The process of making corrective adjustments in strategy execution

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chapter 12

Corporate Culture and Leadership Keys to Good Strategy Execution

Learning Objectives

This chapter will help you

LO 12-1 Identify the key features of a company’s corporate culture and the role of a company’s core values and ethical standards in building corporate culture.

LO 12-2 Explain how and why a company’s culture can aid the drive for proficient strategy execution.

LO 12-3 Identify the kinds of actions management can take to change a problem corporate culture.

LO 12-4 Explain what constitutes effective managerial leadership in achieving superior strategy execution.

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A genuine leader is not a searcher for consensus but a molder of consensus.

Martin Luther King, Jr.—Civil Rights Leader

I came to see, in my time at IBM, that culture isn’t just one aspect of the game, it is the game.

Louis Gerstner—Former Chairman and CEO of IBM

As we look ahead into the next century, leaders will be those who empower others.

Bill Gates—Cofounder and former CEO and chair of Microsoft

process management tools, installing operating systems, and providing the right incentives. In this chapter, we explore the two remaining managerial tasks that contribute to good strategy execution: creating a supportive corporate culture and leading the strategy execution process.

In the previous two chapters, we examined eight of the managerial tasks that drive good strategy execution: staffing the organization, acquiring the needed resources and capabilities, designing the organizational structure, allocating resources, establishing policies and procedures, employing

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INSTILLING A CORPORATE CULTURE CONDUCIVE TO GOOD STRATEGY EXECUTION

Every company has its own unique corporate culture—the shared values, ingrained attitudes, and company traditions that determine norms of behavior, accepted work practices, and styles of operating.1 The character of a company’s culture is a prod- uct of the core values and beliefs that executives espouse, the standards of what is ethically acceptable and what is not, the “chemistry” and the “personality” that permeate the work environment, the company’s traditions, and the stories that get told over and over to illustrate and reinforce the company’s values, business prac- tices, and traditions. In a very real sense, the culture is the company’s automatic, self-replicating “operating system” that defines “how we do things around here.”2 It can be thought of as the company’s psyche or organizational DNA.3 A company’s

culture is important because it influences the organization’s actions and approaches to conducting business. As such, it plays an important role in strategy execution and may have an appreciable effect on business performance as well.

Corporate cultures vary widely. For instance, the bedrock of Walmart’s culture is zealous pursuit of low costs and frugal operating practices, a strong work ethic, ritu- alistic headquarters meetings to exchange ideas and review problems, and company executives’ commitment to visiting stores, listening to customers, and soliciting sugges- tions from employees. The culture at Apple is customer-centered, secretive, and highly protective of company-developed technology. Apple employees share a common goal of making the best products for the consumer; the aim is to make the customer feel delight, surprise, and connection to each Apple device. The company expects creative thinking and inspired solutions from everyone—as the company puts it, “We’re perfec- tionists. Idealists. Inventors. Forever tinkering with products and processes, always on the lookout for better.” According to a former employee, “Apple is one of those compa- nies where people work on an almost religious level of commitment.” To spur innova- tion and creativity, the company fosters extensive collaboration and cross- pollination among different work groups. But it does so in a manner that demands secrecy— employees are expected not to reveal anything relevant about what new project they are working on, not to employees outside their immediate work group and especially not to family members or other outsiders; it is common for different employees working on the same project to be assigned different project code names. The different pieces of a new product launch often come together like a puzzle at the last minute.4 W. L. Gore & Associates, best known for GORE-TEX, credits its unique culture for allow- ing the company to pursue multiple end-market applications simultaneously, enabling rapid growth from a niche business into a diversified multinational company. The company’s culture is team-based and designed to foster personal initiative, with no traditional organizational charts, no chains of command, no predetermined channels of communication. The culture encourages multidiscipline teams to organize around opportunities, and in the process, leaders emerge. At Nordstrom, the corporate cul- ture is centered on delivering exceptional service to customers, where the company’s motto is “Respond to unreasonable customer requests,” and each out-of-the-ordinary request is seen as an opportunity for a “heroic” act by an employee that can further the company’s reputation for unparalleled customer service. Nordstrom makes a point of promoting employees noted for their heroic acts and dedication to outstanding service.

