I Academy of Management Executive. 1996 Vol. 10 No. 1Chang.docx

I Academy of Management Executive. 1996 Vol. 10 No. 1
Changing the deal while
keeping the people^
Denise M. Rousseau
Executive Overview Companies are in danger of losing the
voluntariness that makes possible much
of a business's ability to compete. As whole industries undergo
restructuring,
psychological contracts—fhose unwriffen commifmenfs made
between workers
and their employers—need to change in order to be kept.
Service, quality, and
innovation require higher confribufions from people and.
therefore, a new
psychological contract involving commitment and trust. In high
contribution
work settings, that means changing the deal while keeping the
people. Changes
which violate a contract or fail to substitute another effective
one in its place
won't do. And. even though the psychological contract is not
legally binding,
today's executive must know how successful firms transform it.
Effectively changing a psychological contract depends on two
things: how
similar is the proposed change to the current contract? and how
good is the
relationship between employee and employer? Asking people to

use a new work
system or work a few extra hours can simply mean to modify,
clarify, substitute,
or expand an existing contract. However, asking people to
redefine
themselves—as professionals rather than job holders, customer
service
providers rather than technicians, or as leaders rather than
middle
managers—is far more complicated.
When a good-faith relationship exists, changes are more likely
to be accepted
as part of the existing contract, because parties are not looking
for contract
violations and trust creates willingness to be flexible.̂ On the
other hand, when
a relationship historically has been negative, changes are more
likely to require
more extensive overhaul in the employment relationship. In
such situations,
improving the employment relationship is a necessary first step
in contract
change.
Changing the Contract
There are two ways to change the psychological contract,
accommodation and
transformation. Accommodations modify, clarify, substitute, or
expand terms
within the context of the existing contract so that people feel
the old deal
continues despite changes. Isolated changes in performance
criteria, benefit
packages or work hours are frequent forms of accommodation.
Because of this

continuity, it is the change strategy of choice. However, to be
effective, there
must be a good relationship between the company and its
members. Companies
such as Hewlett Packard and Cummins Engine have introduced
changes in
employment conditions over the years that have been largely
accepted by their
empolyees based on a positive labor history.
In contrast to accommodations, transformations are radical
surgery.
Transformation means that new mindsets replace old ones.
Contemporary
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Rousseau
It is quite common to
find newcomers and
veterans working side
by side holding
different
psychological
contracts.
contracts are changing at unprecedented rates. Shifts in job
duties from
individual efforts to teamwork, from short-term financial results
to customer
satisfaction, or moving from offering "a job for life" to
"employability"
necessitate the rewriting of the psychological contract.

Consider, for example,
the transformation of the Bell System. When divestiture was
ordered by the
courts in the early 1980s, the process of breaking up a highly
successful,
regulated business and turning it into separate competitive
enterprises rewrote
the deep structure of the employment contract. Employees who
for generations
in many cases had "bell-shaped heads" never missed a day of
work, and
labored loyally for a secure job and retirement began coping
with the need to
produce business results, and respond to market demands. A
decade and a half
of uncertainty, terminations, and movement of personnel from
operating
companies to new high-technology business units radically
changed the people
and their relationship to the many new organizations that the
break-up created.
The purpose of contract transformation is the creation of a new
contract that it is
hoped engenders commitment. In some cases companies with a
history of
serious labor/management conflict, such as those in the steel
industry, have had
no choice but transformation. However, contracts resist
revision, and
transformation goes against the grain. Therefore, how that
change is attempted
determines whether change occurs, whether it degenerates into
contract
violation, or successfully transforms the basis of the
relationship.

The fact is that individuals are open to new contract information
only at certain
times, a phenomenon psychologists refers to as "discontinuous
information
processing."^ People often see what they expect to see. gather
information only
when they think they need it, and ignore a lot. Two
circumstances in which
people become open to new information are when they are
newcomers to the
organization or when a disruption occurs which they cannot
ignore.
The easiest way to change a contract is to hire new people.
Recruits ask a lot of
questions while they are newcomers and once they start getting
the answers
they expect, they stop asking. Veterans may do little inquiring
at all. Companies
tell things to newcomers that they would never bother
mentioning to an old
timer. Once norms and practices are internalized, however, the
newcomer is no
longer new.
Significant disruptions make old mindsets tough to maintain.
Several years into
a major re-orientation focusing on customers, teamwork, and
quality, a Xerox
executive encountered a manager who mentioned that he had
taken his team
with him to go through a refresher training course. He asked
why the course
was needed given the company's sustained change efforts:

"Because I never paid much attention the first time through,
since I thought
this thing would be gone by now, I thought it was just another
ice cream
flavor. But I got scared when I saw that [the new CEO] had
picked it up with
vigor. So we know we can't hide in the weeds anymore."*
Information gathering tends to be triggered by events signalling
"this is the
time to ask questions" such as in job interviews, or when the
firm has been
acquired and a new CEO from the parent company has arrived.
Information is
processed when there is a felt need for it, when the old
information doesn't
seem to work, and otherwise pretty well ignored. The cognitive
processes
involved are both lazy and conservative. People do not work
hard on changing
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Academy of Management Executive
contracts or any other established mindset. People work hard on
fitting
experiences into them. It is quite common to find newcomers
and veterans
working side by side holding different psychological contracts.
Transformation Stages
Basic principles in transformation capitalize on how employees
tend to process

information by seeking to unfreeze old mindsets and create new
ones, a process
characterized here in four stages (see Exhibit 1).
STAGE
Challenging the old contract
-Stress
-Disruption
Preparation for change
-Ending old contract
-Reducing losses
-Bridging to new contract
Contract generation
-Sensemaking
-Veterans become "new"
Living the new contract
-Reality checking
Exhibit 1.
INTERVENTION
• Provide new discrepant information (educate people). Why
do we need to change?
• Involve employees in information gathering (send them out
to talk with customers and benchmark successful firms)
• Interpret new information (show videos of customers
describing service and let employees react to it)
• Acknowledge the end of the old contract (celebrate good

features of old contract)
• Create transitional structures (cross-functional task forces
to manage change)
• Evoke "new contract" script (have people sign on to "new
company")
• Make contract makers (managers) readily available to
share information
• Encourage active involvement in new contract creation
• Be consistent in word and action (train everyone in new
terms)
• Follow through (align managers, human resources
practices, etc.)
• Refresh (re-emphasize the mission and new contract
frequently)
Transforming the Psychological Contract
STAGE 1: Challenging the old contract. It takes a "good" (i.e.,
legitimate) reason
to change a contract and keep the people. Consider the
following scenarios:
A photocopying shop has one employee who has worked in the
shop for three
months and earns $9 per hour. Business continues to be
satisfactory, but a
factory in the area has closed and unemployment has increased.
Other small
firms have hired reliable workers at $7 an hour to perform jobs

similar to
those done by the photocopy shop employee. The owner of the
photocopying
shop reduces the employee's wage to $7.
Is it fair for the employer to cut the employee's wage from $9 to
$7 an hour? Now
consider the next scenario:
A house painter employs two assistants and pays them $9 per
hour. The
painter decides to change businesses and go into lawn mowing
where the
52
Rousseau
going wage is lower. He tells the current workers that he will
keep them on if
they want to work, but will only pay them $7 per hour.
Is it fair for this employer to cut the employee's wage from $9
to $7 an hour?
These two scenarios have been widely applied in training
sessions with
executives and consistently yield opposite answers in the vast
majority of cases.
When first employed, the photocopy scenario led approximately
85% of
respondents to say it was "unfair."^ But the reverse happens in
the lawn-mowing
situation where a comparable percentage of respondents indicate

that cutting
the wage is "fair." Each scenario involves the same losses ($2
per hour) and
each involves a change proposed by the employer. The
difference is the way in
which the change is framed. The frame in the house-painting
scenario involves
a shift in the type of business (where the labor market offers a
lower wage).
There is no legitimate external justification in the photocopy
scenario. A core
issue in the management of contract change involves how the
change is framed.
The reluctance of people to endorse the actions of the
photocopy shop's owner
suggests a value placed on continuing contracts, especially if
losses are
involved ($2 per hour), unless there are legitimate reasons to do
otherwise.
These scenarios highlight a central issue in the success of
contract
transformation: effective communication of externally validated
reasons for the
change.
Contracts are challenged when discrepant information is
available regarding
their underlying assumptions. All contracts are based on certain
assumptions,
including the nature of the business (lawn mowing or house
painting, industrial
marketing or consumer sales), and good faith efforts to obtain
mutual benefits.
Shifts in the nature of the business, especially those not directly
under

organizational control, can create severe costs to either party of
continuing the
contract.^ For example, at NCR. management wanted to change
the way sales
representatives treated customers. To help demonstrate why this
change was
essential, NCR videotaped major account customers
complaining about service
and played it to the sales representatives. At first, a few of the
representatives
denied that the customers had really said anything negative.
This denial
persisted until one person asked, "Can we see that tape again?"
When the video
was rerun, the reality of the customer complaints was
undeniably clear.
Transformation failures are often directly attributable to failure
to justify the
contract change or use of insufficient or inappropriate
justifications. One
defense contract or downsized 10% of its workforce under the
banner of
"improved shareholder value." With great fanfare, it gave each
of the more than
100 top managers in the firm a share of company stock encased
in a handsome
frame suitable for hanging on the walls of the executive suite.
The
companywide response was one of resentment, surreptitious
conversations
behind closed doors, and mistrust of hierarchical superiors. The
message sent
touted shareholder interests, not those of the corporation
generally or the
organization member particularly. Unless a person is a

shareholder such a
message doesn't generate a lot of motivation to change.
A more effective message is that offered by Xerox in the early
1980s following
its major loss of market share to Japanese competitors. The
CEO, David Kearns,
saw a need for greater employee involvement to foster customer
responsiveness
and corporate competitiveness:
53
Challenging the
contract requires
creating a deep
understanding of the
reasons why change is
necessary.
"It was obvious to me that we had service problems and had
never addressed
them . . . we dispatched a team of people to Japan. It included
plant
managers, financial analysts, engineers, and manufacturing
specialists . . .
Our team went over everything in a thorough manner. It
examined all the
ingredients of cost: turnover, design time, engineering changes,
manufacturing defects, overhead ratios, inventory, how many
people worked
for a foreman, and so forth. When it was done with its

