Social Media and Corporations: Don't Cross the Line When You Go Online

When you think of “shameless self-promotion on Twitter”, what industry do you think of first? Whatever your choice, there's a good chance it's not Wall Street.

But it's not for lack of wanting. Though investment banking has been slower than most industries to dive headfirst into self-promotion via Twitter and Facebook, many young professionals are eager to reach out to existing and potential customers using social media tools. But firms are cautious about how bankers represent themselves to a public wary of corporate hijinks and poor decision-making. Add to this a very complex regulatory environment surrounding how businesses in banking industry must monitor and store official communications, and you start to understand why Wall Street has been more tentative than most industries to get with the times.

“Who could blame any firm operating in a regulated industry for taking a cautious approach in the face of all that?” asks social media expert Kip Gregory, principal of The Gregory Group. “Especially in financial services, which is at its core an industry built around the management of risk. The question is: How do you, as a competitor in this business, choose to respond to a clearly shifting landscape?”^a

Some firms ban all social media use by employees. Others are taking a predictably cautious approach to exploring social media. For example, Morgan Stanley's position—“There are substantial restrictions on its use right now, but we are continuing to review the issue.”—is itself shorter than a single tweet. But many investment professionals are eager to learn how they can make positive use of social media's persuasive powers.

“We're trying to rally the troops and recognize that you just can't have a policy in place that prohibits this,” says John N. Travagline, vice president of compliance for the trade group Insurance Marketplace Standards Association. “People realize this is something that's here to stay. We've just got to figure out leading solutions—the right way to do this.”^b How can executives manage this emerging aspect of the corporate culture?

living and working together

15 Organizational Culture and Innovation

the key point

Since people spend much of their adult lives in and around organizations, they are often absorbed into the organization culture. While the organizational culture provides meaning and stability, most organizations also contain a number of subcultures and countercultures. To operate as an effective manager you will need to understand the various layers of culture and the important role of stories, rites, and rituals. While culture provides stability, organizations also need innovation to survive. Balancing the need for innovation and stability can be a managerial challenge of the first order as illustrated in the case of Wall Street firms and social media.

chapter at a glance

What Is Organizational Culture?

How Do You Understand an Organizational Culture?

What Is Innovation and Why Is It Important?

How Can We Manage Organizational Culture and Innovation?

Can you imagine eliminating all of your Facebook friends or passing up the opportunity to Twitter the most recent news? It is also like getting disconnected from the world. Although Wall Street executives want to control the use of social media, they also clearly recognize that being interconnected is a part of the larger U.S. culture and rapidly becoming a global standard. This is just one of the newer issues executives are confronting as they attempt to manage organizational culture.

Organizational Culture

Organizational or corporate culture is the system of shared actions, values, and beliefs that develops within an organization and guides the behavior of its members.¹ In the business setting, this system is often referred to as the corporate culture. Each organization has its own unique culture. Just as no two individual personalities are the same, no two organizational cultures are identical. Yet, there are some common cultural elements that yield stability and meaning for organizations. Management scholars and consultants believe that some cultural elements can have a major impact on the performance of organizations and the quality of work life experienced by their members.² In this chapter we will examine the functions of organizational culture and various levels of cultural analysis to understand the powerful force of organizational culture.

• Organizational or corporate culture is the system of shared actions, values, and beliefs that develops within an organization and guides the behavior of its members.

Functions of Organizational Culture

Through their collective experience, members of an organization can solve two extremely important survival issues.³ The first issue is one of external adaptation: What precisely needs to be accomplished, and how can it be done? The second is known as internal integration: How do members resolve the daily problems associated with living and working together?

External Adaptation Issues of external adaptation deal with ways of reaching goals, tasks to be accomplished, methods used to achieve the goals, and methods of coping with success and failure. Through their shared experiences, members may develop common views that help guide their day-to-day activities. Organizational members need to know the real mission of the organization, not just the pronouncements to key constituencies, such as stockholders. By talking to one another, members will naturally develop an understanding of how they contribute to the mission. This view may emphasize the importance of human resources. On the other hand, employees may see themselves as cogs in a machine, or a cost to be reduced.

• External adaptation deals with reaching goals, the tasks to be accomplished, the methods used to achieve the goals, and the methods of coping with success and failure.

Each group of individuals in an organization tends to (1) separate more important from less important external forces, (2) develop ways to measure their accomplishments, and (3) create explanations for why goals are not always met. At Dell, the retailer of computers and consumer electronics, managers, for example, have moved away from judging their progress against specific targets to estimating the degree to which they are moving a development process forward. They work on improving participation and commitment. They don't blame a poor economy or upper-level managers for the firm's failure to reach a profit target. In difficult times they stress the progress all have made in their collective effort.⁴

The final issues in external adaptation deal with two important, but often neglected, aspects of coping with external reality. First, individuals need to develop acceptable ways of telling outsiders just how good they really are. At 3M, for example, employees talk about the quality of their products and the many new, useful products they have brought to the market. Second, individuals must collectively know when and how to admit defeat. At 3M, the answer is easy for new projects: At the beginning of the development process, members establish “drop” points at which to quit the development effort and redirect it. When they quit, project managers are careful not to suggest that the group has failed but stress that what they have learned increases the chances that the next project will succeed to market.⁵

In sum, external adaptation involves answering important instrumental or goal-related questions concerning coping with reality: What is the real mission? How do we contribute? What are our goals? How do we reach our goals? What external forces are important? How do we measure results? What do we do if we do not meet specific targets? How do we tell others how good we are? When do we quit? Chris Connor of Sherwin-Williams expressed his firm's approach to external adaptation in terms of winning.⁶

The process of internal integration often begins with the establishment of a unique identity. Through dialogue and interaction, members begin to characterize their world. They may see it as malleable or fixed, filled with opportunities or threats. Real progress toward innovation can only begin when group members believe that they can change important parts of the world around them and that what appears to be a threat is actually an opportunity for change.