Illustration Capsule 12.1 describes the corporate culture of another exemplary company— Epic Systems, well known by health care providers.

CORE CONCEPT Corporate culture refers to the shared values, ingrained attitudes, core beliefs, and company traditions that determine norms of behav- ior, accepted work practices, and styles of operating.

• LO 12-1 Identify the key fea- tures of a company’s corporate culture and the role of a company’s core values and ethical standards in building corporate culture.

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ILLUSTRATION CAPSULE 12.1

Epic Systems Corporation creates software to support record keeping for mid- to large-sized health care orga- nizations, such as hospitals and managed care organi- zations. Founded in 1979 by CEO Judith Faulkner, the company claims that its software is “quick to implement, easy to use and highly interoperable through industry standards.” Widely recognized for superior products and high levels of customer satisfaction, Epic won the Best Overall Software Suite award for the sixth con- secutive year—a ranking determined by health care professionals and compiled by KLAS, a provider of company performance reviews. Part of this success has been attributed to Epic’s strong corporate culture—one based on the slogan “Do good, have fun, make money.” By remaining true to its 10 commandments and princi- ples, its homegrown version of core values, Epic has nur- tured a work climate where employees are on the same page and all have an overarching standard to guide their actions.

Epic’s 10 Commandments:

1. Do not go public. 2. Do not be acquired. 3. Software must work.

4. Expectations = reality. 5. Keep commitments. 6. Focus on competency. Do not tolerate mediocrity. 7. Have standards. Be fair to all. 8. Have courage. What you put up with is what you

stand for. 9. Teach philosophy and culture. 10. Be frugal. Do not take on debt for operations.

Epic’s Principles:

1. Make our products a joy to use. 2. Have fun with customers. 3. Design in collaboration with users. 4. Make it easy for users to do the right thing. 5. Improve the patient’s health and healthcare experience. 6. Generalize to benefit more. 7. Follow processes. Find root causes. Fix processes. 8. Dissent when you disagree; once decided, support. 9. Do what is difficult for us if it makes things easier for

our users. 10. Escalate problems at the start, not when all hell

breaks loose.

Epic fosters this high-performance culture from the get- go. It targets top-tier universities to hire entry-level tal- ent, focusing on skills rather than personality. A rigorous training and orientation program indoctrinates each new employee. In 2002, Faulkner claimed that someone com- ing straight from college could become an “Epic person” in three years, whereas it takes six years for someone coming from another company. This culture positively affects Epic’s strategy execution because employ- ees are focused on the most important actions, there is peer pressure to contribute to Epic’s success, and employees are genuinely excited to be involved. Epic’s faith in its ability to acculturate new team members and stick true to its core values has allowed it to sustain its status as a premier provider of health care IT systems.

Strong Guiding Principles Drive the High-Performance Culture at Epic

©Kamon_Wongnon/Shutterstock

Note: Developed with Margo Cox.

Sources: Company website; communications with an Epic insider; “Epic Takes Back ‘Best in KLAS’ title,” Healthcare IT News, January 29, 2015, www.healthcareitnews.com/news/epic-takes-back-best-klas; “Epic Systems’ Headquarters Reflect Its Creativity, Growth,” Boston Globe, July 28, 2015, www.bostonglobe.com/business/2015/07/28/epic-systems-success-like-its-headquarters-blend-creativity-and- diligence/LpdQ5m0DDS4UVilCVooRUJ/story.html (accessed December 5, 2015).

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Identifying the Key Features of a Company’s Corporate Culture A company’s corporate culture is mirrored in the character or “personality” of its work environment—the features that describe how the company goes about its business and the workplace behaviors that are held in high esteem. Some of these features are read- ily apparent, and others operate quite subtly. The chief things to look for include:

• The values, business principles, and ethical standards that management preaches and practices—these are the key to a company’s culture, but actions speak much louder than words here.

