Artical 1 Why Do Employee Resist Change

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Artical 1 Why Do Employee Resist Change

  1. 1. Why Do Employees Resist Change? by Paul Strebel Harvard Business Review Reprint 96310
  2. 2. Organizations have personal compacts with their employees. Change efforts will fail unless those compacts are revised. Why Do Employees Resist Change? by Paul Strebel Change management isn’t working as it should. facturing, and supply chain management, and for In a telling statistic, leading practitioners of radical new organizations to fit the new processes. From corporate reengineering report that success rates subordinates, management looks for enthusiasm, in Fortune 1,000 companies are well below 50%; acceptance, and commitment. But it gets some- some say they are as low as 20%. The scenario is all thing less. Communication breaks down, imple- too familiar. Company leaders talk about total mentation plans miss their mark, and results fall quality management, downsizing, or customer val- short. This happens often enough that we have to ue. Determined managers follow up with plans for ask why, and how we can avoid these failures. process improvements in customer service, manu- In the Change Program at IMD, in which executives tackle actual change prob- lems from their own companies, I have worked with more than 200 managers from 32 countries, all of whom are struggling to respond to the shocks of rapidly evolving markets and technology. Although each compa- ny’s particular circumstances ac- count for some of the problems, the widespread difficulties have at least one common root: Managers and employees view change differ- ently. Both groups know that vision and leadership drive successful change, but far too few leaders recog- an rg nize the ways in which individuals on o commit to change to bring it about. s Top-level managers see change as an op- i at portunity to strengthen the business by iz aligning operations with strategy, to take on Paul Strebel is a professor and director of the Change new professional challenges and risks, and to ad- Program for international managers at IMD, the Inter- vance their careers. For many employees, however, national Institute for Management Development in including middle managers, change is neither Lausanne, Switzerland. This article is based on part of his forthcoming book, New Personal Compacts: The sought after nor welcomed. It is disruptive and in- Missing Link in Change Management, to be published by trusive. It upsets the balance. the Harvard Business School Press in 1997. The material Senior managers consistently misjudge the effect on Eisai is taken partly from a study by Liisa Välikangas, of this gap on their relationships with subordinates a senior business analyst with SRI Consulting in Menlo and on the effort required to win acceptance of Park, California. change. To close the gap, managers at all levels Copyright © 1996 by the President and Fellows of Harvard College. All rights reserved. DRAWINGS BY MICHAEL WITTE
  3. 3. must learn to see things differently. They must put formance. In return for the commitment to per- themselves in their employees’ shoes to understand form, managers convey the authority and resources how change looks from that perspective and to ex- each individual needs to do his or her job. What amine the terms of the “personal compacts” be- isn’t explicitly committed to in writing is usually tween employees and the company. agreed to orally. From an employee’s point of view, personal commitment to the organization comes What Is a Personal Compact? from understanding the answers to the following series of questions: Employees and organizations have reciprocal What am I supposed to do for the organization? obligations and mutual commitments, both stated What help will I get to do the job? and implied, that define their relationship. Those How and when will my performance be evalu- agreements are what I call personal compacts, and ated, and what form will the feedback take? corporate change initiatives, whether proactive or What will I be paid, and how will pay relate to my reactive, alter their terms. Unless managers define performance evaluation? new terms and persuade employees to accept them, Companies may differ in their approach to an- it is unrealistic for managers to expect employees swering those questions, but most have policies fully to buy into changes that alter the status quo. and procedures that provide direction and guide- As results all too often prove, disaffected employ- lines to managers and employees. Nevertheless, a ees will undermine their managers’ credibility and clear, accurate formal compact does not ensure that well-designed plans. However, I have observed ini- employees will be satisfied with their jobs or that tiatives in which personal compacts were success- they will make the personal commitment man- fully revised to support major change – although the agers expect. Unfortunately, many managers stop revision process was not necessarily explicit or de- here when anticipating how change will affect em- liberate. Moreover, I have identified three major di- ployees. In fact, performance along this dimension mensions shared by compacts in all companies. is tightly linked to the other two. ac ce p tanc e, br ea ks n w do pro cesses These common dimensions are formal, psychologi- The psychological dimension of a personal com- cal, and social. pact addresses aspects of the employment relation- The formal dimension of a personal compact is ship that are mainly implicit. It incorporates the the most familiar aspect of the relationship be- elements of mutual expectation and reciprocal tween employees and their employers. For an em- commitment that arise from feelings like trust and ployee, it captures the basic tasks and performance dependence between employee and employer. requirements for a job as defined by company docu- Though often unwritten, the psychological dimen- ments such as job descriptions, employment con- sion underpins an employee’s personal commit- tracts, and performance agreements. Business or ment to individual and company objectives. Man- budget plans lay out expectations of financial per- agers expect employees to be loyal and willing to do HARVARD BUSINESS REVIEW May-June 1996 87