calibration, we were in
for quite a shock. [One manager] remembers the results a s
being 'absolutely
nauseating'. It wasn't a case of being out in left field. We
weren't even
playing the same game."'
Results of these analyses revealed that the Japanese carried six
to eight times
less inventory, had half the overhead and a near 99.5% quality
rate on incoming
parts compared to Xerox's 95%. Unit manufacturing cost was
two-thirds that of
the American firm. The product of these insights was a strategy
to improve
business effectiveness at Xerox with two underpinning
concepts: employee
involvement and external benchmarking. Commitment to
Excellence and Team
Xerox are titles of efforts in this strategic change.
Benchmarking—active monitoring of other organizations for
establishing
performance standards—can identify necessary new mindsets.
Involvement
helps people exercise these new mindsets. Challenging the
contract requires
creating a deep understanding of the reasons why change is
necessary.
STAGE 2: Preparation {or change. The goal of this stage is to
unfreeze or take
apart the old contract while readying the parties for the next
stage, creating the
new contract. There is a three-pronged approach to effectively
managing this

stage: creating credible signs of change, reducing losses, and
adopting
transition structures to bridge to the new contract.
Credible signs of change: we really mean it this time. Critical,
undeniable
events are needed for people to believe contract change is
inevitable. Credible
signs of change demonstrate commitment to follow through on
the challenge
conveyed in stage one. and create an appropriate ending for the
earlier contract.
Credibility involves different things in different organizations.
In a family
business where no one but family members have headed the
company, the
hiring of an outsider could provide a credible signal. In a
company whose top
management has changed six times in seven years, keeping the
same
management team on to see a change through may be the
necessary signal.
This credible sign of change says "this time we mean to
change."
The next sign is the message that the old contract is ending.
Symbolic ending of
the old contract is necessary because people are strongly
attached to the
arrangement that must have worked well to have survived a s
long a s it did.
Some mourning for the old relationship is likely. Respecting the
past is part of
respecting the people who believed in the old contract. A
defense contractor
faced with declining markets might celebrate the success of its

efforts during
the Cold War and declare victory before going on to re-orient
its business to
new markets. Before initiating a new contract, an old one needs
to be
completed.
Loss reduction: losses are more painful than gains are good.
Given that any
gains are not yet realized, at this stage of transformation the
sense of loss
exceeds gains. Major forms of loss are palpable departures from
the status quo
54
Rousseau
(e.g., security, status), emotional distress due to change, and the
loss of
certainty. Offsetting such losses involves both remedies such a s
training, and
use of procedures that put greater information and control in the
hands of
people affected by the change. Loss of control and certainty
typically
accompanies changes, but can be offset by involving individuals
in planning
the changes that will affect them. When Ameritech began using
downsizing
through early retirement as part of its change process,
employees were
permitted to select their date of retirement—any day of their
choosing within

the calendar year—which maintained some sense of personal
control and
dignity.
Transition structures: when you can't get there directly from
here. Few
transformations occur all at once, as evident in the decade of
change in the Bell
System. Ouite often they occur due to major external upheavals,
which means
that the full scope of the change cannot be known at the
beginning and
therefore changes cannot be implemented all at once. For
psychological
contracts to change, these transitions usually involve
transitional structures,
temporary practices used to promote the larger contract change
effort.
Organizations that create new contracts among new hires while
honoring
existing ones with veterans seek to transform contracts
gradually. However, the
downside of such gradual transition strategies is that veterans
can feel insecure
about the continued benefits they obtain while newcomers may
feel inequitably
treated. It may be that phased-in change using two-tiered wage
systems
requires some form of phase-out system too, where veterans
need support in
learning and adjusting to new performance criteria.
Aside from phased-in changes, other transition structures can
take on the form
of task forces for people to look into ways of effectively

introducing or managing
change. Such structures are often critical in transformations
because
conventional communication channels are insufficient for
affected individuals
whose anxiety levels and information needs have skyrocketed.
Having task
forces that cut across several functions, areas and levels can aid
transformation
planning both through the information they gather and what
they share. To
maintain trust, it is important to have rich information channels,
conveying both
bad news and any other relevant information in a timely way.
Another transitional structure is an interim contract. Change
breeds uncertainty.
Reactions to it may vary from overt displays of emotion and
frustration to
passive withdrawal—"lie low and keep your head down and you
might not get
shot." When past certainties are gone and nothing yet takes their
place, a sort of
"no guarantees" or "anything goes" type of relationship
prevails, resulting in
passive vigilance where little real work gets done. A more
functional transition
is creation of temporary transaction-like contracts. When the
longer term is not
knowable and specific commitments cannot be made, it is useful
to specify
short-term objectives (e.g., project orientation) that give people
a clear task and
provide support to make that task a success. During this
transition, managers
need to remain readily available for questions and to convey

whatever
information they know when they know it.
STAGE 3: Contract generation: creating a new mindset.
Shotgun weddings don't
create new contracts. People need to want to be a party to a
contract. New
commitments are needed that shift attention from the past to the
future.
Managers generate contract terms by conveying new
expectations and
55
Understanding new
contract terms
requires employees to
act like newcomers,
regardless of how
long they have been
with the organization.
commitments. Absence of commitments undercuts the
contractual nature of the
new arrangement, generating compliance only until a better job
opportunity
comes along. But when top management makes a clear statement
of new terms
and solicits commitment to these terms, the supplanting of one
contract by
another can occur. The terms Jack Welch posted on the wall at
GE are an

exemplar of a contract-making statement.^ But, since even
strong statements by
top managers can be incomplete reflections of a new deal,
employees must still
inquire, observe, and monitor to understand the scope of the
new contract.
During transformation, many earlier contract makers are still
intact.
Compensation systems and senior managers may continue
sending the old
contract message into the new era. Old and new contract
messages have to be
sorted out by employees. Getting the right message out can
mean having top
management, not the training department, do the training. When
Jerre Stedd
initiated a globally integrated manufacturing and sales strategy
for Square D.
he created both Vision Mission, a statement of the Square D's
values and goals,
and Vision College, a corporation-wide program where he, his
managers, and
employees from all levels acted as trainers to help veterans and
newcomers
understand the new mission. The result was rapid dissemination
and broad
awareness of the new mission.
Understanding new contract terms requires employees to act
like newcomers,
regardless of how long they have been with the organization.
New contract
acceptance by veterans is aided by evoking a "new contract
script;" for
example, by signing a contract, recruiting for a new job within

one's current
company, or attending a "new employee" orientation. RR
Donnelly, in the midst
of a major culture shift, transferred veteran employees from its
traditional core
publishing business to its high-tech information services
division, but required
them to be treated like a new employee in the process. Veterans
submitted a
resume, underwent interviews, testing, and a new employee
orientation before
actually signing a new employment contract that stressed the
importance of
teamwork, innovation and customer service.
Signing a new contract signifies the reader's assent to the deal,
especially if the
signature follows a statement that the employee has read and
understands the
provisions. Acceptance of new contract terms is also enhanced
by having
employees:
• adopt a new frame of reference—transfer them to a new job or
new
organization within the same parent company
• actively express a choice—have them bid for a new job, fill
out an
application and/or participate in other recruitment-related
activities
• convey commitment vividly and publicly—have them sign a
written
agreement and/or complete a new employee orientation

• Publicly demonstrate acceptance—have them participate in
training others
to support the change
• become part of a critical mass of people with the same
contract—create a
contract that is widely shared and understood.
STAGE 4: Living the new contract. Some reality testing is part
of the
transformation process. People may wonder what will happen if
someone
reverts to the old ways. The aftermath of the U.S. Navy's
Tailhook scandal with
charges of harassment but few resulting convictions led to a
public commitment
on the part of the U.S. Navy to change the environment for its
female members.
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Rousseau
Until employees know
with certainty that the
"old deal is over." the
new contract is not
reality.
Navy women a s combat pilots and aircraft carrier personnel are
signs of change
since these roles were previously forbidden by both custom and
act of Congress.
When Lieutenant Sally Fountain, 31-year-old electronic warfare

officer on a
radar-jamming plane, telephoned a repair office on the carrier
USS Eisenhower,
a male sailor answered and called to his boss, "Hey there is a
lieutenant chick
on the phone for you." Minutes later, the sailor's angry
supervisor hauled the
young man before Lieutenant Fountain to formally apologize.^
Such events are
part of the reality check that occurs when work roles, norms,
and contract terms
change. All contract makers, executives, managers, staff, and
employees must
be vigilant to reinforce the new contract terms so these can then
become part of
the taken-for-granted reality of the new contract.
Solidifying the new contract means that for a while the
organization has to
strive to be incredibly consistent. Until employees know with
certainty that the
"old deal is over." the new contract is not reality. Managers,
senior executives,
interviewers, co-workers, and human resource practices (e.g.,
performance
reviews and promotions), all must be on the same page, sending
consistent
messages in line with the new contract. Focus groups and
informal networks
can help test whether the new contract is well understood. Until
the new deal is
taken for granted, the organization cannot afford to send mixed
messages.
Training all contract makers, from senior managers and
recruiters, to co-workers
and staff, is critical to contract change. Refreshing and

reinforcing that training
is important to sustaining a new reality.
Toward Continuous Change
Today's new contracts feature active, ongoing renegotiation by
both employee
and employer.'" A more diverse workforce needs flexibility in
working
conditions, prompting employee-driven renegotiations of the
contract. At the
same time, a more competitive marketplace demands frequent
change in the
deliverables required (e.g., shorter cycle times, high quality)
and the way they
are produced (e.g., worldwide, customized), and drives
organizations to
reformulate contract terms. Sustained performance and strategic
focus require
psychological contracts that balance and join the interests of
people and
organizations.
But there is a problem. Restructurings in the 1980s led to an era
of "no
guarantees," an employment relationship involving no contract
at all.
Organizations in the throes of change over several years,
downsizing frequently,
and changing strategy often (which effectively means having no
strategy at all)
can undermine their ability to successfully manage and motivate
a workforce.
Though uncertainty may be necessary in the transition to a new
contract more
in line with competitive strategy, organizations too long in
transition erode their

