Beyond McGregor's Theory Y: Human Capital and Knowledge-Based Work ...

Beyond McGregor’s Theory Y:

Human Capital and Knowledge-Based Work in the 21st Century Organization












by Thomas Kochan, Wanda Orlikowski, and Joel Cutcher-Gershenfeld *


Prepared for the Sloan School 50th Anniversary Session on October 11, 2002




* Thomas Kochan is the George M. Bunker Professor of Management in MIT’s Sloan School of
Management; Wanda Orlikowski is Professor of Information Technologies and Organization Studies at
MIT's Sloan School of Management and holds the Eaton-Peabody Chair of Communication Sciences at
MIT; Joel Cutcher-Gershenfeld is a Senior Research Scientist in MIT’S Sloan School of Management and
the Executive Director of the Engineering Systems Learning Center in MIT’s Engineering Systems
Division (Joel is also a Sloan Alum, Ph.D., 1988). Invaluable assistance in this research was provided by
Natasha Iskander, Jen Fabas, Lynn Dovey, Carolyn Corazo and many other participants in the Sloan
seminar 15.343 on “Transforming Work, Organizations and Society.” Support for this paper was provided
through MIT’s Sloan School of Management and the Cambridge-MIT Initiative (CMI).

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Introduction


Nearly fifty years ago, at the Sloan School’s 5th Anniversary Convocation,
Douglas McGregor launched a debate over how to manage The Human Side of the
Enterprise.1 By comparing what he called Theory X and Theory Y perspectives, he
challenged the management profession to reexamine its assumptions about the
motivations employees bring to their jobs. The question was: Could employees be
trusted and empowered to do good work, or did they have to be closely directed,
monitored, and controlled to act in the interests of the firm? While McGregor’s Theory
Y sparked important innovations in human resource practices, it did not challenge
fundamental assumptions underpinning the 20th Century organizational model. If, as is
widely recognized, human capital and knowledge are the most important sources of value
for the 21st Century organization, then fundamental assumptions about the relationship
between work and organizations will also need to be challenged.


The approach that dominated organizational theory, teaching, and practice for
most of the 20th century looked at organizations from the top down, starting with a view
of the CEO as the “leader” who shapes the organization’s strategy, structure, culture, and
performance potential. The nature of work and the role of the workforce enter the
analysis much later, after considerations of technology and organization design have been
considered. However, if the key source of value in the 21st century organization is to be
derived from the workforce itself, an inversion of the dominant approach will be needed.
We will need to look at organizations from the perspective of where value is created—
people and the work itself. Such an inversion will lead to a transformation in the
management and organization of work, workers, and knowledge.


We believe accomplishing this inversion is among the most important challenges
facing organization and management theory, research, teaching, and practice today. In
fact, these challenges have been at the forefront of the research of a number of Sloan
School research groups (see Figure 1). Furthermore, several Sloan faculty recently stated
these challenges in the provocative form of a “Manifesto for the 21st Century
Organization.”2 And, over the past semester, we have explored these challenges with a
range of industry experts, Sloan School students, and alumni in our course on “Managing
Transformations in Work, Organizations, and Society.”



Figure 1
Selected Sloan Faculty Research Re-Examining Assumptions
About People, Work and Organizations

Piore and Sabel on “The Second Industrial Divide” (1984)
Kochan, Katz, & McKersie on “The Transformation of American Industrial Relations” (1986)
Schein on “Culture and Leadership” (1988)

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Senge on “Learning Organizations and Systems Thinking” (1990)
Bailyn on “Integrating Work and Family” (1992)
Orlikowski on “Use of Technology in Organizations” (1992)
Ancona, Kochan, Scully, Van Mannen, Westney on “Organizational Processes” (1994)
Walton, Cutcher-Gershenfeld, and McKersie on “Strategic Negotiations” (1994)
Orlikowski and Yates on “Collaborative Technologies” (1994)
Cutcher-Gershenfeld, et al, on “Knowledge-Driven Work” (1998)
Osterman, Kochan, Locke, and Piore on “Working in America: A Blueprint for the new Labor Market”
(2001)
Carroll on “Organizational Learning in the Midst of Crisis” (2001)
Murman, et. al. on “Lean Enterprise Value” (2002)
Malone and Scott Morton on “Inventing Organizations of the 21st Century” (forthcoming)



In this paper, we build on these efforts to first contrast the 20th and 21st Century
organizational models and then to examine how organizations are attempting to move
toward a human capital and knowledge-based model of organizing (see Figure 2 for our
methods and process). Finally, we explore the implications of this alternative
organizational model for the future of management education.


