For Brilliant Answers Only

For Brilliant Answers Only
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, andexecution) 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 asstretch 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…[inorder 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 2011545 Sitkin, 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. 546July Academy 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 asan 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 noknown 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 2011547 Sitkin, 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 exploratory learning and organizational perfor- mance. Indeed, macrolevel goals are often in- voked in the organizational literature, but their unique effects have rarely been examined, and unattainable goals remain outside nearly all of the available scholarly work. Much of the pub- lished work focused directly on organizational stretch goals has been restricted to commentar- ies or applied case studies (Collins & Porras, 1994, 1996; Golovin, 1997; Hamel & Prahalad, 1993; Hughes, 2001; Kerr & Landauer, 2004; Rous- seau, 1997; Sherman, 1995; Takeuchi et al., 2008; Thompson et al., 1997). With few exceptions (e.g., Hughes, 2001; Kerr & Landauer, 2004; Sherman, 1995), these authors have focused solely on the presumed benefits of seemingly impossible goals, and their work has remained general, rarely proposing specific causal mechanisms. Notwithstanding these limitations, we have been able to draw on work in organizational theory and cognition to analyze how stretch goal usage can influence learning and performance outcomes through a variety of specific mecha- nisms that we sort as cognitive, affective, or behavioral (as summarized in Figure 1). Our analysis surfaces both potential facilitative and disruptive stretch goal effects. We then propose a set of contingency factors that determine whether stretch goals will have positive or neg- ative effects on learning and performance. In line with our central purpose and with prior work, we conceptualize learning as exploration that yields meaningful insights regarding new practices and capabilities (e.g., March, 1991). Weconceptualize performance in terms of an orga- nization’s tangible outcomes along such dimen- sions as productivity, product or service quality, profitability, growth, and market share (e.g., see Hitt, 1988, and Quinn & Rohrbaugh, 1983). Facilitative Effects of Stretch Goals on Exploratory Learning and Performance Facilitative effects via cognition.Attention is a well-recognized mechanism of influence on organizational learning and performance out- comes (Cyert & March, 1963; Ocasio, 1997; Sut- cliffe, 1994). Because stretch goals involve ex- treme redefinitions of what an organization is capable of being or achieving, they can capture, shift, and refocus attention. According to Rous- seau, “Where performance expectations are el- evated well beyond the limits of past experi- ence” and “where previously successful frameworks are questioned, revised, or dis- carded, prior experience is often a poor guide for stretch-goal achievement . . . [and this] shifts the performers’ attention away from old routines and assumptions toward novel and creative ap- proaches” (1997: 529). Stretch goals present an information-processing challenge (Galbraith, 1973) because the organization needs to find new sources and types of information and also new ways to process that information. A positive reaction to this challenge would be for the orga- nization to become heedful (Weick, 1995; Weick, Sutcliffe, & Obstfeld, 2005) or vigilant (Janis & Mann, 1977) in proactively scanning and assess- ing the situation. The organization could thus become more open to new information from a variety of sources (Huber, 1991; O’Reilly, 1982; Sutcliffe, 1994) and question the validity of old assumptions, old information, and old frame- works (Meyer, 1982; Rousseau, 1997). These con- ditions can facilitate learning processes. Because stretch goals move an organization into uncharted waters, they naturally require flexible thinking about revisable alternative strategies for goal attainment (March, 1991; March & Olsen, 1976). Thus, seemingly impossi- ble goals can elicit a more open, reflective, and opportunity-oriented focus that is beneficial for performance (Sitkin, 1992). By allowing the orga- nization to more freely tap previously underuti- lized sources of information and insight, the jolt of stretch goals can cause an organization to more avidly attend to and consider novel paths 548July Academy of Management Review for pursuing the stretch target (March, 1991). As part of this response, capabilities could be care- fully reevaluated for their potential to be recom- bined in novel ways (e.g., Henderson & Clark, 1990), which would focus attention productively on controllable internal resources and would have positive consequences for performance (Beer et al., 1990; Lant & Shapira, 2008; Levinthal & March, 1981). Facilitative effects via affect.Seemingly im- possible goals can facilitate organizational learning and performance by positively influ- encing the collective emotion and initiative in- fused into the organization (Adler & Obstfeld, 2007). This is not to suggest that organizationsfeel emotions but, rather, to recognize that sig- nificant opportunities or threats can have a col- lective impact that goes beyond individual members’ affective responses through conta- gion processes (Barsade, 2002; Barsade & Gib- son, 2007; Bartel & Saavedra, 2000). Because stretch goals involve such high lev- els of ambition directed toward novel and unfa- miliar opportunities, they can generate energy and greater initiative to learn by evoking a range of positive collective reactions, such as optimism, urgency, enthusiasm, curiosity, and playfulness (March, 1976, 1991). When U.S. Pres- ident John Kennedy announced in 1961 the goal of landing a man on the moon within a decade, FIGURE 1 Mechanisms Through Which Stretch Goals Can Influence Organizational Learning and Performance FacilitationDisruption LearningCognitive Vigilance (heedfulness/mindfulness) Systematic processing of new information Openness Affective Enthusiasm, energy Optimism Sense of urgency Curiosity, playfulness Behavioral Trial-and-error cycles Broad search for new sources and discontinuous advances PerformanceCognitive Focus on internal/controllable factors Opportunity interpretations Attention on usable new information sources and analyses Affective Initiative to improve High resilience to negative feedback Behavioral Effort and persistence Effective strategy selectionCognitive Hypervigilance Inability to process new information Affective Fear Helplessness Aversion to change Defensiveness Behavioral Chaotic change Insufficient familiarity for interpreting feedback Cognitive Focus on external/uncontrollable factors Threat interpretations Attention on quick fixes Affective Low commitment to goal Low resilience to negative feedback Behavioral Threat rigidity Impaired coordination Resource diversion resulting in loss of beneficial routines 2011549 Sitkin, See, Miller, Lawless, and Carton he introduced a target that excited those he led, even though at the time they had no idea how to achieve the goal, or even if its achievement was possible. More generally, stretch goals can stim- ulate exploration by highlighting a potentially better and more exciting future (cf. Shamir, House, & Arthur, 1993). By creating a sense of urgency to take on new challenges and to move toward new understandings, stretch goals can impose a “crisis” that stimulates the initiative within or across the organization to undertake experimentation and learning (Barnett & Pratt, 2000; Baumard & Starbuck, 2005; D’Aveni & Mac- Millan, 1990; Kim, 1998). In other words, the cou- pling of positive affective drivers (e.g., enthusi- asm, energy) with modest stress-related drivers (e.g., urgency) can provide the spark and collec- tive initiative to explore and learn (Argyris & Scho¨ n, 1978; Kotter, 2008). The extreme difficulty of attaining stretch goals should also elevate aspirations (Rousseau, 1997), which is critical for ensuring that organizations strive to increase performance. Organizational the- ory suggests that aspirations well above existing performance levels create a problem to be solved and increase the initiative and desire to find a solu- tion (Cyert & March, 1963; Greve, 1998; Lant, 1992; Levinthal & March, 1981). In Greve’s work (1998), for example, aspirations well above existing perfor- mance led to enhanced motivation to improve per- formance. Strategic planning research also sug- gests that plans involving goals positively affect the desire to enhance performance, because strategic goal setting gives direction to the firm and promotes adaptive thinking (e.g., Miller & Cardinal, 1994). The literature on charismatic leadership, visionary lead- ership, and transformational leadership further sug- gests that the establishment of targets beyond cur- rent capabilities builds collective enthusiasm and resilience (Bass & Riggio, 2005; Dvir, Eden, Avolio, & Shamir, 2002; Nanus, 1992; Shamir et al., 1993). Facilitative effects via behavior.Since there is no known path to achieving a stretch goal, put- ting such a goal in place may generate actions directed toward exploring and learning new practices. When compared with other condi- tions, the extreme demands of stretch goals could stimulate broader and more active search for ideas and solutions (e.g., Baum & Dahlin, 2007; Fang & Levinthal, 2009; Mezias, 1988). Stretch goals could also propel the search for more radical, discontinuous advances (Cyert & March, 1963; Raisch & Birkinshaw, 2008), involv-ing actions such as making contacts with unfa- miliar sources of ideas, imitating innovative techniques (e.g., Sitkin et al., 1994), or undertak- ing trial-and-error learning (see Ingram & Baum, 1997, and Levitt & March, 1988). Moreover, by loosening old restraints and providing focus and energy, stretch goals may allow for trial- and-error learning to be undertaken with faster cycle times (Argote, 1999; Argyris, 1985; March, 1991). In effect, stretch goals can prompt search and experimentation behaviors traditionally as- sociated with learning. Stretch goals can also instigate actions that have positive effects on performance. Once the organization has identified and focused on a stretch target, prior research suggests that its use of specific and measurable (as opposed to vague) goals can lead to increases in organiza- tional performance outcomes via greater collec- tive effort, persistence, and the development of coherent action strategies for attaining the tar- get (e.g., Chesney & Locke, 1991; Cyert & March, 1963; Smith, Locke, & Barry, 1990). For example, Chesney and Locke (1991) found that specifically articulated goals influenced the development of business strategies that increased simulated firm performance in an experiential strategic management exercise. Moreover, research on top management teams has connected upper- echelon agreement on the goals of the firm to financial performance (e.g., Colbert, Kristof- Brown, Bradley, & Barrick, 2008; Dess, 1987). Mov- ing from the use of attainable goals to the case of stretch goals, to the extent that top manage- ment agreement on a stretch goal signals a greater sense of specificity and unified purpose, more effective pathways and strategies for ap- proaching the goal could lead to higher perfor- mance. Essentially, when a stretch goal is artic- ulated as achieving a specific outcome, parallel or independent strategies can be more easily developed and coordinated as the beacon-like stretch target directs and channels action to- ward a singular end point. Disruptive Effects of Stretch Goals on Exploratory Learning