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Like Helen Demarco and her colleagues, the VW engineers had other options but couldn’t see them. Paul Osborne and Martin Winterkorn both thought they were providing bold leadership to vault their organizations forward. They were tripped up in part by human fallibility but also by how hard it can be to know what’s really going on in any organization. Managerial wisdom and artistry require a well-honed understanding of four key character- istics of organizations.

First, organizations are complex. The behavior of the people who populate them is notoriously hard to predict. Large organizations in particular include a bewildering array of people, departments, technologies, strategies. and goals. Moreover, organizations are open systems dealing with a changing, challenging, and erratic environment. Things can get even messier across multiple organizations. The 9/11 disaster resulted from a chain of events that involved several separate systems. Almost anything can affect everything else in collective activity, generating causal knots that are hard to untangle. After an exhaustive investigation, our picture of 9/11 is woven from sundry evidence, con!icting testimony, and conjecture.

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Second, organizations are surprising. What you expect is often not what you get. Paul Osborne saw his plan as a bold leap forward; Helen and her group considered it an expensive albatross. In their view, Osborne was going to make matters worse by trying to improve them. He might have achieved better results by spending more time with his family and letting his organization take care of itself. Martin Winterkorn was stunned when the hidden cheating blew up in his face, costing him his job and hitting VW with devastating “nancial and reputational damage.

The solution to yesterday’s problems often creates tomorrow’s obstacles. A friend of ours headed a retail chain. In the “rm’s early years, he had a problem with two sisters who worked in the same store. To prevent this from recurring, he established a nepotism policy prohibitingmembers of the same family fromworking for the company. Years later, two key employees met at work, fell in love, and began to live together. The president was startled when they asked if they could get married without being “red. Taking action in a cooperative venture is like shooting a wobbly cue ball into a scattered array of self-directed billiard balls. Balls bounce in so many directions that it is impossible to know how things will eventually sort out.

Third, organizations are deceptive. They camou!age mistakes and surprises. After 9/11, America’s homeland defense organizations tried to conceal their confusion and lack of preparedness for fear of revealing strategic weaknesses. Volkswagen engineers developed software whose only purpose was to cheat on emissions tests, hoping that no one would ever see through their deception. Helen Demarco and her colleagues disguised obfuscation as technical analysis.

It is tempting to blame deceit on individual weakness. Yet Helen Demarco disliked fraud and regretted cheating—she simply believed it was her best option. Sophisticated managers know that what happened to Paul Osborne happens all the time. When a quality initiative fails or a promising product tanks, subordinates often clam up or cover up. They fear that the boss will not listen or will kill the messenger. Internal naysayers at Volkswagen and Wells Fargo Bank were silenced until outsiders “blew the whistle.” A friend in a senior position in a large government agency put it simply: “Communications in organizations are rarely candid, open, or timely.”

Fourth, organizations are ambiguous. Complexity, unpredictability, and deception generate rampant ambiguity, a dense fog that shrouds what happens from day to day. It is hard to get the facts and even harder to knowwhat they mean or what to do about them. Helen Demarco never knew how Paul Osborne really felt, how receptive he was to other points of view, or how open he was to compromise. She and her peers piled onmore mystery by conspiring to keep him in the dark.

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Ambiguity has many sources. Sometimes available information is incomplete or vague. Different people may interpret the same information in a variety of ways, depending on mind-sets and organizational doctrines. At other times, ambiguity is intentionally manu- factured as a smoke screen to conceal problems or avoid con!ict. Much of the time, events and processes are so intricate, scattered, and uncoordinated that no one can fully under- stand—let alone control—the reality. Exhibit 2.1 lists some of the most important sources of organizational uncertainty.

ORGANIZATIONAL LEARNING How can lessons be extracted from surroundings that are complex, surprising, deceptive, and ambiguous? It isn’t easy. Decades ago, scholars debated whether the idea of organiza- tional learning made sense: Could organizations actually learn, or was learning inherently individual? That debate lapsed as experience veri”ed instances in which individuals learned and organizations didn’t, or vice versa. Complex “rms such as Apple, Zappos, and Southwest Airlines have “learned” capabilities far beyond individual knowledge. Lessons are enshrined in acknowledged protocols and shared cultural codes and traditions. At the same time, individuals often learn even when systems cannot.

