Theory E and Theory O

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Description of Theory E and Theory O of M. Beer and N. Nohria. Explanation.

Contributed by: Jerry Watson

 

Definition Theory E and Theory O. Description.


Theory E and Theory O are two different approaches to deal with organizational change. According to M. Beer and N. Nohria they should be combined.

In their article "Cracking the Code of Change" (Harvard Business Review, May-June 2000: 133-141), the authors describe two theories:

  • Theory E: Theory E change strategies are aimed at realizing Economic value. Hence the E. In this “Hard” approach to change, Shareholder Value is the only legitimate concern. Change usually involves heavy use of economic incentives, drastic layoffs, Downsizing, and Restructuring.

  • Theory O: Theory O change strategies are aimed at improving the Organization. Hence the O. Managers using Theory O believe if they focus exclusively on the price of their stock, they might harm their organizations. In this “Soft” approach to change, the goal is to develop Corporate Culture and human capability through individual and Organizational Learning. This theory is the process of changing, obtaining feedback, reflecting, and making further changes. Companies that follow this approach have a strong, long-held, commitment-based psychological contract with their employees.

The key differences between Theory E and Theory O are:
 

Dimension of Change Theory E Theory O Theories E and O Combined
Goals Maximize shareholder value Develop organizational capabilities Explicitly embrace the paradox between economic value and organizational capability.
Leadership Manage from the top down Encourage participation from the bottom up Set direction from the top and engage the people below
Focus Emphasize structure and systems Build up corporate culture; employees’ behavior and attitudes Focus simultaneously on the hard (structures and systems) and the soft (corporate culture)
Process Plan and establish programs Experiment and evolve Plan for spontaneity
Reward system Motivate through financial incentives Motivate through commitment – use pay as fair exchange Use incentives to reinforce change but not to drive it
Use of Consultants Consultants analyze problems and shape solutions Consultants support management in shaping their own solutions Consultants are expert resources who empower employees


Instead of using only one theory or sequencing both theories, a company should implement both Theory E and Theory O at the same time. The simultaneous use of both theories is more likely to be the source of Sustainable Competitive Advantage. The company should explicitly confront the tension between E and O goals and embrace the paradox between the two theories. This should become a balancing act between initiating actions that follow one theory and then contradict that theory.

The company should be lead by a leader at the top who clearly sets and organizes company changes. At the same time, this leader should listen and look for input from the lower levels of the company by shifting power from the company’s headquarters to where the company does business.

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