Leading and Managing Change in a Volatile, Uncertain, Complex and Ambiguous World Shyam Sunder, Yale University L’Attitude: Great Lakes Institute of Management, Chennai, India January 10, 2014

An Overview The problem Alliance model of organizations How organizations work Management in steady state Change: what goes wrong? Functions of the C-suite Concluding remarks: failure or prosperity

The Problem Identifying sources of success and failure is difficult Tendency to extrapolate the past Model of success yesterday, model of failure today and in the future Need a guiding framework for continual re-optimization of the firm to survive and prosper in changing environment (it is never easy to argue with success; remember Pan Am, Kodak, Xerox, Enron, Barings Bank, WorldCom?) What could that framework be?

Organization as an Alliance or a Set of Contracts Among many individuals Shareholders Customers Employees Managers Suppliers Government Community, etc.

Organization as an Alliance

Organization as an alliance Each party contributes resources Each party receives resources Each party seeks its own goal through participation in the firm Firm’s goals are a union of individual goals

Individuals and Resource Flows 1/17/2019 (c) Copyright 2004 Shyam Sunder

(c) Copyright 2004 Shyam Sunder How Firms Work Contract is mutual expectation or understanding Not necessarily explicit Role of social conventions Firm is like an arena or game In which individuals seek their goals For their feasibility: Individual condition Each individual must expect to receive more than the opportunity cost of his contribution Otherwise individual has no incentive to continue his participation Aggregate Condition Firm’s production function should be able to produce enough output from resource contributions to satisfy all the individual expectations Otherwise, expectations of some people will not be fulfilled, and they will quit the firm. If these people are necessary for the firm’s contract set to function, their departure may result in collapse of the firm 1/17/2019 (c) Copyright 2004 Shyam Sunder

Change: What Goes Wrong External environment (product, labor, capital markets and technology) subject to continual change Internal environment (opportunity sets and preferences of agents) also subject to continual change (which is largely unobservable to managers) Failure to adjust to these changes is the common cause of most organizational failures

Functions of the C-Suite To anticipate internal and external changes that threaten the feasibility of the alliance Decide when to change the contracts and design new ones feasible in the new environment Renegotiate and implement the new contract set Terminations, new partners And watch out for further changes constantly Never rest on the laurels: today’s business success becomes foundation of tomorrow’s failure

(c) Copyright 2004 Shyam Sunder Anticipating Change Anticipating change is most difficult part of management Redesigning the contract set to reestablish individual and aggregate feasibility if necessary Renegotiate with continuing agents Negotiating termination of contracts Finding new partners and negotiating their contracts Easy to make others look silly ex post Success may make us less vigilant of our fallibility Mechanical projections from the past 1/17/2019 (c) Copyright 2004 Shyam Sunder

(c) Copyright 2004 Shyam Sunder Famous Words  The concept is interesting and well-formed, but in order to earn better than a 'C,' the idea must be feasible.“ A Yale professor on Smith's paper proposing overnight delivery service "But what . . . is it good for?“ Engineer at the Advanced Computing Systems Division of IBM, 1968, commenting on the microchip. "There is no reason anyone would want a computer in their home.“ Ken Olson, founder of Digital Equipment Corp., 1977 1/17/2019 (c) Copyright 2004 Shyam Sunder

(c) Copyright 2004 Shyam Sunder Famous Words Who the hell wants to hear actors talk? H.M. Warner, Warner Brothers, 1927. We don't like their sound, and guitar music is on the way out. Decca Recording Co. rejecting the Beatles, 1962. Drill for oil? You mean drill into the ground to try and find oil? You're crazy. Financiers to Edwin L. Drake, 1859. Heavier-than-air flying machines are impossible. Lord Kelvin, president, Royal Society, 1895. 1/17/2019 (c) Copyright 2004 Shyam Sunder

Redesigning the Contract Set No unique solution Interdependence demands understanding of the whole picture Requires a redesign No obvious algorithm for redesign Search for alternative production technologies, agents, terms of contract Cannot assume that all agents will continue to participate Enough slack to deal with uncertainty during negotiations Continually adjust the design through negotiations 1/17/2019 (c) Copyright 2004 Shyam Sunder

Renegotiating with Continuing Participants Select who will continue Increased O.C. agents will demand more Decreased O.C. agents will be reluctant to accept cuts (fairness!) Asymmetry of information about O.C. and effect on contracts 1/17/2019 (c) Copyright 2004 Shyam Sunder

Termination of Contracts Some agents may not be a part of the revised set Unhappy agents can impose heavy costs on the firm Value of foresight in gaining time to deal with them 1/17/2019 (c) Copyright 2004 Shyam Sunder

(c) Copyright 2004 Shyam Sunder New Agents Find new agents in respective factor markets Distribution of “free” information to reduce frictions in factor markets Advertising in capital, labor and product markets The cycle never stops 1/17/2019 (c) Copyright 2004 Shyam Sunder

(c) Copyright 2004 Shyam Sunder Summary Business unit as an alliance or a set of contracts Agents seek personal goals Contracts define resource exchange relationships Individual and aggregate feasibility Internal and external changes disturb feasibility of existing contracts 1/17/2019 (c) Copyright 2004 Shyam Sunder

Reengineering Contracts Managers must anticipate change to buy time Reengineer and renegotiate contracts to restore feasibility Try to improve on design 1/17/2019 (c) Copyright 2004 Shyam Sunder

Why Reengineering Fails so Often? Over one half of such efforts fail Redesign is focused too narrowly to save costs Interests of the people whose cooperation is necessary for the success is ignored Many people see the reengineering effort as a threat to their jobs Deny cooperation, even sabotage the effort 1/17/2019 (c) Copyright 2004 Shyam Sunder

(c) Copyright 2004 Shyam Sunder Concluding Remarks Failure to modify the contract sets to changing environment causes failure A strategic manager continually scans markets for changes, reengineers contracts to retain Individual and aggregate feasibility Failures without cooperation of people adversely affected by reengineering Contract model as a framework for thinking about and reducing such failures, and maximizing the chances of survival and prosperity 1/17/2019 (c) Copyright 2004 Shyam Sunder

Thank You. Please write to: shyam. sunder@yale Thank You. Please write to: shyam.sunder@yale.edu Or, visit: http://www.som.yale.edu/faculty/sunder/research/