• Internal Integration deals with the creation of a collective identify and with ways of working and living together.

Three important aspects of working together are (1) deciding who is a member of the group and who is not, (2) developing an informal understanding of acceptable and unacceptable behavior, and (3) separating friends from enemies. These are important issues for managers as well. A key to effective total quality management, for instance, is that subgroups in the organization need to view their immediate supervisors as members of the group. The immediate supervisor is expected to represent the group to friendly higher managers. Of course, should management not be seen as friendly, the process of improving quality could quickly break down.⁷ For example, Aetna, one of the nation's leading diversified health care benefits companies, describes its corporate culture as one where employees “work together openly, share information freely and build on each other's ideas to continually create the next better way. Nothing is impossible to our Aetna team. We are eager, ambitious learners and continuous innovators. And we are succeeding. Every day.”⁸

To work together effectively, individuals need to decide collectively how to allocate power, status, and authority. They need to establish a shared understanding of who will get rewards and sanctions for specific types of actions. Too often, managers fail to recognize these important aspects of internal integration. A manager may fail to explain the basis for a promotion and to show why this reward, the status associated with it, and the power given to the newly promoted individual are consistent with commonly shared beliefs.

Collections of individuals also need to work out acceptable ways to communicate and develop guidelines for friendships. Although these aspects of internal integration may appear esoteric, they are vital. For example, to function effectively as a team, all must recognize that some members will be closer than others; friendships are inevitable.⁹

Resolving the issues of internal integration helps individuals develop a shared identity and a collective commitment. It may well lead to longer-term stability and provide a lens for members to make sense of their part of the world. In sum, internal integration involves answers to important questions associated with living together. What is our unique identity? How do we view the world? Who is a member? How do we allocate power, status, and authority? How do we communicate? What is the basis for friendship? Answering these questions is important to organizational members because the organization is more than just a place to work.

Subcultures and Countercultures

Whereas smaller firms often have a single dominant culture with a universal set of shared actions, values, and beliefs, most larger organizations contain several subcultures as well as one or more countercultures.¹⁰

Subcultures Subcultures are groups of individuals who exhibit a unique pattern of values and a philosophy that is consistent with the organization's dominant values and philosophy.¹¹ While subcultures are unique, their members' values do not clash with those of the larger organization. Interestingly, strong subcultures are often found in task forces, teams, and special project groups in organizations. The subculture emerges to bind individuals working intensely together to accomplish a specific task. For example, there are strong subcultures of stress engineers and liaison engineers in the Boeing Renton plant. These highly specialized groups must solve knotty technical issues to ensure that Boeing planes are safe. Though distinct, these groups of engineers also share in the dominant values of Boeing.

• Subcultures are groups who exhibit unique patterns of values and philosophies not consistent with the dominant culture of the larger organization or system.

Countercultures In contrast, countercultures are groups whose patterns of values and philosophies outwardly reject those of the larger organization or social system.¹² When Stephen Jobs reentered Apple Computer as its CEO, he quickly formed a counterculture within Apple. Over the next 18 months, numerous clashes occurred as the followers of the former CEO Gil Amelio fought to maintain their place and the old culture. Jobs won and so did Apple. His counterculture became dominant and the company thrived.¹³

• Countercultures are groups where the patterns of values and philosophies outwardly reject those of the organization or social system.

Every large organization imports potentially important subcultural groupings when it hires employees from the larger society. In North America, for instance, subcultures and countercultures may naturally form based on ethnic, racial, gender, generational, or locational similarities. In Japanese organizations, subcultures often form based on the date of graduation from a university, gender, or geographic location. In European firms, ethnicity and language play an important part in developing subcultures, as does gender. In many less developed nations, language, education, religion, or family social status are often grounds for forming popular subcultures and countercultures.

Within an organization, mergers and acquisitions may produce adjustment problems. Employers and managers of an acquired firm may hold values and assumptions that are inconsistent with those of the acquiring firm. This is known as the “clash of corporate cultures.”¹⁴ One example is the difficulty Bank of America faced when it gave huge bonuses to traders after acquiring Merrill Lynch.¹⁵

National Culture and Corporate Culture

Most organizations originate in one national culture and incorporate many features from this host national culture even when they expand internationally. The difference between Sony's corporate emphasis on group achievements and Zenith's emphasis on individual engineering excellence, for example, can be traced to the Japanese emphasis on collective action versus the U.S. emphasis on individualism. National cultural values may also become embedded in the expectations of important organizational constituencies and in generally accepted solutions to problems.

When moving across national cultures, managers need to be sensitive to national cultural differences so that their actions do not violate common assumptions in the underlying national culture. To improve morale at General Electric's French subsidiary, Chi. Generale de Radiologie, American managers invited all of the European managers to a “get-acquainted” meeting near Paris. The Americans gave out colorful t-shirts with the GE slogan, “Go for One,” a typical maneuver in many American training programs. The French resented the t-shirts. One outspoken individual said, “It was like Hitler was back, forcing us to wear uniforms. It was humiliating.” Firms often face problems in developing strong ethical standards, particularly when they import societal subgroups.

