Organizational Behavior

Abstract

Organizational behavior studies power and organizational politics, trying to understand the organization behavior in its three levels of analysis (the individual, the group, and the organization). To do this, we must begin asking what organizations are. What are the conditions to make good decisions, creating an environment where people can be creative and motivated for a successful business. It identifies how people respond to the stimuli in our environment according to their perception and make decisions, interpreting organizational interactions, so interesting is that we do not solely.

Organizational behavior still debates about the relative importance of metaphors to describe organizations. Metaphor is a basic structural form of experience by which human beings engage, organize, and understand their world. A metaphor is a connection, coupling two ideas. One idea is usually complex and hard to convey. The other idea is then simple and commonplace. The ordinary illuminates the intricate.

Alternative views of a company as a living being, or just as a money-making machine, are discussed. The view that organizations are metaphorically living beings is the idea that organizations can learn (learning companies) and even become wiser.

1 Introduction

Organization behavior is the systematic study and application of knowledge about how individuals and groups act within the organizations where they work.

Systematic is an important word in this definition. It is easy to think we understand something if it makes sense, but research on decision-making shows that this can easily lead to faulty conclusions because our memories fail us. We tend to notice certain things and ignore others, and the specific way information framed can affect the choices we make.

Then, to understand the organization behavior in its three levels of analysis (the individual, the group, and the organization), we must begin asking what are the organizations? It is extremely difficult to define what we mean by the concept organization because in doing so, one inevitably deploys sets of assumptions that lead us to perceive these phenomena in a, often very partial, manner. Indeed, an organization distinguishes from other types of social systems, because, according to Schein ([1], p. 9):

An organization is the rational coordination of the activities of a number of people for the achievement of some common explicit purpose or goal, through division of labor or function, and through a hierarchy of authority and responsibility.

At this point, a question begins to emerge: how do the so-called organizational purpose or common objectives manifest? Does it make sense to say that the organization can be recognized for its personality? The organization theory itself distinguishes different organizations by their behavior, culture, or power. Is there any logic to that? At some point in its history, could the organization be considered competitive or sustainable, regardless of its people?

According to Junisbai [2]:

The act of organizing as human beings can be an abstract to conceptualize. Explaining how and why people create groups, subgroups, and “organizations” is a lifelong pursuit. Or at least, one that requires a fair amount of reflection and more explanation than any one quote could provide.

For Morgan (1997, p. 34) [3]:

Organization theory has become a kind of biology in which the distinctions and relations among molecules, cells, complex organisms, species, and ecology are paralleled in those between individuals, groups, organizations, populations (species) of organizations, and their social ecology.

In this sense, the author had used various metaphors to describe organizations. Metaphor is a basic structural form of experience by which human beings engage, organize, and understand their world.

A metaphor is a connection, coupling two ideas. One idea is usually complex and hard to convey. The other idea is then simple and commonplace. The ordinary illuminates the intricate. In his book, Images of Organization, [4] Gareth Morgan lays out eight metaphors for an organization: machine, organism, brain, culture, political system, psychic prison, flux and transformation, and instrument of domination.

Each metaphor can be grouped into three groups: the machine group, the organism group, and the mind group. The machine group only contains the machine metaphor. Each metaphor can be grouped into three groups: (1) the machine group, (2) the organism group, and (3) the mind group. The machine group only contains the (I) machine metaphor. The organism group focuses on the dynamic relationship between organization and environment and contains the (II) organism metaphor and (III) the flux and transformation metaphor.

The mind group contains two subgroups: The first mind subgroup concentrates on the relationship between the minds of persons and the organization as a (3a) social construct; it contains (IV) the brain metaphor, (V) the culture metaphor, and (VI) the psychic prison metaphor. The second mind subgroup focuses on (3b) coordination mechanisms and power plays and contains the (VII) political system metaphor and (VIII) the instrument of domination metaphor, as shown in ◘ Fig.

Fig. 5.1

Adapted from the eight metaphors of organizations from Gareth Morgan’s images of organization. (Source: NOBL Collective, LLC, available at ► https://academy.nobl.io/gareth-morgan-organizational-metaphors/, accessed on February 12, 2023)

5.1.

2 The Eight Organizational Metaphors

2.1 Organizations as Machines

An organization is seen as a series of connected parts arranged in a logical order to produce a repeatable output, which serves as the foundation for bureaucratic organizations for the scientific management method. The machine metaphor places priority on increased efficiency and maximum utilization of labor. In order to accomplish these tasks, organizations usually need rigid hierarchical structures, a shift of responsibility from the worker to the manager, determination as the most efficient way of work, and work tasks that are designed according to the above-mentioned principles. The operations are engineered by surgical precision, the work is broken down into its smallest parts, efficiency is maximized, and specialized tasks are simplified and assigned to trained people.

According to Morgan [4], men and women were no more than “hands” or “manpower”: the energy or force required to propel the organization machine. Mechanical, machine-like organizations are closed systems, not open for internal learning and self-adaptation, and generally suited for companies with stable product structures and relatively steady markets.

People who see organizations as machines want a profound sense of order and control. They strive for neatly partitioned roles and seek interchangeable people to fill those roles. Above all, they expect logic and reason to always win the day, according to NOBL Collective, LLC.

• When this metaphor works: it works in the same context as when machines do, i.e., when there is a straightforward task, a stable environment, a repeatable outcome, and a focus on precision.

• When this metaphor fails: when the environment changes and when employees crave a greater sense of purpose and human agency.

• What this metaphor means for leadership: under this paradigm, leaders think and workers do; it’s the duty of a leader to lay out exact requirements for every role and swap people out when there is an under-performance.

• What this metaphor says about organizational change: people who hold this view think that change is a matter of shutting down, replacing a cog, and easily resuming production; obviously, this overlooks how people actually think and feel about change.

2.2 Organizations as Living Organism

An organization is a collective response to its environment and, to survive, must adapt as the environment changes. In this sense, organizations can be born, they can grow, become diseased, and even die. The organism has a definite structure and an order to it. Its growth depends on forces that may or not be controllable.

In contrast to the closed-loop, closed-system approach such as the “machine metaphor,” the open-systems approach emphasizes adaptation, flexibility, and the importance of the environment in which the organization exists. Organizations in the open-system theory are seen as sets of interrelated subsystems. Furthering the open-system approach is the contingency theory, which looks at the alignments between different (sub) systems of organizations.

Kast and Rosenzweig [5] explain that it is conceptually easy to draw the analogy between living organisms and social organizations, because there is, after all, an intuitive similarity between the organization of the human body and the kinds of organizations men create.

According to the authors, biological orientation would appear to have an evolutionary view of system effectiveness. That living system that best adapts to its environment prospers and survives. The primary measure of effectiveness is perpetuation of the organism’s species. But, the question is: is survival the only criterion of effectiveness of the social system? It is probably an essential but not all-inclusive measure of effectiveness.

Parsons’ functional-structural views (1951) [6] provide a contrast affirming that a complex organization’s purpose, according to his analysis, is mainly to benefit the society in which they belong and that society is, therefore, the appropriate frame of reference for the evaluation of organizational effectiveness.