• The company’s approach to people management and the official policies, proce- dures, and operating practices that provide guidelines for the behavior of company personnel.

• The atmosphere and spirit that pervades the work climate—whether the workplace is competitive or cooperative, innovative or resistant to change, collegial or politi- cized, all business or fun-loving, and the like.

• How managers and employees interact and relate to one another—whether people tend to work independently or collaboratively, whether communications among employees are free-flowing or infrequent, whether people are called by their first names, whether co-workers spend little or lots of time together outside the work- place, and so on.

• The strength of peer pressure to do things in particular ways and conform to expected norms.

• The actions and behaviors that management explicitly encourages and rewards and those that are frowned upon.

• The company’s revered traditions and oft-repeated stories about “heroic acts” and “how we do things around here.”

• The manner in which the company deals with external stakeholders—whether it treats suppliers as business partners or prefers hard-nosed, arm’s-length business arrangements and whether its commitment to corporate citizenship and environ- mental sustainability is strong and genuine.

The values, beliefs, and practices that undergird a company’s culture can come from anywhere in the organizational hierarchy. Typically, key elements of the culture originate with a founder or certain strong leaders who articulated them as a set of business princi- ples, company policies, operating approaches, and ways of dealing with employees, custom-

ers, vendors, shareholders, and local communities where the company has operations. They also stem from exemplary actions on the part of company personnel and evolving consensus about “how we ought to do things around here.”5 Over time, these cultural underpinnings take root, come to be accepted by company managers and employees alike, and become ingrained in the way the company conducts its business.

The Role of Core Values and Ethics The foundation of a company’s corporate culture nearly always resides in its dedication to certain core values and the bar it sets for ethical behavior. The culture-shaping significance of core values and ethi- cal behaviors accounts for why so many companies have developed a formal value statement and a code of ethics. Many executives want the work climate at their companies to mirror certain values and ethical standards, partly because of personal

A company’s culture is grounded in and shaped by its core values and ethical standards.

A company’s value state- ment and code of ethics communicate expectations of how employees should conduct themselves in the workplace.

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convictions but mainly because they are convinced that adherence to such principles will promote better strategy execution, make the company a better performer, and pos- itively impact its reputation.6 Not incidentally, strongly ingrained values and ethical standards reduce the likelihood of lapses in ethical behavior that mar a company’s pub- lic image and put its financial performance and market standing at risk.

As depicted in Figure 12.1, a company’s stated core values and ethical principles have two roles in the culture-building process. First, a company that works hard at put- ting its core values and ethical principles into practice fosters a work climate in which company personnel share strongly held convictions about how the company’s business is to be conducted. Second, the stated values and ethical principles provide company personnel with guidance about the manner in which they are to do their jobs—which behaviors and ways of doing things are approved (and expected) and which are out- of-bounds. These value-based and ethics-based cultural norms serve as yardsticks for gauging the appropriateness of particular actions, decisions, and behaviors, thus help- ing steer company personnel toward both doing things right and doing the right thing.

Embedding Behavioral Norms in the Organization and Perpetuating the Culture  Once values and ethical standards have been formally adopted, they must be institution- alized in the company’s policies and practices and embedded in the conduct of com- pany personnel. This can be advanced in a number of different ways.7 Tradition-steeped companies with a rich folklore rely heavily on word-of-mouth indoctrination and the power of tradition to instill values and enforce ethical conduct. But most companies employ a variety of techniques, drawing on some or all of the following:

1. Screening applicants and hiring those who will mesh well with the culture. 2. Incorporating discussions of the company’s culture and behavioral norms into orien-

tation programs for new employees and training courses for managers and employees. 3. Having senior executives frequently reiterate the importance and role of company

values and ethical principles at company events and in internal communications to employees.

FIGURE 12.1 The Two Culture-Building Roles of a Company’s Core Values and Ethical Standards

Foster a work climate where company personnel share common and strongly held convictions about how the company’s business is to be conducted.

Provide company personnel with guidance about how to do their jobs—steering them toward both doing things right and doing the right thing.