Importing Societal Subgroups Beyond becoming culturally sensitive, difficulties often arise with importing groupings from the larger society. Some of these groupings are relevant to the organization whereas others may be quite destructive. At the one extreme, senior managers can merely accept societal divisions and work within the confines of the larger culture. This approach presents three primary difficulties. First, subordinated groups, such as members of a specific religion or ethnic group, are likely to form into a counterculture and to work more diligently to change their status than to better the firm. Second, the firm may find it extremely difficult to cope with broader cultural changes. For instance, in the United States the expected treatment of women, ethnic minorities, and the disabled has changed dramatically over the last 20 years. Firms that merely accept old customs and prejudices have experienced a greater loss of key personnel and increased communication difficulties, as well as greater interpersonal conflict, than have their more progressive counterparts. Third, firms that accept and build on natural divisions from the larger culture may find it extremely difficult to develop sound international operations. For example, many Japanese firms have experienced substantial difficulties adjusting to the equal treatment of women in their U.S. operations.¹⁶

Building on National Cultural Diversity At the other extreme, managers can work to eradicate all naturally occurring national subcultures and countercultures. Firms are struggling to develop what Taylor Cox calls the multicultural organization. The multicultural organization is a firm that values diversity but systematically works to block the transfer of societally based subcultures into the fabric of the organization.¹⁷ Because Cox focuses on some problems unique to the United States, his prescription for change may not apply to organizations located in other countries with much more homogeneous populations.

• Multicultural organization is a firm that values diversity but systematically works to block the transfer of societally based subcultures into the fabric of the organization.

Cox suggests a five-step program for developing the multicultural organization. First, the organization should develop pluralism with the objective of multi-based socialization. To accomplish this objective, members of different naturally occurring groups need to school one another to increase knowledge and information and to eliminate stereotyping. Second, the firm should fully integrate its structure so that there is no direct relationship between a naturally occurring group and any particular job—for instance, there are no distinct male or female jobs. Third, the firm must integrate the informal networks by eliminating barriers and increasing participation. That is, it must break down existing societally based informal groups. Fourth, the organization should break the linkage between naturally occurring group identity and the identity of the firm. Fifth, the organization must actively work to eliminate interpersonal conflict based on either the group identity or the natural backlash of the largest societally based grouping.

Understanding Organizational Cultures

Some aspects of organizational culture are easy to see. Yet, not all aspects of organizational culture are readily apparent because they are buried deep in the shared experience of organizational members. It may take years to understand some deeper aspects of the culture. This complexity has led some to examine different layers of analysis ranging from easily observable to deeply hidden aspects of corporate culture.

Layers of Cultural Analysis

Figure 15.1 illustrates the observable aspects of culture, shared values, and underlying assumptions as three layers.¹⁸ The deeper one digs, the more difficult it is to discover the culture but the more important an aspect becomes.

The first layer concerns observable culture, or “the way we do things around here.” Important parts of an organization's culture emerge from the collective experience of its members. These emergent aspects of the culture help make it unique and may well provide a competitive advantage for the organization. Some of these aspects may be observed directly in day-to-day practices. Others may have to be discovered—for example, by asking members to tell stories of important incidents in the history of the organization. We often learn about the unique aspects of the organizational culture through descriptions of specific events.¹⁹ By observing employee actions, listening to stories, and asking members to interpret what is going on, one can begin to understand the organization's culture. The observable culture includes the unique stories, ceremonies, and corporate rituals that make up the history of the firm or a group within the firm.

• Observable culture is the way things are done in an organization

The second layer recognizes that shared values can play a critical part in linking people together and can provide a powerful motivational mechanism for members of the culture. Many consultants suggest that organizations should develop a “dominant and coherent set of shared values.”²⁰ The term shared in cultural analysis implies that the group is a whole. Not every member may agree with the shared values, but they have all been exposed to them and have often been told they are important. At Microsoft a shared culture value is a passion for technology.

Figure 15.1 Three levels of analysis in studying organizational culture.

At the deepest layer of cultural analysis are common cultural assumptions; these are the taken-for-granted truths that collections of corporate members share as a result of their joint experience. It is often extremely difficult to isolate these patterns, but doing so helps explain why culture invades every aspect of organizational life.

Stories, Rites, Rituals, and Symbols

To begin understanding a corporate culture, it is often easiest to start with stories. Organizations are rich with stories of winners and losers, successes and failures. Perhaps one of the most important stories concerns the founding of the organization. The founding story often contains the lessons learned from the heroic efforts of an embattled entrepreneur, whose vision may still guide the firm. The story of the founding may be so embellished that it becomes a saga—a heroic account of accomplishments.²¹ Sagas are important because they are used to tell new members the real mission of the organization, how the organization operates, and how individuals can fit into the company. Rarely is the founding story totally accurate, and it often glosses over some of the more negative aspects of the founders. Such is the case with Monterey Pasta.²²

• Saga is an embellished heroic account of accomplishments.

On its Web site, the organization says of its history, “The Monterey Pasta Company was launched from a 400-square-foot storefront on Lighthouse Avenue in Monterey, California in 1989…. The founders started their small fresh pasta company in response to the public's growing interest in healthy gourmet foods. Customers were increasingly excited about fresh pasta given its superior quality and nutritional value, as well as ease of preparation…. The company soon accepted its first major grocery account…. In 1993, the company completed its first public offering.” The Web site fails to mention another interesting aspect of the firm. An unsuccessful venture into the restaurant business in the mid-1990s provided a significant distraction, and substantial losses were incurred before the company refocused on its successful retail business. But why ruin a good founding story?

If you have job experience, you may well have heard stories concerning the following questions: How will the boss react to a mistake? Can someone move from the bottom to the top of the company? What will get me fired? These are common story topics in many organizations.²³ Often, the stories provide valuable but hidden information about who is more equal than others, whether jobs are secure, and how things are really controlled. In essence, the stories begin to suggest how organizational members view the world and live together.

Some of the most obvious aspects of organizational culture are rites and rituals.²⁴ Rites are standardized and recurring activities that are used at special times to influence the behaviors and understanding of organizational members; rituals are systems of rites. It is common, for example, for Japanese workers and managers to start their workdays together with group exercises and singing of the “company song.” Separately, the exercises and song are rites. Together, they form part of a ritual. In other settings, such as Mary Kay Cosmetics, scheduled ceremonies reminiscent of the Miss America pageant (a ritual) are used regularly to spotlight positive work achievements and reinforce high-performance expectations with awards, including gold and diamond pins and fur stoles.