capacity to contract. When employees don't trust their bosses,
react with
disbelief to would-be contract making executives, change
agents, and training
programs, and respond to escalating change with passivity
("keep your head
down and this too shall pass"), the organization may have lost
its ability to
create contracts based on voluntary commitment and good faith.
Restoring and
protecting the capacity to contract is essential to managing
contract change.
How can organizations and their members improve their ability
to make and
keep contracts? Acting in good faith and signalling concern for
each other's
interests are obviously important. But blind faith won't do.
Active renegotiation
of contracts over the long term requires employees to have a
good
understanding of the nature of the business, its strategy, market
conditions and
57
financial indicators. Change cannot be legitimated if people
don't understand
the reasons for it, nor can they effectively participate in crafting
appropriate
new terms. The same holds true for employee-initiated changes
where

managers need perspective on matters outside their own
experience. Improving
the capacity to contract effectively involves acquiring relevant
information and
the skills to use it while working to make the relationship
stronger.
The present and future psychological contract is increasingly a
balanced one
where adjustments are inevitable on both sides. The most
powerful contracts of
all are those that can be both changed and kept.
Endnotes ' This article is adapted from D.M. Rousseau.
Psychological Contracts in Organizafions:
Understanding Written and Unwritten
Agreements (Sage, 1995). An earlier version was
presented at the International Consortium for
Executive Development Research, Lausanne,
Switzerland, June 1994.
^ The willingness to be flexible in a well-
founded relationship has been referred to as
the "zone of acceptance." Herbert A. Simon
[Adminisfrafive Behavior, 3rd edition, (New
York, NY: Macmillan, 1976)] used this term to
refer to the range of duties and responsibilities
in a job that employees believe to be under the
discretion of their employer. So for example,
whether a secretary sends a letter first class or
by overnight delivery matters little to that
person since both can be thought of as part of
mailing correspondence. This zone of
acceptance is quite elastic, being broad and
open in more relational forms of employment or
narrow and rigid in more transactional ones

(Rousseau. 1995).
' The distinction between systematic and
automatic information processing is detailed by
H. Sims and D. Gioia in The Thinking
Organization (San Francisco. CA: Jossey-Bass,
1987).
' D.T. Kearns and D.A. Nadler, Prophets in (he
Dark: How Xerox Re-Invented Itself and Beat
Back the Japanese (New York, NY: Harper, 1992).
* D. Kahneman, J. Knetsch and R.H. Thaler,
"Fairness and the Assumptions of Economics,"
Journal of Business, 59. 1986, S285-S300.
^ The slow adoption and in many cases
frustrating failures of the quality of work life
(QWL) movement in the United States can be
attributed to a lack of any understood
legitimated reasons for change in the contract.
Quality of work life programs (e.g., Rushton
project as described in P.S. Goodman, Assessing
Organizafionai Change (New York, NY: Wiley,
1979)) were introduced to address declining
productivity. However, there is ample evidence
that the threat of foreign competition—in
particular from Japan—was not perceived by
many managers and employees in large
companies such as General Motors and IBM.
QWL efforts in the late 1970s were frequently
disbanded. A turning point in organizational
change efforts came with the total quality
movement of the 1980s in which the popular use
of benchmarking made it more likely that

organization members would look at their firm's
competition for information on the firm's
relative health and look to other firms even in
unrelated industries for best practices and
innovations. In investigating the history of
organizational development and change, a
contracts framework suggests that it is
important to ask how the change process was
legitimated and whether externally anchored
reasons were offered (as in the case of
changing one's business from house painting to
mowing lawns or from defense contractor to
consumer products).
' Kearns and Nadler, op.cif.. 236.
° Described in both the 1992 GE Annual
Report to Shareholders and in Robert Slater's.
Gef Better or Get Beaten: 31 Leadership Secrets
from GE's Jack Welch (Burr Ridge, IL: Irwin,
1994). this famous statement specifies the four
scenarios for GE employees depending on
whether they meet commitments and share GE
values.
' "Navy women bringing new era on carriers."
New York Times, February 21. 1994.
'" New psychological contracts increasingly
take the form of "balanced contracts" in which
both employee and employer (and often also
customer and supplier) each have performance
terms to live up to and high investments in
the relationship and in each other (Rousseau.
1995).

About the Author Denise M. Rousseau is a professor of
organizational behavior at Carnegie Mellon University and
researches the impact of work group processes on performance
and the changing psychological
contract at work. Her books include: Psychological Contracts in
Organizafions; Wriffen and Unwriffen
Agreemenfs (Sage). The BoundaryJess Career (Oxford) with
Michael Arthur, the Trends in
Organizafionai Behavior series (Wiley) with Cary Cooper, and
Deveioping an inferdiscipiinary
Science of Organizations (Jossey-Bass) with Karlene Roberts
and Charles Hulin. Other articles for
executives include "Teamwork: Inside and Out" and "Managing
Diversity for High Performance."
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Rousseau
Business Week/Advance. She teaches in many executive and
industry programs and serves on the
Academy of Management's Board of Governors.
Executive Commentary
Edward Ridolfi, McGraw-Hill
Nowhere is it more a p p a r e n t that the world is c h a n g i n g
t h a n in b u s i n e s s a n d
industry. Prompted by a variety of e n v i r o n m e n t a l
forces, c o m p a n i e s h a v e
u n d e r g o n e s u b s t a n t i a l c h a n g e in their s t r a t e g
i e s , s t r u c t u r e s a n d p r o c e s s e s .
G o v e r n m e n t r e g u l a t i o n s , s o p h i s t i c a t e d c o

n s u m e r s , competition from multiple
fronts, t h e b r e a k d o w n of t r a d i t i o n a l b a r r i e r s
to market entry, the impact of
technology, downsizing, a n d the e m e r g e n c e of n e w
distribution c h a n n e l s linked
to technological a d v a n c e s h a v e all contributed to the p a
c e a n d scope of c h a n g e .
As a result, o r g a n i z a t i o n s a r e no longer a b l e to
finance or m a n a g e r e s p o n s e s to
c h a n g e that a r e f u n d a m e n t a l l y i n c r e m e n t a l ,
evolving over time in a n orderly
m a n n e r . For o n e thing. Wall Street a n d c o m p a n y s h
a r e h o l d e r s will not a g r e e to
forego short-term profits for the s a k e of p o t e n t i a l long-
term g a i n . The p l a y i n g
fields of b u s i n e s s a r e littered with c a s u a l t i e s ; that
is. corporations u n a b l e to
m a i n t a i n p a y m e n t s on term profit c o m m i t m e n t s
that w e r e s u b s e q u e n t l y
a b a n d o n e d by investors. C o n c e r n for short-term profit
a n d short-term r e s u l t s is
forcing b u s i n e s s e s to m a k e policy a n d structure c h a n
g e s without s e r i o u s
c o n s i d e r a t i o n of either e x i s t i n g or implied
psychological contracts with
e m p l o y e e s .
This reality h a s i r r e p a r a b l y d a m a g e d the good-faith
r e l a t i o n s h i p that h a s
existed, to o n e d e g r e e or a n o t h e r , b e t w e e n m a n a
g e m e n t a n d e m p l o y e e s . The
a u t h o r s u g g e s t s a l t e r i n g the psychological contract
through a c c o m m o d a t i o n or
transformation in which c o m p a n i e s c a n adjust the old
conditions to fit the n e w

r e q u i r e m e n t s or t o s s out the conditions a n d r e p l a c
e them with a l t o g e t h e r n e w
o n e s .
In my e s t i m a t i o n , a s t i p u l a t i o n for both s t r a t e g
i e s n e e d s to b e that the
responsibility for c h a n g e n e e d s to b e s h a r e d by e m p
l o y e e a n d employer.
E m p l o y e e s must a c c e p t those e v e n t s which h a v e
occurred over which their
c o m p a n i e s h a d little control. They n e e d to reframe
their r e l a t i o n s h i p s with the
o r g a n i z a t i o n in w a y s that p a r a l l e l the c o m p a n
y ' s r e s p o n s e to its e n v i r o n m e n t by
d e m o n s t r a t i n g flexibility a n d a d a p t a b i l i t y . The
"used-to-be's" must give w a y to
the r e a l i t i e s of " w h a t is a n d w h a t will be." Finally, e
m p l o y e e s must b e willing
to move into u n c h a r t e d a r e a s in their r e l a t i o n s h i
p s with e m p l o y e r s . They n e e d
to s e e s u c h m o v e m e n t a s opportunity r a t h e r t h a n o
b s t a c l e .
An e x a m i n a t i o n of the n e e d s a n d w a n t s of the o r g
a n i z a t i o n a l talent b a s e must
p r e c e d e the contract a n d c o n t r a c t i n g p r o c e s s in
c o m p a n i e s . The cost of lost
intellectual c a p i t a l a n d h e a v y turnover s h o u l d a l s o
b e factored into this
e x a m i n a t i o n . Q u e s t i o n s s u c h a s "Where will the
next g e n e r a t i o n of m a n a g e r s b e
found?" "What will it t a k e to grow a n d r e t a i n t a l e n t ?
" a r e a m o n g t h o s e that
n e e d to b e c o n s i d e r e d . Hopefully, s u c h a c t i o n s
will p r o d u c e s o m e i n n o v a t i v e
a p p r o a c h e s in which e m p l o y e e d e v e l o p m e n t a

n d c o m p a n y profit n e e d s a r e
jointly met.
59
To understand what makes some organizations winners, take a
close look
at how employees interpret management's values in three
critical areas.
Creating the Climate and
Culture of Success
BENJAMIN SCHNEIDER
SARAH K. GUNNARSON KATHRYN NILES-JOLLY
Zf you wandered around 3M for awhile andasked some casual
questions, you would
soon sense what places this corporation at or
near the top of Fortune's "Most Admired Com-
pany" list year after year.
You couldn't help noticing, for example,
the number of informal meetings in progress.
At these meetings, representatives of 3M's
sales, marketing, manufacturing, engineer-
ing, R&D, and even accounting departments
discuss new-product ideas and problems.
Customers also may be part of the group,
conveniently discussing their problems with