and Performance Disruptive effects via cognition.In contrast to the positive dynamics of vigilance or mind- fulness discussed above (Janis & Mann, 1977; Weick, 1995), the jolt of stretch goals could conceivably elicit negative attentional re- 550July Academy of Management Review sponses that compromise information process- ing and the capacity to learn. In the face of a seemingly impossible problem that is not well understood and for which there are no discrete steps that constitute credible paths toward solu- tion, the organization may respond to the over- whelming situation with hypervigilance (Janis & Mann, 1977). With such a response, the organi- zation’s information processing becomes disor- ganized, impulsive, and less systematic in the consideration of alternatives. Thus, instead of presenting a stimulating intellectual challenge for information processing, stretch goals could constitute an information processing “bridge too far,” in that the organization simply lacks the capacity to match the complexity and demands of its situation or to incorporate new approaches or inputs that could lead to learning (Weick, 1979). The lack of obvious capabilities to respond to the demands of stretch goals can also shift at- tention to potential quick fixes from outside (Beer et al., 1990), even though the organization may not have the absorptive capacity to import these approaches (Cohen & Levinthal, 1990; D’Aveni & MacMillan, 1990). Attending to outside ideas also diverts attention from a more produc- tive focus on internal resources and ideas for change (Beer et al., 1990; Lant & Shapira, 2008). While shifting some attention externally is gen- erally positive for exploration, the extreme dif- ficulty of pursuing a stretch goal can lead the organization to focus attention too much or too haphazardly on outside ideas (e.g., obsessive monitoring or unsystematic benchmarking of other firms), which would directly limit perfor- mance as the organization directs insufficient attention to opportunities that are most useful given its unique history and environment (Cyert & March, 1963). Disruptive effects via affect.The contagion processes that drive collective affect in organi- zations occur regardless of whether the affective response is positive or negative (Barsade, 2002). While the high levels of ambition associated with stretch goals could raise the level of posi- tive collective affect, as discussed earlier, stretch goals signal the need for change and, thus, simultaneously have the potential to elicit the negative affective responses that often ac- company change (Barnett & Pratt, 2000). In par- ticular, facing a goal that is seemingly impossi- ble could instigate a negative affect contagionwhereby exploration and willingness to try new approaches are impeded by a sense of collective fear, helplessness, and demotivation (Sitkin, 1992). Under such conditions, any incentives to explore induced by stretch goals would be dwarfed by the more salient threat created by them. A high level of negative collective affect is generally expected to constrict the motivation to use learning-enhancing processes and the ca- pacity to absorb learning opportunities that may serendipitously present themselves (Cohen & Levinthal, 1990; Levinthal & March, 1993; Levitt & March, 1988; Woodman, Sawyer, & Griffin, 1993). Stretch goals can also have disruptive effects on performance if collective commitment to the goal becomes compromised by widely held em- ployee perceptions that a seemingly impossible goal is unrealistic or unworthy of pursuit. The extremity of stretch goals can also dampen col- lective affective responses like satisfaction and morale, because organizational attempts to reach the goals are likely to involve one or more failures. Thus, less extreme goals that are diffi- cult but still attainable are often advised (Locke & Latham, 1994). Indeed, using goals that are difficult enough to require great effort or persis- tence, yet are still within reach, is consistent with many motivational perspectives (e.g., At- kinson, 1964; Heath, Larrick, & Wu, 1999; Locke & Latham, 1990; Vroom, 1964). For example, Heath et al. (1999) built on prospect theory to contend that because a goal serves as a reference point, initiative for working toward the goal dimin- ishes with distance from the goal. Taken to- gether, stretch goals have the potential to dis- rupt performance by diminishing collective initiative, morale, commitment, and resilience in the face of setbacks. Disruptive effects via behavior.By definition, stretch goals are associated with extreme tar- gets whereby current capabilities are not ade- quate in any obvious way for goal attainment. As such, actions associated with stretch goal implementation could create too large a break from the past, or the actions may simply lead to too many simultaneous changes to effectively distinguish signal from noise (March, 1976). In either case, organizational decision makers would be unable to learn which enacted changes are effective and which are ineffective or detrimental (March & Olsen, 1976). Moreover, organizational learning is best facilitated within at least moderately familiar territory 2011551 Sitkin, See, Miller, Lawless, and Carton where there is a frame of reference to under- stand causal relationships and interpret feed- back from changes that are made (Cohen & Levinthal, 1990; Sitkin, 1992; Weick, 1984). With- out some degree of familiarity, organizations lack an effective frame, and feedback from ac- tions and change efforts is experienced as ambiguous (cf. Levitt & March, 1988; March & Olsen, 1976). The novel means associated with stretch goal pursuit imply that there is little “do- main relevance” to bring to bear on the situa- tion, since “it is hard to be intelligent about that which is unfamiliar” (Sitkin, 1992: 245). Thus, conditions that could facilitate effective learn- ing, such as controllable change in familiar ter- ritory with interpretable feedback, are unlikely to hold in the presence of stretch goals. The extreme novelty of stretch goals could generate actions that complicate organizational performance. Because it is not clear initially how to start working toward a seemingly impos- sible goal, the inherent novelty and task com- plexity involved in attaining a stretch goal can compromise some types of organizational per- formance (e.g., Carley & Lin, 1997; Perrow, 1979). Moreover, an additional concern is the magni- tude of change that would typically be required in attempting to bridge the gap between current capabilities and the attainment of a stretch goal. Greater scale change can be disruptive to performance because problems encountered and lessons learned are often not amenable to effective coping (Beer et al., 1990), whereas re- duced scale of change creates more manage- able problems with smaller performance mile- stones (Sitkin, 1992; Weick, 1984). The prospect of large-scale change induced by stretch goals can also instigate a threat-rigidity response (Staw, Sandelands, & Dutton, 1981)—an inability to act when under threat—that can undermine perfor- mance. Threat rigidity would be particularly maladaptive in the context of stretch goal pur- suit, since rigidly clinging to existing practices cannot result in stretch goal attainment. The extreme novelty and difficulty of attain- ing stretch goals could also directly impair co- ordination. Mandating the use of an organiza- tional stretch goal can be done almost instantly, but actual attempts at implementation demand radical organizational change under vague guidance. Urgent change under such ambigu- ous circumstances can cause different organiza- tional subunits to develop discrepant viewsabout causality and appropriate action (Beer et al., 1990; Levitt & March, 1988). The resulting plurality of “stories” ascribed to the actions and outcomes associated with attempting to reach the stretch goal is likely to impair coordination among subunits that have separate purposes, specialties, and interests (Lawrence & Lorsch, 1967; Martin, 1992). Information distribution and integration, which are fundamental coordina- tion elements inherent in organizational perfor- mance (as well as learning), are likely to be negatively affected as a result (Huber, 1991). Finally, because stretch goals require new routines and resources, working to attain them could reduce (or eventually eliminate) the effec- tive organizational exploitation of existing ca- pabilities, practices, and investments that are otherwise working well. Exploring new routines is, of course, a large part of the rationale and promise of using stretch goals. But diverting too much or diverting for too long from existing, well-functioning investments can undermine overall performance (March, 1991; Perrow, 1979), even in the best case scenario where the orga- nization is simultaneously reaping some learn- ing and performance returns from the stretch pursuit. That is, while stretch goals are intended to break problematic inertial forces, beneficial path dependencies can also be lost if any rou- tines that remain useful are thrown out. The jolt that stretch goals provide can thus outstrip the organization’s existing capabilities and resources. Our analysis in this section has suggested a number of specific mechanisms by which stretch goals could have either facilitative or disruptive effects, as summarized in Figure 1. In the following section we propose a contingency model of the primary organizational factors that ultimately predictwhetherstretch goals will fa- cilitate or impede exploratory learning and performance. CONTINGENCY FACTORS DETERMINING STRETCH GOAL EFFECTS ON LEARNING AND PERFORMANCE To consider the contingencies that influence when organizations benefit or suffer from the use of stretch goals, we focus on the two core organizational factors that reflect the system’s capacity to extract value from radical changes or new approaches: recent performance and 552July Academy of Management Review slack resources (Cyert & March, 1963). In terms of the mechanisms we analyzed in the prior section, we seek to answer the question, “How do recent performance and level of slack re- sources influence the balance between the fa- cilitative and disruptive aspects of the cogni- tive, affective, and behavioral mechanisms by which stretch goals can influence exploratory learning and performance?” In other words, we propose a contingency framework to ex- plain when stretch goals will have positive or negative effects on learning and performance outcomes depending on the levels of recent performance and slack resources of the orga- nization using such goals. Recent Performance Is an organization fresh from success (e.g., recent performance above a benchmark, such as the organization’s own performance in a prior period, average industry performance, or performance of a particular competitor) better sit- uated to leverage the potential benefits of stretch goal use and to withstand fallout from any fail- ure? With respect to the mechanisms summarized in Figure 1, there are reasons to expect that stron- ger recent performers, if they use stretch goals, are well situated to achieve facilitative effects on both learning and performance outcomes, whereas weaker recent performers are situated for disrup- tive effects from the use of stretch goals. Recent performance is likely to drive whether stretch goals shift organizational at- tention in a way that is focused productively or counterproductively. Having just experienced success, stronger recent performers are less likely to perceive an immediate threat; thus, if they undertake a stretch goal, they should be more open to new ideas and more mindful in the scanning and processing of new informa- tion, both of which foster learning (e.g., Levitt & March, 1988; Weick et al., 2005). As part of being more mindful and vigilant, stronger re- cent performers are more likely to attend to contextual features and organizational capa- bilities that are internal and controllable (e.g., Staw et al., 1981; Sutcliffe, 1994), precisely be- cause they have a (recent) history of deploying those features successfully (March & Olsen, 1976). Thus, in striving to reach a stretch goal, any routines that could be leveraged for radi- cal performance-enhancing recombinationswould be cognitively available to, and de- tected by, stronger recent performers. Weaker recent performers, however, do not have the attentional advantages afforded by success. Because they are already in a com- promised state owing to recent losses, if weaker recent performers choose to pursue a seemingly impossible goal, they are more likely to be overwhelmed by its demands and resort to hypervigilant, disorganized, or even frantic information processing that is disrup- tive to learning. Scattered attention and un- systematic information processing are also disruptive to performance such that weaker recent performers may attempt to reach a stretch goal by haphazardly or obsessively monitoring others in the industry for exter- nally sourced quick fixes. Such external re- sources and practices may not pertain to in- ternal resources (Beer et al., 1990), leverage existing strengths (March & Olsen, 1976), or allow for forging new paths and solutions through recombination (Henderson & Clark, 1990). 