A company’s stated core values and

ethical principles

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4. Expecting managers at all levels to be cultural role models and exhibit the advo- cated cultural norms in their own behavior.

5. Making the display of cultural norms a factor in evaluating each person’s job per- formance, granting compensation increases, and offering promotions.

6. Stressing that line managers all the way down to first-level supervisors give ongoing attention to explaining the desired cultural traits and behaviors in their areas and clarifying why they are important.

7. Encouraging company personnel to exert strong peer pressure on co-workers to conform to expected cultural norms.

8. Holding periodic ceremonies to honor people who excel in displaying the company values and ethical principles.

To deeply ingrain the stated core values and high ethical standards, companies must turn them into strictly enforced cultural norms. They must make it unequivocally clear that living up to the company’s values and ethical standards has to be “a way of life” at the company and that there will be little toleration for errant behavior.

The Role of Stories Frequently, a significant part of a company’s culture is captured in the stories that get told over and over again to illustrate to newcomers the impor- tance of certain values and the depth of commitment that various company personnel have displayed. One of the folktales at Zappos, known for its outstanding customer service, is about a customer who ordered shoes for her ill mother from Zappos, hoping the shoes would remedy her mother’s foot pain and numbness. When the shoes didn’t work, the mother called the company to ask how to return them and explain why she was returning them. Two days later, she received a large bouquet of flowers from the company, along with well wishes and a customer upgrade giving her free expedited service on all future orders. Specialty food market Trader Joe’s is similarly known for its culture of going beyond the call of duty for its customers. When a World War II veteran was snowed in without any food for meals, his daughter called several supermarkets to see if they offered grocery delivery. Although Trader Joe’s technically doesn’t offer delivery, it graciously helped the veteran, even recommending items for his low-sodium diet. When the store delivered the groceries, the veteran wasn’t charged for either the groceries or the delivery. Stories of employees at Ritz Carlton going the extra mile for customers both showcase and reinforce its customer-centric culture. Recently, a fam- ily arrived at a Ritz-Carlton only to find that the specialized eggs and milk they had brought along for their son had spoiled. (The child suffered from food allergies.) When the products could not be found locally, the hotel’s staff had the products flown in from Singapore, approximately 1,050 miles away!

Forces That Cause a Company’s Culture to Evolve Despite the role of time- honored stories and long-standing traditions in perpetuating a company’s culture, cultures are far from static—just like strategy and organizational structure, they evolve. New challenges in the marketplace, revolutionary technologies, and shifting internal conditions— especially an internal crisis, a change in company direction, or top-executive turnover—tend to breed new ways of doing things and, in turn, drive cultural evolution. An incoming CEO who decides to shake up the existing business and take it in new directions often triggers a cultural shift, perhaps one of major proportions. Likewise, diversification into new businesses, expansion into foreign countries, rapid growth that brings an influx of new employees, and the merger with or acquisition of another company can all pre- cipitate significant cultural change.

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The Presence of Company Subcultures Although it is common to speak about corporate culture in the singular, it is not unusual for companies to have multiple cul- tures (or subcultures). Values, beliefs, and practices within a company sometimes vary significantly by department, geographic location, division, or business unit. Subcultures can exist because a company has recently acquired other companies. Global and multi- national companies tend to be at least partly multicultural because cross-country orga- nization units have different operating histories and work climates, as well as members who speak different languages, have grown up under different social customs and tra- ditions, and have different sets of values and beliefs. The problem with subcultures is that they can clash, or at least not mesh well, particularly if they embrace conflict- ing business philosophies or operating approaches, if key executives employ different approaches to people management, or if important differences between a company’s culture and those of recently acquired companies have not yet been ironed out. On a number of occasions, companies have decided to pass on acquiring particular compa- nies because of culture conflicts they believed would be hard to resolve.