Yuchtman and Seashore [7] suggest that the organization’s success over a period in this competition for resources—i.e., its bargaining position in a given environment—is regarded as an expression of its overall effectiveness.

Since the resources are of various kinds, the competitive relationships are multiple, and there is interchangeability among classes of resources, the assessment of organizational effectiveness must be in terms not of any single criterion but of an open-ended multidimensional set of criteria.

This viewpoint suggests that questions of organizational effectiveness must be concerned with at least three levels of analysis. The level of the environment, the level of the social organization as a system, and the level of the subsystems (human participants) within the organization. Perhaps much of our confusion and ambiguity concerning organizational effectiveness stems from our failure to clearly delineate the level of our analysis and, even more important, our failure really to understand the relationships among these levels [5].

People who see organizations as organisms are concerned with the environment surrounding the organization and how best to fit into that environment. They see changes to that environment as forces and factors to respond to, NOBL Collective, LLC.

• When this metaphor works: when there is a clear and discrete change in the environment that threatens the organization’s survival (e.g., a new law is enacted).

• When this metaphor fails: when changes are continuous and when uncertainty is rampant; i.e., when it’s unclear what’s called for in response to seismic changes.

• What this metaphor means for leadership: under this paradigm, leaders are called to sense for changes and formulate a step-by-step plan of action in response (this works when classical strategy also works, in a world of discrete, and predictable changes).

• What this metaphor says about organizational change: traditional models of change management fall here (e.g., Lewin), with the idea being that you can make a change and then return to a state of normalcy following the change versus adopting change as a constant state of being.

2.3 Organization as a Brain

An organization is a set of functions designed to process information and learn over time. The brain metaphor compares the organization to a set of functions that process and even learn information in the long run, like a brain does. This metaphor speaks to collective intelligence, such as the different departments within a firm that work together to produce a single product. The brain metaphor is a powerful image; its’ strength is its ability to identify the requirements of learning organizations, to include an open and adaptive view, and its ability to self-regulate, adapt, and develop. There is a limitation of the metaphor; it is self-referencing.

The brain is a complex organ that generates thoughts, memories, and ideas. It is an information storage system that provides data to the body. The brain allows three-dimensional views of the world. Morgan described this aspect as “holographic.” According to Morgan [4], what we see and experience in the brain as a highly ordered stream of consciousness is really the result of a more chaotic process where multiple possibilities are generated.

So, the brain is complex and is a good illustration for describing organizations. The organization has multiple possibilities and processes that information to make decisions about its culture, its vision, and its relationships.

For Engen [8], the brain metaphor is used in the language of the organization. One example is “brainstorming” which is described as “a conference technique of solving specific problems, amassing information, stimulating creative thinking, developing new ideas, etc., by unrestrained and spontaneous participation in discussion” (American Heritage^® Dictionary of the English Language). The amassing of multiple perspectives creates complexity in the organization, which appears to be a chaotic process. However, brainstorming is crucial in surfacing new ideas and multiple viewpoints for the organization.

Junisbai [2] asks if it is really possible to have organizations with the flexibility, resilience, and inventive ability of our brain? Such an organization would need to be able to distribute its intellectual capabilities throughout so that challenges can be tackled as a whole.

Argyris [9] argues that organizations are adept at single-loop learning, the process of correcting an error within the set of operating norms. Single-loop learning does not encourage the challenge of operating norms or procedures. Under single-loop learning, employees are confined to their position within the group and rarely are able to question organizational norms or procedures.

On the other side, according to author, double-loop learning is the process of taking a second look at the situation, in the form of questioning whether the operating norms are acceptable and appropriate. A bureaucracy that punishes employees by making them feel threatened or vulnerable is one of the biggest barriers to double-loop learning. When people feel threatened, they perform a “defensive routine” which often obscures or dilutes the true nature of the problem.

To be an organization that is using double loop learning, organizations must:

• Observe and try to detect “significant variations” in its operating environment:

  • Must detect early warning signs that can indicate shifting trends.

  • Must become skilled in imagining what the future will look like.

• Cultivate a culture of challenging operating norms and procedures:

  • Organization members must understand and be prepared to change the frameworks that the company operates with, and within.

  • A company’s current reality is not necessarily the reality.

• Develop a strategic direction:

  • Objectives need not be emphatically stated and “hard and fast.” Objectives should emerge through exploring an organization’s operating environment.

For Junisbai [2], the challenge faced by most organizations is how to apply the metaphor of organization as a brain, rather than remain in the single-loop stage of repeating the same processes and solving problems the same way because they know it works or because that is the way it has always been. The challenge is to break away from centralized management and into a diffused power structure and utilize the strengths of every member of the organization to achieve their goals.

People who see organizations as brains are concerned with the collective intelligence and organized wisdom of the organization. They see employees as sensors and management layers as sense-making functions in the pursuit of developing a learning organization, according to NOBL Collective, LLC.

• When this metaphor works: when the environment is rife with unknowns but relatively stable so that learnings are still relevant over time (e.g., a team of medical researchers hoping to cure an infectious disease).

• When this metaphor fails: when change is so unprecedented that knowledge of the past is no longer helpful for predicting and responding to the future.

• What this metaphor means for leadership: under this paradigm, leaders are expected to install and instill the capacity for double-loop learning, helping teams not only develop feedback loops that help them gauge their effectiveness but also feedback loops that help them question how they define effectiveness itself.

• What this metaphor says about organizational change: this metaphor assumes that past knowledge is always predictive of future behavior, meaning that changes can be rationalized and planned for with the benefit of enough hindsight and pattern recognition.

2.4 Organization as Cultural System

An organization is a mini society, with its own culture and subcultures defined by their values, norms, beliefs, and rituals. To talk about cultures is to talk about a process of construction of reality that allows people to see and understand certain events, actions, objects, utterances, or situations in different ways.

When one looks at organizations as cultures, he/she might see them as microcosms with distinctive values, shared beliefs, ideologies, languages, rituals, and attitudes. Leadership’s role in company culture can be best demonstrated by observing the roles that contemporary business executives and CEOs play in shaping and influencing the life, norms, and customs of an organization. As leaders have greater influence and power in corporate life, their impact is significant.

It is important, however, to emphasize the limits of management culture. It is self-evolving and cannot be completely controlled. Management is limited to encouraging or shaping values, beliefs, language, and norms. This is most effectively accomplished through the consistent alignment of leadership’s actions with the stated values of the enterprise.

People who see organizations as cultural systems are concerned with the shared beliefs, norms, and rituals of an organization. They often think of the organization as a mini-society and are interested in the holistic experience of being an employee of the organization, according to NOBL Collective, LLC.

• When this metaphor works: when competition for talent is fierce and employees desire for shared identity in their work.

• When this metaphor fails: when cultures become cult-like, i.e., when entering and exiting the culture cause trauma; when external changes are ignored in favor of group cohesion; when a push for a homogenous culture drives out sub-cultures and drives away talent who are not deemed “culture fits.”

• What this metaphor means for leadership: under this paradigm, leaders are expected to be the embodiment of their cultures.

• What this metaphor says about organizational change: cultural systems are inherently systems which favor tradition and reject change; these organizations then struggle to assimilate changes which threaten their core values and beliefs.