people from different parts of the company,
without ever having to leave the room.
You would see a striking amount of co-
operation among 3M employees. Employees
go out of their way to help each other—they
volunteer to work on other employees' ideas
by working long extra hours. Even when told
to stop working on something that interests
them, employees persist, working on it on
their own time.
Chat with any of 3M's 40 division man-
agers. They most likely will reveal that the
unit achieved 25 percent of its sales income
from products that are less than five years old.
And the manager would probably credit this
record to the way employees organize them-
selves into product development teams—
each team made up of volunteers and chaired
by a new-product champion.
In effect, what 3M management has
done is create and maintain a climate that
fosters innovation, customer service, and
"citizenship behavior"—i.e., employees
voluntarily help, in various ways, to pre-
serve and protect the organization. Man-
agers in many organizations, from Marriott
to Motorola, from Xerox to Ritz-Carlton,
share 3M's belief that organizations must
maintain these three aspects of climate
simultaneously.
Some call this achivement "total quality
management." Others call it a "systems ap-

proach." At 3M they call it "success."
We imsh to tlianka number of our colleagues at the Uniivrsity
of Maryland who provided invaluable input uito
the dezvhpment of this article: Richard Guzzo, Paul Manges,
and Katlierine Klein. In addition, Fred Lutlmns.
the editor of Organizational Dynamics, pushed us to the clarity
of our argument tfmt exists in the presentation.
17
Ber}jamin Schneider is professor of psy-
chology and business management at the
University of Maryland at College Park. He
has also taught at Yale University, Michigan
State University, and for brief stints at Bar-
lian University (Israel), Peking University
(PRC), and the Institute for Administration
and Enterprise, University Aix-Marseilles
(France). Ben has pubiished wideiy on topics
concerning organizationai ciimate, personai-
ity in the work place, personnel selection,
and services management. These publica-
tions have appeared in more than 80 profes-
sional journal articles and six books. His
most recent book. Winning the Service
Game (written with David E. Bowen), is in
press with the Harvard Business School
Press.
Ben consults with numerous organiza-
tions through his consuiting firm. Organiza-
tional and Personnel Research, Inc. His ma-

jor projects invoive diagnosis of the service
climate and the culture of organizations as a
prelude to assisting organizations to become
more service-focused, and the development
of simulation-based personnei selection and
promotion systems. Recent clients have in-
cluded GEICO, The Chase Manhattan Bank,
the State of Alabama, and the World Bank.
DEFINING CLIMATE
AND CULTURE
Climate—the "feeling in the air" one gets from
walking around a company—may be difficult
to define. But this doesn't make it any less real.
Climate is the atmosphere that employees
perceive is created in their organizations by
practices, procedures, and rewards. These
perceptions are developed on a day-to-day
basis. They are not based on what manage-
ment, the company newsletter, or the annual
report proclaim—rather, the perceptions are
based on executives' behavior and the actions
they reward.
Certain perceptions play heavily in the cre-
ation of the climate employees perceive. At a
company like 3M, they include the following;
• Practices and procedures in this company
encourage innovation.
• Employees in this company get rewarded
for giving warm and friendly service.
• Employees cooperate for the organiza-

tion's sake, rather than simply meeting the min-
imum requirements of their job descriptions.
Employees observe what happens to
them (and around them) and then draw con-
clusions about their organization's priorities.
They then set their own priorities accordingly.
Thus, these perceptions provide employees
with direction and orientation about where they
should focus their energies and competencies.
This, in turn, becomes a major factor in creat-
ing a climate.
Because organizations have numerous
priorities, any organization can harbor many
climates. For example. General Electric might
have a climate that supports innovation in the
R&D division and one that supports service in
the 1-800 GE Answering Service division.
These departments also might share an over-
all climate for organizational citizenship be-
havior (OCB).
Culture, on the other hand, refers to the
broader pattern of an organization's mores,
values, and beliefs. Again, the actions of senior
managers strongly influence culture. By ob-
serving and interpreting these actions, em-
ployees are able to explain why things are the
18
way they are, and why the organization focus-
es on certain priorities. Culture, then, stems

from employees' interpretations of the as-
sumptions, values, and philosophies that pro-
duce the climates they experience. For exam-
ple, employees' cultural interpretations might
be the following:
• Senior managers create a climate for in-
novation because they give higb priority to
competitiveness. They also value change, and
they recognize the danger of complacency.
• Senior managers create a climate for
service excellence because they value cus-
tomer and employee satisfaction.
• Senior managers create a climate for cit-
izenship behavior because they want em-
ployees to do more than just come to work.
They value the extra effort it takes to preserve
and promote organizational success.
Employees automatically make these at-
tributions about what management values.
The challenge for management is to act in
ways that will lead employees to the kinds of
attributions that result in commitment to
management's most important values.
Culture is created and transmitted mainly
through employees sharing their interpreta-
tions of events ("They are bringing in com-
puters so they can reduce head count"), or
through storytelling ("One day there was a
blizzard and the manager drove a customer
home because the customer's car was buried
in the snow"). Cultural characteristics at-

tributed to the organization actually become
the organization's characteristics when em-
ployees share their beliefs about management.
The more employees talk about manage-
ment's qualities, the more the qualities be-
come organization characteristics.
Thus, it is virtually impossible to have a
service, innovative, or OCB culture unless em-
ployees attribute these values to management.
Employees must first make these attributions,
then share their attributions with other em-
ployees, for these aspects of culture to literal-
ly become part of the organization.
From our experience, an organization
needs employees to perceive all three man-
agement values to be successful. No organiza-
Sarah K. Gunnarson received her Ph.D. in
Industrial and Organizational Psychology
from the University of fVtaryland at College
Park. She completed her undergraduate de-
gree at the University of Virginia. She is a
consultant with McManis Associates and is
currently conducting transfer of training re-
search for the Department of the Navy's To-
tal Quality Leadership Office. Dr. Gunnarson
has also consulted in the areas of cultural
change and the use of incentives to increase
productivity. Her primary interests are the ef-
fects of job attitudes on employee motivation,
organizational citizenship behavior, and ser-
vices management.
19

Kattiryn Niles-Jolly Is employed as a per-
sonnel research psychologist with the U.S.
Offioe of Personnel Management. Her pri-
mary projects there are job analyses of fed-
eral occupations and workforce quality stud-
ies. Ms. Niles-Jolly is a doctoral candidate in
industrial/organizational psychology at the
University of Maryland, where she was a Na-
tional Science Foundation fellow. She re-
ceived her Bachelor of Science degree from
Howard University, graduating magna cum
laude. Her research interests include ser-
vices management and transfer of training.
Previous publications include an article in the
Journal of Applied Psychology and a book
chapter on leadership.
tion succeeds over the long run without at-
tention to customer service, to innovafion and
change, and to the extra effort and energy that
comes from employees' good will.
Readers might debate with us whether
these are the three climates and cultures that
must simultaneously exist for a business to be
successful. These are the three we are betting
on; contentious readers are free to choose
their own three—or four or five—and con-
duct their own research. Even if we lose the
bet, our major point still holds: that organiza-
tions must focus their employees' energies
and competencies on multiple priorities si-
multaneously, and that it is through climate

and culture that this focus happens.
Below, we consider each of the three re-
quirements, giving special attention to man-
agement actions that can foster these climates,
as well as employee attribufions that create (or
are) culture.
THE CLIMATE AND CULTURE
FOR INNOVATION
Andre Delbecq and Peter Mills of the Universi-
ty of Santa Clara in California tried to identify
the characteristics that distinguish highly inno-
vative companies from companies that are less
innovative. Their findings, based on studies of
several hundred managers in high-technology
and health service organizations, provide valu-
able insight into an innovative climate and cul-
ture. While Delbecq and Mills did not interpret
their findings using the terminology of climate
and culture, we will do so here.
The researchers defined innovation as the
capacity to develop and effectively market in-
novations. We define innovation more broad-
ly, as an organization's capacity to change and
to continuously reinvent itself.
Delbecq and Mills discovered that the
practices and procedures shown in Exhibit 1
and discussed below were the major ways in
which the highly innovative organizations
differed from less innovative organizations:
• Commitment from top management and

sponsorship. In organizations with low inno-
vation, top management does not provide fi-
20
nancial and/or emotional support to get the
innovation project started. In contrast, orga-
nizations that promote innovation commit
many resources to the project: They earmark
special funds, they assign employees to find
and promote innovations, and they make
sure that each potential innovation has an as-
signed advocate or sponsor.
• Emphasis on market analyses and cus-
tomer sensitivity. The low innovators relied
on poor feasibility studies, or moved forward
with no feasibility study. This left them with
unrealistic assessments of the demand for the
innovation, overly complex designs, and in-
sufficient attention to the support (such as
training or marketing) that success requires.
High innovators, on the other hand, were
"close to" and "in touch with" the average po-
tential user, so they could accurately assess
market demand and the support required to
meet that demand.
• Adoption procedures. The low innova-
tors lacked the organization's formal com-
mitment, as well as the resources for imple-
mentation. High innovators, in contrast,
received firm commitments from people
throughout the organization. As a result, the

innovations' advocates felt supported rather
than alone and isolated.
• Implementation. Not only were low in-
novators under-resourced, they also had
delusions of grandeur that prompted them to
prematurely implement the innovations with-
out adequate testing along the way. The high
innovation organizations took small steps,
evaluating each throughout the process. They
then made the necessary adjustments for
market acceptance. In addition, the gradual
rollout allowed the companies to realistically
determine the resources required to sustain
the innovation.
When an organization's practices and pro-
cedures are similar to the high innovators de-
scribed by Delbecq and Mills, a company has a
climate for innovation. No single practice or
procedure shown in Exhibit 1 would suffice for
such a climate; all of the differences between
the way the high and low innovators function
must first be in place. The reason is that climate
EXHIBIT 1
KEYS TO SUCCESSFUL INNOVATORS
• Top management commits emo-
tional and financial support and provides
an advocate for the innovation.
• Top management ensures there is
a market for the planned innovation.
• The planned innovation has sup-