Nonetheless, the existence of subcultures does not preclude important areas of commonality and compatibility. Company managements are quite alert to the impor- tance of cultural compatibility in making acquisitions and the need to integrate the cultures of newly acquired companies. Indeed, cultural due diligence is often as important as financial due diligence in deciding whether to go forward on an acquisi- tion or merger. Also, in today’s globalizing world, multinational companies are learn- ing how to make strategy-critical cultural traits travel across country boundaries and create a workably uniform culture worldwide. AES, a sustainable energy company with 10,000 employees and operations on four continents, has found that people in most countries readily embrace the five core values that underlie its culture—putting safety first, acting with integrity, remaining nimble, having fun through work, and striving for excellence. Moreover, AES tries to define and practice its cultural values the same way in all of its locations while still being sensitive to differences that exist among various peoples and groups around the world. Top managers at AES have expressed the view that people across the globe are more similar than different and that the company’s culture is as meaningful in Brazil, Vietnam, or Kazakhstan as in the United States.

Strong versus Weak Cultures Company cultures vary widely in strength and influence. Some are strongly embedded and have a big influence on a company’s operating practices and the behavior of com- pany personnel. Others are weakly ingrained and have little effect on behaviors and how company activities are conducted.

Strong-Culture Companies The hallmark of a strong-culture company is the dominating presence of certain deeply rooted values, business principles, and behavioral norms that “regulate” the conduct of company personnel and determine the climate of the workplace.8 In strong-culture companies, senior managers make a point of explaining and reiterating why these values, principles, norms, and oper- ating approaches need to govern how the company conducts its business and how they ultimately lead to better business performance. Furthermore, they make a con- scious effort to display these values, principles, and behavioral norms in their own actions—they walk the talk. An unequivocal expectation that company personnel will

CORE CONCEPT In a strong-culture com- pany, deeply rooted values and norms of behavior are widely shared and regulate the conduct of the com- pany’s business.

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act and behave in accordance with the adopted values and ways of doing business leads to two important outcomes: (1) Over time, the professed values come to be widely shared by rank-and-file employees—people who dislike the culture tend to leave—and (2) individuals encounter strong peer pressure from co-workers to observe the cultur- ally approved norms and behaviors. Hence, a strongly implanted corporate culture ends up having a powerful influence on behavior because so many company personnel are accepting of the company’s culturally approved traditions and because this acceptance is reinforced by both management expectations and co-worker peer pressure to conform to cultural norms.

Strong cultures emerge only after a period of deliberate and rather intensive cul- ture building that generally takes years (sometimes decades). Two factors contribute to the development of strong cultures: (1) a founder or strong leader who established core values, principles, and practices that are viewed as having contributed to the success of the company; and (2) a sincere, long-standing company commitment to operating the business according to these established traditions and values. Continuity of leadership, low workforce turnover, geographic concentration, and considerable organizational success all contribute to the emergence and sustainability of a strong culture.9

In strong-culture companies, values and behavioral norms are so ingrained that they can endure leadership changes at the top—although their strength can erode over time if new CEOs cease to nurture them or move aggressively to institute cultural adjust- ments. The cultural norms in a strong-culture company typically do not change much as strategy evolves, either because the culture constrains the choice of new strategies or because the dominant traits of the culture are somewhat strategy-neutral and com- patible with evolving versions of the company’s strategy. As a consequence, strongly implanted cultures provide a huge assist in executing strategy because company managers can use the traditions, beliefs, values, common bonds, or behavioral norms as levers to mobilize commitment to executing the chosen strategy.

Weak-Culture Companies In direct contrast to strong-culture companies, weak- culture companies lack widely shared and strongly held values, principles, and behav- ioral norms. As a result, they also lack cultural mechanisms for aligning, constraining, and regulating the actions, decisions, and behaviors of company personnel. In the absence of any long-standing top management commitment to particular values, beliefs, operating practices, and behavioral norms, individuals encounter little pressure to do things in particular ways. Such a dearth of companywide cultural influences and revered traditions produces a work climate where there is no strong employee allegiance to what the company stands for or to operating the business in well-defined ways. While individual employees may well have some bonds of identification with and loyalty toward their department, their colleagues, their union, or their immediate boss, there’s neither passion about the company nor emotional commitment to what it is trying to accomplish—a condition that often results in many employees’ viewing their company as just a place to work and their job as just a way to make a living.

