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CHAPTER 7 CREATING AND MANAGING ORGANIZATIONAL CULTURE TEACHING OBJECTIVES 1. To explain that organizational culture is a set of values that controls behavior and impacts the way members make decisions and interpret the organization’s environment. (7.1) 2. To distinguish between terminal values and instrumental values. (7.1) 3. To discuss the methods used to transmit organizational culture to members. (7.2) 4. To examine the sources of organizational culture: characteristics of the people, organizational ethics, property rights, and organizational structure. (7.3) 5. To explain the interaction of the four sources of culture. (7.4) 6. To discuss the various stances organizations can take on corporate social responsibility. (7.5)
CHAPTER SUMMARY This chapter examines organizational culture, which includes ethics. Organizational culture controls behavior and plays a role in organizational effectiveness.
The sources of culture include the characteristics of the people (particularly the founder), organizational ethics, property rights, and structure. Organizational ethics is a product of societal, professional, and individual ethics. Property rights outline the rights and responsibilities of stakeholder groups. Shareholders enjoy the greatest property rights. Rights given to managers include: a golden parachute, stock options, large salaries, and control over organizational resources. Rights given to employees include long-term employment, pension and benefits, and employee stock ownership. Structure impacts culture; a mechanistic structure produces a predictable culture. An organic structure encourages an innovative culture. Managers must examine the interaction of all four sources. Social responsibility refers to a manager’s duty to make decisions regarding the welfare and well-being of the stakeholders and society. The strength of an organization’s commitment to social responsibility is on a continuum. It has been shown that managers who behave in a socially responsible fashion will, in the long run, most benefit all stakeholders including shareholders.
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Organizational culture is the set of values that controls behavior, determines how organizational members interpret the environment, and helps achieve a competitive advantage. An organization has two types of values: terminal and instrumental. Members learn values indirectly or through a formal socialization process. Van Mannen and Schein’s model of socialization tactics distinguishes between institutionalized and individualized role orientations. For newcomers to develop an institutionalized orientation, company tactics include: collective, formal, sequential, fixed, serial, and divestiture. For an individualized orientation, company tactics include: individual, informal, random, variable, disjunctive, and investiture. Cultural values are transmitted through stories, ceremonies, language, and four rites: passage, integration, enhancement, and degradation.
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CHAPTER OUTLINE 7.1
What Is Organizational Culture?
People are a company’s most valuable resource. A company can control and motivate its people through organizational culture. Q. What is organizational culture? A. Organizational culture is the set of shared values that control interactions among company members and with external stakeholders. An organization usually has two types of values: terminal and instrumental. (Fig. 7.1) Q. What is the difference between a terminal and an instrumental value? A. A terminal value is a desired outcome or end state, whereas an instrumental value is a desired behavior; instrumental values accomplish terminal values. Employee risk-taking (an instrumental value) helps achieve innovation (a terminal value). Terminal values are written in the mission statement and official goals, but instrumental values are conveyed through rules, norms, and standard operating procedures (SOPs). The most influential values are unwritten and reflected in shared beliefs and norms, acceptable standards of behavior. Over time, rules, SOPs, and norms are internalized.
Organizational Insight 7.1: How Global Culture Affects Organizational Culture This insight discusses how a U.S. organization and a Mexican organization formed a joint venture that failed due to cultural differences. Q. How can a country’s culture influence the culture of the organization?
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Organizational Insight 7.2: Mergers and Culture After BankAmerica and Security Pacific merged, they discovered dramatic differences in the way that each organization conducted business. BankAmerica was much more conservative in its decisionmaking style, and believed that its culture was the one that the organization should adopt. Q. How did BankAmerica go about changing the culture of the new organization? A. Because it was the dominant organization, it stripped authority from Security Pacific’s managers and took control of the new organization, all within a couple of weeks after the merger.
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A. The two are very much intertwined. Look at how the Mexican culture’s work schedule differs from the U.S. culture’s. This would very much affect the success of the joint venture, as this case shows. The terminal and instrumental values of each culture was very different, causing problems that were not able to be solved.
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7.2
How Is an Organization’s Culture Transmitted to Its Members?
