CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE

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.
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. 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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CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE

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? 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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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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CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE

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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. 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. 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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CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE

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.
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_ 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.
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_ 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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CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE

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.
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_ 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.
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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?

Organizations have different cultures due to the interaction of four factors:

people, ethics, property rights given to employees, and structure. (Fig. 7.2)
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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CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE
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)
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_ Q. Name the property rights given to managers and employees. 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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CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE

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.

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.

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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Q. What terminal values will a mechanistic structure achieve?

CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE

Q. What values does decentralization promote? What values does centralization

promote? A. Decentralization promotes creativity and innovation; centralization
promote obedience, stability, and accountability.
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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.___________________________________________________________________________
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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.
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7.5

Corporate Social Responsibility

An organization can take several approaches to social responsibility. The following

approaches are on a continuum from low to high. 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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CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE
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.
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_ • Refer to discussion question 4 here to consider the pros and cons of social
responsibility.
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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

1. What is the origin of organizational culture? Why do different organizations
have different cultures?

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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Organizational culture arises from four sources: (1) the characteristics of its
people, (2) organizational ethics, (3) property rights, and (4) organizational
structure.
CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE
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?

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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.

4.

“An organization should always adopt a broad stance on social responsibility.”

Explain why you agree or disagree with this statement.

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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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.
CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE
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.

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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. 2. Could
Value Line’s next CEO copy Southwest’s culture? 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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CHAPTER 7: CREATING AND MANAGING ORGANIZATIONAL CULTURE
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. 2. 3. Students will debate the pros and cons of
social responsibility. As an outside assignment, students will read a work by
Milton Friedman, who opposes social responsibility. Compare and contrast the two
perspectives. 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. 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. 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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4.

5.

6.

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