As a consequence, weak cultures provide little or no assistance in executing strategy because there are no traditions, beliefs, values, common bonds, or behavioral norms that management can use as levers to mobilize commitment to executing the chosen strategy. Without a work climate that channels organizational energy in the direction of good strategy execution, managers are left with the options of either using compen- sation incentives and other motivational devices to mobilize employee commitment, supervising and monitoring employee actions more closely, or trying to establish cul- tural roots that will in time start to nurture the strategy execution process.

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Why Corporate Cultures Matter to the Strategy Execution Process Even if a company has a strong culture, the culture and work climate may or may not be compatible with what is needed for effective implementation of the chosen strategy. When a company’s present culture promotes attitudes, behaviors, and ways of doing things that are in sync with the chosen strategy and conducive to first-rate strategy execu- tion, the culture functions as a valuable ally in the strategy execution process. For example, a corporate culture characterized by frugality and thrift prompts employee actions to identify cost-saving opportunities—the very behavior needed for successful execution of a low-cost leadership strategy. A culture that celebrates taking initiative, exhibiting creativity, taking risks, and embracing change is conducive to successful execution of product innovation and technological leadership strategies.10

A culture that is grounded in actions, behaviors, and work practices that are conducive to good strategy implementation supports the strategy execution effort in three ways:

1. A culture that is well matched to the chosen strategy and the requirements of the strat- egy execution effort focuses the attention of employees on what is most important to this effort. Moreover, it directs their behavior and serves as a guide to their decision making. In this manner, it can align the efforts and decisions of employees through- out the firm and minimize the need for direct supervision.

2. Culture-induced peer pressure further induces company personnel to do things in a manner that aids the cause of good strategy execution. The stronger the culture (the more widely shared and deeply held the values), the more effective peer pressure is in shaping and supporting the strategy execution effort. Research has shown that strong group norms can shape employee behavior even more powerfully than can financial incentives.

3. A company culture that is consistent with the requirements for good strategy execution can energize employees, deepen their commitment to execute the strategy flawlessly, and enhance worker productivity in the process. When a company’s culture is grounded in many of the needed strategy-executing behaviors, employees feel genuinely better about their jobs, the company they work for, and the merits of what the company is trying to accomplish. Greater employee buy-in for what the company is trying to accomplish boosts motivation and marshals organizational energy behind the drive for good strategy execution. An energized workforce enhances the chances of achieving execution-critical performance targets and good strategy execution.

In sharp contrast, when a culture is in conflict with the chosen strategy or what is required to execute the company’s strategy well, the culture becomes a stumbling block.11 Some of the very behaviors needed to execute the strategy successfully run contrary to the attitudes, behaviors, and operating practices embedded in the prevail- ing culture. Such a clash poses a real dilemma for company personnel. Should they be loyal to the culture and company traditions (to which they are likely to be emo- tionally attached) and thus resist or be indifferent to actions that will promote bet- ter strategy execution—a choice that will certainly weaken the drive for good strategy execution? Alternatively, should they go along with management’s strategy execution effort and engage in actions that run counter to the culture—a choice that will likely impair morale and lead to a less-than-enthusiastic commitment to good strategy execution? Neither choice leads to desirable outcomes. Culture-bred resistance to the

• LO 12-2 Explain how and why a company’s culture can aid the drive for proficient strategy execution.

A strong culture that encourages actions, behav- iors, and work practices that are in sync with the chosen strategy is a valuable ally in the strategy execution process.