  4. 4. PERSONAL COMPACTS whatever it takes to get the job done, and they rou- Alignment between a company’s statements and tinely make observations and assumptions about management’s behavior is the key to creating a con- the kind of commitment their employees display. text that evokes employee commitment along the The terms of a job description rarely capture the social dimension. It is often the dimension of a per- importance of commitment, but employees’ behav- sonal compact that is undermined most in a change ior reflects their awareness of it. Employees deter- initiative when conflicts arise and communication mine their commitment to the organization along breaks down. Moreover, it is the dimension along the psychological dimension of their personal com- which management’s credibility, once lost, is most pact by asking: difficult to recover. How hard will I really have to work? What recognition, financial reward, or other per- Unrevised Personal Compacts sonal satisfaction will I get for my efforts? Block Change Are the rewards worth it? Individuals formulate responses to those ques- Looking through the lens of unrevised personal tions in large part by evaluating their relationship compacts, employees often misunderstand or, with their boss. Their loyalty and commitment is worse, ignore the implications of change for their closely connected to their belief in their manager’s individual commitments. At Philips Electronics, willingness to recognize a job well done, and not based in the Netherlands, employees’ failure to un- just with more money. In the context of a major derstand changing circumstances drove the organi- change program, a manager’s sensitivity to this di- zation to the brink of bankruptcy. mension of his or her relationship with subordi- In the early 1980s, Philips’s reputation for engi- nates is crucial to gaining commitment to new neering excellence and financial strength was un- goals and performance standards. paralleled, and it was a prestigious company to Employees gauge an organization’s culture work for. The company – which pioneered the de- through the social dimension of their personal velopment of the audio cassette, the video recorder, compacts. They note what the company says about and the compact disc – recruited the best electrical its values in its mission statement and observe the engineers in the Netherlands. interplay between company practices and manage- Like many multidomestic European companies, ment’s attitude toward them. Perceptions about the Philips had a matrix structure in which strong company’s main goals are tested when employees country managers ran the international sales and marketing subsidiaries like fief- doms. Local product divisions were Employees often misunderstand organized separately, and competi- tion for resources among the differ- or, worse, ignore the implications ent business units was vigorous. Central control was anathema, but of change for their individual the size and complexity of headquar- ters in Eindhoven grew nevertheless. commitments to the company. At the same time, competition was intensifying. Despite its contin- ued excellence in engineering inno- evaluate the balance between financial and non- vation, Philips was having trouble getting new financial objectives, and when they determine products to market in a timely way. Margins were whether management practices what it preaches. squeezed as manufacturing costs slipped out of line They translate those perceptions about values into in comparison with Sony’s and Panasonic’s, and beliefs about how the company really works – about market share started falling even in the company’s the unspoken rules that apply to career develop- northern European heartland, where Sony was ment, promotions, decision making, conflict reso- rapidly taking over the leading position. During the lution, resource allocation, risk sharing, and lay- 1980s, two successive CEOs, Wisse Dekkers and offs. Along the social dimension, an employee tries Cor van der Klugt, tried to redirect the company. to answer these specific questions: Each, in his time, hammered home the problems Are my values similar to those of others in the that needed correcting: the pace and quality of organization? product development, slow time to market, and What are the real rules that determine who gets high manufacturing costs. The two men communi- what in this company? cated vigorously, reorganized, and set up task forces 88 HARVARD BUSINESS REVIEW May-June 1996
  5. 5. on change. In Philips’s 1989 annual report, van der fundamentally different view of their obligations. Klugt reported that he had redefined management Neither Dekkers nor van der Klugt drove the pro- responsibilities to give product divisions greater cess far enough to alter employees’ perceptions and freedom to respond to competitive and market bring about revised personal compacts. pressures. Yet the projected improvements in costs By the time Jan Timmer took over at Philips in and market share did not materialize quickly May 1990, the company faced a crisis. Net operat- enough. At the end of van der Klugt’s tenure, ing income in the first quarter of 1990 was 6 million Philips was facing the biggest operating loss in the guilders compared with 223 million guilders the company’s history. previous year, and the net operating loss for the year Why couldn’t either of those seasoned profes- was projected by analysts at 1.2 billion guilders. sional managers deal with the changes in the com- Timmer was an insider from the consumer elec- petitive environment? They understood the prob- tronics division, where he had successfully stopped lems, articulated the