Drive Out Fear (Unless You Can Drive It In):

Support has been provided by the National Science Foundation, grant SBR-9422228, the Ford Motor Company and the Harley-Davidson Motor Company. Both the content and the presentation of the paper have benefited from the comments of John Sterman, Julio Rotemberg, Steve Graves, Roger Saillant, Edward Anderson, Rogelio Oliva, Liz Krahmer, David Levine, Charlie Fine and participants in seminars at MIT, University of Michigan, Northwestern, and Columbia. Special thanks to Laura Black for excellent editorial assistance. The paper has also benefited significantly from the comments of two anonymous referees. All contributions are gratefully acknowledged.

For more information on the research program that generated this paper, visit the World Wide Web site: http://web.mit.edu/jsterman/www/.

Abstract:

Understanding the wide range of outcomes achieved by firms trying to implement TQM and similar process improvement initiatives presents a challenge to management science and organization theory: a few firms reap sustained benefits from their programs, but most efforts fail and are abandoned. A defining feature of such techniques is the reliance on the front-line workforce to do the work of improvement, thus creating the possibility of agency problems; different incentives facing managers and workers. Specifically, successfully improving productivity can lead to lay-offs. The literature provides two opposing theories of how agency interacts with the ability of quality-oriented improvement techniques to dramaticlly increase productivity. The 'Drive Out Fear' school argues that firms must commit to job security, while the 'Drive In Fear' school emphasizes the positive role that insecurity plays in motivating change. In this study a contract theoretic model is developed to analyze the role of agency in process improvement. The main insight of the study is that there are two types of job security, internal and external, that have opposite impacts on the firm's abilty to implement improvement initiatives. The distinction is useful in explaining the results of different case studies and can reconcile the two change theories.

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