...globalization, deregulation. Whereas change management knowledge techniques have been widely codified and transmitted, important issues have remained largely unexplored, including the relationship between change processes and organizational performance outcomes (Pettigrew et al., 2001). A recent review of the organizational change literature has found that considerable attention has been given to change that is episodic, discontinuous, and intermittent (Weick and Quinn, 1999). Such a mode of change--which will be referred to as organizational transformation in this research--is risky, and its performance outcomes are uncertain (Newman, 2000).

Organizational transformation is a transition between organizational states that differ substantially in crucial features such as strategy and structure. Several studies have explored this phenomenon--alternatively referring to it as "quantum change," "second-order change," "core feature change," "large-scale change" and "strategic reorientation"--adopting partly differing conceptual perspectives that emphasize both common and varying elements. For instance, Miller and Friesen (1984) characterize quantum change as a transition between organizational archetypes, which are configurations of interrelated environmental, organizational and strategic variables. Greenwood and Hinings (1993) adopt a similar view, yet stress that archetypes are sets of structures and systems that reflect specific interpretive schemes. This emphasis on cognitive and interpretive elements is also present in Bartunek and Moch's (1994) description of second-order change as shifts in the cognitive frameworks that underpin organizational activities. With a focus on the defining elements of a given organizational form, Hannan and Freeman (1984) look instead at change in core features--stated goals, forms of authority, core technology, and marketing strategy. Proponents of punctuated equilibrium, such as Tushman and Romanelli (1985) and Gersick (1991), center on changes in an organization's deep structure. For instance, Tushman and Romanelli (1985) examine change in strategic orientation--a set of choices that constitutes a key reference for organizational activities along five domains: core values and beliefs, business unit strategy, distribution of power, structure, and control systems. Huy discusses "large-scale change," involving sizable modifications of many organizational elements, such as "formal structures, work systems, beliefs, and social relationships" that require multiple interventions to be accomplished (2001: 610). Despite their differences, all perspectives consistently portray organizational transformation as consisting of major changes in multiple dimensions.

In this research, we adopt the punctuated equilibrium perspective for reasons of theoretical and practical importance, and define organizational transformation as simultaneous major changes in key activity domains, such as strategy, structure, and power distribution, which typically occur during a brief time interval (Romanelli and Tushman, 1994). The punctuated equilibrium perspective argues that organizational transformation often takes place in a revolutionary fashion--involving rapid, simultaneous major changes in multiple organizational features that are implemented in a brief time interval (Miller and Friesen, 1984; Tushman and Romanelli, 1985), rather than isolated and piecemeal changes. Indeed, several empirical studies (Lant et al., 1992; Romanelli and Tushman, 1994; Sabherwal et al., 2001; Sherman and Chaganti, 1998; Virany et al., 1992) lend support to the notion that organizational transformation is a relatively common mode of organizational change. Whereas organizational change may also take place in different ways (Brown and Eisenhardt, 1997), given the prevalence of organizational transformation, it seems relevant to examine its performance consequences for illuminating both theory and managerial practice. From a practical standpoint, organizational transformation may be critically important in establishing appropriate internal and organization-environment alignment, which in turn influences organizational performance. Research has shown that certain conditions that are increasingly widespread in the present business environment, such as technological discontinuities (Romanelli and Tushman, 1994) and turbulence (Lant et al., 1992; Gordon et al., 2000), tend to increase the likelihood that firms will undertake such revolutionary transformations, making it the more pressing that their performance consequences be better understood by the executives who may consider adopting such a course of action.

To what extent can decision makers expect that revolutionary transformations will lead to significant improvements in firm performance? Dean and Baden-Fuller (1999) measured effectiveness of change programs in the UK water industry using cost reductions in various activities and found that revolutionary transformation was largely ineffective. Virany, Tushman and Romanelli (1992), measuring change in ROA in a study of minicomputer manufacturers, tested the hypothesis that the interaction of CEO change, executive team change, and revolutionary transformation would improve organizational performance, and found support for it. Tushman and Rosenkopf (1996) found that, in stable contexts, organizational reorientations had a negative impact on subsequent firm performance. Macy and Izumi (1993), in a meta-analysis of 161 firms spanning 30 years, examined the impact of organizational changes on financial, behavioral, and attitudinal outcomes. They found that, when multiple changes across four design categories were undertaken concurrently, only financial outcomes exhibited improvement. Collectively, these divergent findings do not provide sufficient evidence to support or reject the arguments espoused by differing theoretical perspectives on the implications of organizational transformation on firm performance.

