Academy of Management Executive, 2004, Vol. 18, No.

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Theory Z: Opening the corporate door for participative management

Commentary by Richard L. Daft

In 1981 Theory Z had major impact in the business press. Bill Ouchi was two years ahead of me in the Ph.D. program at Chicago, and I was following his career closely. Theory Z may have been the first business book featured in the front windows of New York City bookstores.1 I believe it was the first business book bestseller, quickly selling over 100,000 copiesa big number at the timeand commanding a substantial six-figure fee for paperback rights. Ouchis Theory Z ideas were featured in Time magazine as an explanation for Japans economic success. Business Week ran an article touting Ouchi as a founding father of participative management along with Mayo, Maslow, McGregor, and Argyris. The general idea of employee involvement was familiar to organizational behavior professors, but the idea had not been a part of corporate Americas awareness, much less a priority. Now corporate managers were taking notice. Theory Z received several positive reviews as an important book. Ouchi was deluged with requests from companies for speaking and consulting. Theory Z provided hope that American companies could respond to the prevailing frustration and even fear about Japanese corporations overtaking their U.S. counterparts.

Democratic Convention in 1968. Martin Luther King and Robert F. Kennedy were assassinated in 1968. The 1970s saw continued social changes and were tough economic years for corporations in America. The ideal company was big, hierarchical, and dominated by engineering and economic thinking. The MBA degree gained legitimacy via infusion of academic rigor and scientific thinking. Stability, functional specialization, and assemblyline mindsets had worked fine in American companies as long as the European and Japanese economies were recovering from the devastation of World War II. But American management models were losing ground by the 1970s. The oil embargo of 1973 was a shock, and American companies were slower than Japanese and European companies to respond to new international realities. The American economic horizon was gloomy, with no certain cure for stagnant productivity, inflation, high employment, and high interest rates. The 1979 oil embargo reinforced U.S. vulnerability. Management structures adapted to heavy industry were not adjusting to a marketplace based on services, information, entertainment, rapid change, and internationalization.

American management models were losing ground by the 1970s.

By 1980 the Japanese juggernaut was seen as the number one challenge facing American companies. Japanese companies grabbed chunks of market share in autos, steel, and electronics. The high quality of Japanese products was hard to believe. Productivity in Japan was reported to have increased faster than in any other country and four times as fast as in the U.S. since WWII. I remember my personal doubt about the U.S.s ability to compete as the media announced each new Japanese
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Historical Background Theory Z came out after years of increasing corporate uncertainty. The postwar calm of the 1950s was broken by social discontent in the 1960s when African-Americans and women were fighting for recognition and equality in a world dominated by a white-male mindset. Black students sat in at Woolworth lunch counters here in Nashville in 1960. The Feminine Mystique by Betty Friedan came out in 1963. Viet Nam war protests marred the

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acquisition of an American or European company. Was Japan going to take over the world and supplant the U.S. as an economic superpower? What was their secret? Meeting the Japanese Challenge Theory Z promised an answerHow American Business Can Meet the Japanese Challenge. Theory Z argued that business productivity is a problem of social organization and managerial attitude, not just a problem of engineering and economics. The fearsome competitors from Japan were successful because of a social organization that valued people, quality, and productivity. The most often quoted story from Theory Z made the point. A team of engineers and managers from the Buick Division of General Motors visited their Tokyo dealer. The operation appeared to be a massive repair facility, so they asked how he had built up such a large service business. The dealer explained (with some embarrassment) that this was not a repair shop but a reassembly operation, where newly delivered cars were taken apart and reassembled to Japanese standards. While many Japanese admire American automobiles, he noted, they would never accept the low quality with which they are put together.2 Ouchi argued that if a companys social body is ill, the economic body will suffer. The Buick Division of General Motors that was building cars for Japan adopted Japanese management ideas and became the best GM plant in the country within two years. An American company that engaged employees as thinkers as well as doers and managed people based on values, trust, and intimacy could turn things around and restore health and productivity to the organization.