2.5 Organizations as Political Systems

An organization is a game of gaining, influencing, and coordinating power, and culture often has a political dimension as a construction of reality involves a hidden agenda with a strong bias, a political flavor. If there are hidden agendas, they can be confusing and detrimental to the balance of the organization and be counterproductive.

The organizations as political systems metaphor postulates organizations as “loose networks of individuals with divergent interests who come together for the sake of convenience” [4]. This means that some sources of conflict are inherent. For example, an organization’s accountants and financial services users often conflict because doing their job well means they are making each other’s lives more difficult. As can be seen, many organizational conflicts are institutionalized in the organizational culture.

This metaphor sheds light on how organizational power is dispersed through interpersonal alliances, coalitions, and networks that center around mutual dependency and exchange.

While most organizations have power in one form or another, rarely do its members admit to having real power. Whether you talk to a manager or an executive officer, most employees feel they lack power. This discrepancy between employees’ power and their perception of it arises from feelings that they are constrained and have an obstructed path to unbridled power.

Indeed, a roughly equal balance of power can cause individual employees to feel powerless when they do in fact have real power, collectively. In turn, those who find themselves in this scenario can turn to the political system metaphor as a guide for illuminating where power lies in their organization and how it got that way.

Millôr Fernandes, a brilliant Brazilian thinker of great intelligence, formulated wise phrases of great depth and, also, of great irreverence, in a very simple way. He said, on this theme of power in organizations:

Democracy is when I rule you, dictatorship is when you rule me.

For Pfeffer [10], the concepts of power and organizational politics are related; organizational politics is defined as the exercise or use of power, with power being defined as a potential force. Power and politics exist, and we even grudgingly admit that they are necessary to individual success, but we nevertheless don’t like them.

The author emphasizes that this ambivalence toward, if not outright disdain for, the development and use of power in organizations stems from more than one source. First, we often don’t like to consider the methods that are necessary to get things accomplished. Second, we are also ambivalent about ends and means because the same strategies and processes that may produce the outcomes we desire can also be used to produce results that we consider undesirable.

The use of power has two primary outcomes. One is that those with power get their way, typically including the accumulation of valued resources. The second is that those without power come to resent those who use power, and this resentment occurs whether people are threatened with punishment for undesirable behavior or promised rewards for desirable behavior [11].

Willer et al. [12] explain that both rewards and punishments compel people to do things they would not do if the rewards or punishments were not in place. Using power to compel action is also inefficient, requiring a great deal of energy on the part of the power holder to always have rewards and punishments in place to gain compliance. From a leadership perspective, if leaders initiate action only through the use of power, then followers will stop carrying out actions that the leader desires as soon as the incentives are removed. A consequence of creating resentment is that it leads to a loss of status.

Lucas and Baxter [13] understand that leadership, like power, status, and influence, is a concept that has been subject to a limitless number of treatments. At its most basic level, however, they say that leadership is about getting people to do things. If people are carrying out actions they would otherwise perform in any case, then there is no need for a leader. Because power and influence are fundamental ways to get people to do things, theory and research on the concepts have clear relevance to issues of leadership.

In ► Chap. 6, we will study the place of leadership and management in twenty-first-century businesses and organizations, the role of leaders and managers, leadership styles, as well as their levels of efficacy. The place of leadership and management in today’s organizations is changing because leaders and managers require a practical approach to leadership and management to substantially influence and motivate their followers to enhance their performance to achieve set organizational objectives.

People who see organizations as political systems are chiefly concerned with gaining and wielding power and influence. They view employees as followers to accrue, fellow leaders as either allies or foes, and superiors as those to influence and control, according to NOBL Collective, LLC.

• When this metaphor works: when there are diverse and conflicting interests and when self-interests overrule rationality.

• When this metaphor fails: when a competitor or change of any kind emerges as a threat so great that only the collective cooperation of the organization can face it.

• What this metaphor means for leadership: under this paradigm, leaders are expected to vie for attention, influence, and dominance; this leads to a single-minded obsession with how leaders are perceived (i.e., how they perform in a meeting) even over their long-term performance.

• What this metaphor says about organizational change: this metaphor assumes that the leader who emerges victorious from a political system is also a leader who can foresee and marshal change; alas history is replete with examples of leaders who could manipulate a political system and yet fail to respond to societal shifts.

2.6 Organizations as Psychic Prison

An organization is a collection of myths and stories that restrict people’s thoughts, ideas, and actions. Morgan [4] discusses the framework of organizations as psychic prisons to help us understand how people in organizations get trapped by conscious and unconscious processes that carry hidden meanings. These processes exercise significant control over all organizational actors through group illusions that produce conformity and assumed consensus, referred to as groupthink, as psychological phenomenon where members of a group desire conformity.

Being confined in psychic prisons discourages creativity and individuality, restricting us to groupthink. Thus, the strengths and victories of the organization can turn into the organization’s weaknesses that ultimately lead to its downfall.

According to Young [14], if someone has not heard the term “psychic prison” before, his or her first reaction would be probably a negative one. Indeed, the purpose of the psychic prison metaphor is to illustrate how an organization can become trapped in a favored way of thinking to keep peace, which restricts creativity, prohibits change, and limits its ability to progress into the future.

Young develops a very interesting profile that characterizes organizations that have become trapped in a psychic prison, often sharing a common set of the following traits:

• Groupthink is pervasive—Humans have a natural tendency to conform with their groups. When team members conform and do not deviate from what the rest of the groupthinks, ideas, or processes are never challenged. Groupthink occurs to keep the peace, but keeping the peace is not always productive.

• Conflict is avoided—Conflict in the workplace has gotten a bad rap in recent years, and the avoidance of workplace conflict has had some negative consequences. However, productive conflict in the workplace is critical to the success of any business and helps prevent bad ideas from being implemented without serious discussion and consideration.

• “We’ve Never Done it like that before”—If these seven deadly words frequently find their way into the corporate board room, there is a good chance your organization could be trapped in a psychic prison. If this is the case, any attempts to create meaningful change are typically devoured with incredible voracity.

• The “Gooder” Syndrome—Rather than consensus based on the avoidance of conflict, ideas are implemented because of a culture of brown nosers that lacks candor, honesty, and the courage to say what one really thinks.

• An inbred culture—It’s great to promote from within to motivate and reward stellar performance. However, when promotions are given based on loyalty and years of service rather than a record of exceptional performance, big problems arise. This results in a leadership team rank with incompetence that only serves to breed more incompetence.

• Arbitrariness—Key directives and policies are determined by top management with unrelenting randomness and absence of reason. This is often a clear sign that the leadership of an organization has become disconnected and lost touch with what is really happening within the organization.

People who see organizations as a psychic prison want to broaden our ability to perceive, question, and change our organizations. They fear that their organizations are trapped in a static way of thinking, that they adopt conformist ideals, and overall resist change according to NOBL Collective, LLC.

• When this metaphor works: when past success, societal norms, and unconscious biases have deluded the organization into a state of complacency and/or persistent discrimination.

• When this metaphor fails: when the need to embrace new ways of thinking overrides the commercial realities of the organization.