In the remainder of the article, we first review and assess three different theoretical streams that provide insight into the possible effects

of organizational transformation on organizational performance. We then present an empirical examination of these perspectives in a longitudinal study involving large U.S. bank holding companies over two decades. Finally, we discuss our findings and their theoretical and managerial implications.

ORGANIZATIONAL TRANSFORMATION AND PERFORMANCE

In this section, we review the following theoretical perspectives: (1) rational models of organization, (2) the population ecology of organizations, and (3) the institutional perspective.

Rational Perspective and the Performance-gap Argument

Performance-gap logic seems to underlie theories of organizational transformation. These theories conjecture that the primary motivation for initiating major organizational change stems from the decisions of key executives who perceive actual or anticipated performance pressures (Tushman and Romanelli, 1985; Miller and Friesen, 1984) and consequently act to improve performance outcomes. Indeed, some empirical studies have found support for the notion that actual performance pressures increase the chances that firms will undertake organizational transformation (Lant et al., 1992; Zajac and Kraatz, 1993; Webb and Dowson, 1991). Similarly, major environmental shifts such as new technologies or regulatory changes create performance pressures leading to an increased occurrence of organizational transformation (Rindova and Kotha, 2001; Romanelli and Tushman, 1994).

The performance-gap logic is rooted in rational views of decision making. It assumes that performance is a primary goal of organizations. When performance falls below aspirations, it provides feedback that prompts organizational actors to engage in a search for new approaches (Cyert and March, 1963; Manns and March, 1978), and provides the motivation to implement new strategies and practices. This logic does not only encompass poorly performing organizations. Executives at high performing organizations may also undertake major strategic and organizational changes when they foresee impending environmental threats that compromise their firm's ability to extend a successful record, or when they perceive that attractive new opportunities can be seized (Andrews, 1971).

Performance gaps are particularly likely to occur in the wake of an environmental shift. Radical changes in technology, regulation, or competition alter the opportunities available to organizations and introduce new threats that organizations must confront. The prospect that performance could fall short from aspiration levels--either because of expected diminishing performance due to environmental threats or because of higher aspirations raised by new opportunities--will likely impel decision makers to search for and implement new organizational routines (cf. Cyert and March, 1963).

Those new routines are expected to establish an appropriate degree of organization-environment alignment. Systems theorists propose that performance is the ability of an organization to cope with all systematic processes relative to its goal-seeking behavior (Evan, 1976). Open systems rational models of organization (cf. Scott, 1992) suggest that performance is a function of fit both among the organization's internal systems and between the organization and its external environment. Contingency theory, for instance, assumes that rational choices are made in the design of organizations, which take into account the best structures and processes for achieving an organization's goal, given certain task and environmental constraints (Lawrence and Lorsch, 1967; Mintzberg, 1979; Thompson, 1967). Research on dynamic capabilities suggests that, as the environment changes, a firm's ability to achieve competitive advantage depends on its capacity to renew competences that enable it to attain congruence with the environment (Teece et al., 1997). The match between strategy and the environment is a key consideration in explaining successful organizational transformation (Sastry, 1997; Zajac et al., 2000). Furthermore, environmental changes may impact both internal and external fit, with important implications for organizational performance (Siggelkow, 2001).

Theories that portray organizational transformation as a revolutionary process (Miller and Friesen, 1984; Tushman and Romanelli, 1985) posit that the requirements for internal and external fit are achieved by simultaneous changes in several organizational parameters. These theories assume that strong internal and external interdependencies among organizational attributes exist. These interdependencies develop over time to satisfy requirements for efficient and effective performance (Lawrence and Lorsch, 1967; Burns and Stalker, 1961; Mintzberg, 1979) and for institutional legitimacy (Hannan and Freeman, 1984; DiMaggio and Powell, 1983). Miller and Friesen (1984) suggest that strategic, structural, and contextual variables are integrally related. Because multiple changes in organizational attributes are disruptive and expensive, they tend to be avoided unless there are clear incentives to undertake them, or unless there are major risks in not doing so. The detrimental effect on organizational performance stemming from the lack of complementarity among organizational attributes during transitions provides an incentive to complete these multiple changes rapidly (Miller and Friesen, 1984). Thus, major changes in fundamental organizational characteristics such as strategy and structure must be accomplished during brief periods of generalized upheaval in which many...

NOTE: All illustrations and photos have been removed from this article.



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