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