• What this metaphor means for leadership: under this paradigm, leaders are called to question their own self-awareness, prejudices, and biases in order to create more inclusive and equitable environments.

• What this metaphor says about organizational change: this metaphor encourages organizations to progress ahead of governmental and societal changes; this is obviously difficult when an organization is large and diverse enough to encompass a broad set of views and opinions.

2.7 Instrument of Domination

An organization is a means to impose one’s will on others and exploit resources for personal gains. Domination is defined by The Merriam-Webster Dictionary as “the exercise of control or influence over someone or something, or the state of being so controlled.” To exercise dominance, one must have an element of power, (i.e., control/influence) and use it to control a person or a group.

Weber [15] discusses various forms of domination such as domination by threat or force; imposed domination under a charismatic leader, and rational domination where laws, regulations, and procedures guarantee the leader’s rule.

The concept of domination is prevalent in government and military organizations, where a rigid top-down approach is required to run operations smoothly. Many times, this domination is accompanied and supported by a bureaucratic and machine-like framework.

The domination metaphor creates a new level of social consciousness and an appreciation of why relations between exploiting and exploited groups can get so polarized. It invites managers to a deeper sense of the ethical dimensions of their work and its social impact. Domination is not simply an unintended side effect of organizations, and—while to some extend their control is limited—management and leadership do carry responsibility for corporate actions and their consequences [16].

Morgan [4] outlines three types of domination, all of which are relevant to the organizational context:

• Charismatic domination: legitimacy grounded in faith in the person’s ability.

• Classic domination: tradition or history or birth enables dominator to dominate (power × culture).

• Rational-legal domination: bureaucracy enforces domination by a series of written codes and rules.

For Junisbai [17], while rational-legal domination may seem like the most familiar, classic domination is also very common in the organizational context. Corporate elites and governments across the world are well-positioned to pass power and control down through their internal mechanisms. The culture of domination is highly engrained into many of these apparatuses, and by consolidating power in this way, elites keep the working-class sectors of society from raising their status, benefits, or autonomy.

People who see organizations as an instrument of domination are often terrible people to work with and for. They see employees as objects to be subjugated. They also tend to see the natural resources available to the company as theirs to exploit, according to NOBL Collective, LLC.

• 1. When this metaphor works: in some cases, this is the most realistic view of organizational life (sadly).

• 2. When this metaphor fails: this view can be adopted by activists who paint a miserable and myopic view of any kind of effort concentrated to a capitalist end.

• 3. What this metaphor means for leadership: under this paradigm, leaders are expected to override the will and self-determination of their subordinates.

• 4. What this metaphor says about organizational change: this metaphor fails to respond to meaningful external change because it prioritizes the personal wants and needs of a leader; i.e., if a leader doesn’t find it attractive to change, the organization will not change.

2.8 Flux and Transformation

An organization is an ever-changing system indivisible from its environment. A vivid image that might be used to illumine the idea of organizations as flux and transformation is this:

Around 500 BC, the Greek philosopher Heraclitus noted that, “you cannot step into the same river, for other waters are continually flowing on. Everything flows and nothing abides; everything gives way and nothing stays fixed… cool things become warm, the warm grows cool; the moist dries, the parched becomes moist.”

In this metaphor, the very structure of the organization is tied inextricably to movement and transformation from one state to another. If motion, flux, or movement discontinues—the organized structure ceases to exist.

What implications for managers are suggested by the metaphor of flux and transformation?

Morgan [3] first proposes that managers recognize that as they work to promote change and lead their organizations, they must recognize that there will opposing forces with which they will be forced to deal. Morgan asserts that the best way for managers to deal with these opposing forces is to find and adopt initiatives that retain the positive side of opposing forces while seeking to lessen the more negative aspects of those competing perspectives.

Second, Morgan asserts that good managers must recognize that innovation is promoted by creative destruction. Here Morgan draws upon the notion that in the chaos caused by the fall and destruction of economies, markets, organizations, etc., creativity finds room to grow and flourish. Morgan argues that good managers will recognize and make use of these contradicting forces to bring about good things for their organizations.

Transformation and flux theories help us to understand that we must look at the logic of all changes in the system. We must solve why what is happening and understand the factors that are causing the situation not just to respond to the immediate changes. There is a reaction to systems and their surroundings. The empowering parts of these changes are the pieces of the organizations that reflect upon these changes and understand the cycles that are produced. There is an order to transformation and flux; leaders and systems must realize this and understand the circular relationships.

People who see organizations in terms of flux and transformation have embraced uncertainty, complexity, and even chaos in terms of the changes their organization is experiencing. You can think of this metaphor as an evolution of organism—rather than thinking that simply the environment changes and then the organization must respond in kind, this metaphor says that both the environment and organization influence one another and both must respond to change, according to NOBL Collective, LLC.

• When this metaphor works: when there is continuous and complex change; when cause and effect no longer make neat sense.

• When this metaphor fails: when the organization itself needs only work as simply as a machine, or when the external chaos causes leaders to throw up their hands and abdicate responsibility for change.

• What this metaphor means for leadership: under this paradigm, leaders are called to experiment with small, safe-to-fail changes and then marshal resources to further successful experiments while shutting down failures; in contrast to the organism view, changes within an organization also spur changes in the environment.

• What this metaphor says about organizational change: this metaphor advocates for a test-and-learn mentality, even over-rushing to introduce a series of planned changes informed by pattern recognition.

3 The Living Company

According to De Geus [18], all corporate activities are grounded in two hypotheses: “The company is a living being; like all organisms, the living company exists primarily for its own survival and improvement: to fulfill its potential and to become as great as it can be (p. 11).”

De Geus’s arguments are probably at their weakest when he contemplates why it is that companies deserve to live long lives. A study done at Royal Dutch/Shell, where he was the coordinator of planning worldwide, found that the average life expectancy of Fortune 500 firms, from birth to death, was only 40–50 years. The study also found many companies over 200 years old. Arie was convinced that they are somehow unable to adapt and evolve as the world around them changes.

Managers do not experience that their company is suffering from low life expectancy. Such endemic failure had been attributed to the focus of managers on profits and the bottom line rather than the human community that makes up their organization.

Peter Senge has expressed in his foreword of De Geus’s book that like individuals who are unhealthy and can expect an early demise, most large, apparently successful corporations are profoundly unhealthy. The members of these organizations experience poor corporate health due to work stress, endless struggles for power and control, and the cynicism and resignation that result from a work environment that stifles rather than releases human imagination, energy, and commitment. The day-to-day climate of most organizations is probably more toxic than we care to admit.

Senge questions our assumptions of organization as machine. What if we thought about a company as a living being? Indeed, the machine metaphor is so powerful that it shapes the character of most organizations. They become more like machines than like living beings because their members think of them that way.

For Senge, apparently, cultures around the world have embraced similar notions for a very long time. In Swedish, the oldest term for “business” is nårings liv, literally “nourishment for life.” The ancient Chinese characters for “business,” at least 3000 years old, are as follows:

The first of these characters translates as “life” or “live.” It can also be translated as “survive” and “birth.” The second translates as “meaning.”