1 Recent performance would also be expected to influence whether the collective affective re- sponses to stretch goals facilitate or disrupt learning and performance. Success generates optimism, enthusiasm, and commitment and be- comes self-reinforcing (March & Olsen, 1976; Weick, 1984). Thus, if strong recent performers use stretch goals, they should be more able to leverage optimism and energy from their recent success toward learning solutions for goal at- tainment and increased performance. In con- trast, poor recent performance undermines many of these affective mechanisms. Poor re- cent performers attempting to reach a stretch goal are thus more susceptible to collective re- 1We note one situation at the far extreme of poor perfor- mance, where setting stretch goals is the only option for survival. Like the “Hail Mary” pass at the end of a U.S. football game, the pursuit of stretch goals when an organi- zation has no other option could be normatively superior so long as it does not hasten death. However, one could also draw an analogy to the pursuit of a miracle cure for a terminal disease, which introduces the notion that if setting stretch goals consumes fungible resources that could still be used more effectively in other pursuits (e.g., employees de- voting time to find other employment or more resources available to pay creditors), then the use of stretch goals even for survival may not always be the superior option to a quick and relatively painless organizational death. 2011553 Sitkin, See, Miller, Lawless, and Carton sponses of fear or defensiveness that would ob- struct the readiness to try new things and learn from them (Argyris, 1985; Sitkin & Pablo, 1992), as well as hamper the initiative and commitment needed to effectively pursue the performance opportunities offered by a stretch goal (Baumard & Starbuck, 2005). Finally, the actions taken in the attempts to reach a stretch target would conceivably be very different as a function of an organization’s re- cent performance and would therefore bring about different learning and performance out- comes. To the extent that success breeds the persistent utilization of the routines and prac- tices that led to that success (Audia, Locke, & Smith, 2000; March & Olsen, 1976; Weick, 1984), strong recent performance might initially lead the organization down the erroneous path of try- ing to reach a stretch goal only by repeating actions undertaken in the past. However, once it determines that such an approach is not suffi- cient for reaching a stretch target, a stronger recent performer, lacking an existing threat, could respond to the crisis imposed by stretch goals with greater flexibility (Barnett & Pratt, 2000), such as by devising new strategies to meet the target and undertaking more effortful search activities, which are actions that can yield both learning and performance benefits. Poor recent performance, however, can com- promise the capacity to undertake systematic and controlled experimentation, thus leaving or- ganizational actors to approach a stretch goal by instituting more chaotic changes that will not provide the clear feedback needed for complete learning. Moreover, recent performance prob- lems signal that an organization is already un- der threat. It may even be the case that the stretch goal itself is related to the performance problems. Thus, encountering a stretch goal when there is existing pressure and where it is not immediately clear how to approach the goal could evoke a dysfunctional threat-rigidity re- sponse (Barnett & Pratt, 2000; Staw et al., 1981). Overall, stronger recent performers using stretch goals are better situated to experience facilitative effects on learning and performance, whereas weaker recent performers using stretch goals are situated for disruptive effects. Proposition 1: For organizations with strong (weak) recent performance, the use of stretch goals will yield positive(negative) effects on learning and performance. Slack Resources The presence of financial or other resources that have not been committed or deployed in the system (Bourgeois, 1981) and are available for the discretionary use of management (Nativi- dad, 2009) creates a buffer that scholars have conceptualized as unabsorbed slack. How might greater unabsorbed slack resources affect the capacity for organizations to reap successful outcomes when pursuing the seemingly impos- sible? Existing research suggests that greater slack resources protect against many of the dis- ruptive mechanisms listed in Figure 1 and thereby help to facilitate positive effects on both exploratory learning and performance for orga- nizations using stretch goals. Slack serves a practical role in that finding exciting opportunities and identifying and cul- tivating internal capabilities to reach a seem- ingly impossible goal will typically demand the availability of people, money, time, and other resources. As a result, greater slack imbues an organization that opts to use stretch goals with certain cognitive advantages. By providing the time and access to the resources necessary to discover positive potential outcomes and attain- ment paths, slack allows for more openness to new information and vigilance in the processing of that information, which is beneficial for learning. Moreover, the presence of slack resources should shift attention in a way that could be beneficial for performance (Ferrier, 2001; Nohria & Gulati, 1996; Young, Smith, & Grimm, 1996). We argue that, for an organization that is pursuing a stretch goal, having sufficient slack resources creates a situation in which the stretch goal is more likely to be interpreted as an opportunity to generate and sift through new ideas that are potentially usable based on internal existing capabilities. In contrast, limited slack would ob- struct attention to possibly innovative (yet not obvious) leveraging of current capabilities, since detecting novel recombinations takes time and effort that would be less available. Having slack also enables stretch goals to facilitate learning and performance by serving as both a literal and psychological buffer against the potentially negative collective affec- 554July Academy of Management Review tive responses to seemingly impossible goals. Because stretch goals involve the prospect of extreme change without an obvious method for goal attainment, collective responses of fear and helplessness may ensue if there are insuffi- cient available resources to bring to bear on the situation. Greater slack reduces the pressure of obtaining resources necessary for trying to reach a seemingly impossible goal, and, thus, the pur- suit of stretch goals can be met with more playful- ness, curiosity, and enthusiasm, which are condu- cive to learning (Cyert & March, 1963; March, 1976). An organization opting to use a stretch goal when it has greater slack should also experience affec- tive responses that aid in performance improve- ments. Stretch goal pursuit would typically in- volve failures and complications, at least in the early stages of implementation, and having ade- quate (or more than adequate) resources should make collective commitment more resilient when those obstacles surface (Young et al., 1996). A lack of tangible slack resources to credibly attempt stretch goal attainment, however, could easily lower morale and resilience needed to sustain initiative. In addition, organizations with greater slack can test more varied actions and survive fail- ures, which underresourced competitors are less capable of doing (e.g., having a capital reserve or back orders on existing products can help an organization survive a large R&D effort that fails). Using an organizational stretch goal to impose a crisis is precarious, since such inten- tionally generated crises meant to spur change “usually overwhelm organizations and their members’ emotional, cognitive and behavioral capacities” and can result in dysfunctional ri- gidity (Barnett & Pratt, 2000: 75). However, orga- nizations are more likely to avoid rigidity and instead respond to the imposed crisis with flex- ibility to the extent that they have sufficient time and encouragement for knowledge generation (Barnett & Pratt, 2000). Having slack resources thus permits an organization using stretch goals to encourage knowledge generation and to more feasibly and successfully engage in actions that can bring about learning from the goal, such as search that is extensive both in breadth and duration (Sitkin, 1992). Moreover, when excess slack resources are available, parallel initia- tives for stretch goal attainment can be pursued in different units (Brown & Eisenhardt, 1998; March, 1991; Weick, 1984), allowing for the sys-tematic and controlled experimentation vital to learning (Campbell, 1969). When slack is un- available, however, learning is likely to be ham- pered, because a lack of resources constrains the capacity to undertake careful trial-and-error activities and obtain useful feedback (Cyert & March, 1963; Singh, 1986). Finally, whereas slack resource availability allows organizations to take on new stretch tar- gets without having to abandon what is already working well, low slack requires organizations pursuing stretch goals to divert resources away from other areas, which if carried out tooexten- sively or for too long might eventually result in the loss of beneficial path dependencies and decline in overall performance. Organizations pursuing stretch goals with insufficient slack are also likely to experience impaired coordination, because co- ordinating actions across units on how to address radical change requires effort and time, a problem that is exacerbated as the internal task environ- ment becomes more complex, interdependent, and urgent (Perrow, 1979). Taken together, organi- zations using stretch goals with greater slack re- sources are better situated to experience facilita- tive effects on learning and performance, whereas organizations without slack are situated for dis- ruptive effects if they use stretch goals. Proposition 2: For organizations with high (low) slack resources, the use of stretch goals will yield positive (negative) effects on learning and performance. DETERMINANTS OF STRETCH GOAL PURSUIT As we argued above, levels of recent perfor- mance and slack resources determine whether an organization is positioned to experience fa- cilitative or disruptive effects of stretch goals on exploratory learning and performance. But how do these same organizational factors influence whether an organization will actually use stretch goals in the first place? In this section we examine how recent performance and slack rep- resent two distinct motives for pursuing any rad- ical tool or technique: because the organization must(e.g., in response to recent performance problems) or because the organizationcan(i.e., availability of slack resources). 