• Rites are standardized and recurring activities used at special times to influence the behaviors and understanding of organizational members.

• Rituals are systems of rites.

Rituals and rites may be unique to particular groups within the organization. Subcultures often arise from the type of technology deployed by the unit, the specific function being performed, and the specific collection of specialists in the unit. A unique language may well maintain the boundaries of the subculture. Often, the language of a subculture, and its rituals and rites, emerge from the group as a form of jargon. In some cases, the special language starts to move outside the firm and begins to enter the larger society. For instance, look at Microsoft Word's specialized language, with such words as hyperlink, frames, and quick parts. It's a good thing they also provide a Help button defining each.

Another observable aspect of corporate culture centers on the symbols found in organizations. A cultural symbol is any object, act, or event that serves to transmit cultural meaning. Good examples are the corporate uniforms worn by UPS and Federal Express delivery personnel.

• A cultural symbol is any object, act, or event that serves to transmit cultural meaning.

Cultural Rules and Roles

Organizational culture often specifies when various types of actions are appropriate and where individual members stand in the social system. These cultural rules and roles are part of the normative controls of the organization and emerge from its daily routines.²⁵ For instance, the timing, presentation, and methods of communicating authoritative directives are often quite specific to each organization. In one firm, meetings may follow a set rigid agenda. The manager could go into meetings to tell subordinates what to do and how to accomplish tasks. Private conversations prior to the meeting might be the place for any new ideas or critical examination. In other firms, meetings might be forums for dialogue and discussion, where managers set agendas and then let others offer new ideas, critically examine alternatives, and fully participate. Take a look at how R&R Partners uses what it calls a SWARM.²⁶

Shared Values, Meanings, and Organizational Myths

To describe an organization's culture more fully, it is necessary to go deeper than the observable aspects. To many researchers and managers, shared common values lie at the very heart of organizational culture.

Shared Values Shared values help turn routine activities into valuable and important actions, tie the corporation to the important values of society, and possibly provide a very distinctive source of competitive advantage. In organizations, what works for one person is often taught to new members as the correct way to think and feel. Important values are then attributed to these solutions to everyday problems. By linking values and actions, the organization taps into some of the strongest and deepest realms of the individual. The tasks a person performs are given not only meaning but also value: What one does is not only workable but correct, right, and important.

Some successful organizations share some common cultural characteristics.²⁷ Organizations with “strong cultures” possess a broadly and deeply shared value system. Unique, shared values can provide a strong corporate identity, enhance collective commitment, provide a stable social system, and reduce the need for formal and bureaucratic controls. For firms in a very stable domestic environment, several consultants suggest that firms develop a “strong culture.”²⁸ By this, they basically mean:

• A widely shared real understanding of what the firm stands for, often embodied in slogans
• A concern for individuals over rules, policies, procedures, and adherence to job duties
• A recognition of heroes whose actions illustrate the company's shared philosophy and concerns
• A belief in ritual and ceremony as important to members and to building a common identity
• A well-understood sense of the informal rules and expectations so that employees and managers understand what is expected of them
• A belief that what employees and managers do is important and that it is important to share information and ideas

When it is established over a long period of time, a strong culture can be a double-edged sword. A strong culture and value system can reinforce a singular and sometimes outdated view of the organization and its environment. If dramatic changes are needed, it may be very difficult to change the organization. For years General Motors had a “strong” culture. But as the global auto industry changed, GM could not. It took bankruptcy to shake it to its foundations and provide the impetus for radical change.

Shared Meanings When you are observing the actions within a firm, it is important to keep in mind the three levels of analysis we mentioned earlier. What you see as an outside observer may not be what organizational members experience because members may link actions to values and unstated assumptions. For instance, in the aftermath of 9/11 many casual observers saw crane operators moving wreckage from an 18-acre pile of rubble that was once the Twin Towers at the World Trade Center complex into waiting trucks.

If you probe the values and assumptions about what these individuals are doing, however, you get an entirely different picture from those actually doing the work. They were not just hauling away the remnants of the Twin Towers at the World Trade Center complex. They were rebuilding America. These workers had infused a larger shared meaning—or sense of broader purpose—into their tasks. Through interaction with one another, and as reinforced by the rest of their organizations and the larger society, their work had deeper meaning. In this deeper sense, organizational culture is a “shared” set of meanings and perceptions.

In most corporations, these shared meanings and perceptions may not be as dramatic as those shared at Ground Zero, yet in most firms employees create and learn a deeper aspect of their culture.²⁹ Often one finds a series of common assumptions known to most everyone in the corporation: “We are different.” “We are better at….” “We have unrecognized talents.” Cisco Systems provides an excellent example. Senior managers often share common assumptions, such as “We are good stewards” and “We are competent managers” and “We are practical innovators.” Like values, such assumptions become reflected in the organizational culture.

As with a “strong culture,” shared meanings and perceptions can be a double-edged sword. While a deeper shared perception can provide managers with a common base for decision making to develop an effective organization, Jim Collins notes in his book How Do the Mighty Fall, that firms may begin to decline if managers share an unrealistic positive perception of their firm.³⁰

Organizational Myths In many firms, a key aspect of the shared common assumptions involves organizational myths. Organizational myths are unproven and frequently unstated beliefs that are accepted uncritically. Often corporate mythology focuses on cause–effect relationships and assertions by senior management that cannot be empirically supported.³¹ Although some may scoff at organizational myths and want to see rational, hard-nosed analysis replace mythology, each firm needs a series of managerial myths.³² Myths allow executives to redefine impossible problems into more manageable components. Myths can facilitate experimentation and creativity, and they allow managers to govern. Of course, there is also a potential downside to the power of myths.