The method of conveying values influences the culture to motivate employees and increase organizational effectiveness. Q. How can culture can be communicated to new organizational members? A. Newcomers learn values from formal socialization and informal stories, ceremonies, and language. Socialization and Socialization Tactics Newcomers become insiders when they internalize organizational values. Q. How does a newcomer learn values? A. Watching existing members and determining appropriate behavior lets newcomers learn indirectly, but they also learn unacceptable practices. Socialization, the process of learning and internalizing norms, assures that members learn appropriate values. A socialization model by Van Mannen and Schein, suggests that structuring socialization teaches newcomers key values. Role orientation is the characteristic way newcomers respond to a situation. (Table 7.1) Q. Name two types of role orientations.
Differences between the two include: 1. Collective vs. Individual. Collective tactics consist of common experiences to generate standard responses. Individual tactics allow newcomers to learn new responses. 2. Formal vs. Informal. Formal tactics separate newcomers during learning; informal tactics encourage learning on the job. 3. Sequential vs. Random. Sequential tactics establish a sequence for activities; random tactics are based on newcomer interests and needs. 4. Fixed vs. Variable. Fixed tactics provide a specific timetable for each stage; variable tactics set no timetable. 5. Serial vs. Disjunctive. Serial tactics use existing members as role models and mentors; disjunctive processes develop individual behavior. 6. Divestiture vs. Investiture. Divestiture gives members negative social support (neglect) until they conform to norms. Investiture gives positive support immediately. These tactics influence role orientation; military-style socialization leads to an institutional orientation.
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A. Institutionalized role orientation. Newcomers respond the same way as existing members do. Individualized role orientation. Newcomers respond creatively and experiment with changing norms and values.
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Q. What are the dangers of institutionalized socialization? A. It produces sameness among members, making it hard to adapt to changes. An organization chooses institutionalized or individualized tactics based on goals. For predictability and standardization, institutionalized tactics fit; for innovation, individualized tactics fit. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Stories, Ceremonies, and Organizational Language Stories, ceremonies, and organizational language convey cultural values. (Table 7.2) There are four organizational rites: 1. Rites of passage signify entry to, promotion in, and departure from the organization. 2. Rites of integration build bonds between members (an office party or cookout). 3. Rites of enhancement are public recognition of employees (news releases and awards dinners). 4. Rites of degradation denote involuntary departure, allowing a change or reaffirmation of values.
Organizational Insight 7.3: Triad Systems Builds a Culture Based on Success Triad Systems, a computer company, uses rites to enhance its culture. Triad has won a national quality award, and its sales have exceeded forecasts every quarter. Q. What does Triad do to enhance culture? A. Triad uses rites of integration and rites of enhancement. At its annual trade show, the company rewards almost half of its 1,500 employees for focus, innovation, and teamwork. The show serves as a rite of integration because the employees’ shared experiences encourage teamwork. These rites foster a cooperative and innovative culture.
Stories, ceremonies, and organizational language communicate cultural values. Stories and language reveal the type of behaviors the company values and those that are frowned upon. Language includes not only speech, but also what people wear, their offices, their company cars, and a formal manner of addressing each other. Technical language facilitates mutual adjustment (sports team). Q. What company evokes conservative values, and how are those values conveyed? A. The military, Arthur Andersen, and EDS have strict dress codes, nice offices, and nice company cars and speak formally. Q. What company evokes innovation, and how are those values conveyed? A. Microsoft and 3M are more informal, have a casual dress code, and use technical language.
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Organizational Insight 7.4: siteROCK’s Military Management Culture A high-tech, dot-com organization goes against the norm and implements a culture similar to that of a military organization. This has resulted in an organization that provides high levels of customer service. Q. How did siteROCK develop an institutionalized role orientation? A. All processes and procedures are in writing. They also implemented “two-man” norms that allowed co-workers to work with a partner in solving problems. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Symbols also reveal an organization’s values; office size, location, and luxury communicate images about an organization’s values. Isolating the corporate office conveys the image of a hierarchical and status-conscious organization. A building design can be a symbol; Team Disney Building has offices, a restaurant, and a patio connected to a garden to show the value Disney places on imagination and creativity. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________
Managerial Implications: Analyzing Organizational Culture Managers need to study the culture to identify terminal and instrumental values. Are goals, norms, and rules effectively transmitted? Managers should examine socialization methods and look for ways to improve the process. Managers should develop ceremonies to teach values and enhance commitment.
7.3
Where Does Organizational Culture Come From?
Characteristics of People within the Organization Companies attract, hire, and retain people with different values, personalities, and ethics. People are drawn to companies with values similar to their own. As people and values become more similar, organizational culture becomes more unique. The founder impacts the culture by setting the initial values and hiring the first employees.