Figure 2: Methods and Process in Developing this Paper
This paper has its roots in an MIT course entitled “Transforming Work, Organizations and
Society,” which was first offered in the Spring of 2001 and again offered in the Spring of 2002. The
course, which was developed under the leadership of Tom Kochan in partnership with Joel Cutcher-
Gershenfeld, Wanda Orlikowski, and others, focused on all of the themes covered in this paper. From
the outset, the course involved participation from Sloan and other graduate students on campus, as
well as System Design and Management (SDM) students on rotation back in their home organizations.
It also included life-long learning participants from partner corporations such as the U.S. Air Force,
Pratt & Whitney, Ford, Hewlett-Packard, Lucent, NASA, Otis Elevators, Polaroid, Qualcom, Saturn,
Teradyne, Visteon, and Xerox. It involved both in-class discussion, remote video participation, and on-
line discussions.
In honor of Sloan’s 50th Anniversary, we offered Sloan Alums the opportunity to participate
directly in the sessions as well as the chance to follow the discussions and make contributions through
the internet. Over 100 Sloan alums signed up at the web site and contributed comments or vignettes
on the topics covered in the course. Students in the class drew on their own experience and
interviewed some of the alums to generate additional vignettes on all of these topics. They also
organized all of this data into integrative final papers that corresponded to the themes for the
course. The analysis in this paper draws on independent research conducted by all three authors as
well as the many vignettes, comments and papers generated. Current Sloan Student experience and
the experience of Sloan Alums are woven throughout the text (with the names of specific individuals
and organizations deleted for confidentiality).


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Contrasting Assumptions:
20th and 21st Century Organizational Models


As evident in Figure 3, the organizational model that dominated the past century
embodied assumptions (about people, work, technology, leadership and goals) that
contrast with the model that may come to dominate the next century.

Figure 3:
Contrasting Assumptions in 20th and 21st Century Organizations

Assumptions about:
Assumptions characterizing Assumptions that may characterize
20th Century Organizations
21st Century Organizations
People
Theory X: People are a cost that must
Theory Y: People are an asset that should
be monitored and controlled
be valued and developed
Work
Segmented, industrially-based and
Collaborative, knowledge-based projects
individual tasks
Technology
Design technology to control work and
Integrate technology with social systems
minimize human error
to enable knowledge-based work
Leadership
Senior managers and technical experts
Distributed leadership at all levels
Goals
Unitary focus on returns to
Multi-dimensional focus on value for
shareholders
multiple stakeholders


Like McGregor, we are counterposing two alternative models, each of which
involves competing assumptions. Reality, of course, may involve a spectrum of choices
between these extremes, but it is helpful to understand the way alternative choices will
pull organizations in one direction or the other. In the balance of this section, we will
examine the implications of each of these assumptions.

People: Labor Costs or Human Assets?


Conventional economic and organization theory views labor as a cost to be
controlled. Moreover, since labor cannot be separated from its human motivation and
free will, incentives are needed to ensure employees will commit their full energies and
skills to the goals of the organization. Labor also brings its own interests and sources of
power to the organization. Therefore, efforts on the part of employees to use their
collective power by forming unions or other organizations to represent their own interests
need to be discouraged or defeated.


A human capital, knowledge-based perspective understands workers as human
assets who create the value of the organization. By joining and staying in the
organization, employees invest and put at risk some of their human capital. By taking
advantage of opportunities for continued learning and development, their human capital
is deepened and expanded. Since employees have interests and obligations outside of
work—to their professions, families, communities, and themselves—they cannot and do

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not wish to commit their full energies to the organization. Therefore, efforts are needed
to integrate work and personal aspects of life. Employees also bring a variety of
expectations to their jobs, including an interest in having meaningful influence and voice
in matters that are important to them. At the same time, employers can reasonably expect
employees and their representative organizations to contribute to the continued viability
and effectiveness of the enterprise. Therefore, efforts are needed to engage employees
individually and collectively in ways that simultaneously address organizational and
individual interests and expectations.