port from all levels of the organization.
• The planned innovation goes
through several small, carefully evaluat-
ed steps prior to actual implementation.
perceptions are based on aggregate practices
and procedures, not isolated practices or pro-
cedures. Climate perceptions are global; they
are summaries of many experiences.
The contrasts that Delbecq and Mills pre-
sent can be used to infer the beliefs employ-
ees might share about senior managers' im-
plicit assumptions and values. Although
Delbecq and Mills did not explicitly identify
these, we will surmise what they might in-
clude. Employees might agree that manage-
ment believes that:
• Success in the marketplace comes from
complete knowledge of, and input from, the end
user. Customer acceptance, not engineering
sophistication, is what ultimately leads to suc-
cessful innovation.
• The quality of the idea is important, not
the authority and power of the person behind
the innovation. Decisions should be based on
information and data rather than politics and
power.
• Creative people need nurturing, support,
and organizational commitment to succeed. No
matter how creative, these people cannot sus-
tain the effort it takes to successfully innovate

if left alone and unsupported.
• Decisions should be made a step at a
time. This is slow but also the most effective
path to success.
This last inference may seem to be
21
• T
counter-intuitive: intuition, for example, sug-
gests that innovative companies are quick ac-
tors. In fact, they are quick actors—but only af-
ter careful analysis and study. Innovative
firms are the way they are because they con-
sfanlly pursue innovative ideas; they are stick-
lers for detail; and they demonstrate commit-
ment to innovation over time.
Our research and consulting show us that
management creates a climate by what man-
agement tioes, not by what it says. Employees
believe their company is an innovative com-
pany when they see things happening to
them and around them that push them to be
innovative and demand they pay attention to
innovation. At 3M and elsewhere (for exam-
ple, at the Proctor & Gamble Co. and Hewlett-
Packard) everything is set up to foster innova-
tion—who gets hired, who is rewarded, how
the organization is structured, what proce-
dures and resources are available, and so on.

It takes more than innovation to win in
today's competitive national and internation-
al environment, however. Recall that the U.S.
bred the concepts and early models of the
compact disk and the video cassette recorder,
only to see these innovations languish in re-
search, not in development. Companies like
3M, Motorola, and Hewlett-Packard know
that research is not enough; development of the
product for market is required. More recently,
another issue has become a key to success in
the marketplace—service to the end-user con-
sumer.
Perhaps researchers and consultants
have focused so intently on customer satisfac-
tion with products that they have overlooked
the role of service in the world of consumer
goods. Recently, however, various studies of
service industries have shed new light on the
role service plays in any business. The impli-
cations of these findings for goods-producing
firms are becoming clear.
THE CLIMATE A N D CULTURE FOR
SERVICE EXCELLENCE
Service organizations need to think different-
ly about their business, compared with those
EXHIBIT 2
KEYS TO SERVICE EXCELLENCE
• Human resource practices pro-
mote employee well-being and a sense

of community.
• There is active retention of exist-
ing customers.
• There is attention to details
regarding the quality of staff and the
resources needed to deliver excellent
service.
companies producing tangible products. This
is true because of the ways in which services
differ from goods:
• Services are more intangible than
goods. Goods yield "things" while services
yield "experiences." As a result, relationships
between the consumer and the service deliv-
erer are more significant in the evaluation of
a service. Consider the "intangibility" of an
experience in the theater. Once a play is over,
the participant is left only with the experi-
ence, not an object or product. Many services
have some of this same intangibility.
• Services often require consumer par-
ticipation in the production of the service.
For example, airplane passengers provide in-
formation about where they want to go, what
they want to eat, and where they want to sit.
If the customer fails to do his or her part (i.e.,
arrive for departure), the airline cannot save
that flight for another customer and recoup
its costs.
• Services tend to be produced and con-

sumed simultaneously. Due to intangibility
and the need for consumer participation,
services are usually produced and consumed
in the presence of both an employee and a
consumer. Thus, a cabin attendant in an air-
plane cannot deliver a service in the absence
of a passenger, in contrast, a product can be
manufactured at one place and point in time,
then shipped, stored, inventoried, and ulti-
mately delivered to a consumer at another
place and time.
22
These differences between services and
products exist on continua; they are not di-
chotomies. The more central that providing a
service is to the business, however, the more
important delivery becomes in determining
an organization's effectiveness.
One of us (Schneider) and his colleagues
have produced a series of studies and papers
that reveal the kinds of practices and proce-
dures that characterize a climate for service.
Exhibit 2 summarizes these findings and
shows the kinds of practices and procedures
employees report exist when customers say
they experience high-quality service.
• Human resources practices that pro-
mote employee well-being and a sense of
community. When employees view their orga-
nization's practices and procedures as "treat-

ing them well" and providing a sense of com-
munity at work, customers report they receive
high-quality service.
• Active retention of current customers.
When customers say a service organization de-
livers high service quality, employees describe
their organization as being equally concerned
with retaining current customers and attract-
ing new consumers.
• Attention to details regarding the qual-
ity of staff and availability of necessary re-
sources. In organizations that deliver service
rated as superior by customers, employees
say they are well trained, and that the equip-
ment and supplies they work with are up-to-
date and well-serviced. In general, the logis-
tics of service excellence are very carefully
thought out.
Because service quality is in the delivery,
it is the interaction between the service deliv-
erer and the consumer at the time of delivery
that determines service quality for the con-
sumer. Organizations can only indirectly con-
trol what has been called the "service en-
counter" because of the simultaneous nature
of production and consumption. In the ab-
sence of direct control of the service en-
counter, it is the climate and culture that de-
termine high-quality service. When the
organization has practices and procedures
that communicate service as a top priority,
then service quality is usually the result.

How does management communicate
that service quality is a priority? Management
sends this message through various facets of
"how things are done" within the organiza-
tion. When employees experience support for
performing well (via staffing, training, and lo-
gistics support), when they feel they are per-
sonally treated well, and when the organiza-
tion emphasizes excellence in the treatment
of current customers, then employees experi-
ence a climate for service excellence. At Dis-
neyland, for example, "cast members" go
through an intensive selection process and a
continuous socialization to the Disney way.
This socialization includes education and ex-
perience in multiple functions so they can
identify with how their "role" fits with the
rest of the experience created for customers.
But Disneyland does more than carefully se-
lect and train employees—it is impeccably
maintained. Because management has made
the collection and disposal of trash a high pri-
ority, customers are struck by the overall
cleanliness of the facility. In general, the back-
stage activities (e.g., kitchen help in the
restaurants) receive as much attention as the
people who play the characters. Consequent-
ly, the total environment sends a service qual-
ity message, and this message leads to an un-
forgettable experience for the Disney guests.
The principles we have enumerated also
apply to (a) internal service and (b) service to
customers of goods-producing organizations.
By internal service, we refer to relationships
between employees and work groups within

an organization—the relationship between
sales and production, for example, or be-
tween marketing and human resources.
When these functions treat each other as val-
ued "customers," people working in the func-
tions feel better about themselves and the or-
ganization and end-user consumers report
they receive superior service. At hundreds of
companies now (Xerox, to cite one example),
project teams composed of employees from
different functions are being used to solve
problems. These teams break down the old
walls separating functions—walls that result-
ed in poor service quality to each other, and
ultimately to customers.
23
EXHIBIT 3
KEYS TO ORGANIZATIONAL
CITIZENSHIP BEHAVIOR
• Management is non-exploitative
and trustworthy.
• There are norms of helpfulness
and cooperation.
• There are fair reward systems
based on broad and diverse contribu-
tions to organizational success.
At Chrysler, a similar process seems to

have led to improved products, such as the
best-selling mini-vans and a new line of cars
for 1993 that has received rave reviews. In this
goods-producing environment, cross-func-
tional project teams have improved internal
communication and internal service to each
other such that Chrysler has cut the amount
of time required to produce a new Une of au-
tomobiles from five years to three years (for
the new Neon). Not only has internal com-
munication and service improved, but
Chrysler is also involving dealer sales and ser-
vice people as partners in new ways of think-
ing about the production, delivery, sales, and
service of Chrysler products. Total quality
management is moving beyond customer sat-
isfaction with the product to customer satisfac-
tion with the entire experience of buying and
owning a car.
When management creates and main-
tains a climate for service, employees are like-
ly to attribute to management the following
values:
• People are the key to our success. Both
customers and employees are valuable re-
sources and should be viewed as long-term
investments in the future.
• Employees have a tendency to treat
others as they have been treated. Customer-
contact employees who are treated as valu-
able persons by the organization will treat the
organization's customers similarly. How em-
ployees get treated will be reflected in how

customers get treated.
24
• It is the little things that count. Good
service consists of many well-executed small
details.
• Work should offer employees a sense
of community and belonging where em-
ployees treat each other like family. Studies
at Sears and Ryder, as well as studies report-
ed by the FORUM Corporation, all support
the following conclusion: When employees
experience their organization as one that sup-
ports them as people and supports excellence
in service delivery, customers report they re-
ceive superior service.
There is more to organizational effective-
ness than service and innovation, however.
Organizational effectiveness also requires
that employees be committed to the organi-
zation's success. This commitment needs to
take the form of cooperative, extra-role be-
haviors where employees are dedicated to the
organization's long-term survival. In short,
employees determine the success of an orga-
nization by their support of the organization.
These kinds of supportive behaviors on the
part of employees are called good citizenship.
THE CLIMATE AND CULTURE
FOR CITIZENSHIP BEHAVIOR
For about a decade now, Dennis Organ and his

colleagues at Indiana University (Blooming-
ton) have studied the role that cooperative, ex-
tra-role behaviors play in facilitating organiza-
tional effectiveness. Organizational citizenship
behavior (OCB) or prosodal organizational be-
havior (POB) consists of helpful, cooperative
acts that are not directly required of employ-
ees. Examples include orienting new employ-
ees, using sick leave only when one is really
sick, and helping a supervisor with a task with-
out being asked. Taken as a whole, however,
these behaviors quickly add up and greatly
benefit the organization. The research suggests
that three key issues (summarized in Exhibit 3)
relate to a climate and culture for OCBs:
• Perceptions of fairness and trust.
When employees perceive that a "just world"
exists in their organization, supervisors report
that employees display more OCBs. Fairness
generates a sense of trust, and this trust yields
employee behaviors supportive of organiza-
tional effectiveness. A just world is created for
employees based on perceptions of fairness
and equity, not only with regard to pay but
also with regard to all forms of recognition
and reward—benefits, respect, and opportu-
nities for advancement.
• Norms of helpfulness and cooperation.
When a senior manager is willing to pitch in
on the assembly line or take over a teller's
post during a crisis, this communicates the