Organizational Insight 7.5: Proctor & Gamble’s Culture is Hard to Change Proctor & Gamble (P&G), the well-known soap and detergent company, has a distinct and insular culture with a strong and homogeneous set of values. Q. What were the problems with P&G’s culture? A. The values and norms of consensus and obedience to the hierarchy and respect for authority made employees sound alike, think alike, and look alike. P&G had become a bureaucratic nightmare!
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Organizations have different cultures due to the interaction of four factors: people, ethics, property rights given to employees, and structure. (Fig. 7.2)
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Q. How did the new CEO change the culture? A. To instill a new entrepreneurial spirit with risk-taking, the CEO fired 15,000 employees and made “stretch, innovation, and speed” the new terminal and instrumental values. Rewards are now based on the ability to increase P&G’s value. Organizational Ethics The cultural values of the founder and the top managers are beyond an organization’s control. Yet an organization can cultivate ethical values to control employees through guidelines for appropriate behavior. Ethical values are an inseparable part of organizational culture.
Organizational Insight 7.6: Apple Juice or Sugar Water? In the 1980s, Beech-Nut, a maker of baby foods, selected a low-cost supplier to save $250,000 a year. An R&D specialist revealed that the concentrate contained corn syrup, sugar, and malic acid, but managers sold it as pure apple juice. The Food and Drug Administration (FDA) investigated and fined the company over $2 million. Q. What ethical values were violated? A. Beech-Nut violated societal ethics codified in law. To reduce costs, Beech-Nut broke the law and threatened consumer health. Top management failed to instill ethical values. Personal ethics influence organizational ethics. Personal ethics stem from societal ethics and an individual’s upbringing. Property Rights Cultural values arise from property rights, the rights given to stakeholders to receive and use organizational resources. Shareholders have the greatest property rights, because they own the resources and share in profits. (Table 7.3) Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________
A. Managers receive golden parachutes, stock options, large salaries, control over resources, and decision-making authority. Employees receive notification of layoffs, severance payments, lifetime or long-term employment, pension and benefits, stock ownership plans, and decision-making opportunities. Employees’ rights may be limited to wages, health insurance, and pensions. Property rights shape employee behavior and determine organizational effectiveness. Strong property rights at Southwest Airlines’ result in employee loyalty.
Organizational Insight 7.7: A Clash of Two Cultures General Motors (GM) bought Electronic Data Systems (EDS) in 1987, and a clash emerged over property rights. Q. Why did GM’s divisional managers refuse to sign contracts with EDS to benefit GM as a whole?
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Q. Name the property rights given to managers and employees.
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A. GM’s managers had different behavioral expectations. They received straight salaries without performance based rewards, whereas EDS’s employees received stock options based on contract profits. GM’s managers refused to have EDS’s managers, also GM employees, benefit from markups on contracts with them. Top Management and Property Rights Top managers determine their own property rights: terms of their employment, salaries, benefits, pension, and termination agreements. Because top managers decide how property rights are distributed to others, they influence culture.
Organizational Insight 7.8: Bimba Changes Its Property Rights System The property rights system changes an organization’s culture. Bimba Manufacturing Company, a producer of aluminum cylinders, had a rigid culture in which employees followed orders. Cultural changes in 1987 increased sales by 70 percent and the workforce by 79 percent. Q. What did Bimba do to change its culture? A. Bimba changed its property rights system. The owner created an employee stock ownership (ESOP) plan in 1987, sold 90 percent of the company to employees, and instituted a more cooperative culture. Employees tried to increase quality to meet customer needs. Cross-functional teams including managers shared concerns and met with customers. Managers functioned as advisors not bosses. Teams hired and socialized their own members. Can Property Rights Be Too Strong? Property rights affect performance positively but can also be too strong. IBM had a conservative culture because employees had the rights of lifetime employment. Employees feel ownership for their position, resulting in conflict and power struggles. Organizations must assign property rights based on performance and continually evaluate the property rights system.
Q. What terminal values will a mechanistic structure achieve? A. A mechanistic structure results in predictability and stability. Q. What terminal values will an organic structure achieve? A. An organic structure leads to innovation and flexibility. Structure can promote cooperative norms and values that improve integration and coordination. Teams in a product team or matrix structure have shared cultural values, thus product development time is short. The choice between centralization and decentralization promotes different cultural values.
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Organizational Structure Organizational structure, the formal system of rules and task and authority relationships, is a source of culture. Different structures lead to different cultures.