Work: Industrial or Knowledge-Based Systems?


The early years of the 20th century witnessed the gradual movement from agrarian
and craft to an industrial model of work organization. The latter part of the century has
witnessed efforts to continue the transformation from the industrial to a knowledge-based
system of work organization. That transformation process continues today.

The industrial model created sharp legal and status distinctions between managers
who conceived and directed how work was done and non-managers who executed their
tasks as directed. Productivity was maximized by organizing tasks into well-defined jobs
and functions. Efficiency gains were achieved through increased specialization and
formalization of reporting relationships, promotion paths, and compensation rules.


The transformation in work systems underway today involves efforts to shift from
industrial to knowledge-based work systems that blur the lines between managerial and
non-managerial work. These systems assume that in a knowledge-based economy, high
levels of performance can only be achieved by organizing work in ways that allow
workers to utilize and deepen their knowledge and skills, while working collaboratively
on multiple, temporary projects to accomplish flexible and innovative operations. As a
result, there is an emphasis on horizontal interrelationships among diverse groups (both
internal and external), and the coordinated use of teams, cross-functional task forces, and
cross-organizational alliances and networks.

Technology: A Mechanistic or Integrative Perspective?


Technology is conventionally viewed as a physical asset—a piece of machinery
or an information system—that is initially developed and designed by technical experts
and then implemented for use by the workforce. This view emphasizes the mechanistic
dimensions of the technology, while disregarding or attempting to eliminate the human
side. For example, a major function of technology in this view is to reduce reliance on
human inputs—both the quantity of labor and the variance (error) that can result from
human judgment, fatigue, lack of motivation, or direct challenges or conflicts with
management decisions or actions. Even today, the dominant assumption in much of the
machine tool industry, for example, involves designing people out of the process—even
at the expense of flexibility and innovation.


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A human capital, knowledge-based view of technology is best captured by the
Japanese saying that it is “workers who give wisdom to the machines.”3 Technology is
understood to be simultaneously physical and social, and its capabilities are only
effective when utilized in practice by workers operating in a variety of
social/organizational contexts. This relational view of technology recognizes that
technological outcomes are highly contingent and emergent—depending on how the
technical capabilities interact with human choices, political actions, cultural norms, and
learning opportunities over time. In this view, benefits from technologies can only be
realized when the technical and social dimensions are integrated through the design,
implementation, and ongoing adaptation of the technologies employed in an organization.

Leadership: Exclusive Role of the CEO or a Distributed Capability?

Leadership is conventionally viewed as being vested primarily in the role of the
CEO and other top executives. The CEO is to provide vision and broad strategic
direction to the rest of the organization and in doing so shape the culture and values of
the enterprise. The search process for CEOs therefore focuses on identifying individuals
in top positions in apparently successful organizations who appear to have these personal
attributes. Wall Street analysts, the business press, and business school case studies often
attribute organizational success (or failure) to the quality of the CEO’s leadership,
thereby perpetuating this image of what leadership is and where it resides in
organizations.


A human capital, knowledge-based view of the enterprise envisions leadership as
a distributed capability that involves multiple people and groups at all levels of the
organization. To be sure, the CEO and other executives are critical players in leading a
process which generates a clear and compelling shared vision for the organization.
However, such action by senior executives is not sufficient unless and until it engages the
aspirations and energies of all organizational participants. Leadership is thus more than a
set of individual traits or abilities; it is a set of capabilities that extends throughout the
organization and over time. In this view, a CEO would be seen to be effective if she/he
creates the conditions that enable people at all levels in the organization to exercise
leadership in their everyday activities. Performance in the 21st century organization is a
function of the quality of leadership capabilities in action throughout the organization.

Goals: Value for Shareholders or Multiple Stakeholders?


This brings us to a fundamental question: What purpose(s) do organizations
serve? With the rise to prominence of the modern corporation, the answer that dominated
American organizations and management education throughout most of the 20th century
was that business organizations exist to maximize shareholder value. This reflects a
recognition of the role played by owners who provide and put at risk the critical resource
— significant pools of financial capital — needed to build large corporations. As a
result, the governance structure and processes are seen to be the exclusive domain of the
financial owners and their direct agents, the CEO and other top executives.