Senge follows:

Why does it seem so difficult for me to think of a company as a living being? Is it that our mental model of “company” is just so fixed in our minds that we cannot suspend it? If, indeed, we have thought of the companies of which we have been a part as machines, this implies that we are mechanical elements in the machine. A machine does not have living parts. For many of us, this has undoubtedly fostered a deep antipathy toward our organizations.

For Senge, this raises the obvious question: What is the alternative view of a company if we do not see it as a living being? The alternative view is to see a company as a machine for making money. The contrast between these two views machine for making money versus living being illuminates a host of core assumptions about management and organizations.

• 1. First, according to Senge, a machine is owned by someone. We are used to thinking of companies in exactly that way: they are owned by owners, usually distinct from the company’s members. But what does it mean to say that a living being is owned by someone? Most people in the world would regard the idea that one person owns another as fundamentally immoral. Is it no less problematic about a company?

• 2. A machine exists for a purpose conceived of by its builders. Again, this is the conventional view of a company: its purpose is to make as much money as possible for its owners. But living beings have their own purpose. This inherent purpose can never be completely supplanted by the goals of another, even though a living being might respond to others’ goals. What happens to the life energy of a living being when it is unable to pursue its purpose?

• 3. To be effective, a machine must be controllable by its operators. But living beings are not controllable in the ways that a machine is.

• 4. Senge going further, seeing a company as a machine implies that it is created by someone outside. Seeing a company as a living being implies that it creates its own processes, just as the human body manufactures its own cells, which in turn compose its own organs and bodily systems. Is this not exactly how the informal organization of any large company comes into being? The networks of relationships and communication channels essential to anyone doing any job are indeed created by the people themselves.

• 5. Seeing a company as a machine implies that it is fixed, static. It can change only if somebody changes it. Seeing a company as a living being means that it evolves naturally. Seeing a company as a machine implies that its only sense of identity is that given to it by its builders.

• 6. Seeing a company as a machine implies that it will run down unless it is rebuilt by management. Seeing a company as a living being means that it can regenerate itself, of continuity as an identifiable entity beyond its present members.

• 7. Seeing a company as a machine implies that its members are employees or, worse, “human resources,” humans standing in reserve, waiting to be used. Seeing a company as a living being leads to seeing its members as human work communities.

Returning to study done at Royal Dutch/Shell that had showed a full one-third of the companies listed in the 1970 Fortune 500, for instance, had vanished by 1983, acquired, merged, or broken to pieces. Today the scenario is not so different!

According to De Geus [18], most corporations are dramatically underachievers. They develop and exploit only a fraction of their potential. Human beings have learned to survive, on average, for 75 years or more, but there are very few companies that are that old and flourishing.

The author explains why so many companies die prematurely. In this sense, there is accumulating evidence that corporations fail because the prevailing thinking and language of management are too narrowly based on the prevailing thinking and language of economics. To put it another way: companies die because their managers focus on the economic activity of producing goods and services, and they forget that their organizations’ true nature is that of a community of humans.

The Royal Dutch/Shell team identified four key characteristics. The long-lived were sensitive to their environment; cohesive, with a strong sense of identity; tolerant, and conservative in financing:

• 1. Long-lived companies were sensitive to their environment. Whether they had built their fortunes on knowledge, they remained in harmony with the world around them. As wars, depressions, technologies, and political changes surged and ebbed around them, they always seemed to excel at keeping their feelers out, tuned to whatever was going on around them, managed to react in timely fashion to the conditions of society around them. In other words, sensitivity to the environment represents a company’s ability to learn and adapt.

• 2. Long-lived companies were cohesive, with a strong sense of identity. No matter how widely diversified they were, their employees (and even their suppliers, at times) felt they were all part of one entity. This sense of belonging to an organization and being able to identify with its achievements showed that strong employee links were essential for survival amid change. This cohesion around the idea of “community” meant that managers were typically chosen for advancement from within; they succeeded through the generational flow of members and considered themselves stewards of the longstanding enterprise. Each management generation was only a link in a long chain. In other words, cohesion and identity are aspects of a company’s innate ability to build a community and a persona for itself.

• 3. Long-lived companies were tolerant. Long-lived companies generally avoided exercising any centralized control over attempts to diversify the company. These companies were particularly tolerant of activities on the margin: outliers, experiments, and eccentricities within the boundaries of the cohesive firm, which kept stretching their understanding of possibilities. In other words, tolerance and its corollary, decentralization, are both symptoms of a company’s awareness of ecology: its ability to build constructive relationships with other entities, within and outside itself.

• 4. Long-lived companies were conservative in financing. They were frugal and did not risk their capital gratuitously. They understood the meaning of money in an old-fashioned way; they knew the usefulness of having spare cash in the kitty. Having money in hand gave them flexibility and independence of action. They could pursue options that their competitors could not. They could grasp opportunities without first having to convince third-party financiers of their attractiveness. In other words, conservative financing is one element in a very critical corporate attribute: the ability to govern its own growth and evolution effectively.

3.1 Visionary Organizations

These conclusions are echoed by Jerry Porras and James Collins in their equally thought-provoking book, Built to Last [19]. Between 1988 and 1994, Stanford University professors Collins and Porras did a study on higher-performing organizations in 18 economic sectors and asked 700 chief executives of US companies large and small, private and public, industrial and service to name the firms they most admired. From the responses, they identified two types of organizations in each of them: “visionary organizations” and “comparative organizations.”

Visionary organizations were recognized as sector leaders and widely admired; they settled ambitious goals, communicated them to their employees, and embraced a higher purpose beyond making money. They also performed higher than that of comparative organizations. Visionary organizations included GE, HP, and Boeing, while the comparative organizations correspondents were Westinghouse, Texas Instruments, and McDonnell Douglas.

They didn’t set out to find long-lived companies, but, as it happened, most of the firms that the CEOs chose had existed for 60 years or longer. (The only exceptions were Sony and Wal-Mart, at that time.) The authors paired these companies up with key competitors (Ford with General Motors, Procter and Gamble with Colgate, Motorola with Zenith) and began to look at the differences.

Visionary companies put a lower priority on maximizing shareholder wealth or profits. They had found that their most-admired companies combined sensitivity to their environment with a strong sense of identity: according to Collins and Porras, visionary companies display a powerful drive for progress that enables them to change and adapt without compromising their cherished core ideals.

The researchers identified three common points among the 18 organizations’ visionary and market leaders, that is:

• 1. Values: Each of the visionary organizations held a distinct set of values from which they did not divert. Thus, IBM has established itself in the principles of respect for the individual, customer satisfaction, and continuous quality improvement throughout its history. Johnson & Johnson is up to the principle that its first responsibility is for its customers, the second to its employees, the third to the community, and the fourth to its shareholders.

• 2. Purpose: The second common point is that visionary organizations express their purpose in explicit and very clear terms. Xerox wants to improve “office productivity,” while Monsanto wants to “help end hunger in the world.”

• 3. Vision of the future: The third point is that visionary organizations develop a vision of the future and act to make it a reality. Today, IBM works to establish leadership as a “network-centric” organization and no longer simply as the leading computer manufacturer.