2011555 Sitkin, See, Miller, Lawless, and Carton Recent Performance We argued above that recent organizational success (performance above a benchmark) sig- nals a greater capacity to reap beneficial out- comes from using stretch goals, but whether or- ganizations with stronger recent performance will actually be drawn to using such goals is a separate question. Undertaking a radical tool like a stretch goal is likely to be driven in part by organizational sensitivity to risk and a propen- sity to accept new challenges, which are af- fected by levels of recent success. Prior research suggests that success can breed a conservative disposition toward risk in organizations (e.g., Levitt & March, 1988; Sitkin & Pablo, 1992). There is an observed tendency for strongly performing organizations to fall into a success or compe- tency trap, in that success reinforces habits and leads to more exploitation of current skills and practices and less exploration of new capabili- ties (Lant, Milliken, & Batra, 1992; Levitt & March, 1988; Maidique & Zirger, 1985). Forexample, while consistent success leads to more focus within proven routines, Weick (1984), March and Olsen (1976), and Sitkin (1992) argue that it also results in less expansive search activities and a reduced willingness to utilize less established skills in pursuing riskier, innovative paths. Like- wise, prospect theory (Kahneman & Tversky, 1979), which characterizes the behavior of both individ- uals and organizations (e.g., Mezias, 1988; Singh, 1986), implies risk aversion in the domain of gains such that when an organization has been perform- ing well, it tends to continue its current strategy and course of action rather than try new or risky approaches like stretch goals. In contrast, an organization experiencing re- cent performance below a benchmark tends to interpret its present situation as a loss relative to the benchmark. Under such conditions, the organization is more likely to undertake risky actions or even to try radically new methods with uncertain prospects for success 2(e.g.,Levinthal & March, 1993; Singh, 1986; Sitkin & Pablo, 1992). Stretch goals may therefore appear more frequently in organizations that are driven to “go for broke” (Singh, 1986; Sitkin & Pablo, 1992: 27) after experiencing noteworthy poor per- formance (called “the failure trap” by Levinthal & March, 1993: 105). Fiegenbaum (1990), Wise- man and Catanach (1997), and Shoham and Fiegenbaum (2002), forexample, found that poorly performing organizations were more likely to exhibit risky action relative to orga- nizations above the industry average in per- formance. Simon, Houghton, and Savelli (2003) and Miller and Chen (2004) found that organi- zations with disappointing performance un- dertook riskier projects. Lee (1997) found that organizations unable to match their own past performance exhibited risk seeking relative to those exceeding their own past performance. All of this suggests that stretch goals would be less likely to be used by successful performers than by unsuccessful ones. Proposition 3: Stronger recent perfor- mance is associated with a lower like- lihood that an organization will use stretch goals. Slack Resources The ready availability of excess uncommitted resources should position an organization to reap positive effects on learning and perfor- mance should it choose to use stretch goals, as we argued above. Although slack resources al- low for experimentation with radical tools such as stretch goals (e.g., Cyert & March, 1963; Nohria & Gulati, 1996), an organization with slack resources is probably unlikely to actually use such goals, because slack functions as an inertia- and complacency-fostering buffer be- tween the organization and the environment (e.g., Sitkin, 1992), rather than as a force for the creation of an enriching, exploration-enhancing milieu. Indeed, empirical studies have shown that the presence of unabsorbed slack inhibits risk taking and adaptiveness (e.g., Kraatz & Za- jac, 2001; Maidique & Zirger, 1985). 2It is important to emphasize thatrecentperformance is the focus of our argument. Over a longer time horizon, per- formance can cause aspirations to change. Performance that has been consistently below an industry average or some other reference point can drive down aspirations, resulting in a decreased propensity to undertake risks designed for performance improvement (Lant, 1992; Mezias, Chen, & Mur- phy, 2002). Similarly, work on threat rigidity (Staw et al., 1981) and permanently failing organizations (Meyer & Zucker, 1989) highlights that some organizations with extreme levels of poor performance may avoid escalating risky behavior because of an inability to respond (e.g., threat rigidity) or an ability to buffer (e.g., permanent failure). 556July Academy of Management Review We surmise that “free” resources (i.e., slack) typically are not used by organizations to ex- plore more freely; instead, slack seems to reduce the felt pressure for organizations to be respon- sive. Thus, we expect that having greater slack results in less motivation to engage in actions that involve substantial adaptation or change in routines. In terms of the behavioral theory of the firm (Cyert & March, 1963), we posit that organi- zations will not typically engage in expansive slack-driven search, even in the presence of suf- ficient slack, but, rather, will engage in at most incremental search and local adaptation, which will preclude attraction to the use of radical initiatives like stretch goals. Proposition 4: Greater slack is associ- ated with a lower likelihood that an organization will use stretch goals. The Paradox of Stretch Goals Figure 2 summarizes our propositions con- cerning how different combinations of slack and recent performance influence the expected va- lence (positive versus negative) of stretch goal effectson learning and performance (Proposi- tions 1 and 2), as well as the likelihood organi- zations will actuallyusestretch goals (Proposi- tions 3 and 4). The figure reveals that there is amisalignment between the organizations we predict are most likely to reap learning and per- formance benefits from stretch goals and the organizations most likely to pursue such goals. In cell 2, for example, an organization has both the slack resources to help take on the risks of trying a stretch goal and the positive momentum associated with recent performance success (Propositions 1 and 2). However, when an orga- nization is doing well, we suggest it will gener- ally be averse to aggressive risky or radical change initiatives (Propositions 3 and 4). An or- ganization in this cell thus has the lowest rela- tive likelihood of pursuing stretch goals, al- though it is arguably the best situated for facilitative learning and performance effects. It is understandable that such a munificent cir- cumstance could obviate the perceived need to use stretch goals, but organizations in such a situation would be advised to fight inertia and occasionally go against their inclination to avoid stretch goals because they have the req- uisite resources and resilience (in terms of cog- nitive, affective, and behavioral capacity) to benefit from such goals. In cell 3, where recent performance and slack are both low, Propositions 3 and 4 would suggest that stretch initiatives are most likely to be un- dertaken, particularly as a way to reverse past FIGURE 2 The Paradox of Stretch Goals High Effect of use: Neutral to disruptive Likelihood of use: Low Cell 1 Effect of use: Most facilitative Likelihood of use: Lowest Cell 2 Slack resources High Low Recent performance LowCell 3 Cell 4 Effect of use: Most disruptive Likelihood of use: Highest Effect of use: Neutral to facilitative Likelihood of use: High 2011557 Sitkin, See, Miller, Lawless, and Carton failures or as a last-ditch effort for survival. De- spite the motivational, performance-driven se- duction of stretch goals when recent perfor- mance and slack are both low, organizations in this cell are positioned to experience primarily disruptive effects on learning and performance because they do not have the cognitive or affec- tive advantages of recent success (Proposition 1) or the buffer around experimental action that slack provides (Proposition 2). Counter to what we predict will be the inclination of such orga- nizations, they should avoid stretch goals and should instead pursue “small wins” (Weick, 1984) to try to accumulate resources and resil- ience. Or, at most, such organizations could try a “small losses” strategy (Sitkin, 1992) that allows for building experience in a way that costs less and requires less resilience for survival. Figure 2 also reveals that for two combina- tions of slack and recent performance (cells 1 and 4), the likelihood of using stretch goals is reasonably aligned with the expected positive or negative valence of effects. In cell 1, organi- zations with strong recent performance and low slack should have a relatively low propensity to pursue stretch goals (as compared to cells 3 or 4). Recalling Proposition 3, organizations with very strong recent performance may become mired in competency traps and tend to avoid risky change. These organizations simply do not have a pressing need for stretch goals in the near term. Although Proposition 4 suggests that less slack tends to be associated with a higher pro- pensity to pursue stretch goals, we expect that this tendency is tempered significantly by per- formance-driven conservatism. Because of the powerful effects of recency on judgment (e.g., Bjork & Whitten, 1974; Hogarth & Einhorn, 1992), we surmise that recent performance will be a stronger factor than slack when it comes to what drives an organization to act, and, thus, organi- zations with strong recent performance will ex- hibit a relatively low likelihood to pursue stretch goals. 3Organizations in this cell should, in fact, follow their strategic inclination to avoid using stretch goals. Although strong recent per- formance would provide some advantages in leveraging the positive potential of stretch goals(Proposition 1), limited unabsorbed slack re- sources act as a significant constraint that would contribute to primarily disruptive (or at best neutral) effects of stretch pursuit on learn- ing and performance (Proposition 2). In cell 4, where the level of slack resources is high but recent performance is weak, organiza- tions will exhibit a relatively high likelihood of pursuing stretch goals (compared to cells 1 or 2). For organizations in this cell, the pursuit of stretch initiatives is driven by the desire to re- coup recent performance losses (Proposition 3), without the tempering effect of (slack)resource constraints. Although higher levels of slack could contribute to complacency and dampen enthusiasm for radical change (Proposition 4), we once again expect that the power of re- cency (e.g., Bjork & Whitten, 1974; Hogarth & Einhorn, 1992) is likely to motivate organiza- tional decision makers to emphasize recent poor performance, even over successful (but far less salient) longer-term past performance. Organizations in this cell also have some ad- vantages that should protect them from disrup- tive stretch goal effects on learning and perfor- mance. Greater slack resources provide buffers against short-run performance problems and make the organization more resilient in the face of the extreme demands of stretch goals, and the ongoing munificence of the internal environ- ment makes large-scale, risky projects more fea- sible to undertake (Proposition 2). Overall, when reacting to recent performance losses and ade- quately resourced with slack, organizations are reasonably likely to use stretch goals and are also positioned to experience some facilita- tive (or at least neutral) effects on learning and performance. Our analysis reveals a paradox: the organiza- tions most likely to benefit from stretch goals are least likely to use them, and the organizations least likely to benefit from them are the most likely to use them (i.e., cells 2 and 3 in Figure 2). This pattern suggests that it is really only under quite limited conditions that organizations will be safely positioned to experience positive learning and performance outcomes from pursuing stretch targets—namely, organizations with both high slack resources and high recent performance (cell 2 in Figure 2). Yet few organizations can realisti- cally be expected to fall into that category. In fact, we speculate that most organizations carry low levels of unabsorbed slack (cells 1 or 3), which by 3Recencyeffects (e.g., Bjork & Whitten, 1974; Hogarth & Einhorn, 1992) in psychology refer to a cognitive tendency where recent stimuli or events are more salient and, thus, are given disproportionate weight in judgment and decisions. 