---
title: "Theory E and Theory O: which comes first?"
description: "Beer and Nohria split change into Theory E (shareholder value) and Theory O (capability). Scott Paper, Champion, GE and ASDA show what order to pick."
url: "https://staging.khoi.co.uk/en/blog/thuyet-e-thuyet-o-asda"
lang: en-GB
author: "Lê Quốc Khôi"
date: 2026-11-03
updated: 2026-11-03
topics: ["Change management"]
tags: ["Change management", "Theory E and Theory O", "Organisational change", "Shareholder value", "ASDA"]
---

# Theory E and Theory O: shareholder value or organisational capability?

## Key takeaways

- Beer and Nohria (2000) split organisational change into two archetypes: Theory E makes shareholder value the only yardstick, Theory O aims at organisational capability (Beer and Nohria, 2000).
- Each pure theory has a price. By the authors' account, Scott Paper tripled its market value but built no capability, while Champion International built a culture and saw no significant rise in shareholder value for more than a decade (Beer and Nohria, 2000).
- On sequencing, the authors say E then O is workable but slow (almost two decades at GE), O then E is highly unlikely to work, and doing both at once, as ASDA did, is hardest and more likely to give lasting advantage (Beer and Nohria, 2000).
- The company figures here are the authors' own account; I have not checked them against independent sources. The 150-person furniture workshop is a hypothetical example of mine.

In May 1994 Al Dunlap became chief executive of Scott Paper and at once laid off 11,000 people, then sold off several businesses. By Beer and Nohria's account, the company's market value rose from about $3 billion to about $9 billion in 20 months, and in 1995 Dunlap sold the company to Kimberly-Clark (Beer and Nohria, 2000). A competitor in the same industry, Champion International, laid off no one in a decade of reform. If you had to turn round a failing firm, which would you copy? This post reads the two authors' answer through [Theory E and Theory O of change](https://staging.khoi.co.uk/en/framework/theory-e-theory-o) and the [ASDA and Scott Paper case](https://staging.khoi.co.uk/en/case/asda-scott-paper-theory-eo), and asks what to choose and in what order.

## What separates Theory E from Theory O?

The end goal. Theory E treats shareholder value as the only legitimate measure of success. Theory O treats organisational capability, and the ability to learn from experience, as a legitimate measure too (Beer and Nohria, 2000). How you lead, where you start, how you plan and how you pay all follow from that choice.

> **Figure:** [Theory E and Theory O of change](https://staging.khoi.co.uk/en/framework/theory-e-theory-o) Theory E, Theory O and the combined approach (redrawn from Beer and Nohria, 2000).

## What did each pure theory cost?

Each reached the goal it set itself and paid for what it ignored. The table sets out the two near-pure cases in the article, as the authors tell them (Beer and Nohria, 2000).

| | Scott Paper (nearly pure E) | Champion International (nearly pure O) |
|:--|:--|:--|
| Leader | Al Dunlap from May 1994, who liked his nickname "Chainsaw Al" | Andrew Sigler, who began in 1981 |
| First moves | Fired 11,000 people, sold businesses, outsourced many functions, set targets by date | Built the "Champion Way", a set of values to raise employee capability; no layoffs for a decade |
| What it gained | Market value from about $3 billion in 1994 to about $9 billion by the end of 1995 (20 months) | By 1997, one of the leaders in its industry on most performance measures |
| What it cost | Did not build the capabilities for lasting advantage: commitment, coordination, communication, creativity; sold to Kimberly-Clark in 1995 | New chief executive admitted in 1997 that shareholders had seen no significant rise in value for more than a decade; the article says it was later sold to UPM-Kymmene for "a mere 1.5 times its original share value", without saying original to what |

Why could neither side fix itself? The authors' explanation is that each style protects its own blind spot. An E chief executive makes painful choices and tends to keep a distance from staff to ease the guilt. From a distance, staff start to look like part of the problem, and investment in people dries up. An O chief executive is held back by loyalty, postpones the bitter medicine and hopes rising productivity will be enough. The article says productivity gains are not enough when the structure itself must change (Beer and Nohria, 2000).

## Can you do E first and O afterwards?

Yes. The authors call sequencing the obvious way to combine them, and say it is far easier if you begin with E. But it is slow, and in practice it works in one direction only (Beer and Nohria, 2000).

Their example is General Electric. Jack Welch began with E: every GE business had to be first or second in its industry, or be fixed, sold or closed. Between 1981 and 1985 employment fell from 412,000 to 299,000, and 60 per cent of corporate staff were laid off. From 1985 he switched to O, calling for a "boundaryless" company and letting subordinates challenge unit leaders in open forums (Beer and Nohria, 2000).

The price, according to the article, is time and people. At the time of writing, GE had taken almost two decades. A sequenced change may need two chief executives with opposite styles, because most turnaround managers do not survive the restructuring they start, partly from inflexibility and partly from the distrust their ruthlessness earned. Welch, they say, is the exception that proves the rule (Beer and Nohria, 2000).

The reverse order, they argue, is highly unlikely to work: after O, an E phase brings a sense of betrayal, and it is hard to see how a drastic layoff can leave intact the [psychological contract](https://staging.khoi.co.uk/en/glossary#psychological-contract) and culture built over years (Beer and Nohria, 2000). That is a judgement drawn from the cases they studied; I found no data in the article that tests it. A broken psychological contract is also one of the four causes of resistance covered in the post on [four theories of resistance to change](https://staging.khoi.co.uk/en/blog/bon-ly-thuyet-khang-cu-thay-doi).