plans, and undertook the mounting operating losses. But the scale of Tim- initiatives that we associate with change leader- mer’s challenge to turn the company around was ship. Yet each failed in his attempt to redirect the matched by the pressure on him to deal quickly and company in time because widespread employee effectively with the potentially crippling losses. support was missing. In fact, personal compacts in place at the time actually blocked change because Orchestrating the Revision there was little alignment between senior man- of Compacts agers’ statements and the practice and attitude of lower-level managers and their subordinates. The revision of personal compacts occurs in But the problem could have been predicted. Dur- three phases. First, leaders draw attention to the ing Philips’s prosperous years, a tradition of lifelong need to change and establish the context for revis- employment was part of the company culture. Job ing compacts. Second, they initiate a process in security came in exchange for loyalty to the com- which employees are able to revise and buy into pany and to individual managers. Informal rules new compact terms. Finally, they lock in commit- and personal relationships dominated formal sys- ments with new formal and informal rules. By ap- tems for performance evaluations and career ad- proaching these phases systematically and creating vancement. Managers’ job descriptions and position explicit links between employees’ commitments and in the hierarchy set limits on their responsibilities, the company’s necessary change outcomes, manag- and operating outside those boundaries was dis- ers dramatically improve the probability of hit- couraged. Subordinates weren’t encouraged any dif- ting demanding targets. To lead Philips out of its ferently. People weren’t trying to meet challenges crisis, Jan Timmer had to steer the company through facing the company or even looking for personal those phases. growth. Position and perceived power in the com- Shock Treatment at Philips. Although the com- pany network determined who got what. And be- petitive landscape around Philips had changed, the cause seniority so directly affected an employee’s company and its employees had not. Employees’ career growth and level of compensation, workers personal compacts favored maintaining the status had no incentive to work harder than people just quo, so resistance to change was imbedded in the above them or to exceed their boss’s minimum ex- culture. To achieve a turnaround, Timmer was go- pectations for performance. ing to have to reach deep into the organization and Moreover, even when costs were demonstrably not only lead the initiative but also closely manage out of line and operating margins were declining, it. Getting people’s attention was merely the first Philips had no effective mechanism for holding step. Persuading them to revise the terms of their managers accountable for failing to achieve finan- personal compacts was a much bigger challenge. cial targets. Budget-to-actual variances were attrib- Timmer’s approach was a dramatic one; in fact, it uted to events outside the control of unit managers. was shock treatment. Shortly after becoming CEO And because of the limitations of financial report- in mid-1990, he invited the company’s top 100 ing systems and a culture that encouraged loyalty managers to an off-site retreat at Philips’s training over performance, no one was able to challenge this center in De Ruwenberg. There he explained the mind-set effectively. company’s situation in stark terms: Its survival was None of that changed under Dekkers or van der in jeopardy. To reinforce the message, he handed Klugt. Managers and subordinates were not forced out a hypothetical press release stating that Philips to understand how the changes essential to turning was bankrupt. It was up to the group in the room the company around would require them to take a to bring the company back. Everyone would have to HARVARD BUSINESS REVIEW May-June 1996 89
  6. 6. PERSONAL COMPACTS contribute. Operation Centurion had begun and, tunities to reinforce his message about personal with it, the end of life in the company as all those in commitments to current goals. Ongoing meetings the room had known it. with Philips’s top 100 managers were the forum for From the start, Timmer’s terms for change were discussing long-term plans. tough and unambiguous, and those who didn’t like But Timmer knew that he could not accom- them were encouraged to leave. In Operation Cen- plish his goals unless managers and subordinates turion, Timmer captured the mind-set he wanted throughout the company were also committed to and created the process he would use to focus man- change. Employees’ concerns about this corporate agers’ attention on the new goals. Extending the initiative had to be addressed. Therefore, as the ob- metaphor, Timmer offered his managers new per- jectives for Operation Centurion came into focus at sonal contracts, which were like the assignments senior levels, plans to extend its reach emerged. Se- given officers by their superiors in the Roman nior managers negotiated Centurion contracts with army. In the ensuing Centurion Sessions, the terms their business unit directors, and that group then of these new compacts would begin to take shape. took the initiative to the product-group and coun- Drawing on benchmarking data on best-in-class try-management teams. At workshops and training productivity, Timmer called for an across-the-board programs, employees at all levels talked about the 20% reduction in head count. He also stipulated consequences and objectives of change. Timmer that resources for essential new initiatives would reached out via company “town meetings” to an- have to come from within, despite deep cuts in ex- swer questions and talk about the future. His ap- proach made people feel included, and his direct style encouraged them Personal commitments, binding to support him. It soon became clear that