558July Academy of Management Review our analysis would suggest that stretch goals usu- ally will have disruptive, or at best neutral, effects on learning and performance for the typical organization. DISCUSSION Drawing from a variety of theoretical perspec- tives, our primary purpose in this article is to ad- vance the understanding of exploratory learning and adaptation by systematically investigating the causes and effects of pursuing seemingly im- possible organizational goals—stretch goals. In this section we review our conclusions and exam- ine the contributions our work makes to extant theory and research in several areas of inquiry. We also consider the reasons behind the common belief that stretch goals are simple and widely successful when careful analysis suggests a more complicated picture. Finally, we identify research opportunities that extend beyond the scope of the present investigation and highlight implications for managerial practice. Opening the Theoretical Black Box of Seemingly Impossible Goals Goals and aspirations play an important role in organizational theory (e.g., Cyert & March, 1963). Yet scholars have placed little emphasis on understanding the specific underlying pro- cesses through which macrolevel goals, partic- ularly unattainable goals, can influence organi- zational outcomes. Thus, our theoretical investigation of how stretch goals function and affect organizational outcomes began with a thorough consideration of the cognitive, affec- tive, and behavioral mechanisms by which seemingly impossible goals can influence ex- ploratory learning and organizational perfor- mance (summarized in Figure 1). Going beyond prior thinking on organizational stretch goals, which has not systematically considered mech- anisms and has focused largely on presumed positive effects, we examined the potential for seemingly impossible goals to both facilitate anddisrupt learning and performance. We then proposed that whether facilitative or disruptive effects ensue is contingent on two core organi- zational factors: recent performance and slack resources (Propositions 1 and 2). We also posited that these same two factors determine the like- lihood that organizations will be drawn to using stretch goals (Propositions 3 and 4).The conclusion suggested by the aggregated analysis of our four propositions, as revealed in Figure 2, is the unfortunate tendency for the wrong organizations to be most drawn to using stretch goals. Furthermore, whereas weak organi- zations might pursue stretch goals out of desper- ation and make their dire circumstances worse, those with the capabilities to truly benefit from stretch goals typically fail to do so because the same characteristics that make them well posi- tioned to benefit from stretch goals also limit their inclination to actually pursue them. This situation is what we call “the paradox of stretch goals.” Our theory building contributes interdisci- plinary insights at the intersection of the litera- ture on organizational goals, on learning, and on adaptation by investigating the means by which extreme goals can prompt exploration (e.g., Rahmandad, 2008; Uotila et al., 2009) and dynamic capability development (e.g., Agarwal & Helfat, 2009; Capron & Mitchell, 2009; Winter, 2000). As summarized in Figure 1, our analysis indicates that stretch goals can capture atten- tion and facilitate openness to questioning the validity of old assumptions, old information, and old frameworks. Stretch goals can also prompt behaviors traditionally associated with learning, such as broad search, experimenta- tion, and trial and error. Yet, at the same time, some of the most critical conditions for effective learning to occur (such as more experience, con- trollable change, and interpretable feedback) do not automatically hold in the case of stretch goals, and, thus, organizations are unlikely to learn from them unless they have the slack re- sources to repeatedly and systematically exper- iment and withstand failures. The requisite resilience required to effectively pursue stretch goals is also aided by strong recent performance. These ideas provide a basis for deeper analysis and clarity around the processes and conditions needed for organizations to learn effectively under ambiguity (March & Olsen, 1976; Weick, 1979, 1995). Although we build on the be- havioral theory of the firm (Cyert & March, 1963) in suggesting that slack resources can positively en- able organizations to benefit from using stretch goals (Proposition 2), our predictions diverge from the behavioral theory of the firm when we posit that organizations with these capabilities are un- likely to actually use innovation methods that are as radical and risky as stretch goals (Proposition 4). That is, we diverge because we expect that 2011559 Sitkin, See, Miller, Lawless, and Carton having greater unabsorbed slack, while enabling, results in less motivation to actually engage in actions that involve substantial adaptation, risk, or change in routines. In considering the reasons why organizations might be drawn to use stretch goals, our analy- sis speaks to the literature on organizational change and adaptation to internal and external jolts (e.g., Barnett & Pratt, 2000; Beer et al., 1990; D’Aveni & MacMillan, 1990; Meyer, 1982). We ar- gue that stretch goals can be viewed as auto- genic crises meant to spur innovation, change, learning, and increases in performance (e.g., Barnett & Pratt, 2000; D’Aveni & MacMillan, 1990). Our theoretical analysis of the causes and effects of using seemingly impossible goals generates additional insight into how organiza- tions more or less effectively learn from both internal and environmental stimuli (e.g., Sut- cliffe, 1994), as well as the conditions that give rise to punctuated organizational change pro- cesses (Romanelli & Tushman, 1994). Finally, our investigation advances our under- standing of the effects of unattainable goals (e.g., Garland, 1982, 1983; Locke, 1982, 2004; Rous- seau, 1997) at a collective level by systemati- cally surfacing specific mechanisms through which such goals have organizational out- comes. As such, our analysis contributes to the literature on organizational goals (e.g., Cyert & March, 1963; Ethiraj & Levinthal, 2009; Lant, 1992; Lant & Shapira, 2008) by revealing how stretch goals can challenge important scholarly as- sumptions regarding the relationship between aspirations and firm performance. We argue that stretch goals create aspiration-performance gaps that are too extreme to reliably lead to organizational performance increases, except for the rare organizations that have sufficient slack resources and strong recent performance. The Persistent Perception That Stretch Goals Consistently Lead to Success Because the scholarly research we draw from suggests that the effects of seemingly impossi- ble goals are complex and contingent, we need to ask why so many authors (mostly, but not exclusively, practice-focused authors) argue that stretch goals are an unmitigated organiza- tional success story. Numerous practitioner- focused writings assert that stretch goals reli- ably lead to positive performance results (e.g.,Collins & Porras, 1994; Hamel, 1998; Hamel & Prahalad, 1993), including reports concerning 3M, CSX, Motorola, General Electric, Union Pa- cific, Boeing, Mead, and Toyota (Takeuchi et al., 2008; Thompson et al., 1997; Tully, 1994). Such highly visible successes make salient the per- ception of universal stretch goal success, as il- lustrated in the following effusive endorsement from Jack Welch, former CEO of General Electric (where the termstretchmay have originated): We have what we call stretch targets….For ex- ample, we spent 105 years in this company and we never had double digit operating margins. We said in 1991 we want 15 and we put it in our annual report. We told everybody. 9.6 or 9.5 was our best. We’ll do 14 in 1994, and prices have been going down in the global market. And we’ll do 15 next year. We never did more than 5 inventory turns and we said we’ll do 10. We had no idea how we would get to 10….The bigline I use today is that budgets enervate and stretch ener- gizes. It’s real (Bartlett, 1999). There are several reasons why stretch goals may be persistently perceived and portrayed as more beneficial for learning and performance than we propose they actually are. Our theoretical analysis suggests one particular reason why this mispercep- tion may arise and persist: most famous stretch goal success stories come from organizations in which management set very ambitious performance goals to prepare for a radical change while the organiza- tion had good resource endowments (e.g., IBM in the 1960s, General Electric in the 1980s, and Toyota in the 1990s; see also Bartlett & Wozny, 1999; Hamel, 1998; Sherman, 1995; Takeuchi et al., 2008; Thompson et al., 1997). That is, proponents of stretch goals may have overgeneralized based on evidence from orga- nizations that had substantial slack resources and, in many cases, also had strong recent performance (i.e., cell 2 in Figure 2). By our analysis, these orga- nizations were unusually well positioned to benefit from stretch goals (Propositions 1 and 2). But these organizations were probably outliers that somehow avoided the dominant pattern of inertia that Propo- sitions 3 and 4 would predict for organizations hav- ing both a large amount of slack and strong recent performance. Thus, we argue that the generalized basis for the success of stretch goals has been mis- construed and has consequently led to an oversim- plified and inflated perception of their value. Aside from focusing on high-performing organiza- tions with substantial resources, the pervasive view of stretch goals as beneficial could be due to success stories based on incomplete learning cycles, such as 560July Academy of Management Review when apparent consequences are actually unre- lated to organizational action and lead to what March and Olsen (1976) call “superstitious” experi- ential learning (see also Huber, 1991). Similarly, some organizational decision makers may come to unjustified or overconfident conclusions based on few data points, a sample size problem where faulty learning can occur from low-frequency events in which performance effects are often confounded with random error or other fallacious data (March, Sproull, & Tamuz, 1991). Moreover, failure