4 Learning Organization

Today, the economic enterprise that produces goods and services, trying to find the ideal combination of the three factors of production (labor, capital, and land) is an abstraction with little to do with reality because the emphasis on profits and maximizing shareholder value ignores the two most significant forces acting on corporations competitiveness today: knowledge as a critical factor of production and the value added by companies working along their supply channels.

Companies could act according to the economic definition of success when managers felt that they were in control of their world. No more. In a globalized and competitive world, there is a need for organizations to develop strategies to differentiate themselves, create value, and stand out in the market. In this age of change, organizations need to develop their own capabilities to produce and manage their changes to achieve the results they want. To cope with a changing world, organizations must develop the capability of changing, of developing new skills and attitudes: in short, the capability of learning.

Thus, learning-oriented organizations began to be conceived as spaces where human beings expand their possibilities of generating the results for which they were mobilized, through new models of thought that are supported by collective aspiration, learning to learn in groups. They are more flexible, adaptable, and more competitive as they learn faster about society and market dynamics.

According to De Geus [11], we need a new way of thinking about the measurement of success in our companies. By outsiders, they are judged and measured in economic terms: return on investment and capital assets. But within the companies, the success depends on human skills and developing the consistent knowledge base of our enterprise.

The tension between the definitions of economic enterprise and learning company is almost certainly one of the main reasons behind the surprisingly low average life expectancy of companies. The evidence should be clear to managers that the core nature of their companies, their heart, is their existence as a community of continuous work, that is, a living and learning company.

Learning is the process of changing or changing behavior due to new knowledge or skills incorporated in order to improve it. Piaget et al. [20] affirm that each person constructs knowledge by himself/herself, organizing what he/she interprets from experience and, by interpreting it, gives it the form of a structured world [20].

For the authors, there are two types of learning: by assimilation and by accommodation.

4.1 Learning by Assimilation

Learning by assimilation means absorbing information for which the person already has mounted structures that allow to recognize and give meaning to them. The direction of a bank instantly recognizes the signal in any increase in interest rate because the bank already has all the structures and procedures to give meaning to the signal, and the institution at all levels is ready to recreate it, reach conclusions, and based on them make decisions about deposits, loans, investments, or any other banking business.

4.2 Learning by Accommodation

In this type of learning, there is an internal structural change in beliefs, ideas, and attitudes. Learning causes all previous experience to be restructured and modified to properly support it. Learning by accommodation requires much more than assimilation learning, as it is a process based on the experience by which the person changes to adapt to changes in the environment.

In organizations, assimilation learning predominates, although the most competitive organizations are trying to learn by accommodation. The increase in interest rates—which the bank director already has with mounted structures—has a different meaning for a construction company that is operating at full capacity. The increase would lead the company to make changes throughout its internal structure: it would have to renegotiate its financing, dispart part of its project portfolio, and postpone or change certain projects.

For Kim ([21], p. 6), learning is a cycle in which new data are assimilated, reflected on previous experiences, reaching a conclusion that is incorporated and stored to the new experience in the form of mental models.

4.3 Learning by Playing

Surprisingly, there is a faster and more effective learning path. It’s learning to “play.” Playing with a toy is very different from playing a game or playing a sport. There’s no way to win. Those who play are experimenting with the object that somehow represents reality. The deeper the simulation and the more you play with the possibilities, the more you stimulate imagination and learning. And more effective becomes the decision-making process.

This clarifies the difference between games and fun. To play is to try the toy that is accepted as representative of reality. This makes the toy a representation of the real world with which the learner can experiment without fear of consequences. Under an aura of fun, there is a very serious purpose: playing with reality itself allows the person to better understand the world in which he lives. To play, in other words, is to learn [18].

The theme organizational learning has been studied under several approaches, with emphasis on the competitive and economic capacity of the organization. As for innovation, learning is considered an active strategy in promoting innovative efficiency.

Organizational learning improves the way organizations build, organize, integrate, maintain, and elevate knowledge and routine around their activities, applying the competencies of their workforce in an increasingly efficient way. The learning organization should actively promote, facilitate, and reward organizational learning, as it may not happen if such learning depends solely on the costly method of trial and error.

Several theorists have proposed several definitions in relation to organizational learning. Most authors associate learning with knowledge acquisition and continuous improvement. According to Argyris [22], an organization may be said to learn to the extent that it identifies and corrects errors. This requirement, in turn, implies that learning also requires the capacity to know when it is unable to identify and correct errors.

Starkey et al. [23] describe it as an ability to develop and self-transform. In turn, Shaw and Perkins [24] define it as an ability to acquire knowledge through experience [24].

Organizational learning can be defined as the process of creating or capturing, transferring, and organizing available knowledge to enable the organization to adapt to changes in its environments.

The organizational learning process is a continuation of individual learning and depends on it and is more than the sum of the individual learnings of its individuals. Organizational learning is the ability to create different ideas or simulate new possibilities, multiplied by the ability to generalize them throughout the organization, creating a true intellectual capital [25].

Just like people, organizations learn and develop different learning styles. This is possible through your interactions with the environment. Kolb [26] points out that due to the need to relate to the different aspects of the environment, the different units of an organization develop characteristic forms of thought and work together and different decision-making and problem-solving styles. These same units shape and select their managers in order to make them solve problems and make decisions in the manner required by their environment [26].

Schein (1993) [27] considers that organizations that encourage learning have some characteristics, such as (1) balanced interests; (2) belief in people and their development; (3) belief that it is possible to change the organizational environment; (4) dedication of time to learning; and (5) teamwork and sharing of ideas.

According to Senge [28], organizations that learn are those in which people continually expand their ability to create new patterns of thought and in which they continually learn to work together as a team. Organizational learning is never an end product, but a process in continuous development. The success of a company will depend on its ability to expand learning, involving all members of the organization. In this way, the solution to the problems is no longer exclusive to senior management. It is assumed that we are all apprentices, because the act of learning is part of human nature [28].

The author also considers that the mastery of certain basic disciplines is what will distinguish organizations that learn from so-called controlling and authoritarian organizations. Such basic disciplines are considered development paths for the acquisition of certain skills or competences. The five disciplines are:

■ Systems thinking ■ Personal mastery ■ Mental models ■ Shared vision ■ Team learning

• 1. Domain of systemic thinking—It is a discipline that seeks the vision of globality, of the whole system. People need to have an overview of the system and its parts in order to be able to change the systems in their entirety and not only in their punctual details. It is the condition to look at the whole (the forest) instead of its parts (tree). Senge called this discipline a fifth discipline because it integrates the other disciplines into a coherent and integrated strategy.

• 2. Domain of personal mastery—It is a discipline of aspiration that creates a creative tension between personal vision (what people want to achieve) and their current reality (what they are doing) to increase the ability to make better choices and achieve better results. It means individual proficiency and moral sharing, to the extent that each person is responsible for their decisions and assumes their consequences. When a problem or opportunity arises, each person must have the initiative to learn the skills to deal with it.

• 3. Domain of paradigms development (mental models)—It is a discipline of reflection and questioning making people adjust their internal images of the world (which condition their perceptions) to improve their decisions and actions, exploring the mental models that determine and explain individual behavior.