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Q. What values does decentralization promote? What values does centralization promote? A. Decentralization promotes creativity and innovation; centralization promote obedience, stability, and accountability. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________
7.4
Can Organizational Culture Be Managed?
Managers must examine the interaction of the sources of culture: the characteristics of organizational members, organizational ethics, the property rights system, and organizational structure. These factors interact, and only major modifications change values, making cultural change difficult. An organization might need to change its structure, its people, or its property rights system. A larger and more complex organization with a successful culture can decrease effectiveness. To avoid negative cultural change, managers must design a structure to handle control problems. •
Refer to discussion question 3 here to emphasize the fit between organizational culture and design.___________________________________________________________________________ _________________________________________________________________________________
Managerial Implications: Designing Organizational Culture A manager should identify the source of cultural values and norms and analyze the effects of people, ethics, property rights, and structure on culture. A manager should produce a plan including all four factors to redesign culture to improve effectiveness. Developing ethical values should be a top priority. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________
7.5
Corporate Social Responsibility
The Obstructionist Approach Managers choose to behave unethically and illegally, and do all they can to prevent knowledge of their behavior from reaching stakeholders. The Defensive Approach Defensive managers stay within the law, but make no attempt beyond this to behave socially responsibly. The Accommodative Approach Accommodative managers recognize the need to behave responsibly, and focus on balancing the interests of the many different stakeholders.
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An organization can take several approaches to social responsibility. The following approaches are on a continuum from low to high.
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The Proactive Approach Proactive managers go out of their way to learn about the needs of the different stakeholder groups, and are willing to utilize organizational resources to benefit all stakeholder groups, not just shareholders.
Organizational Insight 7.8: Ben & Jerry’s Ethical Culture Ben & Jerry’s Homemade Inc., a producer of super premium ice cream, has a culture instilled by founders Ben and Jerry that adopts a broad stance on social responsibility. Q. Describe Ben & Jerry’s view of social responsibility. A. The founders are socially conscious and contribute 7.5 percent of pretax profits as grants to support social activities. Employees are evaluated on their participation in the social mission. Ben & Jerry’s sponsors local concerts and film festivals, offer free ice cream at charitable events, and has renovated a New York subway station. Employees remain focused on the company’s social mission. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ •
Refer to discussion question 4 here to consider the pros and cons of social responsibility. ______________________________________________________________________________ ______________________________________________________________________________
Why be Socially Responsible? The answer to this seems clear in that all stakeholders benefit from responsible, ethical behavior. The other perspective on this is that businesses that focus on things other than increasing profits is a deterrent from the overall mission of the organization. Consider, for example, that managers need to spend resources determining which social issues they will respond to, which could deter from customer service or build products of high quality.
DISCUSSION QUESTIONS AND ANSWERS
Organizational culture arises from four sources: (1) the characteristics of its people, (2) organizational ethics, (3) property rights, and (4) organizational structure. The people within an organization are the primary source of culture; companies attract those with similar values, and over time culture becomes more distinct. The founder establishes culture by setting values and hiring the first members. The second source of culture is ethics, a product of societal, professional, and individual ethics. Ethics can control behavior. The third source is property rights, given to members to receive and use organizational resources. The distribution of property rights motivates employees. Organizational structure influences culture. A mechanistic structure promotes a conservative, stable culture, and an organic structure promotes an innovative culture. Each company’s pattern of interaction among these four variables sets its culture apart.
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1. What is the origin of organizational culture? Why do different organizations have different cultures?
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2. How do newcomers learn the culture of an organization? How can an organization encourage newcomers to develop (a) an institutionalized role orientation and (b) an individualized role orientation? Newcomers learn culture indirectly by observing existing members and determining appropriate behavior. Values are conveyed through stories, ceremonies, and language, but a company instills values through socialization, the way members learn and internalize values. a. To develop an institutionalized role orientation, a company uses several tactics: collective, formal, sequential, fixed, serial, and divestiture. Collective tactics provide common learning experiences to encourage standardized responses. Formal tactics separate newcomers from existing members. Sequential procedures offer a sequence of activities. Fixed tactics provide a timetable. Serial methods provide role models and mentors. Divestiture offers negative support, neglect, or taunting until newcomers conform. b. To develop an individualized role orientation, a company employs socialization tactics: individual, informal, random, variable, disjunctive, and investiture. Individual tactics involve viewing each learning experience as unique. Informal tactics include on-the-job training in a team. Random and variable tactics use no set sequence and no timetable, with training tailored to individual needs. Disjunctive procedures require newcomers to develop behavior. Investiture tactics provide immediate positive support. 3.