• Organizational myth is a commonly held cause–effect relationship or assertion that cannot be supported empirically.

Three common myths may combine to present major risk problems.³³ The first common myth is the presumption that at least senior management has no risk bias. This myth is often expressed as, “Although others may be biased, I am able to define problems and develop solutions objectively.” We are all subject to bias in varying degrees and in varying ways. As an issue becomes more complex, it is much more likely there are several biased viable interpretations.

A second common myth is the presumption of administrative competence. Managers at all levels are subject to believing that their part of the firm is okay and just needs minor improvements in implementation. As we have documented throughout this book, such is rarely the case. In almost all firms, there is often considerable room for improvement. One particularly damaging manifestation of this myth is that new process and product innovations can be managed in the same way as older ones.

A third common myth is the denial of trade-offs; their group, unit, or firm can avoid making undesirable trade-offs and simultaneously please nearly every constituency. Whereas the denial of trade-offs is common, it can be a dangerous myth in some firms. An emphasis on a single goal often means that other goals are neglected. For example, throughout this book we have emphasized ethics to remind the reader that ethics does not stem from the search for higher efficiency. It is a worthy goal among several.

As illustrated in Figure 15.2, these myths may combine to yield purposeful unintended consequences.

Purposeful unintended consequences arise from the collective application of these three myths. Purposeful unintended consequences are dramatic, unanticipated benefits or costs arising from the implementation of a way of doing business. Often these unintended consequences are dire. They are purposeful because they stem from unexamined myths—myths managers think apply to others and not themselves.

The recent financial meltdown in mortgage-backed securities is an example.³⁴ Over the last decade, banks and financial institutions bought and sold mortgage-backed derivatives (complex financial instruments) under the myths that they could (1) accurately judge the risk themselves and value them accurately (they were not risk biased), (2) administer these complex instruments in a manner similar to traditional mortgages (the presumption of administrative competence), and (3) gain great short-term returns without risking long-term profitability (denial of trade-offs). These combined myths allowed the managers to dismiss collectively the potential of a systematic meltdown of the entire financial system (the dire unintended consequence). Yet, by the end of 2008 and the beginning of 2009 the global financial system almost collapsed from these and related problems. Was the unintended consequence pursued on purpose? Yes and no. No one manager sought a meltdown. Yet, collectively, millions of mortgages were granted to individuals with questionable credit and used to develop new types of financial instruments. It took unprecedented actions by many central banks and governments to avert a collapse.

Figure 15.2 Purposeful unintended consequences arising from organizational myths.

And yet, mortgage-backed securities and derivatives were one of the financial system's major innovations toward the turn of the century. They were an important way to broaden the financial support for housing. Initially they appeared quite successful and provided financial institutions with a way to grow and prosper. So, we turn to the topic of innovation to delve more deeply into this important factor for growth and prosperity.

Innovation in Organizations

When analysis stresses commonly shared actions, values, and common assumptions across the entire organization, it can appear that firms are static, unchanging entities. It is quite clear that much of the organization's culture and its structure emphasize stability and control. Yet, we all know that the world is changing and that firms must change with it. The best organizations don't stagnate; they consistently innovate to the extent that innovation becomes a part of everyday operations.

Innovation is the process of creating new ideas and putting them into practice.³⁵ It is the means by which creative ideas find their way into everyday practices—ideally practices that contribute to improved customer service or organizational productivity. There are a variety of ways to look at innovation. Here, we will examine it as a process, separate product from process innovation, and note the tensions between the early development of ideas and the task of implementation.

• Innovation is the process of creating new ideas and putting them into practice.

Figure 15.3 The innovation process: a case of new product development.

The Process of Innovation

One easy way to look at the complex process of innovation is to break it down into four steps (see Figure 15.3).

1. Idea creation—to create an idea through spontaneous creativity, ingenuity, and information processing
2. Initial experimentation—to establish the idea's potential value and application
3. Feasibility determination—to identify anticipated costs and benefits
4. Final application—to produce and market a new product or service, or to implement a new approach to operations

It takes many creative ideas to establish a base for initial experimentation. Moreover, many successful initial experiments are just not feasible. Even among the few feasible ideas, only the rare idea actually makes it into application. Finally, innovative entities benefit from and require top-management support. Senior managers can and must provide good examples for others, eliminate obstacles to innovation, and try to get things done that make innovation easier.

By emphasizing the innovation process, innovative entities often adapt a different culture from the ones typically found where more routine operations are paramount. Innovative entities look to the future, are willing to cannibalize existing products in their development of new ones, have a high tolerance for risk, have a high tolerance for mistakes, respect well-intentioned ideas that just do not work, prize creativity, and reward and give special attention to idea generators, information keepers, product champions, and project leaders. They also prize empowerment and emphasize communication up, down, and across all individuals in the unit.³⁶

Although it is convenient to depict the process as a sequential four-step affair, you should be aware that in practice the process of innovation is often quite messy. Take a look at Figure 15.3. With initial experimentation, for instance, the very act of sharing ideas with others can, and often does, yield a completely new set of ideas. Even in final application, the process does not stop, as astute innovators carefully listen to customers and clients to make further improvements. Also note that organizational support for innovation is needed in each step in this ongoing process.

Although the desire to improve financial performance is often important in stimulating innovation, it is also important to note that innovation can arise from the firm's desire to be more legitimate in the eyes of key stakeholders, such as government regulators. For example, one recent study suggested that pressures from regulators and a prior record of poor environmental performance yielded more innovative environmental responses from firms. There was an exception, however, in that firms with greater slack resources did not respond as positively to regulatory pressures even if they had a record of poorer prior environmental performance.³⁷

Research also shows the results of the team factors associated with greater innovation. It is clear from this work that a number of important team processes are consistently linked to greater innovation in addition to the organizational factors noted above.