myopia (Levinthal & March, 1993) may be an issue, whereby organizational learning is based on oversampling of successes and undersampling of failures because successful practitioner examples, salient and com- pelling as they are, may be but a small, unrepresen- tative drop in a large ocean of organizational initia- tives (see also Denrell, 2003). Base-rate neglect can also make highly risky exploration (e.g., stretch goals) appear to be a good idea, with an unrealisti- cally high expectation of success. In addition, orga- nizations that pursue stretch goals, particularly those that do so as a last-ditch effort when they are already failing, might subsequently fail entirely and disappear, thus biasing the observable sample of users toward success. Observers trying to judge the effectiveness of stretch goals are therefore exposed to a systematically biased sample with an overrep- resentation of successes. All of these issues lead us to conclude that inves- tigations based on a few select cases, including many that appear in practice-focused publications, are unlikely to present a balanced picture of stretch goal processes and effects. By sidestepping glib ex- hortations and focusing instead on a generative, theoretically grounded analysis of mechanisms and contingency factors, we hope we have provided some useful guidelines for managers to use in tai- loring their practices to conditions most likely to lead to positive outcomes. Foundations for Future Research We conclude with a discussion of possible em- pirical settings and extensions for research on stretch goals, as well as a brief commentary on two implications of stretch goal pursuit that are beyond the scope of the current investigation but highlight important areas for future inquiry. Empirical tests of stretch goal effects.To set the stage for future empirical work, we have proposed a testable theory suggesting that seemingly impossible organizational goals ex-hibit a predictable pattern of positive and neg- ative effects contingent on recent performance and slack resources, and these contingency fac- tors also determine when organizations are more or less likely to use such goals. Our prop- ositions could be examined using several em- pirical approaches. For example, initial empiri- cal studies of stretch goal effects could take the form of qualitative theory testing, whereby mul- tiple firms with different attributes are studied in depth. Or a study using one very large orga- nization could examine the use and effective- ness of project proposals within the organiza- tion (e.g., high-risk research initiatives or new venture proposals). Alternatively, a simulation study would provide the control to vary organi- zational conditions and measure baseline levels of learning and performance before and after the imposition of a stretch goal. In addition, quantitative investigations could be undertaken to study both the effects and like- lihood of pursuing stretch goals using a strati- fied random sample based on archival indica- tors of slack and recent performance. Within the sample, evidence of stretch goal usage could be measured by conducting a survey of senior man- agers in organizations, or it could be extracted from annual reports or letters to shareholders. In any of these approaches, individual organiza- tions in the sample could be coded for the timing of stretch goal use and the type or nature of the stretch goal (e.g., a goal to increase market share, reduce manufacturing process time, re- duce error rate) in order to better compare ef- fects across organizations. Beyond testing the organization-level effects we have proposed in this article, future research could focus more specifically on the potential un- derlying processes and mechanisms summarized in Figure 1. That is, researchers could study unat- tainable goals in terms of their impact on the cognitive, affective, and behavioral mechanisms through which stretch goals can influence organi- zational outcomes. To further enrich and extend the theory proposed here, future studies could also examine possible sequences, interactions, and path dependencies among the mechanisms. It would be interesting as well to explore the impli- cations of variation in the degree of stretch goal implementation, such as when unattainable goals are used only by segments of an organization ver- sus the entire organization. 2011561 Sitkin, See, Miller, Lawless, and Carton In our theorizing we have discussed organiza- tion-level effects on learning and performance, but within the organization stretch goals might have differential effects on various parts of the system. Additionally, because the use of stretch goals implies a willingness to undertake high risks to pursue high rewards, variation in incen- tives within organizations for the pursuit of stretch goals could be examined to see how this affects both use and effectiveness of such goals. All of these questions highlight fruitful ways in which the ideas we have proposed can be further ex- tended and refined if future research were to focus on the ripple effects inside organizations that use stretch goals, rather than focusing only on the aggregated organization-level outcomes that have been our primary focus. Process-oriented stretch goals.Scholarly and practitioner accounts of stretch goals suggest that such goals are typically used in the explicit hope of directly improving performance, and po- tentially also spurring exploratory learning in the course of achieving the extreme target. Con- sistent with the use of stretch goals in practice and also the majority of goal research, we have defined and analyzed stretch goals as outcome- oriented goals that make explicit a specific, quantifiable level of desired performance or out- put (e.g., decrease errors by a particular percent- age). Note that this precludes goals that are articulated solely in terms of enhancing the learning process as an end in itself (e.g., where the goal is to formulate five ways of learning how to decrease errors). This raises the question of whether learning-focused organizations (i.e., considering the use of stretch goals solely to learn) really need to use stretch goals (which are performance outcome goals) as a vehicle, or whether they could gain the facilitative benefits of stretch goals and limit their disruptive liabil- ities by using process-oriented learning goals instead (see, for example, Seijts & Latham, 2005). It is ultimately an empirical question, and future work could explore whether our analysis holds when one moves beyond outcome-oriented per- formance goals to include seemingly impossible goals that are explicitly focused on the acquisi- tion of procedural knowledge at the organiza- tion level of analysis. Ethical implications of stretch goal pursuit. While we have focused on the organization level of analysis, we wish to point out some findings at the individual level pertaining to the unin-tended negative consequences of goal setting, with a particular focus on how goals can induce unethical behavior (Barsky, 2008; Jensen, 2003; Locke, 2004; Ordonez, Schweitzer, Galinsky, & Bazerman, 2009; Schweitzer, Ordonez, & Douma, 2004). Although goals can pose an especially dangerous temptation to breach ethics when as- sociated with performance measurement or compensation systems by creating incentives to misrepresent performance (Jensen, 2003; Locke, 2004; Schweitzer et al., 2004), empirical work pro- vides direct evidence that even nonmonetary rewards for meeting a goal (such as internal satisfaction) are sufficient to influence unethical behavior (Schweitzer et al., 2004). Moving from merely difficult goals at the in- dividual level to the case of stretch goals at the organization level, the ethical implications could be amplified. The seeming impossibility of achieving stretch goals using ordinary means could easily slip into the seductiveness of using extraordinary means, such as falsifying records. Managing the unintended ethical perils of seemingly impossible goals, as well as other individual-level disruptive effects that are be- yond the scope of the present investigation, is worthy of further examination. CONCLUSION We investigated the organizational pursuit of seemingly impossible goals— commonly known as stretch goals—and the effects of such goals on exploratory learning and increased perfor- mance. Despite widespread interest in the idea of stretch goals and assertions about their sys- tematic benefits, there are many reasons to in- terpret the normative stories of stretch goal suc- cess as resulting from misunderstandings of the actual functioning and effects of this enticing technique. Although our analysis suggests that there are very specific and limited conditions under which some organizations should pursue seemingly impossible goals, we recognize that organizations may continue to look for success in all the wrong places. Thus, a challenge for organizational researchers is to more clearly identify control mechanisms, learning strate- gies, and decision aids that organizations can use to achieve greater effectiveness in overcom- ing the paradox of stretch goals. 562July Academy of Management Review REFERENCES Adler, P. S., & Obstfeld, D. 2007. The role of affect in creative projects and exploratory search.Industrial and Corpo- rate Change,16: 19 –50. Agarwal, R., & Helfat, C. E. 2009. Strategic renewal of orga- nizations.Organization Science,20: 281–293. Argote, L. 1999.Organizational learning: Creating, retaining, and transferring knowledge.New York: Kluwer. Argyris, C. 1985.Strategy, change, and defensive routines. Boston: Pitman. Argyris, C., & Scho¨ n, D. A. 1978.Organizational learning: A theory of action perspective.Reading, MA: Addison- Wesley. Atkinson, J. W. 1964.An introduction to motivation.Princeton, NJ: Van Nostrand. Audia, P. G., Locke, E. A., & Smith, K. G. 2000. The paradox of success: An archival and a laboratory study of strategic persistence following radical environmental change. Academy of Management Journal,43: 837– 851. Barnett, C. K., & Pratt, M. G. 2000. From threat-rigidity to flexibility—Toward a learning model of autogenic crisis in organizations.Journal of Organizational Change Management,13: 74 – 88. Barsade, S. G. 2002. The ripple effect: Emotional contagion and its influence on group behavior.Administrative Sci- ence Quarterly,47: 644 – 675. Barsade, S. G., & Gibson, D. E. 2007. Why does affect matter in organizations?Academy of Management Perspec- tives,21(1): 36 –59. Barsky, A. 2008. Understanding the ethical cost of organiza- tional goal-setting: A review and theory development. Journal of Business Ethics,81: 63– 81. Bartel, C. A., & Saavedra, R. 2000. The collective construction of work group moods.Administrative Science Quarterly,45: 197–231. Bartlett, C. A. 1999.GE compilation: Jack Welch 1981–1999. Video, Harvard Business School, Boston. Bartlett, C. A., & Wozny, M. 1999.GE’s two-decade transfor- mation: Jack Welch’s leadership. Case No. 301040-MMC- ENG. Boston: Harvard Business School Case Services. Bass, B., & Riggio, E. G. 2005.Transformational leadership (2nd ed.). Mahwah, NJ: Lawrence Erlbaum Associates. Baum, J. A. C., & Dahlin, K. B. 2007. Aspiration performance and railroads’ pattern of learning from train wrecks and crashes.Organization Science,18: 368 –385. Baumard, P., & Starbuck, W. H. 2005. Learning from failures: Why it may not happen,Long Range Planning,38: 281–298. Beer, M., Eisenstat, R. A., & Spector, B. 1990.The critical path to corporate renewal.Boston: Harvard Business School Press. Bjork, R. A., & Whitten, W. B. 1974. Recency-sensitive retrieval processes in long-term free recall.Cognitive Psychol- ogy,6: 173–189. Bourgeois, L. J. 1981. On the measurement of organizational slack.Academy of Management Review,6: 29 –39.Brown, S. L., & Eisenhardt, K. M. 1998.Competing