The Elements of Theory Z The seven elements of Theory Z appear in Table 1. Japanese management (Theory J) was extremely successful in the early 1980s but couldnt be expected to work intact in the U.S. Ouchi identified the parts of Japanese management that he believed would work in America and pieced them together with traditional American management (Theory A) to create Theory Z. The Theory Z blend took shape when Ouchis research into Japanese companies with operations in America revealed that the Japanese were using a modified management form in the U.S. with considerable success and positive response from U.S. employees.3 Ouchi then sought evidence to show that the following seven elements of the Theory Z management philosophy would work in American companies.4 Length of Employment Length of employment is the average number of years employees serve within a corporation. Compared to the typical American model of frequent company hopping, long-term employment confers company advantages such as employees understanding one anothers goals, acquiring feelings of commitment, and gaining a long-term perspective. Akio Morita, CEO of Sony in 1981, said that at Sony employees were concerned for Sonys future because they would be with the company for more than twenty years. Decision-Making Decision-making pertains to typical ways of dealing with non-routine problems. In American companies, managers were the thinkers and deciders, and workers were the doers. Shifting to consensus decision-making engaged employees in a joint effort to boost productivity and quality. Japanese companies were slow to make decisions because

Table 1 Characteristics of Organizational Ideal types J, A, and Z

Type J Lifetime employment Consensual decision-making Collective responsibility Slow evaluation and promotion Implicit, informal control Non-specialized career path Holistic concern Type A Short-term employment Individual decision-making Individual responsibility Rapid evaluation and promotion Explicit, formalized control Specialized career path Segmented concern Type Z Long-term employment Consensual decision-making Individual responsibility Slow evaluation and promotion Implicit, informal control with explicit, formalized measures Moderately specialized career path Holistic concern, including family

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they had forums for give and take so employees could challenge managers. But the consensus building resulting from give and take enabled rapid implementation, which meant decisions were faster overall than in American companies. In a U.S. application of Theory Z, a Buick plant started bringing workers into decision processes. The 400 workers were divided into work teams that could solve their own problems and were also consulted on plant-wide decisions. Responsibility The locus of responsibility is an underlying value about who is accountable and how to confer rewards in a meritocracy. Individual responsibility is deeply ingrained in the U.S. national culture. In a Japanese company, everyone in a unit was considered in charge because the group often made the decision. It was not realistic in American companies not to know who was in charge. A Japanese motto, For you to make it, every worker has to make it, wouldnt make sense to U.S. workers, so Ouchi recommended that U.S. firms stay with individual responsibility. Evaluation and Promotion Speed of evaluation and promotion is self-explanatory, but the effect of slowing down evaluations and promotions in Japanese companies is important. At Sony wages were reviewed every three years so there was no reason for employees to engage in short-term thinking. There was no incentive for manager trainees to seek visible projects or game the system for immediate promotion. Promotions in a Japanese company might occur every ten years, but no one was falling behind. Slow evaluation and promotion created a solid, long-term view of the business, with people focused on work that needed to be done. Control Implicit vs. explicit control refers to social vs. quantitative measures for evaluation and promotion. The American ethos for evaluation was numbers, numbers, numbers, with management preferring the rational over the non-rational, the objective over the subjective, and quantitative analysis over experience and wisdom. Ouchi learned in his department store research that profits were lower in stores that mindlessly gave quantitative-based raises to employees, who then spent their time on narrowly rewarded tasks. He also found that when managers used their own experi-