importance of cooperation. When employees
see others "going beyond the call of duty" to
benefit the organization as a whole, they tend
to do the same. When an new employee ob-
serves these behaviors early in his or her
tenure, that employee is more likely to see
such action as the norm—what is expected.
• Fair reward systems based on broad
contributions. Individually based piece-rate
systems have the potential to depress the
probability of OCBs. For example, if employ-
ees are rewarded only for very specific per-
formance behaviors and nothing else (such as
loyalty, tenure, courtesy, trying new ways of
doing things), then they may conclude that
the only behaviors of importance are those
tied to the productivity on which the piece-
rate system is based. When employees see co-
workers being recognized for many different
kinds of activities that promote organization-
al effectiveness, the probability increases that
they, too, will display these other forms of
OCB.
In summary, research shows that a cli-
mate for these cooperative and organization-
ally helpful behaviors is likely to exist when
management is perceived to be fair and just,
when newcomers see cooperative behavior
on the part of co-workers and supervisors,
and when reward systems are tied to more
than job-specific, individually based piece-
rate productivity. An organization with a cli-
mate for OCB might have employees who at-
tribute to management the following values:

• Earning employees' trust is essential
to employee commitment. Workers who see
themselves as exploited have little or no com-
mitment. The employer-employee relation-
ship is a reciprocal, two-way relationship.
• An atmosphere of reciprocation and
cooperation establishes a culture in which
employees willingly go beyond their job de-
scriptions. Management must display coop-
eration and helpfulness if they expect em-
ployees to be cooperative and helpful.
• Leaders must set trends for perfor-
mance by doing the same kinds of things
they expect from subordinates. Leaders are
not special. For example, if leaders expect em-
ployees to take a cut in pay, they should be
willing to take a comparable salary reduction.
When employees attribute these assump-
tions to management, they create a culture for
OCBs. We argue that this culture is likely only
when the climate for OCBs exists. As we said
about the climates and cultures for service and
for innovation, it is the practices and proce-
dures employees observe that yield the global
climate perceptions. These perceptions, in
turn, yield the attributions about manage-
ment's assumptions, beliefs, and values.
IMPLICATIONS FOR
ORGANIZATIONAL CHANGE

Managers can improve their organization's
effectiveness by changing their organization's
climate and culture, but the process for doing
so is slow and difficult. This is because man-
agers must modify the practices, procedures,
and behavior by which they manage before
there will be a change in the climate. And di-
mate change precedes culture change.
To complicate things, not only is it diffi-
cult for people to change their behavior, it can
take a long time for the change to become no-
ticeable. We change very slowly because we
must overcome the inertia of our own behav-
ior first; only after we overcome that inertia
do we actually begin to change in ways that
others can see. The whole process is some-
what like the launch of a space shuttle. The
rocket motors, fighting against gravity, ex-
pend most of their fuel on the launch pad—
producing no noticeable movement for a
25
while. Similarly, managers can expend a lot of
energy to change a climate and culture with-
out having a lot to show for it—until inertia is
overcome and the climate can get moving in
new directions.
O n e risk of change is that the organiza-
tion will operate less effectively for a while as
the new climate is being created; w h e n the
practices and procedures are changing, em-

ployees become less certain about what man-
agement has as its priorities. This creates am-
biguity, and ambiguity leads to stress.
O n e CEO with w h o m we have worked
said that changing the climate of an organiza-
tion is like changing a Boeing 727 into a Boe-
ing 747 in mid flight. O n the one hand, the
change seems worth the trouble, because the
747 will be a more effective transport vehicle.
O n the other hand, there will be a point
where the craft is neither 727 nor 747—and
the whole thing could crash!
But change, and the change process, have
posihve consequences, too. Change sensitizes
people to what happens to them and around
them. Consequently, the change process is a
great opportunity for m a n a g e m e n t to flood
the environment with cues to the intended
new priorities. The more consistent the mes-
sages are about the new priorities, a n d the
more employees participate in the change,
the more likely the change in climate is to
happen. Also, the more visible the manifesta-
tions of the change are, the more likely em-
ployees will latch onto the new climate.
The new culture will emerge later as em-
ployees have opportunities to talk with each
other about what is going on and w h y it is
happening. They will begin to share their be-
liefs about the change and management's
goals and priorities, and make attributions
about management's values based on their
experiences.

In general, management can more direct-
ly change climate than it can change culture.
But changing even climate is a d e m a n d i n g
task—ask managers at General Motors or IBM
or Sears.
Suppose the management of an organi-
zation wished to create a climate and culture
for success by dealing with the three priorities
we have outlined. How might management
use our presentation as a framework? Here
are some areas to consider.
1. NEW EMPLOYEE RECRUITMENT, SELEC-
TION, AND ORIENTATION. The kinds of em-
ployees recruited and selected and the kinds
of orientation experiences provided for new
employees send strong messages about orga-
nizational priorities. For example, h u m a n re-
sources personnel can conduct job and orga-
nizational analyses to identify the
characteristics important to consider in selec-
tion. Only people who are likely to have those
persona] attributes should be recruited a n d
hired. You simply cannot hire and socialize
new employees for only one priority; success
requires competencies and energies directed
at multiple simultaneous priorities.
2. T R A I N I N G . The mere presence of for-
mal training programs and what is empha-
sized in training sends powerful messages
about an organization's priorities. Most orga-
nizations, if they have training at all, focus

narrowly on job-specific skills. To our way of
thinking, all employees require training for all
of the organization's priorities. Every em-
ployee has responsibility for identifying op-
portunities to be innovative, for ensuring the
service deUvered both internally and exter-
nally is superior, and for finding opportuni-
ties to be helpful and to support the organi-
zation's progress.
Most employees possess inclinations or
predispositions toward making greater contri-
butions to the organization. Training gives
them the skills that permit those inclinations
and predispositions to become active. In oth-
er words, training transfers a motivation into
a competency.
3. FORMAL AND INEORMAL REWARD
SYSTEMS. There are two key issues here: (1)
which behaviors get rewarded and (2)
whether rewards are dispensed fairly. Hu-
mans direct their energies and competencies
toward rewards they value. M a n a g e m e n t
must ensure that rewards reinforce behavior
that maximizes the simultaneous attainment
of multiple organizational priorities. Behav-
26
EXHIBIT 4
KEY CULTURAL ASSUMPTIONS RELATED TO
INNOVATION, SERVICE, AND OCB

INNOVATION SERVICE OCB
HOW WE SOLVE
PROBLEMS
How WE MANAGE
PEOPLE
How W E SUCCEED
Througb gathering
information, not
power; slow but sure
A creative mind
needs nurturing
and support
Through customer
acceptance
By attending to
small details
With consideration;
treat employees as
you want them to
treat customers
By treating both
employees and
customers well
If you see some-
thing that needs
doing, you do it

By setting examples
for employees;
act as you want
employees to act
Througb both man-
agers and employees
going beyond their
role requirements
for the greater good
of the organization
iors that are customer-oriented and innova-
tion-oriented and put tbe spotlight on citizen-
ship behavior sbould be rewarded. Valued re-
wards include not only pay and promotion
but also recognition and other perquisites
(cars, offices, and so fortb).
4. LOGISTICAL RESOURCES. Employees
can experience their work world as one that ei-
tber facilitates or inhibits tbe attainment of stat-
ed priorities. Organizations tbat state priorities
but fail to support those priorities with re-
sources will evoke appropriate cynicism. Em-
ployees pay attention to what management ac-
tually provides resources to accomplish—to
wbere management puts its money, not where
it puts its moutb. Money is usually required to
support priorities, especially to support tbe at-
tainment of service and innovation and OCB.
Resources in the way of staff, tecbnology, train-
ing to use new tecbnology, and so fortb are
what really send tbe message about priorities.

Tbe purpose of this list is to encourage
managers to scrutinize every facet of tbeir or-
ganization's practices, procedures, and re-
wards, and look for omissions and inconsisten-
cies between what is being preacbed and what
is actually happening. What is happening de-
termines the climate and the attributions em-
ployees make about what management values.
SUMMARY
Organizations become effective wben they
create, maintain, and sometimes change ch-
mates and cultures to emphasize the achieve-
ment of multiple priorities. In tbis environ-
ment, employees are able to interpret what
happens to them and around them in ways
that are consistent witb their organization's
goals and priorities—and set tbeir own prior-
ities accordingly.
Employees bave thousands, if not mil-
lions, of seemingly isolated experiences as
tbey go about their work. But tbese experi-
ences do not remain isolated. Tbe experiences
are clustered according to tbe meaning em-
ployees give them. These clusters of events
and experiences result in climate perceptions.
These climate perceptions, in turn, serve
to illustrate for employees what management
believes in and values. Exhibit 4 summarizes
wbat employees may surmise management
values in an organization that has climates for
innovation, service, and OCB. Tbe exhibit

27
shows that employees attribute to manage-
ment a set of broadly focused values—values
concerning how the organization solves prob-
lems, or how an organization manages peo-
ple, or what an organization believes are the
keys to success.
A look back at Exhibits 1,2, and 3 reveals
that the values summarized in Exhibit 4 are
based on employees' climate perceptions.
These perceptions, in turn, are based on em-
ployee experiences with the practices and
procedures of the organization and the kinds
of behaviors they see being rewarded.
In tandem with climate, the key to orga-
nizational effectiveness is for management to
identify the values they hold about the nature
of people and the way the world works. Man-
agers need to identify their values because it
is inevitable that the practices and procedures
they establish and the behaviors they reward
will reflect those values—and their employ-
ees will attribute values to them based on
what they do—not what they say. Our expe-
rience is that many managers are unaware of
the kinds of values they hold or, even worse,
they espouse values that are inconsistent with
their behavior and with the values their em-
ployees attribute to them.