on the edge: Strategy as structured chaos.Boston: Harvard Business School Press. Campbell, D. T. 1969. Reforms as experiments.American Psychologist,24: 409 – 429. Capron, L., & Mitchell, W. 2009. Selection capability: How capability gaps and internal social frictions affect inter- nal and external strategic renewal.Organization Sci- ence,20: 294 –312. Carley, K. M., & Lin, Z. A. 1997. A theoretical study of orga- nizational performance under information distortion. Management Science,43: 976 –997. Chesney, A. A., & Locke, E. A. 1991. Relationships among goal difficulty, business strategies, and performance on a complex management simulation task.Academy of Management Journal,34: 400 – 424. Christensen, C. M. 1997.The innovator’s dilemma: When new technologies cause great firms to fail.Boston: Harvard Business School Press. Cohen, W. M., & Levinthal, D. A. 1990. Absorptive capacity: A new perspective on learning and innovation.Adminis- trative Science Quarterly,35: 128 –152. Colbert, A. E., Kristof-Brown, A. I., Bradley, B. H., & Barrick, M. R. 2008. CEO transformational leadership: The role of goal importance congruence in top management teams. Academy of Management Journal,51: 81–96. Collins, J. C., & Porras, J. I. 1994.Built to last: Successful habits of visionary companies.New York: Harper Collins. Collins, J. C., & Porras, J. I. 1996. Building your company’s vision.Harvard Business Review, 74(5): 65–77. Cyert, R. M., & March, J. G. 1963.Behavioral theory of the firm. Englewood Cliffs, NJ: Prentice-Hall. D’Aveni, R. A., & MacMillan, I. C. 1990. Crisis and the content of managerial communications: A study of the focus of attention of top managers in surviving and failing firms. Administrative Science Quarterly,35: 634 – 657. Denrell, J. 2003. Vicarious learning, undersampling of failure, and the myths of management.Organization Science, 14: 227–243. Dess, G. G. 1987. Consensus on strategy formulation and orga- nizational performance: Competitors in a fragmented in- dustry.Strategic Management Journal,8: 259 –277. Drazin, R., & Sandelands, L. 1992. Autogenesis: A perspective on the process of organizations.Organization Science,3: 230 –249 Dvir, T., Eden, D., Avolio, B. J., & Shamir, B. 2002. Impact of transformational leadership on follower development and performance: A field experiment.Academy of Man- agement Journal,45: 735–744. Edmondson, A. C., Bohmer, R. M., & Pisano, G. P. 2001. Dis- puted routines: Team learning and new technology im- plementation in hospitals.Administrative Science Quar- terly, 46: 685–716. Ethiraj, S. K., & Levinthal, D. 2009. Hoping for A to Z while 2011563 Sitkin, See, Miller, Lawless, and Carton rewarding only A: Complex and multiple organizational goals.Organization Science,20: 4 –21. Fang, C., & Levinthal, D. 2009. The near term liability of exploitation: Exploration and exploitation in multi-stage problems.Organization Science,20: 538 –551. Ferrier, W. J. 2001. Navigating the competitive landscape: The drivers and consequences of competitive aggres- siveness.Academy of Management Journal,44: 858 – 877. Fiegenbaum, A. 1990. Prospect theory and the risk-return association: An empirical examination in 85 indus- tries.Journal of Economic Behavior and Organization, 14: 187–203. Freiberg, K., & Freiberg, J. 1996.Nuts! Southwest Airlines’ crazy recipe for business and personal success.Austin, TX: Bard Press. Galbraith, J. R. 1973.Designing complex organizations.Read- ing, MA: Addison-Wesley. Garland, H. 1982. Goal levels and task performance: A com- pelling replication of some compelling results.Journal of Applied Psychology,67: 245–248. Garland, H. 1983. Influence of ability, assigned goals, and normative information on personal goals and perfor- mance: A challenge to the goal attainability assump- tion.Journal of Applied Psychology,68: 20 –30. Golovin, J. J. 1997.Achieving stretch goals: Best practices in manufacturing for the new millennium. Upper Saddle River, NJ: Prentice-Hall. Greve, H. R. 1998. Performance, aspirations, and risky organi- zational change.Administrative Science Quarterly,43: 58 – 77. Greve, H. R. 2003.Organizational learning from performance feedback.Cambridge: Cambridge University Press. Hamel, G. 1998. Strategy innovation and the quest for value. Sloan Management Review,39(2): 7–15. Hamel, G., & Prahalad, C. K. 1993. Strategy as stretch and leverage.Harvard Business Review, 71(2): 75– 84. Heath, C., Larrick, R. P., & Wu, G. 1999. Goals as reference points.Cognitive Psychology,38: 79 –109. Henderson, R. M., & Clark, K. B. 1990. Architectural innova- tion: The reconfiguration of existing product technolo- gies and the failure of established firms.Administrative Science Quarterly,35: 9 –30. Hitt, M. A. 1988. The measuring of organizational effective- ness: Multiple domains and constituencies.Manage- ment International Review,28: 28 – 40. Hogarth, R. M., & Einhorn, H. J. 1992. Order effects in belief updating: The belief-adjustment model.Cognitive Psy- chology,24: 1–55. Huber, G. P. 1991. Organizational learning: The contributing processes and the literatures.Organization Science,2: 88 – 115. Hughes, R. E. 2001. Contingent use of stretch goals: Consid- erations of workflow integration and risk deviation. Work Study,50: 7–12. Ingram, P., & Baum, J. A. C. 1997. Opportunity and constraint: Organizations’ learning from the operating and compet-itive experience of industries.Strategic Management Journal,18(Summer Special Issue): 75–98. Janis, I. L., & Mann, L. 1977.Decision making.New York: Free Press. Jensen, M. C. 2003. Paying people to lie: The truth about the budgeting process.European Financial Management, 9: 379 – 406. Kahneman, D., & Tversky, A. 1979. Prospect theory: An anal- ysis of decision under risk.Econometrica,47: 263–291. Kang, S. C., Morris, S. S., & Snell, S. A. 2007. Relational archetypes, organizational learning, and value creation. Academy of Management Review,32: 236 –256. Kerr, S., & Landauer, S. 2004. Using stretch goals to promote organizational effectiveness and personal growth: Gen- eral Electric and Goldman Sachs.Academy of Manage- ment Executive,18(4): 134 –138. Kim, L. 1998. Crisis construction and organizational learning: Capability building in catching-up at Hyundai Motor. Organization Science,9: 506 –521. Kim, T., & Rhee, M. 2009. Exploration and exploitation: Inter- nal variety and environmental dynamism.Strategic Or- ganization,7: 11– 41. Kotter, J. P. 2008.A sense of urgency.Boston: Harvard Busi- ness School Press. Kraatz, M. S., & Zajac, E. J. 2001. How organizational re- sources affect strategic change and performance in tur- bulent environments: Theory and evidence.Organiza- tion Science,12: 632– 657. Lant, T. K. 1992. Aspiration level adaptation: An empirical exploration.Management Science,38: 623– 644. Lant, T. K., Milliken, F. J., & Batra, B. 1992. The role of mana- gerial learning and interpretation in strategic persis- tence and reorientation: An empirical exploration.Stra- tegic Management Journal,13: 585– 608. Lant, T. K., & Shapira, Z. 2008. Managerial reasoning about aspirations and expectations.Journal of Economic Be- havior and Organization,66: 60 –73. Lawrence, P. R., & Lorsch, J. W. 1967.Organization and envi- ronment: Managing differentiation and integration.Bos- ton: Harvard Business School Press. Lee, D. Y. 1997. The impact of poor performance on risk- taking attitudes: A longitudinal study with PLS causal modeling approach,Decision Sciences,28: 59 – 80. Leonard-Barton, D. 1992. Core capabilities and core rigidi- ties: A paradox in managing new product development. Strategic Management Journal,13: 111–125. Levinthal, D. A., & March, J. G. 1981. A model of adaptive organizational search.Journal of Economic Behavior and Organization,2: 307–333. Levinthal, D. A., & March, J. G. 1993. The myopia of learning. Strategic Management Journal,14: 95–112. Levitt, B., & March, J. G. 1988. Organizational learning.An- nual Review of Sociology, 14: 319 –340. Locke, E. A. 1982. Relation of goal level to performance with a short work period and multiple goal levels.Journal of Applied Psychology,67: 512–514. 564July Academy of Management Review Locke, E. A. 2004. Linking goals to monetary incentives. Academy of Management Executive,18(4): 130 –133. Locke, E. A., & Latham, G. P. 1990.A theory of goal setting and task performance.Englewood Cliffs, NJ: Prentice-Hall. Locke, E. A., & Latham, G. P. 1994. Goal setting theory. In H. F. O’Neil & M. Drillings (Eds.),Motivation: Theory and research:13–29. Hillsdale, NJ: Lawrence Erlbaum Associates. Maidique, M. A., & Zirger, B. J. 1985. The new product learn- ing cycle.Research Policy,14: 299 –313. March, J. G. 1976. The technology of foolishness. In J. G. March & J. P. Olsen (Eds.),Ambiguity and choice in organizations: 69 – 81. Bergen, Norway: Universitetsforlaget. March, J. G. 1991. Exploration and exploitation in organiza- tional learning.Organization Science,2: 71– 87. March, J. G., & Olsen, J. P. 1976. Organizational learning and the ambiguity of the past. In J. G. March & J. P. Olsen (Eds.),Ambiguity and choice in organizations:54 – 68. Bergen: Universitetsforlaget. March, J. G., Sproull, L. S., & Tamuz, M. 1991. Learning from samples of one or fewer.Organization Science,2: 1–13. Martin, J. 1992.Organizational cultures.London: Sage. McGrath, R.G. 2001. Exploratory learning, innovative capac- ity, and managerial oversight.Academy of Management Journal,44: 118 –131. Meyer, A. D. 1982. Adapting to environmental jolt.Adminis- trative Science Quarterly,27: 515–537. Meyer, M. W., & Zucker, L. G. 1989.Permanently failing or- ganizations.Newbury Park, CA: Sage. Mezias, S. J. 1988. Aspiration level effects: An empirical in- vestigation.Journal of Economic Behavior and Organi- zation,10: 389 – 400. Mezias, S. J., Chen, Y. R., & Murphy, P. R. 2002. Aspiration level adaptation in an American financial services or- ganization: A field study.Management Science,48: 1285–1300. Miller, C. C., & Cardinal, L. B. 1994. Strategic planning and firm performance: A synthesis of more than two de- cades of research.Academy of Management Journal, 37: 1649 –1665. Miller, K. D., & Chen, W. 2004. Variable organizational risk preferences: Test of the March-Shapira model.Academy of Management Journal,47: 105–115. Nanus, B. 1992.Visionary leadership: Creating a compelling sense of direction for your organization.San Francisco: Jossey-Bass. Natividad, G. 2009.Financial slack, organization, and com- petition in movie distribution.Working paper, New York University, New York. Nohria, N., & Gulati, R. 1996. Is slack good or bad for inno- vation?Academy of Management Journal,39: 1245–1264. Ocasio, W. 1997. Towards an attention-based view of the firm.Strategic Management Journal,18: 187–206. Ordonez, L. D., Schweitzer, M. E., Galinsky, A. D., & Bazer- man, M. H. 2009. Goals gone wild: The systematic sideeffects of overprescribing goal setting.Academy of Man- agement Perspectives,23(1): 6 –16. O’Reilly, C. A. 1982. Variations in decision makers’ use of information sources: The impact of quality and accessi- bility of information.Academy of Management Journal, 25: 756 –771. Perrow, C. 1979.Complex organizations.Glenview, IL: Scott Foresman. Quinn, R. E., & Rohrbaugh, J. 1983. A spatial model of effective- ness criteria: Towards a competing values approach to organizational analysis.Management Science,29: 363–377. Rahmandad, H. 2008. Effect of delays on complexity of orga- nizational learning.Management Science,52: 1297–1312. Raisch, S., & Birkinshaw, J. 2008. Organizational ambidexter- ity: Antecedents, outcomes, and moderators.Journal of Management,34: 375– 409. Romanelli, E., & Tushman, M. 1994. Organizational transfor- mation as punctuated equilibrium: An empirical test. Academy of Management Journal,37: 1141–1166. Rousseau, D. M. 1997. Organizational behavior in the new organizational era.Annual Review of Psychology,48: 515–546. Schweitzer, M., Ordonez, L., & Douma, B. 2004. Goal setting as a motivator of unethical behavior.Academy of Manage- ment Journal,47: 422– 432. Seijts, G. H., & Latham, G. P. 2005. Learning versus perfor- mance goals: When should each be used?Academy of Management Executive,19(1): 124 –131. Shamir, B., House, R. J., & Arthur, M. B. 1993. The motivational effects of charismatic leadership: A self-concept based theory.Organization Science,4: 577–594. Sherman, S. 1995. Stretch goals: The dark side of asking for miracles.Fortune,November 13: 231–232. Shoham, A., & Fiegenbaum, A. 2002. Competitive determinants of organizational risk-taking attitude: The role of strategic reference points.Management Decision,40(2): 127–141. Siggelkow, N., & Levinthal, D. A. 2003. Temporarily divide to conquer: Centralized, decentralized, and reintegrated organizational approaches to exploration and adapta- tion.Organization Science,14: 650 – 669. Simon, M., Houghton, S. M., & Savelli, 2003. Out of the frying pan…? Whysmall business managers introduce high- risk products.Journal of Business Venturing,18: 419 – 440. Singh, J. V. 1986. Performance, slack, and risk taking in or- ganizational decision making.Academy of Manage- ment Journal,29: 562–585. Sitkin, S. B. 1992. Learning through failure: The strategy of small losses.Research in Organizational Behavior,14: 231–266. Sitkin, S. B., & Pablo, A. L. 1992. Reconceptualizing the deter- minants of risk behavior.Academy of Management Re- view,17: 9 –38. Sitkin, S. B., Sutcliffe, K. M., & Schroeder, R. G. 1994. Distin- guishing control from learning in Total Quality Manage- ment: A contingency perspective.Academy of Manage- ment Review,18: 537–564. 