## How did ASDA do both at once?

By saying plainly from the start that it would do both, then choosing separate tools for each dimension. ASDA, the British supermarket chain, was nearly bankrupt when Archie Norman became chief executive in December 1991. He laid off staff, flattened the organisation and sold loss-making businesses, which usually breeds distrust. Yet over his eight years ASDA became known for trust and openness (Beer and Nohria, 2000).

| Dimension | What happened at ASDA, per the article (Beer and Nohria, 2000) |
|:--|:--|
| Goals | His first speech put value for shareholders as objective number one, and in the same breath asked for a culture of listening and learning built from the stores upwards |
| Leadership | Norman set the everyday-low-price strategy himself, started "Tell Archie" for staff to voice concerns, and hired the warmer Allan Leighton to complement his own style |
| Focus | Removed top layers of management, froze pay for everyone; by his later account spent 75 per cent of his early months acting as human resources director |
| Process | An experimental store, later three, declared a "risk-free zone"; a "Driving Test" for store managers, and those who failed it were replaced |
| Reward | Stock options for senior executives, share ownership for all employees, variable pay tied to company and store results |

Two details are worth keeping. Norman warned the markets that financial recovery would take three years, which bought time for the whole change. And the Driving Test came up from below in the O manner yet bound managers to an E-style contract, so it shows where the two theories meet (Beer and Nohria, 2000).

The outcome, by the authors' account: by 1999 ASDA had multiplied shareholder value eightfold, and in June 1999 Norman and Leighton found a friendly suitor in Wal-Mart, which was willing to pay a substantial premium for the capabilities they had built (Beer and Nohria, 2000). The article gives no base year or measure for "eightfold", and no figure for the premium.

## Which should a small firm start with?

Ask three questions, then tell staff which you chose. The table is my own reading of the article's sequencing argument, and I have not tested it on any small firm.

| Question | Leans towards E first | Leans towards O first |
|:--|:--|:--|
| How long does the cash last? | A few months: no time for culture | A year or two or more: room to build capability |
| Is the fault in structure or capability? | Costs, products or management layers must change at the root | Structure is sound; quality, speed or coordination is failing |
| What have you promised staff? | Nothing binding, or you are ready to say what will change | You promised to keep people and mean to keep your word |

Suppose a 150-person furniture workshop in Bình Dương loses its biggest order. Cash covers six months of wages, and the owner has said publicly that nobody will be let go. This workshop is my invention, not a real firm. By the table, the first two rows lean towards E and the third towards O. Reading ASDA suggests one way out: tell the whole workshop that both aims stand, freeze pay at every level instead of cutting people, and set a review after three months. That only works if the owner does both parts.

The article also has a passage on start-ups: founders with an E outlook aim at a cash-out through a sale or flotation, while founders with an O outlook care more about building an institution than about money. The authors name Steve Jobs's Next as a case of the second kind going wrong, for being too wrapped up in a higher ideal to attend to the market (Beer and Nohria, 2000).

## Going deeper: what did I read, and where does it stop?

This post rests on one main source: Beer and Nohria in the May–June 2000 issue of Harvard Business Review (Beer and Nohria, 2000). The HBR page is behind a paywall. I read the full text from a reprint (R00301) that a third party had put online. It carries no page numbers from the journal, so I give none and quote nothing at length.

First limit: one article, a handful of companies. Figures such as 11,000 layoffs or "eightfold" are the authors' own account, and I have not checked them against independent press or company reports.

Second limit: the article picks ASDA as its success case and does not say how cases were chosen. One successful combination does not show the method works elsewhere.

Third limit: the article's opening says about 70 per cent of change initiatives fail. Hughes (2011) examined five published instances of that figure and concluded there is no valid and reliable empirical evidence for it. Here I read only the abstract of his paper (Hughes, 2011). The post on [where the 70% figure comes from](https://staging.khoi.co.uk/en/blog/70-phan-tram-thay-doi-that-bai) reads that citation chain closely; the library also has the concept [the "70% of change fails" claim](https://staging.khoi.co.uk/en/glossary#change-failure-rate-claim).

I have not read the authors' book *Breaking the Code of Change* (2000), where the argument may run fuller, nor checked how other researchers have reassessed ASDA or Scott Paper.

## Frequently asked questions

### Who proposed Theory E and Theory O, and when?

Michael Beer and Nitin Nohria of Harvard Business School, in "Cracking the code of change" in the May–June 2000 issue of Harvard Business Review. They say they had studied corporate change for more than 40 years and found two archetypes, built on assumptions that executives often hold without saying so (Beer and Nohria, 2000).

### Does Theory E mean laying people off?

Not by definition. The authors describe E change as typically leaning on economic incentives, drastic layoffs, downsizing and restructuring (Beer and Nohria, 2000). What marks it out for them is that shareholder value is the only legitimate yardstick and that change is driven from the top. At ASDA, a pay freeze for everyone was also an E move.

### Is combining E and O always better than picking one?

No. The article warns that mixing the two carelessly can bring the worst of both and the benefits of neither. Managers in that position would have done better with a pure E or a pure O strategy, since at least one set of stakeholders would then have gained (Beer and Nohria, 2000). Their claim is that applying both together is harder than sequencing them but more likely to give lasting advantage.

### Is Theory E an American habit and Theory O a European or Asian one?

That is the authors' observation about frequency, not a law. They say E is more common in the United States, where financial markets push boards for quick turnarounds, and that Asian and European firms are more likely to adopt O because they place a high value on employee commitment (Beer and Nohria, 2000). The article gives no figures behind it.

## References

- Beer, M. and Nohria, N. (2000) *Cracking the code of change*. Harvard Business Review. Available at: https://hbr.org/2000/05/cracking-the-code-of-change (Accessed: 2026-11-01).
- Hughes, M. (2011) ‘Do 70 per cent of all organizational change initiatives really fail?’, *Journal of Change Management*, 11(4), pp. 451–464. https://doi.org/10.1080/14697017.2011.630506

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