• 4. Domain of shared vision—It is a collective discipline that aims to establish common goals by developing among individuals a sense of commitment in the group or organization in order to be able to create plausible images of the future. It is the explanation of where one wants to be in the future, discussing and communicating this vision to provide the guide and energy to seek its realization.

• 5. Domain of team learning practice—It is a discipline of interactive learning, through teams and dialogue techniques and group dynamics to develop collective thinking and achieve common goals. Objective: to develop an intelligence and capacity greater than the sum of individual talents, forming a cycle in which individual actions become collective actions that function as organizational memory, feeding the learning of individuals and influencing their mental models, in a participatory and investigative attitude.

For Hodgetts et al. (1994), the learning organization—one that becomes a learning agency for its individuals—is based on four basic foundations (as shown in ◘ Fig. 5.2):

• 1. Organizational architecture: team-based and endorsed with empowerment and intensive channels of communication between members. This is the structural basis of the learning organization.

• 2. Organizational culture: participatory, democratic, and engaging, based on human relationships, friendships, trust, and clear organizational values, capable of providing a sense of community. This is the behavioral basis of the learning organization.

• 3. Information sharing: information and knowledge are integrated, stored, distributed, and shared by all individuals in the organization through an effective information system that provides openness, agility, acuity, and a broad insight into situations. This is the informational basis of the learning organization.

• 4. Strategic leadership: the leader provides a shared vision of the future that is intended for the organization, to obtain commitment, participation, and emotional involvement of all. This is the energy that flows in the learning organization and that leverages and drives it in a sustainable way.

Fig. 5.2

Four basic fundamentals. (Source: Adapted from HODGETTS, R. M., LUTHANS, F. and LEE, S.M. New paradigm organizations: from total quality to learning to world class. Organizational Dynamics, Winter, 1994, p. 4–19)

5 The Wise Company

The value of knowledge is increasingly beyond the value of the previous experience. It’s just that previous experience reflects the past. And the past has been and does not always serve as an example for the present or for the future. The present is different from the past, and the future will be different from what we do now.

Thus, knowledge today has become the most valuable currency on the market. According to this 1991 article by Japanese organizational theorist Nonaka and Takeuchi [29], the one sure source of lasting competitive advantage is knowledge. The problem is that most Western managers define knowledge—and what companies must do to exploit it—too narrowly. They believe that the only useful knowledge is “hard” (read “quantifiable”) data. And they see the company as a kind of machine for information processing.

According to Sveiby [30], in practice, knowledge has three characteristics:

• 1. Knowledge is tacit: It is the knowledge that is in people’s minds, and it is derived from their personal experiences and experiences being transmitted vaguely and unstructured, often unconsciously. It represents the knowledge of what is known, but that cannot be verbalized or written in words. The following sentence defines what tacit knowledge comes to be: “We can know more than we can tell” [31]. The cost of sharing tacit knowledge is high because it rests on direct face-to-face communication. Its transference is inefficient, as it is often an unconscious knowledge [32].

• 2. Knowledge is dynamic: The human being is always generating new knowledge through the analysis of the sensory impressions he/she receives from the real world and losing the old knowledge. To explain how we acquire and generate new knowledge by applying to our sensory perceptions the capabilities and facts we already possess, Polanyi—the creator of tacit knowledge theory—uses the expression “process of knowledge,” which corresponds to the gathering of data and fragmented information into analogous categories, organized by theories, methods, feelings, values, and abilities [32].

• 3. Knowledge tends to be standardized: Over time, the brain creates countless patterns that act as unconscious rules of procedures to deal with every conceivable type of situation. These rules save a lot of energy and allow you to act quickly and effectively without having to stop to think about what you are doing.

The patterns are also tied to the result of the actions. What’s more, the standards act as filters for new knowledge. The greatest difficulty is not in persuading people to accept new things, but in persuading them to abandon the old ones, as said Keynes (1883–1946) [33].

For Sveiby [30], the difficulty in dealing with knowledge in fact is that being tacit, dynamic, and tending to standardization, its application is not something usually simple. It is necessary to make knowledge become an operational concept through some mutually dependent competencies, that is:

• 1. Verbalization: It is the competence to express tacit knowledge in a formalized manner through documents, manuals, and books that are structured and stored, printed, or digitized. In organizations, verbalized or explicit knowledge is expressed by formal language, which describes and guides the business procedures and processes that form the basis of the organization’s operations.

  The cost of sharing explicit knowledge through electronic and graphic means is low, but the cost of capturing tacit knowledge and turning it into explicit knowledge is still very high.

• 2. Skill: It is the competence to know how to do something with knowledge and involves some practical proficiency—physical or mental—that is acquired by training and practice. Includes knowledge of rules of procedures and communication skills.

• 3. Experience: It is the competence to reflect on past mistakes and successes and thereby find appropriate patterns of behavior.

• 4. Value judgments: It is the competence to evaluate what is right and what is wrong to successfully apply your skills and experience. Value judgments act as conscious filters for each individual’s knowledge process.

• 5. Social network: It is the competence to establish relationships and interactions with other people within an environment and a culture transmitted by tradition.

It turns out that knowledge also has an increasingly short life cycle. The change in which we live—the only constant of our life—makes the obsolescence of knowledge increasingly rapid. It is that knowledge also goes through constant transformations.

Creating new knowledge is not simply a matter of mechanistically processing objective information. Rather, it depends on tapping the tacit and often highly subjective insights, intuitions, and ideals of employees. The tools for making use of such knowledge are often “soft”—such as slogans, metaphors, and symbols—but they are indispensable for continuous innovation.

The key to this process is personal commitment—the employees’ sense of identity with the enterprise and its mission.

When markets shift, technologies proliferate, competitors multiply, and products become obsolete almost overnight, successful companies are those that consistently create new knowledge, disseminate it widely throughout the organization, and quickly embody it in new technologies and products.

This is the organizational equivalent of self-knowledge—a shared understanding of what the company stands for, where it is going, what kind of world it wants to live in, and, most important, how to make that world a reality.

Senior managers give voice to a company’s future by articulating metaphors, symbols, and concepts that orient the knowledge-creating activities of employees. They do this by asking the questions, what are we trying to learn? What do we need to know? Where should we be going? Who are we? If the job of frontline employees is to know “what is,” then the job of senior executives is to know “what ought to be.”

But when the company has neatly organized itself to cope with the previous situation, when the current business environment diverges. It becomes disharmonious with the way management has structured the company, particularly with the large, well-established, powerful components that benefited from the previous structure. If this disharmony is of a fundamental enough nature, then fundamental changes are required in the company as well.

Continuous, fundamental changes in the external world’s turbulent business environment require continuous management for change in the company. This means making continuous, fundamental changes in the internal structures of the company.

The company must see clearly what is happening in its environment. Once again, learning begins with perception. How else can managers know when significant change is necessary, or how to act effectively to achieve a new sort of harmony? Yet corporate managers, enmeshed in the details of their change efforts, often think about their outside pressures in only the vaguest terms. They do not see; they do not develop a careful sensitivity to the signals of pressures outside the firm and how those pressures are changing.

5.1 Why Do Companies Fail to See the Signals of Change Ahead of Time?

Why is it so difficult for managers to maintain their sensitivity? Why do companies fail to see the signals of change ahead of time?

