While there are many types of change programs, 2 primary goals typically drive a change initiative:
- Near term economic improvement or
- Improvement in organisational capabilities
Harvard Business School professors Michael Berr and Nitin Nohria coined the terms Theory E and Theory O to describe these two goals.
Theory E: An economic approach
The primary focus of Theory E is to immediately increase shareholder value. The same is measured by improved cash flows and share price. Popular notions of employee participation and the ” learning organisation” take a back seat in this approach.
According to Theory E all implicit contracts between the company and its employees are suspended during the change effort. Individuals and units whose activities fail to provide tangible value creation (example: R&D and Planning) are particularly vulnerable in this approach.
The CEO and the executive team along with the help of some external consultants drive this type of change. The various departments, business units and employees of the organisation are like pieces in the managements strategic chess board wherein they are rearranged or combined or occasionally cashed out.
Theory O: An Organisational Capabilities Approach
The goal of theory O change is to develop an organisational culture that supports learning and an high performance employee base. In this approach the companies invigorate their cultures and capabilities via individuals and organisational learnings. This promotes a flatter organisation, encourages employee participation and fosters strong bonds between the organisation and its people.
Implicit contracts in this approach are too important to be broken as this approach banks on employee participation which is quite the opposite of a Theory E approach.
Companies taking the Theory O route don’t subscribe to concentrated power and directions from the top. Leaders that drive Theory O change are less interested in driving the change themselves. They are more focused in developing employee attitudes and behaviours that will sustain the change that they (the leaders) intend to bring.
Theory E or Theory O?
Most companies studied by professors Michael Berr and Nitin Nohria preferred a mix of the two to suit their needs.
The table below explains why
(Image Credit: Harvard Business Review)
So which approach is best for your company? Well, only the people familiar with the inner workings of your company can say with authority. However, you may use the content above as a good starting point.