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Oticon: from traditional hierarchy to

spaghetti organisation
Oticon is one of the worlds leading hearing aid manufacturers
and has designed the first hearing aid that connects to the
Internet where individuals can craft their own connections
(www.oticon.com). Yet, in the 1990s after nearly a hundred years
in business, the company was in crisis. As a family owned
company until the late 1980s, this is hardly the sort of company where you'd expect to find a corporate radical,
but Lars Kolind and his Danish colleagues, working from a three-tier loft space in an old Tuborg soda factory just
north of Copenhagen, built a business model that opened up new markets, has continued to capture the
imagination of business innovators around the world, and has become one of the most well-known and quoted
case studies of change and innovation. This case provides an opportunity for you to build on your previous
learning and to examine links between theory and practice. The changes that have occurred provide a context
and background for you to analyse and critically evaluate the case organisation using models and frameworks
linked to the topics and themes covered in the module.

Background
Oticon, a Danish company, was founded in 1904 by Hans Demant who was driven by a profound
desire to help his hard-of-hearing wife and others with similar problems lead better lives. Inspired
by this humanistic philosophy, his son and successor William Demant later created the charitable
Oticon Foundation. Today the Oticon Foundation is the majority shareholder in Oticon (now part of
William Demant Group) and is committed through its statutes to support the needs of the hearing
impaired.

By the 1970s, Oticon had grown internationally and had become the worlds number one
manufacturer of behind-the-ear hearing aids. However, as the market grew and there was more
competition, its fortunes plummeted. By 1987, the company had lost half of its equity. At this time,
Oticon was a very traditional, departmentalised organisation. It had a distinguished past but it was a
small company operating in a global market and slow to change. Although it had 15 sites around the
world and 95 distributorships, the Head Office its largest site only employed 145 people. It was
operating and trying to hold its own in a market dominated by Siemens, Phillips, Sony, 3M and
Panasonic. Also market preference had changed people now wanted in-the-ear products and
while Oticon was still strong in analogue technology, others were discovering the possibilities of digital
technology. It could be said that Oticon rested on its laurels, and mis-calculated the impact of these
new digital technologies.

The need for turnaround


In 1988, Lars Kolind was appointed as President. His job was to revive a deeply troubled company.
He was only the third person and first non-family member - to hold this post in the companys

Case: Oticon: From traditional hierarchy to spaghetti organisation, Newcastle: Northumbria University case 1
prepared as part of class discussion and analysis (Myers, 2016 revised).
history. His assessment of the company was that it had been sleeping for the last 10 years and there
was a need to re-energise the company and the workforce. Over the next 2 years, he worked hard to
turn the company around through cost cutting measures. He cut staff numbers (estimates are
between 10-15 % of employees at headquarters lost their jobs); increased efficiency; and reduced
costs and prices. By 1990, Oticon was showing a profit. Sales had grown at 2% per annum. However,
the market was continuing to grow at 6% per annum and Kolind thought that the future of the
company was bleak he had been searching for a competitive advantage for the company:

I looked at technology, audiology, I looked at distribution strength. I looked at everything, but


there was nothing we could do better than the competition.

It was give-up-and-die time, or time to think outside of the box: to think the unthinkable.

Kolind realised that the industry was totally technology-focused and with lack of technical excellence,
lack of capital and general lack of resources it would not be possible for Oticon to be significantly
more creative, faster and more cost-effective than the big players. He believed that Oticon was not in
the hearing business per se, they were in the business of making people smile. Making people smile
would mean not only providing them with a wonderful piece of technology, but in actually changing
peoples lives for the better. This is reflected in their vision:

To help people live the life they want with the hearing they have.

To achieve this required knowledge of peoples life style and how hearing impairment affects them.
What was needed therefore was a more holistic approach to customer care. A system that would
allow a hearing clinic to assess hearing loss, to discuss lifestyle needs of the adult or child concerned,
to select the appropriate hearing aid, to programme it, and fine tune it to individual choice whether
they preferred classical music or rock music, worked in a quiet or noisy environment focusing on
people not ears.