Product and Process Innovations

Product innovations result in the introduction of new or improved goods or services to better meet customer needs. A number of studies suggest that the key difficulty associated with product development is the integration across all of the units needed to move from the idea stage to final implementation.³⁸ Culturally, new product development often challenges existing practice, existing value structures, and common understandings. For instance, by its very definition, product innovation means that the definition of the business will change. Many firms find it difficult to cannibalize their existing product lineup in the hope that new products will be even more successful. Yet, this is what often needs to be done.³⁹

• Product innovations introduce new goods or services to better meet customer needs.

Product innovation is so important that a number of government-based initiatives have been launched to help spur the development of new products. Individuals proposing initiatives point to the revolution resulting from development of the Internet, the hope for new green technologies, and the promise of medical breakthroughs to change the human condition. One important new study suggests that corporate culture, rather than national policy, makes the biggest difference with radical product innovation.⁴⁰

A number of interrelated firms may share the product innovation process.⁴¹ Generally speaking, large complex products are often combinations of individual components from a variety of corporations. At the extreme, there is open innovation where each firm knows what the others are doing. Control is exercised by a common design, often under the direction of a single integrator who maintains the dominant design. This is often the model in computer software, for instance. It is important to note that the development and control of the dominant design can be linked to extremely high profitability.⁴² Furthermore, the dominant design is often not the best technical solution—it is the solution most often adopted by a large number of users.

Where the product innovation process is less open, firms often find that coordination with lead users can help provide design insights.⁴³ Yet, firms typically confront waning commitment to product innovation. Although no solution is perfect, several studies suggest that the development of multidisciplinary teams can help maintain broader commitment. Of course, just the inclusion of individuals with diverse skills, interests, and perspectives calls for astute management. As we said earlier, the innovation process is far from easy.

Process innovations result in the introduction of new and better work methods and operations. Perhaps one of the most interesting and difficult types of process improvement is that of management innovation.⁴⁴ Obviously, much management innovation comes from the vast industry known as management consulting, Unfortunately, many of the new management practices emanating from these outside units are more fashions and fads than workable solutions to the problems faced by individual firms. The key to successful managerial innovation often involves extensive interaction with peers, subordinates, and superiors. As astute managers try new practices, they compare initial implementation with the reactions of peers and subordinates to refine and modify the practice. Often this process of trial and error takes several iterations before the practice becomes accepted well enough to provide the intended benefits.

• Process innovations introduce into operations new and better ways of doing things.

Balancing Exploration and Exploitation

As suggested by Figure 15.3, the innovation continuum runs from exploration to exploitation.⁴⁵ In the early stages of innovation, time, energy, and effort to explore potentials are necessary. These early phases are the result of the research and development units found in so many companies. Yet, too much emphasis on exploration will yield a whole list of potential ideas for new products and processes to new clients and customers in new markets, but little payoff. It is also important to stress exploitation to capture the economic value stemming from exploration.⁴⁶ Exploitation often focuses on refinement and reuse of existing products and processes. Refining an existing product to make it more saleable in a new market is an example of exploitation. Of course, too much emphasis on exploitation and the firm loses its competitive edge because its products become obsolete and its processes less effective and efficient than those of competitors.

• Exploitation focuses on refinement and reuse of existing products and processes.

The admonition to balance exploration and exploitation sounds very simple, but it comes with a major problem. Exploration calls for the organization and its managers to stress freedom and radical thinking and therefore opens the firm to big changes—or what some call radical innovations.⁴⁷ Although some radical departures are built on existing competencies, often the adoption of a radically new product or process means that the existing knowledge within a firm is invalidated.⁴⁸ Conversely, an emphasis on exploitation stresses control and evolutionary development. Such exploitation can be planned with tight budgets, careful forecasts, and steady implementation. It is often much easier to stress exploitation because most organizations have a structure and culture that emphasize stability and control.⁴⁹

• Exploration calls for the organization and its managers to stress freedom and radical thinking and therefore opens the firm to big changes–or what some call radical innovations.

Managers may attempt to solve this tension between exploration and exploitation in a variety of ways. One partial solution is to have separate units for the two types of activities. For example, some firms rely heavily on cooperative R&D arrangements with other firms for exploration and keep a tight rein on exploitation within the firm.⁵⁰ Others rely on middle managers to reconcile the tensions stemming from attempts to link explorative and exploitative groups. However, the desired mix of explorative and exploitative may well depend on the industry setting.

Recent research suggests a more culturally oriented solution based on the notion of an ambidextrous organization. There appear to be four critical factors in building an ambidextrous organization:

1. Managers must recognize the tension between exploration and exploitation.
2. Managers should realize that one form of thinking based on a single perspective is inappropriate.
3. Managers need to discuss with their subordinates the paradoxes arising from simultaneously thinking about big ideas and sound incremental improvements.
4. Managers must encourage subordinates to embrace these paradoxes and use them as motivations to provide creative solutions.⁵¹

Managing Organizational Culture and Innovation

Good managers are able to reinforce and support an existing strong culture. They are also able to help build resilient cultures in situations where they are absent. The best managers also recognize that effectively managing an organization culture involves incorporation of the innovation process as well.

Management Philosophy and Strategy

The process of managing organizational culture calls for a clear understanding of the organizational subculture at the top and a firm recognition of what can and cannot be changed. The first step in managing an organizational culture is for management to recognize its own subculture. Key aspects of the top-management subculture are often referred to in the OB literature by the term management philosophy. A management philosophy links important goals with key collaboration issues and comes up with a series of general ways by which the firm will manage its affairs.⁵² Specifically it (1) establishes generally understood boundaries for all members of the firm, (2) provides a consistent way of approaching new and novel situations, and (3) helps hold individuals together by assuring them of a known path toward success. In other words, it is the way in which top management addresses the questions of external adaptation.