ence and judgment to evaluate employees, stores performed better, partly because employees performed the wide range of tasks needed to make the store succeed. Career Path Specialization Career path specialization means the extent to which people serve in one department or function versus being rotated among several during their careers. Ouchi reported that typical American managers served in 1.4 functions over their careers. For example, a bank advertised that the employee making loans to forest product companies in the Northwest had 30 years of experience doing so. The negative impact from that much specialization is that relationships in U.S. firms among people across functions, among domestic and international branches, and between managers and employees were distant and narrow. Japanese managers, on the other hand, typically served in several functions and were rotated abroad, which engendered rich networks of relationships and intimate knowledge of company strengths and weaknesses. Theory Zs recommended moderate specialization in U.S. companies would promote a broader range of contacts domestically and abroad and loyalty to the company as a whole rather than to just one department or function. Scope of Concern Holistic concern refers to the scope with which employees view each other and especially the concern of supervisors for subordinates. Japanese companies expressed interest in each employees complete life, which yielded greater employee satisfaction when implemented in the U.S. Spouses, family, and community activities were part of the equation in Theory Z firms. Employees who felt secure and confident at work were more successful in contributing to their families and communities. Theory Z was unusual for a book at the time because it illustrated theoretical concepts with real and rich company examples. Ouchi had surveyed U.S. companies to identify some that had management characteristics similar to Theory Z, and he provided interesting stories about management techniques at Hewlett-Packard, IBM, Intel, Dayton-Hudson, Lockheed, Honeywell, Texas Instruments, and Procter & Gamble. These companies were highly respected for their successful management systems, and Ouchi provided a name and labels for what they were doing well. Ouchi offered evidence that successful management

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practices in the U.S., although not copied directly from the Japanese, reflected both Japanese and American management ideas. Values and Freedom In addition, Theory Z tackled the prominence of values. Ouchi stated that a strong, explicit statement of corporate philosophy and values to develop trust with employees was the key to the lock of the Theory Z management approach. Without explicit values, trust and intimacy, changing to a Z organization would be nearly impossible. One appendix in the book is devoted to philosophy statements from Theory Z companies. What about the freedom of individuals in a Theory Z company? Skeptics could argue that employees lost their autonomy under Theory Z, and the model would only work with people who had high needs for security and belongingness. Ouchi addressed this point by explaining that employees in Type Z firms experienced more freedom than employees in Type A firms. Type A firms relied on the hierarchy and explicit control far more than Type Z companies did. Once trust was developed in a Type Z setting and employees were drawn into the philosophy, they acted like independent contractors. Z organization employees made their own decisions and acted independently within secure jobs. Theory Z led to the counterintuitive outcome of increasing employee freedom. The Natural Selection of Organizations But is it realistic to import an organizational form from an Asian culture? Ouchi argued that in Western society, Type A organizations were the result of natural selection processes that favored this form. Geographical dispersion, the industrial revolution, and conditions of heterogeneity, mobility, and individualism led naturally to Type A. In Japan, Type J organizations were a natural evolution from cultural homogeneity, feudalism, geographic density, and the subordination of the individual to the group in Japans cultural heritage. Using population ecology logic, Ouchi argued that the Type Z organizations he found in the U.S. were highly successful deviations from the Type A norm. Contrary to common managerial beliefs, lower specialization was associated with higher productivity, consensus decision-making was associated with higher quality and efficiency, and the Type Z firms had markedly lower turnover and absenteeism. He recommended that other organizations in the population learn from these deviants and that the tra-

ditional monarch of American management be reclothed. Research Support for Theory Z The research findings in support of Theory Z were impressive. It started with Ouchis dissertation research into control mechanisms in 78 retail department store companies in the U.S.5 This was followed by a second study in which managers were interviewed in both the U.S. and Japan and previous studies on the topic were exhaustively researched, 6 which led to the description of Theory Z dimensions. The third stage was to survey American managers to identify American companies that fit the Theory A and Theory Z descriptions. Some twenty-two companies were identified, and two were selected as the best pure examples of Type A and Type Z firms. Twelve hundred questionnaires were sent to employees of these two firms to test whether systematic differences consistent with the Theory Z elements could be found. The findings supported Ouchis model and provided the evidence on which to base the book.7

The research findings in support of Theory Z were impressive.