employees were listening and agreements, and performance the company was changing. By the end of 1991, the workforce standards formed the basis for had been cut by 22% – 68,000 people. Those who didn’t meet the terms of new compacts at Philips. their contracts were gone, including Timmer’s successor in the consumer electronics division. Even at the top, penses throughout the company. The meeting the culture of patronage, social networking, and broke up to allow managers from each product divi- lifetime employment in exchange for loyalty be- sion to come to grips with what they had been pre- came things of the past. When no one inside quali- sented and to consider how they would respond. fied, Timmer hired top managers from outside. As Before this initial session with Timmer ended, each a result, by mid-1994, only 4 members of the origi- of the division managers had orally agreed on tar- nal senior-management committee remained, and gets for reductions in head count and operating only 5 of the 14 were Dutch. A company survey in costs. In subsequent discussions, those plans be- 1994 confirmed that employees had responded fa- came formal budget agreements between Timmer vorably to the changes and the new atmosphere: and his Centurion managers: Each plan was signed Morale and feelings of empowerment had soared. by the presenting manager to signify his personal After fluctuating during the early nineties, Philips’s commitment to the terms. Performance would be financial performance recovered strongly in 1993 measured against achievement of the targets and and 1994; operating income rose from (4.3%) of linked to individual bonuses and career opportuni- sales in 1990 to 6.2% in 1994 and the share price ties. Personal commitments, binding agreements, moved from 20.30 guilders to 51.40 guilders. and standards for performance would form the ba- Of course, not every case is like Philips’s. You do sis for the new personal compacts at Philips. not need a crisis to revise personal compacts and The De Ruwenberg meeting has become part of get greater commitment. The contrasting example Philips’s company lore. It underscored the urgency of Eisai, a Japanese health-care company, shows of the company’s situation and set the stage for the how far the understanding of personal compacts compact-revision process that followed. In the days can take you when change is proactive. and weeks thereafter, Timmer maintained a high Creating the Context for Change at Eisai. A profile as he spread the message of Operation Cen- small, family-owned company, Eisai was one of the turion and the significance of the new personal original manufacturers of vitamin E, and it main- compacts. Regular budget reviews gave him oppor- tained a strong research commitment to natural 90 HARVARD BUSINESS REVIEW May-June 1996
  7. 7. pharmaceuticals. Over the years, it developed drugs Human Health Care (HHC). It extended the compa- for the treatment of cardiovascular, respiratory, and ny’s focus from manufacturing drug treatments for neurological diseases; by the end of the 1980s, such specific illnesses to improving the overall quality of drugs comprised 60% of the company’s sales. The life, especially for elderly sick people. To accom- company experienced steady, modest growth dur- plish that mission, Eisai would have to develop a ing that decade, and in 1989 sales reached 197 billion yen and profits approached 13 billion yen. But there were signs of potential trouble To accomplish strategic ahead. Eisai was spending a hefty 13% of sales on R&D – compared transformation, Eisai’s CEO had with an average of 8.5% in other companies – and between 1982 and to create a context for change. 1991, only 12 of the company’s 295 patent applications in Japan had been approved by wide array of new products and services. And that, regulatory authorities. Although it was the sixth- in turn, would require broad employee involve- largest Japanese pharmaceutical company, Eisai ment and commitment. Although Naito did not ex- was a relatively small player in an industry in plicitly characterize Eisai employees’ commit- which global competition was increasing while ments as personal compacts, he clearly understood growth in the domestic market was slowing down. that individuals would have to accept new terms In 1988, Haruo Naito took over as CEO and presi- and performance standards that he could not sim- dent from his father. Before that, he had chaired ply mandate. He had to encourage entrepreneurial Eisai’s five-year strategic planning committee. Dur- and innovative activity and create an environment ing that time, he had become convinced that the in which such efforts would be accepted and re- company’s focus on the discovery and manufacture warded. Indeed, for his vision of HHC to become of pharmaceuticals was not sustainable for long- reality, Naito knew that employees themselves term growth against large, global competitors. In would ultimately have to take the lead in designing the absence of either a real or a perceived crisis, the formal terms of their personal compacts. however, and in the face of deeply felt cultural tra- In 1989, Naito announced his new strategic vi- ditions, changing direction at Eisai would require sion and initiated a training program for 103 “inno- unusual leadership. vation managers” who were to become the agents In the tradition of Japanese family companies, for change in the company. The training program Eisai had few formal rules of employment. Among consisted of seminars on trends in health care and the 4,000 employees, lifelong employment was concepts of organizational change. It also gave em- the norm and career advancement and authority ployees a firsthand look at patient-care practices by were based on seniority. Groups made decisions be- having them spend several days in both traditional cause failure by an individual would mean loss of and nontraditional health-care facilities where they face. And employees were not encouraged to step performed