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. 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.



Theory X and theory Y Assumptions

Two distinct sets of assumptions that managers, in general, have about their employees and which often turn out to be self-fulfilling prophesies.

Theory-X assumptions are:

(1)     Most people dislike work and will avoid it to the extent possible, therefore

(2)     They must be continually coerced, controlled, and threatened with punishment to get the work done, and that

(3)     They have little or no ambition, prefer to avoid responsibility, and choose security above everything else.

Theory-Y assumptions are:

(1)     Physical and mental effort are natural and most people (depending on the work environment) find work to be a source of satisfaction,

(2)     They generally, on their own motivation, exercise self-control, self-direction, creativity, and ingenuity in pursuit of individual and collective (company) goals,

(3)     They either seek responsibility or learn to accept it willingly, and that

(4)     Their full potential is not tapped in most organizations.


Contrasting Assumptions:  20th and 21st Century Organizational Models   

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.

Like McGregor, we are counter-posing 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 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.

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”. 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.   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. 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 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.


Knowledge-Based Work 

The last quarter century has witnessed the gradual diffusion of what are called knowledge-based work systems among front line manufacturing and service workers.  The general consensus derived from a broad range of studies and the experience of our industry participants is that these produce higher levels of organizational performance and higher levels of learning and employee satisfaction than the industrial models of work organization they are replacing. Yet, the best known examples of knowledge-based work systems are generally in what are termed “greenfield” facilities (literally new facilities built in open, green fields).  Most organizations fall into the “brownfield” category existing operations with many of the legacy 20th century assumptions firmly in place.  Implementing the new work systems in these existing operations requires extended and continued effort.  Leaders from one Pratt & Whitney facility participated in our class and cataloged their fluctuating efforts to implement team-based work systems and sustained labor management cooperation.  Successes were periodically set back by turnover of plant managers or union leaders, and by decisions to outsource work or lay off employees, which undermined the trust needed to build and retain employee support for these workplace changes and innovations. This is not an isolated example.  The best estimates from our research and others are that about one third of U.S. establishments have implemented some features of knowledge-based work systems in their operations. Very few have achieved what might be termed a transformation.  Whether these efforts will be maintained and whether further diffusion will occur depends on the actions of a variety of Stakeholders managers, workers, labor union representatives, Wall Street analysts, and government policy makers.  The key issue is whether these stakeholders will recognize the value that knowledge-based work systems offer the workforce and the economy, and choose to work together to sustain the momentum already underway, or will short-term decisions by these groups limit or even undermine transformation efforts? Alongside the implementing of new work systems is another key labor market development: the increased use of various types of contract, consultant, and project work arrangements.  From the demand side of the labor market, these arrangements offer employers access to specialized knowledge from outside sources, flexibility, reduced headcount and associated labor cost reductions, and the opportunity to focus on core competencies.  From the supply side, these arrangements can also offer opportunities to learn across jobs and organizational assignments, while also providing more options for integrating work with different stages of personal and/or family life, for example, combining work with further education, child or elder care duties, or as a bridge into retirement.  The downside of these arrangements lies in the reduction of benefits, employment security, status, influence, and more variable earnings for contractors.  The costs to the organization include increased coordination requirements, potential safety or security risks, and the potential loss of organizational knowledge or capability all downsides that become more visible after the outsourcing decision.   Clearly, if managed well, there are potential benefits to both organizations and individuals from sensible use of contracting arrangements.  Our students and alumni see both the benefits and the pitfalls of these work arrangements playing out in their organizations.


Re-Defining Organizational Goals   

One inevitable consequence of adopting a human capital, knowledge-based organizational model is that the voices of employees will become more influential in shaping the values, goals, and priorities of the 21st century organizations.  Judging from the level of interest exhibited by our Sloan Fellows students, high on the list of priorities of employees today are concerns for social and environmental sustainability.  These leaders want to work in and lead organizations in ways that ensure their children and future generations have the same opportunities as they do.  This is the vision they express in their thesis projects and comments.  Thus, sustainability may be the frontier example of how the underlying objectives of organizations may change in human centered organizations.