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Knowledge-based organizations depend on employees to invest and put at risk
their human capital in joining and remaining with the firm. This places human capital in
an analogous position in the 21st century organization to that of financial capital in the
20th century corporation. Thus, employees could claim a legitimate role in shaping the
objectives of the organization to be consistent with their interests and values. Other
stakeholders can make similar claims. Suppliers, for example, are increasingly
responsible for critical aspects of product design, inventory management, and other tasks
that require long-term partnership agreements. Communities have legitimate claims to
the social and environmental impacts generated by the products and processes of
organizations. Governments today are more interested in long-term public-private
partnerships (government as “enabler” rather than “enforcer”). Even regulatory agencies
are exploring more embedded relationships with the regulated community. Thus,
processes of stakeholder—not just shareholder—governance assume strategic
significance in the 21st century organization. Viewed one way, these many embedded
stakeholder relationships represent complex constraints on organizational flexibility and
innovation. Viewed another way, these same stakeholder relationships constitute an
extended enterprise capable of delivering value to the organization and to these many
stakeholders in unprecedented ways.4



Today, organizations are connected to these many stakeholders in complex
networks including strategic alliances, public-private partnerships, and other
collaborative initiatives. In all cases, there are both common interests that bring these
parties together and conflicting interests that threaten the viability of the cooperative
venture. In many cases, individual organizations may come and go, but others will take
their place in these emerging institutional arrangements. Therefore, organizations are
called upon to take a longer view—ensuring today’s actions do not make it more difficult
for future generations of citizens and communities to realize their aspirations and
objectives. Management and management education needs to take a longer-term,
sustainability perspective and a broader, networked view of organizations. More
emphasis is needed on developing professional standards, ethics, and norms that hold
individuals and organizations accountable for their effects on multiple stakeholders, both
today and in the future.

Taking Stock of Current Organizational Practice

The above distinctions between 20th and 21st century organizational models are
somewhat over-simplified. Few organizations could survive by completely ignoring
some of the assumptions underlying either model. And, as noted, many organizations
have been pursuing aspects of a human-centered, knowledge-based approach for some
time. So the reality today is that organizations have implemented different sets of
assumptions drawn from both the 20th and 21st organizational models depicted above.
Below, we draw on the data collected from our industry participants, students, and
alumni to take stock of current organizational practices as experienced by the people in
these organizations. These are the people who will collectively shape the organizations
of the 21st century. In this section, we summarize their experiences and assessments of

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current practice, their visions for where they want their organizations to be in the future,
and their ideas for what it will take to get there.

People: The Workforce of the 21st Century


One word best captures the contemporary workforce: Diversity. A second key
word applies to the workforce of tomorrow: Scarcity.

Diversity and its Implications. Today and tomorrow’s workforce will depart
dramatically from the 20th century image of the average (some would say “idealized”)
worker as a male breadwinner or organizational man with a wife at home attending to
family and community affairs. Today, workers are more diverse in gender, race,
ethnicity, age, nationality and culture, just to mention the more obvious and visible
features. The households that workers come from are equally diverse, with less than 20
percent fitting the old image. The majority have either both spouses/partners in the paid
labor force and/or an individual who is a working, single parent. Work and family
decisions are highly interdependent.

Leading firms are recognizing the importance of both the need to attend to
demographic diversity and work and family issues, as the following boxed text illustrates.
Our research and the views of our students and alumni suggest that most firms have
internalized the legal and social responsibilities introduced by the civil rights movement
and laws enacted in the 1960s and 1970s. For example, there is considerable training
aimed at “valuing diversity.” Today’s workforce generally also shares these values,
especially younger workers who have grown up in more diverse cultural and racial
settings. Many of our students and alumni therefore are more frustrated than supported
by this type of training. They are ready for something more substantive.


A More Diverse Pool of Future Leaders

“Over the past 20 years the demographics of our company’s professional staff have been
changed dramatically. Female engineers today represent a large percentage of the population
and a large percentage of its high potential future leaders. These are employees we
desperately want to hold onto for the long run.”