actual nursing activities. At the end of outside established roles to take on assignments beyond the scope and structure of the existing organiza- tion. Individuals were loyal both to The employees themselves their managers and to group norms, so they did not seek personal rec- would have to take the lead in ognition or accomplishment. And because other Japanese companies designing the formal terms of operated in similar ways, there was no external competitive pressure to their personal compacts. be different. To accomplish strategic transformation, Naito would have to create a com- the program, Naito charged the innovation man- pelling context for change and an inducement for agers with turning the insights from their experi- employees to try something new – without disrupt- ences into proposals for new products and services. ing the entire organization. Each proposal was brought before Naito and Eisai’s Several years after becoming CEO, Naito formu- executive management to gain high-level corporate lated a radical new vision for Eisai that he called support and, as important to Naito, to secure indi- HARVARD BUSINESS REVIEW May-June 1996 91
  8. 8. PERSONAL COMPACTS vidual managers’ public commitment to the achieve- In general, the more homogeneous the culture, the ment of their HHC projects’ goals. more implicit the formal dimension of personal This training program and the subsequent HHC compacts is likely to be. The same is true along psy- product-development efforts set the stage for the chological and social dimensions in homogeneous creation of a dramatically different set of personal environments, because employers and employees compacts at Eisai. The innovation managers oper- share similar perspectives and expectations. For ex- ated outside both the normal organizational struc- ample, in Japan and continental Europe, the legal ture and the company’s traditional cultural boundaries. They designed new products and programs, put to- gether multidisciplinary teams to Personal compacts will need to develop their ideas, and drew new participants of their own choice into be more explicit as companies the change initiative. They reported to Naito, and he personally evaluat- become truly multinational. ed their performance and the contri- bution of individual projects to the HHC vision. As systems for settling disputes are based on a civil a result, junior people had a chance to break out of code documented in statutes. Those systems carry the seniority system and to shape the development over to the underlying principles in legal contracts of the company’s new strategy as well as the terms and to the assumptions that support employer- of their own personal compacts. These were oppor- employee relationships. Indeed, when a compact is tunities previously unheard of in Eisai or in other laid out too explicitly in Japan, it is taken as an af- Japanese pharmaceutical companies. front and a sign that one party doesn’t understand The visibility and senior-management support how things work. for the first projects generated widespread enthusi- By contrast, in countries like the United States, asm for participating in the new movement at Eisai. personal compacts tend to be supported by formal The cross-functional teams established employee systems to ensure objectivity in the standards for ownership of the HHC vision, which rapidly took performance evaluation. And more structure exists on a life of its own. Soon there were proposals for to support employee-employer relations, both in 130 additional HHC projects involving 900 people, the form of company policies and procedures and in and by the end of 1993, 73 projects were under way. the role that human resource departments play. New services offered by the company included a 24- Similarly, as companies become more truly multi- hour telephone line to assist people taking Eisai national, the importance of making the terms of medications. Another brought consumers and med- personal compacts explicit increases, as does the re- ical professionals together at conferences to discuss quirement to support them formally. In my experi- health care needs. New attention to consumer pref- ence, this is true whether companies are imple- erences led to improvements in the packaging and menting change to meet the needs of a culturally delivery of medications. diverse workforce or to respond to market opportu- Although personal compacts at Eisai are still nities and threats. dominated by traditional cultural norms, Naito’s Regardless of the cultural context, unless the re- ability to lead his employees through a process in vision of personal compacts is treated as integral to which they examined and revised the old terms en- the change process, companies will not accomplish abled them to accomplish major strategic change. their goals. In one way or another, leaders must The effects of the new strategy are visible in Eisai’s take charge of the process and address each dimen- product mix. By the end of 1993, the company had sion. Jan Timmer and Haruo Naito revised their moved from sixth to fifth place in the Japanese do- employees’ personal compacts using different ap- mestic pharmaceutical industry, and today Eisai’s proaches and for different reasons. But each drove customers and competitors view the company as a successful corporate change by redefining his em- leader in health care. ployees’ commitment to new goals in terms that everyone could understand and act on. Without Culture and Personal Compacts such leadership, employees will remain skeptical of the vision for change and distrustful of manage- The extent to which personal compacts are writ- ment, and management will likewise be frustrated ten or oral varies with the organization’s culture and stymied by employees’ resistance. and, in many cases, the company’s home country. Reprint 96310 To place an order, call 1-800-545-7685. 92 HARVARD BUSINESS REVIEW May-June 1996

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