Obviously, every service organization es-
pouses good service, but how many man-
agers hold the kinds of values that lead to the
promotion of a climate for service excellence?
Just as obviously, every organization would
rather be a successful innovator than a failed
innovator, but how many organizations cre-
ate the kinds of practices and procedures and
reward the behaviors required to create a cli-
mate for innovation? According to Delbecq
and Mills, most of the organizations they
studied were failures at innovation. We be-
lieve this is true because most decision mak-
ers hold values about people and how to run
a business that are inconsistent with success
at innovation. And to be successful in an in-
creasingly competitive and global environ-
ment, organizations must be simultaneously
excellent in service and innovation. They must
also create conditions that foster a willingness
to expend extra effort on behalf of the organi-
zation.
Management cannot expect employees to
focus their energies and competencies only
on what management says is important. In-
stead, employees will focus on what manage-
ment communicates through their behav-
ior—through the decisions they make about
the practices and procedures and rewards
employees experience. Whether on purpose
or by default, management is responsible for
the climates and cultures created in the minds
of employees. Ultimately, these are the cli-
mates and cultures that determine how suc-

cessful an organization will be.
If you wish to make photocopies or
obtain reprints of this or other
articles in ORCANIZATIONAL DYNAMICS,
please refer to the special reprint
service instructions on page 80.
28
SELECTED BIBLIOGRAPHY
Some useful books on climate and culture in-
clude Benjamin Schneider (ed.). Organization-
al Climate and Culture (San Francisco: Jossey-
Bass, 1990); Harrison Trice and Jan Byers,
Organizational Culture (Englewood Cliffs, NJ;
Prentice-Hall, 1992); and Edgar Schein, Orga-
nizational Culture and Leadership, 2nd ed. (San
Francisco: Jossey-Bass, 1992).
Tbe information about 3M at the opening
comes from Tom Peters and Robert Water-
man, Jr., In Search of Excellence: Lessons from
America's Best-run Companies (New York:
Warner Books, 1982).
The materials on innovation used as a
basis for this article are from Andre Delbecq
and Peter Mills, "Managerial Practices tbat
Enhance Innovation," Organizational Dynam-
ics, Summer 1985, pp. 24-34. The materials on
innovation throughout tbe article profited

from a book by Louis Tornatzky and Mitchell
Fleischer, The Process of Technological Innova-
tion (New York: Lexington Books, 1990). The
information about service climate comes
from Benjamin Schneider and David Bowen,
"Employee and Customer Perceptions of
Service in Banks: Replication and Exten-
sion," Journal of Applied Psychology, August
1985, pp. 423-433. For additional information
on service quality and human resources
management, see Benjamin Schneider and
David Bowen, "The Service Organization:
Human Resources Is Crucial," Organizational
Dynamics, Spring 1993. For a good treatise on
management action for service quality and
tbe FORUM Corporation's research, see
Richard Whitely, The Customer Driven Com-
pany: Moi'ing From Talk to Action (Reading,
MA: Addison-Wesley, 1990). On organiza-
tional citizenship behavior, see Dennis Or-
gan, Organizational Citizenship Behavior: The
Good Soldier Syndrome (Lexington, MA: Lex-
ington Books, 1986). On the importance of
organizational reward systems, ratber than
management's words, for directing employ-
ee energies and competencies, see the semi-
nal article by Steven Kerr, "On tbe Folly of
Rewarding A, Wbile Hoping for B," Academy
of Management Journal, May 1975, pp. 769-783.
29

THE PARADOX OF STRETCH GOALS:
ORGANIZATIONS IN PURSUIT OF THE
SEEMINGLY IMPOSSIBLE
SIM B. SITKIN
Duke University
KELLY E. SEE
New York University
C. CHET MILLER
University of Houston
MICHAEL W. LAWLESS
University of Maryland
ANDREW M. CARTON
The Pennsylvania State University
We investigate the organizational pursuit of seemingly
impossible goals—commonly
known as stretch goals. Building from our analysis of the
mechanisms through which
stretch goals could influence organizational learning and
performance, we offer a
contingency framework evaluating which organizations are
positioned to benefit from
such extreme goals and which are most likely to pursue them.
We conclude that
stretch goals are, paradoxically, most seductive for
organizations that can least afford
the risks associated with them.

As highlighted by a number of organizational
theorists, organizations must balance short-term
performance concerns with long-term learning ob-
jectives (e.g., Levinthal & March, 1993; Sutcliffe,
Sitkin, & Browning, 2000). An organization can en-
sure continued survival only by performing well in
the near term while positioning itself for strong
performance in an uncertain future. Although lan-
guage and concepts from a number of theoretical
domains can be used to characterize the balanc-
ing of attention between the short term and the
long term, the organizational learning literature
provides the most directly relevant conceptualiza-
tion. From this perspective, organizations must in-
vest in activities that “exploit” their known current
capabilities (i.e., refinement, implementation, and
execution) while also investing in activities that
“explore” new, unknown possibilities (i.e., experi-
mentation, innovation, playfulness; e.g., Kang,
Morris, & Snell, 2007; Levinthal & March, 1993;
March, 1991; McGrath, 2001; Sitkin, Sutcliffe, &
Schroeder, 1994).
Although exploration is critical for long-term
learning, change, and survival, organizations of-
ten have difficulty searching outside their current
routines and processes (Adler & Obstfeld, 2007;
Baumard & Starbuck, 2005). Returns to invest-
ments that exploit existing capabilities are imme-
diate, whereas returns to exploration and learning
are distant and uncertain (March, 1991). Instead of
facing uncertainty, organizational actors often fail
to look into the distant future, choosing to “solve
pressing problems rather than develop long-run

strategies” (Cyert & March, 1963: 119). In essence,
existing routines can become sources of inertia
(Edmondson, Bohmer, & Pisano, 2001; Leonard-
Barton, 1992; Levitt & March, 1988).
Organizational theorists have proposed a
number of approaches for encouraging explora-
tion and discontinuous advances in learning (for
For their helpful comments on previous versions of this
manuscript, we thank Bettina Buechel, Rich Burton, Laura
Cardinal, Christina Fang, John Joseph, Theresa Lant, Rick
Larrick, Ed Locke, Frances Milliken, Elizabeth Morrison,
Gerardo Okhuysen, Randall Peterson, and three anonymous
reviewers. We also thank participants in the Harvard–MIT
Organizational Economics Seminar Series and the 2008
Academy of Management annual meeting.
� Academy of Management Review
2011, Vol. 36, No. 3, 544–566.
544
Copyright of the Academy of Management, all rights reserved.
Contents may not be copied, emailed, posted to a listserv, or
otherwise transmitted without the copyright
holder’s express written permission. Users may print, download,
or email articles for individual use only.
reviews see Greve, 2003; Huber, 1991; Levitt &
March, 1988; Sitkin, Sutcliffe, & Weick, 1998).
March (1991), for example, highlighted the value
of turnover that creates new perspectives. Chris-
tensen (1997) argued for forming new operating
units that are not encumbered by existing rou-

tines and capabilities. Siggelkow and Levinthal
(2003) considered the role of decentralization.
Levinthal and March (1993) suggested a number
of diverse tactics for encouraging change, in-
cluding leveraging employees who have failed
to thrive within the existing order or explicitly
manipulating risk preferences in the organiza-
tion. These ideas for promoting exploration have
been useful but also have nontrivial drawbacks,
such as the substantial structural changes re-
quired to implement new operating units or the
loss of still valuable tacit knowledge through
turnover. Moreover, these and other ideas for
promoting exploration often have been built on
a foundation of general or abstract theoretical
reasoning, leaving the underlying mechanisms
underspecified. All of these issues, as well as
the inherent complexity of the topic, have
helped to keep exploration at the forefront of
debates and study within the organizational re-
search community (for recent commentaries see
Fang & Levinthal, 2009; Kim & Rhee, 2009; Raisch
& Birkinshaw, 2008).
Both theory and intuition suggest that meth-
ods for promoting exploration and change
should facilitate attention, energy, and action in
the domain of alternative routines and capabil-
ities. Without attention being channeled to al-
ternative futures, new paths are not likely to be
considered (e.g., D’Aveni & MacMillan, 1990;
Drazin & Sandelands, 1992; Starbuck, 1983).
Without energy and enthusiasm for major
change, challenges to the status quo are un-
likely (e.g., Beer, Eisenstat, & Spector, 1990).
Without coordinated action, trial-and-error ex-

perimentation is less likely to yield meaningful
results (e.g., Huber, 1991; Sitkin et al., 1994). The
attention-based view of the firm (e.g., Ocasio,
1997), research into organizational change and
adaptation (e.g., Barnett & Pratt, 2000; Kotter,
2008), and studies of organizational learning
and design (e.g., Argyris, 1985) directly highlight
the importance of these cognitive, affective, and
behavioral mechanisms, respectively.
One method for exploration that might insti-
gate the mechanisms discussed above is the use
of seemingly impossible organizational goals—
commonly referred to as stretch goals. Because
they are extreme, stretch goals have been ar-
gued to serve as jolting events that disrupt com-
placency and promote new ways of thinking and
acting (e.g., Hamel & Prahalad, 1993; Rousseau,
1997). In effect, the imposition of such extreme
goals can be similar to an autogenic (i.e., inten-
tional, internally generated) crisis meant to spur
change (e.g., Barnett & Pratt, 2000; D’Aveni &
MacMillan, 1990). By forcing a substantial eleva-
tion in collective aspirations, stretch goals can
shift attention to possible new futures and per-
haps spark increased energy in the organiza-
tion. They thus can prompt exploratory learning
through experimentation, innovation, broad
search, or playfulness as organizational actors
seek new or varied approaches to reach the tar-
get. Stretch goals also can enhance tangible
performance outcomes as gaps between aspira-
tion and current performance elicit and guide
effort and persistence (Cyert & March, 1963).