• A management philosophy links key goal-related issues with key collaboration issues to come up with general ways by which the firm will manage its affairs.

When the management philosophy stresses security and stability management reinforces such values as benevolence. Such firms tend to be less innovative than when the management philosophy is more self-directive and reinforces risk taking. When the management philosophy stresses reaching out to others, embracing novel situations, and collectively developing a new path toward new visions of success, there is greater innovation.⁵³

For instance, the management philosophy at Cisco Systems links the strategic concerns of growth, profitability, and customer service with observable aspects of culture and desired underlying values. While elements of a management philosophy may be formally documented in a corporate plan or statement of business philosophy, it is the understood fundamentals these documents signify that form the heart of a successfully developed management philosophy.^53A

Building, Reinforcing, and Changing Culture

Managers can modify the visible aspects of culture, such as the language, stories, rites, rituals, and sagas. They can change the lessons drawn from common stories and even encourage individuals to see the reality they see. Because of their positions, senior managers can interpret situations in new ways and can adjust the meanings attached to important corporate events. They can create new rites and rituals. Executives can back these initiatives with both their words and their actions. This takes time and an enormous amount of energy, but the long-run benefits can be great. This is the approach found at Cisco Systems.⁵⁴

One of the key ways management influences the organizational culture is through the reward systems it establishes. In many larger U.S.-based firms, the reward system matches the overall strategy of the firm and reinforces the culture emerging from day-to-day activities. Two patterns of reward systems, strategies, and corporate cultures are common. The first is a steady-state strategy matched with hierarchical rewards and consistent with what can be labeled a clan culture. Specifically, rewards emphasize and reinforce a culture characterized by long-term commitment, fraternal relationships, mutual interests, and collegiality with heavy pressures to conform from peers and with superiors acting as mentors. Firms with this pattern were in such industries as power generation, chemicals, mining, and pharmaceuticals.

In contrast was a second pattern in which the strategy stressed evolution and change. Here the rewards emphasized and reinforced a more market culture. That is, rewards emphasized a contractual link between employee and employer, focused on short-term performance, and stressed individual initiative with very little pressure from peers to conform and with supervisors acting as resource allocators. Firms with this pattern were often in such industries as restaurants, consumer products, and industrial services.⁵⁵

Beyond reward systems, top managers can set the tone for a culture and for cultural change. Managers at Aetna Life and Casualty Insurance built on its humanistic traditions to provide basic skills to highly motivated but underqualified individuals. Even in the highly cost-competitive steel industry, Nucor executives built on basic entrepreneurial values in U.S. society to reduce the number of management levels by half.

Each of these examples illustrates how managers can help foster a culture that provides answers to important questions concerning external adaptation and internal integration. Recent work on the linkages between corporate culture and financial performance reaffirms the importance of an emphasis on helping employees adjust to the environment. It also suggests that this emphasis alone is not sufficient. Neither is an emphasis solely on stockholders or customers associated with long-term economic performance. Instead, managers must work to emphasize all three issues simultaneously.

The need to provide a balanced emphasis can be seen when executives violate ethical and legal standards as in the case of misleading earning statements. One key study found that while the fines levied for “cooking the books” may appear small, other costs were far more substantial. The real costs to these firms came from a loss of their reputation in the business community. Customers lost confidence, suppliers demanded greater assurances, and, of course, the entire financial community undervalued the firm so that loan costs were higher, stock prices were lower, and scrutiny was more extensive. How big is big? The fines averaged about $23 million a firm. The estimated financial cost from the loss of reputation was estimated at 7.5 times the average fine. That yielded a loss of some $196 million.⁵⁶

Early research on culture and cultural change often emphasized direct attempts by senior management to alter the values and assumptions of individuals by resocializing them—that is, trying to change their hearts so that their minds and actions would follow.⁵⁷ The goal was to establish a clear, consistent organization-wide consensus. More recent work suggests that this unified approach of working through values may not be either possible or desirable.⁵⁸

Trying to change people's values from the top down without also changing how the organization operates and recognizes the importance of individuals does not work very well. Look again at the example of Cisco Systems. Here managers realized that maintaining a dynamic, change-oriented culture is a mix of managerial actions, decisions about technology, and initiatives from all employees. The values are not set and imposed from someone on high. The shared values emerge, and they are not identical across all of Cisco's operating sites. For instance, subtle but important differences emerge across their operations in Silicon Valley, the North Carolina operation, and the Australian setting.

Tensions Between Cultural Stability and Innovation

Although organizational cultures help individuals cope with external adaptation and internal integration, the enduring pattern of observable actions, shared values, and common assumptions often does not evolve as quickly as required by innovations. Organizational cultural lag is a condition in which dominant cultural patterns are inconsistent with new emerging innovations.⁵⁹ As we suggested earlier, observable aspects of organizational culture such as rites, rituals, and cultural symbols often have powerful underlying meaning for organizational members. In a way they are symbols of prior successful ways to cope with external adaptation and internal integration. Individuals are often wary of abandoning the successful for an unproven new approach. One scholar notes that there can be a major “cultural drag on innovation from cultural legacies.”⁶⁰ These legacy effects come from an overreliance on rule following and reinforcement of old existing patterns of action.

• Organizational cultural lag is a condition where dominant cultural patterns are inconsistent with new emerging innovations.