In what ways can organizational culture increase organizational effectiveness? Why is it important to obtain the right fit between organizational structure and culture?
Culture increases effectiveness through motivation. Culture motivates employees because norms and values encourage behavior for goal achievement. Culture uses incentives to reward behavior resulting in core competences and a competitive advantage. Culture improves structure. Structure and culture must fit because different structures promote different behaviors. Structure can help achieve terminal values. A mechanistic structure, tall and centralized, is appropriate for a company that desires predictability. An organic structure fits innovation and flexibility.
“An organization should always adopt a broad stance on social responsibility.” Explain why you agree or disagree with this statement.
The answer to this question will vary. Some will argue that an organization should examine every situation from a moral perspective. An organization should act to produce the greatest good for its stakeholders, whether or not laws exist. For clear-cut situations, there is the golden rule. In ambiguous situations, a company should act to produce the greatest benefit for the majority. Supporters of the broad stance argue that ethical and moral behavior pays off long-term and that employees should use judgment instead of relying solely on laws and standards. Others may disagree and state that sometimes moral actions reduce profits. They will not support unethical behavior, but state that a company is responsible only for complying with laws and conforming to society’s ethical customs and practices. Organizations are free to do as they wish if they obey the law.
ORGANIZATIONAL THEORY IN ACTION
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Practicing Organizational Theory: Developing a Service Culture In small groups, students are the owners of a new five star hotel in Florida. They are to determine how to develop a culture that will focus on high-quality service.
The Ethical Dimension Students examine how in certain companies the culture becomes so strong that individuals begin to act unethically and pursue their own short run interests. The discussion should focus on how culture and structure contribute to this problem, and the steps organizations can take to help prevent the problem.
Making the Connection Ask students to find an example of a company that has been trying to change its culture and to explain why the old culture is no longer effective.
ANALYZING THE ORGANIZATION Students analyze the culture of their organization, discuss the characteristic ways in which members interact, and identify the organization’s ethical stance.
CASE FOR ANALYSIS A Tale of Two Cultures Values, determined in part by the CEO, impact effectiveness. To achieve excellent customer service, a terminal value, Southwest Airlines maintains a flat structure, and managers cooperate with employees. Value Line under CEO Jean Buttner monitors employees closely and gives meager raises because being frugal is the main instrumental value. 1. List the reasons why Southwest’s and Value Line’s cultures differ so sharply. Southwest’s culture is marked by good customer service and management cooperation with employees. A flat, informal structure encourages innovation, and the stock ownership system rewards employees for company performance. On the other hand, Value Line’s culture fosters employee turnover and customer dissatisfaction. Management does not cooperate with employees; CEO Jean Buttner values frugality so much that employees sign in every day and raises are limited. Managers file daily reports on the neatness of employees’ desks.
Although Value Line could certainly benefit from copying Southwest’s culture, it is not as simple as changing CEOs. Culture becomes entrenched and is very difficult to change, so a new CEO would have to be patient and accept that change would come over a long period of time.
TEACHING SUGGESTIONS 1.
A role-play illustrates how socialization tactics encourage an institutionalized orientation. Two volunteers are new military recruits, one volunteer is a drill sergeant, and others refuse to help the recruits. The two recruits are in the same platoon (a collective tactic). Newcomers are separated (a formal procedure). Boot camp (a fixed procedure), lasts six weeks; the drill sergeant trains newcomers to march and do specific drills (sequential procedures). The drill sergeant is a role
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2. Could Value Line’s next CEO copy Southwest’s culture?
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2.
Students will debate the pros and cons of social responsibility.
3.
As an outside assignment, students will read a work by Milton Friedman, who opposes social responsibility. Compare and contrast the two perspectives.
4.
Students will look at Ben & Jerry’s web site to find out about their current projects to improve society. Students will report to the class.
5.
Students can search the web for examples of organizations that behave in a socially responsible fashion. Organizations like Enron and Arthur Andersen tend to make us think that most organizations behave irresponsibly if given the opportunity.
6.
Using Table 7.4, have students come up with their own examples of social responsibility based upon organizations in their own community.
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model (a serial procedure). The drill sergeant is hard on the recruits and others call them names (divestiture tactics). These tactics result in conformity and obedience to military’s norms.