If companies could see early and manage internal change by foresight, a great deal of capital destruction and social misery would be prevented not only in our company but in any company. Why, then, are so many companies seemingly so blind and deaf to what is happening around them?

For De Geus [18], over time, five different answers to that question emerged. The first two or three of them have probably occurred to you; they represent the unspoken, but prevalent, myths about why managers fail to perceive effectively.

Theory 1 Managers Are Not Intellectually Equipped—Clearly, businesspeople are not intellectually equipped to cope with the changing nature of their environment. In any case, the problem managers face is not acting intelligently in isolation but tapping all of the company’s intelligence to foresee problems together.

Theory 2 We Can See Only When a Crisis Opens Our Eyes—Why do managers fail to exercise foresight? There is a human resistance to change a resistance which is basically good, for both the individual and society. One should not change for change’s sake. However, in effect, when change is demanded for survival, this resistance must be overcome and the only way for this to happen is through pain deep, prolonged pain!

The corporate equivalent of pain is a crisis. In the heat of a lengthy crisis, according to this theory, people in the organization will feel the pain and be convinced that something must be done. Often, I hear managers say to me, “What this company needs is a nice little crisis. Then we’ll be able to get some change around here.”

There is no denying that many fundamental changes had a crisis at its roots. Whenever I talk to managers of a company that went through structural adaptation, they always remember clearly how painful a time they had in the period preceding the changes.

Warnings were ignored until, finally, the disharmony began to show up (in companies) in the quarterly results (when it is almost too late anyway). Even then, the old objectives were doggedly pursued. Belts were tightened. Jobs were lost. People struggled under stress. Ultimately, the institution’s survival was at stake. And finally, grudgingly, people began to adopt an orientation of learning.

Despite the stress involved, many managers enjoy a crisis. At last, it is possible to do things. Because time is of the essence, at last the company can move without consultations and lengthy deliberations.

To act by foresight would surely be superior. But can fundamental change be brought about by foresight? In practice, this can happen only if the company’s managers can see the signals for change in time before the situation has deteriorated to the point where the company is losing options. In short, to act with foresight, the company must act on signals, rather than on pain.

In the end, the psychologist’s view that the only way to obtain a fundamental change is by way of a crisis is a pessimistic one which I have difficulty accepting. It means that, faced with a disharmonious environment, there is nothing that a manager can do on his or her own. Events follow their inescapable road to disaster. Business life is a gamble or, rather, a Greek tragedy. We suffer and cope. There is no hope for improvement.

Theory 3 We Can See Only What We Have Already Experienced—People can only “see” what they have experienced before at least in some respect. To receive a signal from the outside world, it must match some matrix already in the mind, placed there by previous events.

It would mean that old companies with rich histories would always prevail over young ones, at least when it came to being flexible, because the old companies would have built up a much greater store of experience from which to draw meaningful links with new perceptions.

Actually, I believe this dynamic does take place. An older company with a good institutional memory will probably see more than a young company. Nevertheless, old and experienced companies consistently miss the signals. As the statistics convincingly show, they are just as prone to crisis as newer companies. Some other factors must be at work.

Theory 4 We Cannot See What Is Emotionally Difficult to See—To make fundamental change was emotionally difficult. Moreover, managing for fundamental internal change is inherently far less gratifying than managing for growth. In a nongrowth environment, you no longer manage by allocating an ever-expanding pool of resources. Now you have to cut costs; you learn about frugality; and you seek new business with much greater risks, much less room for error, and much more uncertain rewards.

Switching direction is never fun for the people who were at the front of the previous charge. Consequently, the newspapers are full of examples of companies that, under conditions of diverging environment, postpone changing their (previously successful) policies for far too long until they slide into a deepening crisis.

In addition, human beings seem to have developed a much better capability for foresight than companies.

Theory 5 We Can See Only What Is Relevant to Our View of the Future—Every moment of our lives, we instinctively create action plans and programs for the future anticipating the moment at hand, the next minutes, the emerging hours, the following days, the ongoing weeks, and the anticipated years to come in one part of our mind. This brain activity takes place throughout the daytime, independent of what else we are doing; it occurs in even more concentrated form at night, during sleep.

Not only does the brain make those time paths in the prefrontal lobes, but it also stores them. We visit these futures and remember our visits. We have, in other words, a “memory of the future,” continually being formed and optimized in our imaginations and revisited time and time again.

The memory of the future is an internal process within the brain, related to man’s language ability and perception.

We perceive something as meaningful if it fits meaningfully with a memory that we have made of an anticipated future. The healthier the brain, the more alternative time paths it makes, striking a reasonable balance between favorable conditions and unfavorable ones.

The brain could not function properly if it gave equal priority to all the information it receives. Our “memories of the future” provide a subconscious guide to help us determine which incoming information is relevant. The stored time paths serve as templates against which the incoming signals are measured. If the incoming information fits one of the alternative time paths, the input is understood. Information becomes knowledge, and the signal acquires meaning.

The message is clear. We will not perceive a signal from the outside world unless it is relevant to an option for the future that we have already worked out in our imaginations. The more “memories of the future” we develop, the more open and receptive we will be to signals from the outside world.

5.2 Learning Begins with Perception

The act of perception is not simply a matter of collecting information or looking at an object and noting all sorts of observations and data about it. Perception, to a human being, is an active engagement with the world. And, in a company, it is similarly active. Perception requires the deliberate effort by management groups within the company to “visit their future” and develop time paths and options.

Otherwise, the observations and data that one has collected will have no meaning. Making this effort is easier for an individual human being than for a company because the brain is hard-wired to perform this sort of active engagement.

Perception may be defined as the process with which individuals detect and interpret environmental stimuli. What makes human perception so interesting is that we do not solely respond to the stimuli in our environment. We go beyond the information that is present in our environment, pay selective attention to some aspects of the environment, and ignore other elements that may be immediately apparent to other people. Our perception of the environment is not entirely rational.

Finally, De Geus [18] details that sometime over the course of the twentieth century, the Western nations moved out of the age of capital into the age of knowledge. Few managers recognized it at the time, but capital was losing its scarcity. With capital easily available, the critical production factor shifted to people. But it did not shift to simple labor. Instead, knowledge displaced capital as the scarce production factor that was the key to corporate success. Those who had knowledge and knew how to apply it would henceforth be the wealthiest members of society.

For the author, this was not merely a function of the need for people to supply technical skills, under the direction of their bosses. The growing complexity of work created a need for people to be a source of inventiveness and to become distributors and evaluators of inventions and knowledge, through the whole work community. Judgment, on behalf of the company as a whole, could no longer be the exclusive prerogative of a few people at the top.

As De Geus follows, all of these brain-rich companies cannot be managed in the old asset-oriented style. Their managers have had to shift their priorities, from running companies to optimize capital, to running companies to optimize people. People, in these companies, are the carriers of knowledge and, therefore, the source of competitive advantage. The economic company is an abstraction with little to do with the reality of corporate life. Not only does labor not equate with people, but the emphasis on profits and on the maximization of shareholder value ignores the two most significant forces acting on companies today: the shift to knowledge as the critical production factor and the changing world around the companies [18].