Kolind now had a vision, but still had to find a way of communicating it and implementing it. If Oticon
were to move away from merely making hearing aids and instead provide a total package of support
for people with hearing difficulties, it would have to develop a whole new concept in hearing aid
service and in terms of how the employees worked and behaved:

"Hearing aids are not the core of what this company is about," Kolind says. "It's about
something more fundamental. It's about the way people perceive work. We give people the
freedom to do what they want

On New Year's Day 1990, Kolind released a multi-page memo on reinventing the company. Oticon
needed breakthroughs that "require the combination of technology with audiology, psychology, and

Case: Oticon: From traditional hierarchy to spaghetti organisation, Newcastle: Northumbria University case 2
prepared as part of class discussion and analysis (Myers, 2016 revised).
imaginationThe ability to `think the unthinkable' and make it happen." In organizations of the future,
Kolin stated, "staff would be liberated to grow, personally and professionally, and to become more
creative, action-oriented, and efficient." What was the enemy of these new organizations? The
organization itself.

For Kolind, a knowledge-based or learning organization should not work like a machine, it should
work like a brain. Brains do not have hierarchies no boxes no job descriptions; what there is, is a
very chaotic set of thousands of relationships tangled in with each other on certain knowledge
centres, with an interaction that may seem chaotic. At Oticons headquarters in Copenhagen the
worlds first knowledge-based spaghetti organization was introduced in 1991: a flat, dynamic
structure well suited for the realization of ideas.

On New Years day 1990, I sat down and


While maintaining control, Kolind saw himself not as
tried to think the unthinkable: a vision for the
the captain who steers the ship but as the naval
company of tomorrowshaping jobs to fit
architect who designs it. Kolind involved as many
each person instead of the other way around.
Each person would be given more functions people as possible in planning the transformation, and
and a job would be developed by the established a number of working groups consisting of
individuals accumulating portfolio of both internal and external stakeholders and experts.
functionsif people dont have anything to
do, they need to find something or we dont Nearly all the staff in the old organisation were
need then... the understanding is that you
brought into the new organisation. Some chose to
must complete projects you have accepted
leave, but turnover rate remained low and there were
if you want to know what the individual] is
few resignations following the transformation.
involved in, ask himOne thing is sure,
Oticon will have changed. We have created a
flexible organisation, where everyone realises Initially Kolind had tried to overcome the old/new
that the only certain thing is change. cultures by proposing a move to new headquarters,
but this had to be abandoned when resistance from
Extracts of interviews with Kolind, in Morsing Oticons management intensified:
& Eiberg, 1998 cited by Larsen, 2002, p 31

I knew what I wanted to do and I felt powerful


enough to handle the opposition. They honestly felt I was on the wrong track. They believed
that resistance was their only way to prevent me from ruining the whole company; therefore,
they openly tried to obstruct what I was doing. I believe they showed loyalty to the company
that I think one should respect. If the boss is making the mistake of the century, then its right
to try to stop it.

I gained their support by stepping back and saying, Okay, you won that one. I respect you.
(Kolind cited in Morgan Gould, 2002, p 9)

Case: Oticon: From traditional hierarchy to spaghetti organisation, Newcastle: Northumbria University case 3
prepared as part of class discussion and analysis (Myers, 2016 revised).
Formal structures, job descriptions and product development functions were seen as creating barriers
to cooperation, innovation and teamwork rather than facilitating it. Kolinds new (dis-)organization
would be based on four principles:
Departments and job titles would disappear and all activities would become projects and
initiated and pursued informally by groupings of interested people.
Jobs would be redesigned into fluid and unique combinations of functions to suit each
employees needs and capabilities
All vestiges of the formal office would be eradicated and replaced by open space filled with
workstations that anyone could use.
Informal face-to-face dialogue would replace memos as the acceptable mode of
communication

The intent was to see what happened when staff were liberated to do what they thought best.
Underlying this was a view that adults do not have to be told when to come to work and go home, so
there was no need to continually remind them of the company rules or practices. Kolind wanted
everyone in the organization, from secretaries to technical experts, to work more closely together to
make things happen more creatively, faster and more cost-effectively; to be multi-skilled, involved in
different projects and performing different roles. In addition, each person could appoint a coach for
him/herself. This was also seen as a shift away from more tradition career and talent management
processes. While some found this new environment opening up new opportunities, some may
preferred to be managed more traditionally, with clearer (more hierarchical) career progression more
apparent.

After 15 months of preparation, where management and staff openly, and at length, discussed and
debated the new strategy for the company and the implications, the changes to the new way of
th
working at head office began with state-of-the art electronic infrastructure on 8am on 8 August 1991.