Several perspectives on organizational learning are exempli”ed in the work of Peter Senge (1990), Barry Oshry (1995), and Chris Argyris and Donald Schön (1978, 1996). Senge

Exhibit 2.1. Sources of Ambiguity.

• We are not sure what the problem is.

• We are not sure what is really happening.

• We are not sure what we want.

• We do not have the resources we need.

• We are not sure who is supposed to do what.

• We are not sure how to get what we want.

• We are not sure how to determine if we have succeeded.

Source: Adapted from McCaskey (1982).

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sees a core-learning dilemma: “We learn best from our experience, but we never directly experience the consequences of many of our decisions” (p. 23). Learning is relatively easy when the link between cause and effect is clear. But complex systems often sever that connection: causes remote from effects, solutions detached from problems, and feedback absent, delayed, or misleading (Cyert and March, 1963; Senge, 1990). Wells Fargo’s aggressive push for cross-selling led to cheating from coast to coast, but that was mostly invisible at headquarters, which kept its eyes on the “nancial results—until the scandal blew up.

Senge emphasizes the value of “system maps” that clarify how a system works. Consider the system created by Robert Nardelli at Home Depot. Nardelli had expected to win the three-way competition to succeed management legend Jack Welch as CEO of General Electric. He was stunned when he learned he didn’t get the job. But within a week, he was hired as Home Depot’s new CEO. He was a big change from the company’s free-spirited founders, who had built the wildly successful retailer on the foundation of an uninhibited, entrepreneurial “orange” culture. Managers ran their stores using “tribal knowledge,” and customers counted on friendly, knowledgeable staff for helpful advice.

Nardelli revamped Home Depot with a heavy dose of command-and-control, discipline, and metrics. Almost all the top executives and many of the frontline managers were replaced, often by ex-military hires. At “rst, it seemed to work—pro”ts improved, and management experts hailed Nardelli’s success. He was even designated Best Manager of 2004 on the cover of Business Week (Business Week, 2005). But employee morale and customer service went steadily downhill. The founders had successfully promoted a “make love to the customers” ethic, but Nardelli’s toe-the-line stance pummeled Home Depot to last place in its industry for consumer satisfaction. A website, Home Depot Sucks.com, gave customers a place to vent their rage. As criticism grew, Nardelli tried to keep naysayers at bay, but his efforts failed to placate customers, shareholders, or his board. Nardelli abruptly left Home Depot at the beginning of 2007.

The story is one of many examples of tactics that look good until long-term costs become apparent. A corresponding systemsmodel might look like Exhibit 2.2. The strategy might be cutting training to improve short-term pro”tability, drinking martinis to relieve stress, offering rebates to entice customers, or borrowing from a loan shark to cover gambling debts. In each case, the results look good at “rst, and the costs only emerge much later.

Oshry (1995) agrees that system blindness is widespread but highlights causes rooted in troubled relationships between groups that have little grasp of what’s going on outside their own neighborhood. Top managers feel overwhelmed by complexity, responsibility, and overwork. They are chronically dissatis”ed with subordinates’ lack of initiative and

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creativity. Middle managers, meanwhile, feel trapped between contradictory signals and pressures. The top tells them to take risks but then punishes mistakes. Their subordinates expect them to intervene with the boss and improve working conditions. Top and bottom tug in opposite directions, causing those in the middle to feel pulled apart, confused, and weak. At the bottom, workers feel helpless, unacknowledged, and demoralized. “They give us bad jobs, lousy pay, and lots of orders but never tell us what’s really going on. Then they wonder why we don’t love our work.” Unless you can step back and see how system dynamics create these patterns, you muddle along blindly, unaware of better options.

Both Oshry and Senge argue that our failure to read system dynamics traps us in cycles of blaming and self-defense. Problems are always someone else’s fault. Unlike Senge, who sees gaps between cause and effect as primary barriers to learning, Argyris and Schön emphasize managers’ fears and defenses. As a result, “the actions we take to promote productive organizational learning actually inhibit deeper learning” (1996, p. 281).

According to Argyris and Schön, our behavior obstructs learning because we avoid undiscussable issues and tiptoe around organizational taboos. That often seems to work because we avoid con!ict and discomfort in the moment, but we create a double bind. We can’t solve problems without dealing with issues we have tried to hide but discussing them would expose our cover up. Facing that double bind, Volkswagen engineers hid their

Exhibit 2.2. Systems Model with Delay.

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