Reflecting on both performance and explora-
tion, Rousseau put it this way: “[Stretch goals]
motivate high performance by mandating cre-
ativity and assumption-breaking thinking”
(1997: 528). Winter said the following in the con-
text of stretch goals and organizations develop-
ing new capabilities: “It is not a secret that high
aspirations can often contribute to high achieve-
ment” (2000: 990). These sentiments are echoed
in the business press. Steve Kerr, former Chief
Learning Officer at General Electric and Gold-
man Sachs, illustrated the popular motive for,
and the method of, stretch goals:
If done right, a stretch target . . . gets your people
to perform in ways they never imagined possible.
It’s a goal that, by definition, you don’t know how
to reach. You might, for instance, ask people to
cut costs by half or reduce product-development
time from years to months . . . [in order to] find
dramatically new ways of doing business (Sher-
man, 1995: 231).
Pursuing goals that are seemingly impossible
might stimulate exploratory learning specifi-
cally because radically new approaches are re-
quired. Southwest Airlines and Toyota provide
examples. After being forced to sell part of its
fleet early in its history, Southwest Airlines set a
goal of ten-minute turnaround times at airport
gates in an attempt to use its few remaining
planes more efficiently. Although officials with
the U.S. Federal Aviation Administration, Boe-
ing, and competing airlines believed the goal to
2011 545Sitkin, See, Miller, Lawless, and Carton

be unachievable (as did many Southwest em-
ployees), the seemingly impossible ten-minute
turnarounds were ultimately accomplished by
employing an approach (drawn from race car pit
crews) that was radically new and unfamiliar to
the airline industry (Freiberg & Freiberg, 1996).
Likewise, some have argued that at Toyota the
seemingly impossible goal of 100 percent near-
term improvement in fuel efficiency (relative to
prevailing standards) played a key role in the
development of hybrid vehicle technology (Takeu-
chi, Osono, & Shimizu, 2008). Beyond these two
anecdotal illustrations, researchers have sug-
gested that the use of stretch goals remains fairly
common in practice (for examples see Collins &
Porras, 1994; Takeuchi et al., 2008; Thompson,
Hochwarter, & Mathys, 1997).
Goals and aspirations in general have long
played an important role in organization the-
ory (e.g., Cyert & March, 1963), and stretch
goals in particular have generated interest
among the business press and the various
scholars noted earlier. Yet pushing the bound-
aries of goal attainability raises organiza-
tional implications that require deeper analy-
sis. In this article we integrate the literature
on organizational goals with research on
learning to examine the role of seemingly im-
possible goals in facilitating exploratory
learning while promoting, or at least not sac-
rificing, performance. Specifically, we con-
sider a number of fundamental questions at

the organizational level of analysis: What are
the mechanisms through which this class of
goals might promote exploratory learning and
organizational performance? What are the
risks to such extreme goals that could nega-
tively affect the organization’s capacity to per-
form and to learn? Do stretch goals increase
learning or performance in some circum-
stances but decrease them in others? Do orga-
nizations that could benefit the most from
stretch goals exhibit the greatest propensity to
pursue them?
In gaining an understanding of why organiza-
tions would use seemingly impossible goals
and how their use influences exploratory learn-
ing and performance, we address an important
theoretical gap at the intersection of research on
organizational goals and organizational learn-
ing processes. In particular, we contribute new
insights on how the use of extreme goals might
relate to exploring new and innovative practices
(e.g., Levinthal & March, 1993; March, 1991; Rah-
mandad, 2008; Uotila, Maula, Keil, & Zahra,
2009), organizational risk taking (e.g., Singh,
1986; Sitkin & Pablo, 1992), learning under am-
biguous feedback (March & Olsen, 1976; Weick,
1979, 1995), and dynamic capability develop-
ment (e.g., Agarwal & Helfat, 2009; Capron &
Mitchell, 2009; Winter, 2000). Our work reveals
ways that the extremity of stretch goals might
challenge core assumptions about the relation-
ships among aspirations, learning, and firm per-
formance (e.g., Ethiraj & Levinthal, 2009; Cyert &
March, 1963; Greve, 1998; Lant, 1992; Lant & Sha-

pira, 2008; Mezias, 1988). We suggest that as
goals become extreme, there are complex yet
predictable organizational effects that are likely
to be negative except under a limited set of
specifiable circumstances. Moreover, we con-
tribute to scholarly thinking on organizational
change and adaptation by examining why orga-
nizations would be drawn to using stretch goals
as intentional, internally generated jolts or crises
(e.g., Barnett & Pratt, 2000; D’Aveni & MacMillan,
1990), as well as the conditions under which such
jolts might successfully or unsuccessfully trigger
discontinuous advances in learning (e.g., Beer et
al, 1990; Meyer, 1982; Romanelli & Tushman, 1994).
Our theoretical analysis also advances the under-
standing of the little-known effects of unattain-
able goals (e.g., Garland, 1982, 1983; Locke, 1982,
2004; Rousseau, 1997) by examining the underly-
ing mechanisms through which such goals can
lead to collective outcomes.
In the following section we specify our con-
ceptual space by providing a definition of
stretch goals. We then examine the underlying
cognitive, affective, and behavioral mecha-
nisms through which stretch goals might posi-
tively or negatively influence organizational
learning and performance outcomes. Building di-
rectly on this discussion, we formulate pro-
positions around recent performance and slack
resources as the key contingency factors deter-
mining when stretch goals will facilitate versus
disrupt learning and performance. We follow with
propositions concerning how these same contin-
gency factors also determine the likelihood that
an organization will be drawn to using stretch

goals. As part of our closing discussion, we recon-
sider reported stretch goal success stories in light
of our analysis and highlight important contexts
for future empirical inquiry.
546 JulyAcademy of Management Review
STRETCH GOALS DEFINED
Consistent with an early stage of conceptual
development, stretch goals have not been pre-
cisely defined, and the term has not been used
consistently within or across previous commen-
taries. Even so, earlier use of the term does pro-
vide guidance in formulating a definition. Draw-
ing on prior descriptions (e.g., Collins & Porras,
1994; Hamel & Prahalad, 1993; Rousseau, 1997;
Sherman, 1995), we define a stretch goal as an
organizational goal with an objective probabil-
ity of attainment that may be unknown but is
seemingly impossible given current capabilities
(i.e., current practices, skills, and knowledge).
Because we define stretch goals in terms of an
unknown yet seemingly impossible (i.e., 0 per-
cent) probability of attainment, we depart mark-
edly from the focus in organizational behavior
research on challenging goals, which have a
nonzero (typically, 10 percent) probability of at-
tainment (Locke & Latham, 1990). We do not de-
part, however, from the usual focus on outcome-
oriented performance goals as opposed to
process-oriented learning goals (e.g., Seijts &
Latham, 2005; Winters & Latham, 1996). Setting a

performance goal entails specifying a tangible
outcome to be reached (usually a quantifiable
level of performance), such as a specific reduc-
tion in turnaround times at airport gates, a per-
centage increase in fuel efficiency of vehicles, a
reduction in cycle time in a production process,
or an increase in sales from new products. Once
that performance goal is set, the entity charged
with pursuing it must devise strategies to reach
the targeted outcome. Although learning can re-
sult as a by-product of dealing with the de-
mands of meeting a performance goal, it is im-
portant to emphasize that stretch goals are still
articulated by the organization in terms of a
specific level of performance or output. In con-
trast, setting a learning goal that does not make
explicit a specific outcome to be reached (but,
rather, articulates the acquisition of procedural
knowledge as the end in itself) would not qual-
ify as a stretch goal under our definition.
Our characterization of stretch goals high-
lights that they differ from ordinary difficult
goals in two important respects: (1) extreme dif-
ficulty—an extremely high level of difficulty
that renders the goal seemingly impossible
given current situational characteristics and re-
sources—and (2) extreme novelty—there are no
known paths for achieving the goal given cur-
rent capabilities (i.e., current practices, skills,
and knowledge). Although these dimensions im-
ply each other, extreme difficulty and novelty
stress different aspects of the stretch goal con-
struct (the specified performance outcome and
knowledge of the means to reach it, respec-

tively) and also directly relate to the two differ-
ent core outcomes of interest in this article (or-
ganizational performance and organizational
learning, respectively). Thus, below we elabo-
rate on the dimensions separately in order to
facilitate systematic theorizing about distinct
stretch goal effects.
Extreme Difficulty
Stretch goals involve extreme or radical ex-
pectations. Even if the stretch goal involves en-
hancing a process already in place (e.g., the
elapsed time between an order and delivery of a
product to the customer), the desired process
improvement extends beyond what is possible
with current capabilities. Returning to the
Southwest Airlines example, the goal of a ten-
minute turnaround certainly involved a familiar
task (efficient turnarounds at airports), but the
target was dramatically beyond the company’s
then-current performance limits, as well as the
industry average and range of industry prac-
tices. Regardless of the method Southwest Air-
lines deployed to try to reach the stretch target,
attainment would at best be extraordinarily dif-
ficult and was perceived to be impossible.
We note that a goal need not be universally
(or eternally) impossible in order to qualify as a
“stretch” for an organization in a given context.
Although it is likely that seemingly impossible
goals for one organization are also seemingly
impossible for most other organizations in the
industry at the time, there could be exceptions.
Overall, the determination of extreme difficulty

is context specific.
Extreme Novelty
A second aspect of stretch goals is the lack of
a discernible path to attainment. When an orga-
nization lacks the skills, knowledge, or practices
to attain a stretch goal and does not have knowl-
edge of any feasible approaches, it is effectively
forced to search outside of its normal routines
and knowledge to see if any ways to achieve the
2011 547Sitkin, See, Miller, Lawless, and Carton
goal exist or can be created. At issue are the
particular circumstances of the organization
charged with pursuing the goal. To continue
with the Southwest Airlines illustration, the goal
of a ten-minute turnaround could only be
achieved by learning to employ a radically new
approach. There were no guiding templates to
use within the organization or even within the
airline industry. In other words, the path to
achievement was unimaginable at the time the
goal was set, and, thus, novel means were re-
quired to achieve the goal.
STRETCH GOALS AS FACILITATORS AND
DISRUPTORS OF ORGANIZATIONAL
LEARNING AND PERFORMANCE
There is as yet no explicit theory of the poten-
tial effects of seemingly impossible goals on

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