As part of a networked and team-based structure, teams formed, disbanded, and formed again as the
work required. Project leaders (basically, anyone with a compelling idea) had to compete to attract the
resources and people to deliver results. Project owners (members of the company's 10-person
management team at that time), provided advice and support, but made few actual decisions; the re-
organisation meant there were very few middle managers. Project leads had the responsibility for
managing resources, budgets, schedules and responsibility for the outputs and outcomes of each
project. The company had a hundred or so projects at any one time, and most people worked on
several projects at once. If an R&D specialist or a secretary wanted to work with a marketing group
then all they have to do is have a chat with the project leader in order to sign on, allowing careers to
unfold organically.
"We want each project to feel like a company, and the project leader to feel like a CEO,"
Kolind says. "We allow a lot of freedom. We don't worry if we use more resources than
planned. Deadlines are what really matter."

Case: Oticon: From traditional hierarchy to spaghetti organisation, Newcastle: Northumbria University case 4
prepared as part of class discussion and analysis (Myers, 2016 revised).
We told them they were going to The company's physical space reflected its logic of work. All
take all existing departments away. vestiges of hierarchy disappeared. Oticon headquarters
Nobody could hide anymore, as became an anti-paper, open plan office with uniform mobile
everything would be out in the open. workstations consisting of desks without drawers and state-of-
We would b able to look at what they the-art networked computers. People are always on the move,
were doing, and they could see what
their "office" nothing more than where they choose to park
we were doing. This was a shock to
their mobile workstation (mini filing cabinet on wheels) for the
a lot of people. They asked, How
duration of a project--anywhere from a few weeks to several
are we going t cope with this? Where
are we going to sit? Is everybody months, armed with mobile phones that reflected the ebb and

going to look at us all the time? What flow of the work projects.
about people like me who are
managers, how are we supposed to "When people move around and sit next to different people,
talk to employees privately? And they learn something about what others are doing," Poul Erik
where? Lyregaard, Oticon's R&D leader for 20 years explained "They
Former middle manager cited by
also learn to respect what those people do. It's hard to
Morgan Gould, 2002, p 1.
maintain `enemy pictures' in this company--they're not `those
bloody fools in marketing.' You know too much about what people do."

It became an environment that maximized walking, talking, and acting. Every morning, people visited
the company's second-floor "paper room" to sort through incoming mail. They may have kept a few
magazines and reports to work with for the day, but they ran everything else through an electronic
scanner and threw the originals into a shredder. The shredder fed a long glass tube that emptied into
recycling bins on the ground floor--unleashing a daily blizzard of confetti. The office was also littered
with stand-up coffee bars to encourage small, informal (but short) meetings. Ideas were usually
uploaded straight into a computer and shared with everyone else. To bring individuals up to speed
with technology use, all staff members were given a home-based computer.

Oticon became the only hearing instrument manufacturer in the industry supporting its own research
facility (funds allocated to research and development were tripled during this time). While many tasks
remained the same, many employees felt they had gained a broader knowledge and understanding
about what was happening in the organisation and how they contributed to the overall vision and aims
of the organisation.

The unusual Oticon processes were highly disciplined and the results are impressive. One immediate
benefit was that Oticon found that it had already developed the industrys first automatic, self-
adjusting hearing aid back in the 1980s. Lack of communication between different parts of the
organisation and because of some technical problems, no-one seemed to realise that they had
developed a potentially world-beating product. In the transformed Oticon, this project quickly
resurfaced and problems rapidly ironed out to take an improved product to market.

Case: Oticon: From traditional hierarchy to spaghetti organisation, Newcastle: Northumbria University case 5
prepared as part of class discussion and analysis (Myers, 2016 revised).
Profits didnt come overnight and the company suffered losses after the first tranche of changes from
1991-2. In 1992, Neils Jacobsen came on board and began to focus more on the operational issues,
tightening up some of the policies and procedures, which was also an uncomfortable shift after the
loosening of structures and processes; although a compromise was reached with a shared
leadership approach with Kolind.

By 1994, 15 new products had been launched, new product and lead-time had halved and the
companys sales were growing at 20% per year. In part, this was down to project-based organisation,
mentioned above, which allowed employees from different parts of the organisation to come together
to work on specific projects - or to develop them - together with a culture of self-discipline focused on
creativity, speed, and productivity. In 1995, Oticon launched the worlds first digital hearing aid and
won a number of innovation awards. See Appendix A for key events and results, 1990-93.