2011565 Sitkin, See, Miller, Lawless, and Carton Sitkin, S. B., Sutcliffe, K. M., & Weick, K. E. 1998. Organiza- tional learning. In R. C. Dorf (Ed.),The technology man- agement handbook:70 –76. Boca Raton, FL: CRC Press and IEEE Press. Smith, K. G., Locke, E. A., & Barry, D. 1990. Goal setting, planning, and organizational performance: An experi- mental simulation.Organizational Behavior and Hu- man Decision Processes,46: 118 –135. Starbuck, W. H. 1983. Organizations as action generators. American Sociological Review,48: 91–102. Staw, B. M., Sandelands, L. E., & Dutton, J. E. 1981. Threat- rigidity effects in organizational behavior: A multi- level analysis.Administrative Science Quarterly,26: 501–524. Sutcliffe, K. M. 1994. What executives notice: Accurate per- ceptions in top management teams.Academy of Man- agement Journal,37: 1360 –1378. Sutcliffe, K. M., Sitkin, S. B., & Browning, L. D. 2000. Tailoring process management to situational requirements: Be- yond the control and exploration dichotomy. In R. Cole & W. R. Scott (Eds.),The quality movement and organiza- tion theory:315–330. Thousand Oaks, CA: Sage. Takeuchi, H., Osono, E., & Shimizu, N. 2008. The contradic- tions that drive Toyota’s success.Harvard Business Re- view,86(6): 96 –104. Thompson, K. R., Hochwarter, W. A., & Mathys, N. J. 1997. Stretch targets: What makes them effective?Academy of Management Executive,11(3): 48 – 60. Tully, S. 1994. Why go for stretch targets?Fortune,November 14: 145–158.Uotila, J., Maula, M., Keil, T., & Zahra, S. A. 2009. Exploration, exploitation, and financial performance: Analysis of S&P 500 corporations.Strategic Management Journal,30: 221–231. Vroom, V. H. 1964.Work and motivation.New York: Wiley. Weick, K. E. 1979.The social psychology of organizing.Read- ing, MA: Addison-Wesley Weick, K. E. 1984. Small wins: Redefining the scale of social problems.American Psychologist,39: 40 – 49. Weick, K. E. 1995.Sensemaking in organizations.Thousand Oaks, CA: Sage. Weick, K. E., Sutcliffe, K.M., & Obstfeld, D. 2005. Organizing and the process of sensemaking.Organization Science, 16: 409 – 421. Winter, S. G. 2000. The satisficing principle in capability learning.Strategic Management Journal,21: 981–996. Winters, D., & Latham, G. P. 1996. The effect of learning versus outcome goals on a simple versus a complex task.Group & Organization Management,21: 236 –250. Wiseman, R. W., & Catanach, A. H. 1997. A longitudinal disaggregation of operational risk under changing reg- ulations: Evidence from the savings and loan industry. Academy of Management Journal,40: 799 – 830. Woodman, R. W., Sawyer, J. E., & Griffin, R. W. 1993. Toward a theory of organizational creativity.Academy of Man- agement Review,18: 293–321. Young, G., Smith, K., & Grimm, C. 1996. “Austrian” and in- dustrial organization perspectives on firm-level compet- itive activity and performance.Organization Science,7: 243–254. Sim B. Sitkin([email protected]) is professor of management, Staudenmeyer Re- search Fellow, and faculty director of the Fuqua/Coach K Center on Leadership and Ethics, Fuqua School of Business, Duke University. He received his Ph.D. from Stanford University. His research concerns the influence of leadership and control systems on organizational and individual change, innovation, trust, learning, risk taking, and accountability. Kelly E. See([email protected]) is assistant professor of management and organi- zations in the Stern School of Business at New York University. She received her Ph.D. in management from Duke University. Her research focuses on the role of learning in judgment under uncertainty and on how factors such as fairness, power, and goals affect organizational decision processes. C. Chet Miller([email protected]) is the Bauer Professor of Organizational Studies at the C. T. Bauer College of Business, University of Houston. He earned his Ph.D. from the University of Texas. His research focuses on upper-echelon leaders, strategic decision processes, and management systems. Michael W. Lawless([email protected]) is Tyser Teaching Fellow at the R. H. Smith School of Business, University of Maryland. He earned his Ph.D. from the Anderson Graduate School of Management, UCLA. His research takes an evolutionary perspec- tive on technology and innovation management, strategy implementation, and entre- preneurship and new venture financing. Andrew M. Carton([email protected]) will be an assistant professor of management and organization in the Smeal College of Business at The Pennsylvania State Uni- versity beginning in Fall 2011. He received his Ph.D. from Duke University’s Fuqua School of Business. His research focuses on how leaders adapt to the increasingly complex nature of goal systems and intergroup relations in organizations. 566July Academy of Management Review Copyright of Academy of Management Review is the property of Academy of Management and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder’s express written permission. However, users may print, download, or email articles for individual use.
For Brilliant Answers Only
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 Z f you wandered around 3M for awhile and asked 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 AND 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. One risk of change is that the organiza- tion will operate less effectively for a while as the new climate is being created; when 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. One CEO with whom 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. On the one hand, the change seems worth the trouble, because the 747 will be a more effective transport vehicle. On 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 management to flood the environment with cues to the intended new priorities. The more consistent the mes- sages are about the new priorities, and 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 why 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 demanding 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, human 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 and hired. You simply cannot hire and socialize new employees for only one priority; success requires competencies and energies directed at multiple simultaneous priorities. 2. TRAINING. 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. Management 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 WE 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
For Brilliant Answers Only
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 50 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 51 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 Academy of Management Executive 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 as 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 as long as 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 as 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 Academy of Management Executive 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. 56 Rousseau Until employees know with certainty that the “old deal is over.” the new contract is not reality. Navy women as 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 Academy of Management Executive 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.” 58 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 apparent that the world is changing than in business and industry. Prompted by a variety of environmental forces, companies have undergone substantial change in their strategies, structures and processes. Government regulations, sophisticated consumers, competition from multiple fronts, the breakdown of traditional barriers to market entry, the impact of technology, downsizing, and the emergence of new distribution channels linked to technological advances have all contributed to the pace and scope of change. As a result, organizations are no longer able to finance or manage responses to change that are fundamentally incremental, evolving over time in an orderly manner. For one thing. Wall Street and company shareholders will not agree to forego short-term profits for the sake of potential long-term gain. The playing fields of business are littered with casualties; that is. corporations unable to maintain payments on term profit commitments that were subsequently abandoned by investors. Concern for short-term profit and short-term results is forcing businesses to make policy and structure changes without serious consideration of either existing or implied psychological contracts with employees. This reality has irreparably damaged the good-faith relationship that has existed, to one degree or another, between management and employees. The author suggests altering the psychological contract through accommodation or transformation in which companies can adjust the old conditions to fit the new requirements or toss out the conditions and replace them with altogether new ones. In my estimation, a stipulation for both strategies needs to be that the responsibility for change needs to be shared by employee and employer. Employees must accept those events which have occurred over which their companies had little control. They need to reframe their relationships with the organization in ways that parallel the company’s response to its environment by demonstrating flexibility and adaptability. The “used-to-be’s” must give way to the realities of “what is and what will be.” Finally, employees must be willing to move into uncharted areas in their relationships with employers. They need to see such movement as opportunity rather than obstacle. An examination of the needs and wants of the organizational talent base must precede the contract and contracting process in companies. The cost of lost intellectual capital and heavy turnover should also be factored into this examination. Questions such as “Where will the next generation of managers be found?” “What will it take to grow and retain talent?” are among those that need to be considered. Hopefully, such actions will produce some innovative approaches in which employee development and company profit needs are jointly met. 59