Thus, one of the key challenges to management in promoting innovation where there are widely held and strong attached-to shared values and common assumptions is to show how they apply to the new innovations. When managers see an opportunity to develop new visions, create new strategies, and move the organization in new directions, they need to balance rule changing and rule following.⁶¹ If left uncontrolled, rule changing can yield runaway industry change that can quickly lead to chaos. While rule following can lead to a more stable industry structure and/or controlled industry change, there is also a danger of reinforcing cultural lag.

15 study guide

Key Questions and Answers

What is organizational culture?

• Organizational or corporate culture is the system of shared actions, values, and beliefs that develops within an organization and guides the behavior of its members.
• The functions of the corporate culture include responding to both external adaptation and internal integration issues.
• Most organizations contain a variety of subcultures, and a few have countercultures that can sometimes become the source of potentially harmful conflicts.
• The corporate culture also reflects the values and implicit assumptions of the larger national culture.

How do you understand an organizational culture?

• Organizational cultures may be analyzed in terms of observable actions, shared values, and common assumptions (the taken-for-granted truths).
• Observable aspects of culture include the stories, rites, rituals, and symbols that are shared by organization members.
• Cultural rules and roles specify when various types of actions are appropriate and where individual members stand in the social system.
• Shared meanings and understandings help everyone know how to act and expect others to act in various circumstances.
• Common assumptions are the taken-for-granted truths that are shared by collections of corporate members.

What is innovation and why is it important?

• Innovation is the process of creating new ideas and then implementing them in practical applications.
• Steps in the innovation process normally include idea generation, initial experimentation, feasibility determination, and final application.
• Common features of highly innovative organizations include supportive strategies, cultures, structures, staffing, and senior leadership.
• Product innovations result in improved goods or services; process innovations result in improved work methods and operations.
• Process innovations introduce into operations new and better ways of doing things.
• While it is necessary to balance exploration and exploitation, it is difficult to accomplish.

How can we manage organizational culture and innovation?

• Executives may manage many aspects of the observable culture directly.
• Nurturing shared values among the membership is a major challenge for executives.
• Adjusting actions to common understandings limits the decision scope of even the CEO.
• There are tensions between the tendency for cultural stability in most firms and the need to innovate.

Terms to Know

Countercultures (p. 350)

Cultural symbol (p. 355)

Exploitation (p. 364)

Exploration (p. 364)

External adaptation (p. 348)

Innovation (p. 360)

Internal integration (p. 349)

Management philosophy (p. 365)

Multicultural organization (p. 352)

Observable culture (p. 353)

Organizational cultural lag (p. 367)

Organizational or corporate culture (p. 348)

Organizational myth (p. 358)

Process innovations (p. 363)

Product innovations (p. 362)

Rites (p. 355)

Rituals (p. 355)

Saga (p. 354)

Subcultures (p. 350)

Self-Test 15

Multiple Choice

1. Culture concerns all of the following except ____________. (a) the collective concepts shared by members of a firm (b) acquired capabilities (c) the personality of the leader (d) the beliefs of members
2. The three levels of cultural analysis highlighted in the text concern ____________. (a) observable culture, shared values, and common assumptions (b) stories, rites, and rituals (c) symbols, myths, and stories (d) manifest culture, latent culture, and observable artifacts
3. External adaptation concerns ____________. (a) the unproven beliefs of senior executives (b) the process of coping with outside forces (c) the vision of the founder (d) the processes working together
4. Internal integration concerns ____________. (a) the process of deciding the collective identity and how members will live together (b) the totality of the daily life of members as they see and describe it (c) expressed unproven beliefs that are accepted uncritically and used to justify current actions (d) groups of individuals with a pattern of values that rejects those of the larger society
5. When Japanese workers start each day with the company song, this is an example of a(n) ____________. (a) symbol (b) myth (c) underlying assumption (d) ritual
6. ____________ is a sense of broader purpose that workers infuse into their tasks as a result of interaction with one another. (a) A rite (b) A cultural symbol (c) A foundation myth (d) A shared meaning
7. The story of a corporate turnaround attributed to the efforts of a visionary manager is an example of ____________. (a) a saga (b) a foundation myth (c) internal integration (d) a latent cultural artifact
8. The process of creating new ideas and putting them into practice is ____________. (a) innovation (b) creative destruction (c) product innovation (d) process innovation
9. Any object, act, or event that serves to transmit cultural meaning is called ____________. (a) a saga (b) a cultural symbol (c) a cultural lag (d) a cultural myth
10. Groups where the patterns of values outwardly reject those of the larger organization are ____________. (a) external adaptation rejectionist (b) cultural lag (c) countercultures (d) organizational myths
11. Groups with unique patterns of values and philosophies that are consistent with the dominant organizational culture are called ____________. (a) countercultures (b) subcultures (c) sagas (d) rituals
12. A ____________ links key goal-related issues with key collaboration issues to come up with general ways by which the firm will manage its affairs. (a) managerial philosophy (b) cultural symbol (c) ritual (d) saga
13. Commonly held cause–effect relationships that cannot be empirically supported are referred to as____________. (a) cultural lags (b) rituals (c) management philosophy (d) organizational myths
14. The patterns of values and philosophies that outwardly reject those of the larger organization or social system are called ____________. (a) sagas (b) organizational development (c) rituals (d) countercultures
15. ____________ is a condition in which dominant cultural patterns are inconsistent with new emerging innovations. (a) Organizational cultural lag (b) Management philosophy (c) Internal integration (d) External adaptation

Short Response

• 16. Describe the five steps Taylor Cox suggests need to be developed to help generate a multicultural organization or pluralistic company culture.
• 17. List the three aspects that help individuals and groups work together effectively and illustrate them through practical examples.
• 18. Give an example of how cultural rules and roles affect the atmosphere in a college classroom. Provide specific examples from your own perspective.
• 19. What are the major elements of a strong corporate culture?

Applications Essay

• 20. Discuss why managers should balance exploration and exploitation when seeking greater innovation.

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