dogma,” he said. “We must continually challenge the past so that we can renew ourselves each day.”

At a more macro level, Maruta created a dynamic challenge by continually alternating his emphasis on simplification and integration. Soon after assuming Kao’s presidency in 1971, he initiated the so-called CCR movement, a major corporate initiative to reduce work-force size through a widespread computerization of activities. This efficiency-driven initiative was followed in the mid-1970s by a TQM program that focused on organizationwide investments and cross-unit integration to improve long-term performance. By the early 1980s, an office automation thrust returned attention to the simplification agenda, which, by the mid-1980s, was broadened into a total cost reduction (TCR) program. By the late 1980s, however, top management was reemphasizing the integration agenda, and the company’s TCR slogan was reinterpreted as “total creative revolution” requiring intensive cross-unit collaboration.

Through this constant shift between simplification and integration, Maruta created an organization that not only supported both capabilities but embedded them dynamically to ensure that no one mode of operation became the dominant model. This organizational context was vital for ongoing business regeneration.

Leading the Renewal Process

Managers in many large companies recognize the need for the kind of radical change we have described. Yet, most shy away from it. The European head of a large U.S. company gave us perhaps the most plausible explanation for this gap between intellectual understanding and emotional commitment to action: “The tragedy of top management in large corporations is that it is so much more reassuring to stay as you are, even though you know the result will be certain failure, than to try to make a fundamental change when you cannot be certain that the effort will succeed.”

Many of the recent books and articles on corporate transformation suggest that the process is inherently complex and messy. While that is true, many also ascribe a mystical characteristic to transformation by claiming that it is impossible to generalize it. That is not true. We have seen several companies that made effective, sustainable change toward the self-regenerative capability we have described. In all such cases — Motorola, GE, AT&T, ABB, Lufthansa, and several others — we observed the same sequential process, with distinct, though overlapping phases of simplification, integration, and regeneration. At the same time, others like IBM, Daimler Benz, DEC, Philips, and Hitachi that have tried alternative routes have made little progress until a change of top management led them to something closer to the model we have described. Similarly, when such a phased approach failed, as it did at Westinghouse, it was because changes in the organizational hardware were not matched with changes in the behavioral software. The model we have presented is general, and while we have inferred it from observations of practice, recent theoretical advances suggest that the particular sequence we have proposed is necessary to break down the forces of organizational inertia.11

We do not mean, however, that leading a company through such a renewal process will be easy, quick, or painless. The metaphor of a caterpillar transforming into a butterfly may be romantic, but the experience is an unpleasant one for the caterpillar. In the process of transformation, it goes blind, its legs fall off, and its body is torn apart, as beautiful wings emerge. Similarly, the transformation from a hierarchical bureaucracy to a flexible, self-regenerating company will be painful and requires the enormous courage of its leaders. We hope the road map we have provided will help instill this courage by removing some of the mysticism and uncertainty from the most daunting challenge of corporate leadership today.