The current challenge in managing diversity is to go beyond efforts to change
attitudes to focus on building the skills needed to facilitate work in diverse teams and to
learn from the variety of backgrounds and knowledge people bring to their jobs. This is
how the diversity in our contemporary workforce can be used to add value to both
workers and their organizations. The following boxed text provides a vivid example of
this opportunity, drawing on the efforts of Japanese managers teaching their U.S.
counterparts how to relate and sell to their Japanese customers.


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Learning Across Cultures

“As the number of Japanese sales staff was reduced, the local staff built good connections
with Japanese OEMs and delivered the same quality services without the assistance of
Japanese expatriates. To do this, the local sales staff needed to learn skills and know-how to
build the relationships with Japanese OEMs . . . This change did not happen naturally.”


People are also highly diverse in the expectations they bring to their work and
organizations. To be sure, as survey data and labor market behavior continue to
demonstrate, good wages and benefits remain a high priority for all workers. But these,
by and large, are taken as a given—a necessary condition for individuals to consider a
prospective job offer. Beyond these essentials, as a recent survey supplied by Towers
Perrin indicated (see Figure 4), jobs have to be tailored to the priorities of different
groups. Young workers place highest priority on possibilities for learning and
developing their skills; mid-career and mid-life workers value the opportunity to
integrate work and family life; and older workers assign highest priority to long-term
employment and income security. Most workers, young and old alike, appear to have
learned the lesson of the past decades’ breakdown in the prospect of long-term jobs.
Over 40 percent of those employed actively look at alternative job opportunities on a
regular basis and few see it as their responsibility to stay with a given employer for any
particular length of time.5

Figure 4: What Attracts Employees by Age

Top Attractors
U.S.
Age
Age
Age
Age
Overall 18-29 30-44 45-54
55+
Competitive Base Pay/Salary





Competitive Health Care Benefits





Package
Opportunities for Advancement
1 1 2 3
Work/Life Balance
2 2 1 2
Competitive Retirement Benefits
3 1 1
Package
Pay Raises Linked to Individual
3 3 3 2
Performance
Learning and Development
3
Opportunities
Source: Towers Perrin Talent Report 2001: New Realities in Today’s Workforce

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Key:
Core rewards that rank at the top for all groups

1-3 Top differentiators in rank order

Clearly, the actions of organizations in the last decade have shaped the
expectations of the current workforce. Few are ready to commit their loyalty and put
their trust in any single firm to provide life-time jobs and careers. This, does not,
however, mean that they all want to be “free agents.” As these data and others show,
employees still expect firms to manage in ways that offer learning and career
development opportunities. Also, with age comes the heightened priority of and
expectation for long-term security. Fairness in employment decisions—layoffs,
compensation, and promotion opportunities — are just as much an expectation today as
in the past.


Work-family integration serves as today’s frontier workforce issue. Of all the
issues we examined, it generated the most interest among our alumni, students, and
industry participants. They documented a wide range of “family-friendly” policies and
procedures offered in their organizations today, including flexible hours, part-time
options, assistance with domestic services and back-up day care. They also indicated that
these polices and procedures often remained underutilized and, consequently, were
ineffective. This is not for lack of thought on these matters. As one individual observed,
being a “married couple with dual careers requires a constant evaluation of [our] roles as
parents and professionals.”

Two factors stand out as constraints, limiting the use and effectiveness of work-
family policies. In many professions and organizations, the use of part-time options is
still interpreted as signaling less commitment to the organization and to one’s
professional career. This was brought home vividly by our expert panel from the legal
profession. Beth Boland, a partner in the Boston law firm of Mintz Levin, Cohn, Ferris,
Glovsky, and Popeo, P.C., reported that although over 90 percent of leading law firms in
Boston now provide a part-time option for associates and partners, less than 5 percent of
those eligible actually take advantage of the option. Moreover, more than one-third of
lawyers believe doing so would hurt their careers.

Similar low rates of uptake on work-family policies are reported in other studies
and by our students and alumni in their organizations, for comparable reasons. The
importance of face time and full-time commitment appear to still permeate the culture of
many organizations and professions, dominating the images of the ideal worker or high
potential employee in the eyes of senior executives and even peers. As one student
commented, “Unfortunately, there still does occur this notion of 'face time' that seems to
equate the number of times your face is seen to that of a higher performer.” The
following boxed text from another student further elaborates on this issue and the overall
gap between policy and practice.





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