In 1998, after 10 years as head of Oticon, Lars Kolind decided it was time to move on. He left the
company in a far stronger position than it had been when he first arrived. While his leaving was
amicable it highlights the dilemma of a transformational manager what do you do when you have
transformed the company? Following, Kolinds departure, there does not appear to have been any
rethinking of his approach to work, rather the reverse. Oticon is continuing to stress the wider ethical
and social role it wishes to play. This was demonstrated when Kolinds successor, Niels Jacobsen
(mentioned above and brought in initially when the transformation was having financial difficulties, and
now president and CEO of William Demant Group and President of Oticon), said on receiving the
prestigious Employee Empowerment Award in New York in 1998:

Our goal is to do business in a manner that positively contributes to society in every country
where we do business. We support the principle that industry has a responsibility for society
and that we have a collective responsibility to the environment.

In 2002, the first hearing aid that understands people was introduced - it won the Society
Technology IST Grand Prize. In 2003 William Demant Holding A/S won the prestigious European
Company of the Year Award a title shared with companies such as Nokia, BMW and Hugo Boss. In
2004, Oticon introduced Syncro - a hearing aid using artificial intelligence.

In many respects, Oticon has been seen as demonstrating many characteristics of a learning
organisation, and had been seen to try to embody many of the non-traditional management practices
that were gaining currency at that time. By 2002, although the management ideology and practice
remained relatively the same (see Appendix B, Oticons management philosophy), there have been
some changes. Training in project management was launched and project team leadership is now
seen as part of a career path; the coach role had continued. There has been more development of
functional activities (including an HR function and HR director, although much of the management is
devolved to project team leaders). While retreat from spaghetti had been seen to start before Kolind

Case: Oticon: From traditional hierarchy to spaghetti organisation, Newcastle: Northumbria University case 6
prepared as part of class discussion and analysis (Myers, 2016 revised).
left the company, the companys continued growth and acquisition of suppliers, distributors and
retailers means that Oticon is one of the three largest providers of hearing aids and is listed on the
NASDAQ QMX (Copenhagen).

William Demant is a leading global company that develops, manufactures and sells hearing instruments,
hearing implants, diagnostic instruments and personal communication devices. William Demant Invest,
wholly owned by the Oticon Foundation, holds the majority shares in William Demant Holding, the company
behind the commercial successes of such world-renowned brands as Oticon, Bernafon, Sonic, Oticon
Medical, Maico, Interacoustics, Grason-Stadler and Sennheiser Communications. The Group operates in a
global market with companies in more than 30 countries, a total staff exceeding 11,000 and generates annual
revenues of more than DKK 10 billion.
www.demant.com

Sources
(Kolind quotes, unless otherwise stated are from Bourke, 1995)

Beech, N. & MacIntosh, R. (2012) Managing change: Enquiry and action, Cambridge: CUP
Bourke, D (1995) QAD case study: Oticon A/S Medical Electronics News available at URL:
http://www.qad.com/company/resource_library/case_studies/electronics/oticon.pdf
th
Burnes, B (2009) Managing Change, 5 edition, London: FT/Prentice Hall
Fosse, N. (2002) Internal disaggregation in Oticon: An organizational economics interpretation of the
rise and decline of the spaghetti organisaiton, Working Paper, Copenhagen~: Copenhagan
Business chool
LaBarre, P(1996)This Organization is Dis-Organization: No titles. No offices. No paper. How
Denmark's Oticon thrives on chaos. US/Fast Company
Larsen, H.H. (2002) Oticon: Unorthodox project-based management and careers in a Spaghetti
Organization, Human Resource Planning, 25(4), pp 30-37
Peters, T. (1993) Where you stand depends on where you sit, available at www.tompeters.com
Peters, T (1992) One thousand People, One thousand careers, available at www.tompeter.com

Oticon corporate website: www.oticon.com

William Demant Group website: www.demant.com

Case: Oticon: From traditional hierarchy to spaghetti organisation, Newcastle: Northumbria University case 7
prepared as part of class discussion and analysis (Myers, 2016 revised).
Appendix A: Key events and results 1990-1993

Case: Oticon: From traditional hierarchy to spaghetti organisation, Newcastle: Northumbria University case 8
prepared as part of class discussion and analysis (Myers, 2016 revised).
Case: Oticon: From traditional hierarchy to spaghetti organisation, Newcastle: Northumbria University case 9
prepared as part of class discussion and analysis (Myers, 2016 revised).
Appendix B: Oticons management philosophy

Case: Oticon: From traditional hierarchy to spaghetti organisation, Newcastle: Northumbria University case 10
prepared as part of class discussion and analysis (Myers, 2016 revised).
Case: Oticon: From traditional hierarchy to spaghetti organisation, Newcastle: Northumbria University case 11
prepared as part of class discussion and analysis (Myers, 2016 revised).