Theory Z had strong and immediate academic impact. It racked up 650 citations in the Social Science Citation Index in just two years, although citations dropped off sharply after that. Ouchis related research on control types (clan, bureaucratic, market) and approaches (behavior and output) were published in important academic journals (three articles in ASQ and one in Management Science). These concepts shaped and were shaped by Ouchis work on Japanese management. I thought these publications provided an important conceptual and empirical frame for how organizations could be designed to achieve desired outcomes. I still use the clan, bureaucratic, and market control types in my own thinking and in my organization theory textbook.8 The Contemporary Relevance of Theory Z Reading Theory Z again after many years, I found the seven Theory Z elements relevant to todays managers if the Japanese linkage is omitted. A lot has happened since Theory Z was published. One year later, In Search of Excellence came out.9 It addressed a similar management need and went on to become a mega bestseller, opening the mar-

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ket for hundreds of subsequent business books that aspired to both business impact and bestseller status. The Japanese juggernaut had lost its punch by the 1990s, bogging down in an economic system that had looked invulnerable a decade earlier. U.S. business went through massive middle-management layoffs and restructuring during the 1980s, discovered their ability to efficiently produce goods of world-class quality, and went on to prosper mightily for the most part during the 1990s. Theory Z, viewed as a model of progressive management in 1981, wears well as a source of management ideas in 2004.

door to American managers on what was then a new, more participative management philosophy. Subsequent books rushed through that door, and, despite a few exceptions, American management has continued to evolve toward management by values, employee participation, engagement, and horizontal thinking to heal the social body of organizations. Theory Z started a trend that isnt over and that has contributed to the sharply higher quality and productivity of American business today. Endnotes
Thanks to Bill Ouchi for sharing with me his files of magazine and newspaper articles, academic articles, and book reviews from the early 1980s. The historical review is partly based on those articles and my personal recollections. 2 Ouchi, W. G. 1981. Theory Z. How American business can meet the Japanese challenge. Reading, MA: Addison-Wesley: 3 4. 3 Johnson, R. T., & Ouchi, W. G. 1974. Made in America: (Under Japanese management). Harvard Business Review (September/ October): 61 69. 4 Ouchi, W. G., & Jaeger, A. M. 1978. Type Z organization: Stability in the midst of mobility. Academy of Management Review, 3 (2): 305314. 5 Ouchi, W. G. 1972. A novel approach to organizational control. Unpublished doctoral dissertation. University of Chicago. 6 Johnson & Ouchi, 1974, op. cit. 7 Ouchi, W. G. 1981. Theory Z: An elaboration of methodology and findings. Journal of Contemporary Business, 11: 27 41. 8 Daft, R. L. 2004. Organization theory and design, 8th ed. Mason, OH: South-Western. 9 Peters, T. J., & Waterman, Jr., R. H. 1982. In search of excellence. New York: Harper & Row. 10 Collins, J. 2001. Good to great: Why some companies make the leap . . . and others dont. New York: Harper Business; Bossidy, L., & Charan, R. 2002. Execution. The discipline of getting things done. New York: Crown Business. Richard L. Daft is the Brownlee O. Currey Jr. Professor of Management at Vanderbilt University. He has published twelve books, including The Leadership Experience, and many academic articles. His current research interests are leadership mental models and the design of post M-form mega-corporations. He received his MBA and Ph.D. from the University of Chicago. Contact: dick.daft@ owen.vanderbilt.edu.
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Theory Z, viewed as a model of progressive management in 1981, wears well as a source of management ideas in 2004.
Two current business books, Good to Great and Execution, were published twenty years later and have been on the business bestseller lists since publication.10 I like these books and use them in my MBA classes. Good to Great, for example, proposes that Level 5 leaders are humble, reserved, and self-effacing, and also possess a strong force of will. Theory Z wasnt about leadership per se, but humility in the sense of placing the organization ahead of self was part of Theory Z, and it also stressed the importance of the company leader taking responsibility to champion a new, explicit management philosophy. Execution argued for the engagement of leaders with employees rather than hands-off leadership that acts from abstract strategies and quantitative measures of control, points that came through in Theory Z. Both of these recent books emphasize the importance of people with many timely and valuable insights, and both have an echo of Theory Z as well as the management books that followed. Theory Z made academic work on the human side of management legitimate among many corporate managers. Over the last ten years, I have observed a nearly universal management awareness and espousal of involving people that was absent twenty-five years ago. Theory Z opened the