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actions and behaviors needed for good strategy execution, particularly if strong and widespread, poses a formidable hurdle that must be cleared for a strategy’s execution to

be successful. The consequences of having—or not having—an execution-supportive corporate

culture says something important about the task of managing the strategy execu- tion process: Closely aligning corporate culture with the requirements for proficient strategy execution merits the full attention of senior executives. The culture-building objective is to create a work climate and style of operating that mobilize the energy of company personnel squarely behind efforts to execute strategy competently. The more deeply management can embed execution-supportive ways of doing things, the more management can rely on the culture to automatically steer company per- sonnel toward behaviors and work practices that aid good strategy execution and

veer from doing things that impede it. Moreover, culturally astute managers under- stand that nourishing the right cultural environment not only adds power to their push for proficient strategy execution but also promotes strong employee identification with, and commitment to, the company’s vision, performance targets, and strategy.

Healthy Cultures That Aid Good Strategy Execution A strong culture, provided it fits the chosen strategy and embraces execution- supportive attitudes, behaviors, and work practices, is definitely a healthy culture. Two other types of cultures exist that tend to be healthy and largely supportive of good strategy execu- tion: high-performance cultures and adaptive cultures.

High-Performance Cultures Some companies have so-called high-performance cultures where the standout traits are a “can-do” spirit, pride in doing things right, no- excuses accountability, and a pervasive results-oriented work climate in which people go all out to meet or beat stretch objectives.12 In high-performance cultures, there’s a strong sense of involvement on the part of company personnel and emphasis on indi- vidual initiative and effort. Performance expectations are clearly delineated for the company as a whole, for each organizational unit, and for each individual. Issues and problems are promptly addressed; there’s a razor-sharp focus on what needs to be done. The clear and unyielding expectation is that all company personnel, from senior execu- tives to frontline employees, will display high-performance behaviors and a passion for making the company successful. Such a culture—permeated by a spirit of achievement and constructive pressure to achieve good results—is a valuable contributor to good strategy execution and operating excellence.13

The challenge in creating a high-performance culture is to inspire high loyalty and dedication on the part of employees, such that they are energized to put forth their very best efforts. Managers have to take pains to reinforce constructive behavior, reward top performers, and purge habits and behaviors that stand in the way of high productivity and good results. They must work at knowing the strengths and weaknesses of their subordi- nates to better match talent with task and enable people to make meaningful contribu- tions by doing what they do best. They have to stress learning from mistakes and must put an unrelenting emphasis on moving forward and making good progress—in effect, there has to be a disciplined, performance-focused approach to managing the organization.

Adaptive Cultures The hallmark of adaptive corporate cultures is willingness on the part of organization members to accept change and take on the challenge of introduc- ing and executing new strategies. Company personnel share a feeling of confidence that

It is in management’s best interest to dedicate consid- erable effort to establishing a corporate culture that encourages behaviors and work practices conducive to good strategy execution.

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the organization can deal with whatever threats and opportunities arise; they are recep- tive to risk taking, experimentation, innovation, and changing strategies and practices. The work climate is supportive of managers and employees who propose or initiate useful change. Internal entrepreneurship (often called intrapreneurship) on the part of individuals and groups is encouraged and rewarded. Senior executives seek out, sup- port, and promote individuals who exercise initiative, spot opportunities for improve- ment, and display the skills to implement them. Managers openly evaluate ideas and suggestions, fund initiatives to develop new or better products, and take prudent risks to pursue emerging market opportunities. As in high-performance cultures, the company exhibits a proactive approach to identifying issues, evaluating the implica- tions and options, and moving ahead quickly with workable solutions. Strategies and traditional operating practices are modified as needed to adjust to, or take advantage of, changes in the business environment.

But why is change so willingly embraced in an adaptive culture? Why are organization members not fearful of how change will affect them? Why does an adaptive culture not break down from the force of ongoing changes in strategy, operating practices, and behavioral norms? The answers lie in two distinctive and dominant traits of an adaptive culture: (1) Changes in operating practices and behav- iors must not compromise core values and long-standing business principles (since they are at the root of the culture), and (2) changes that are instituted must satisfy the legitimate interests of key constituencies—customers, employees, shareholders, suppliers, and the communities where the company operates. In other words, what sustains an adaptive culture is that organization members perceive the changes that management is trying to institute as legitimate, in keeping with the core values, and in the overall best interests of stakeholders.14 Not surprisingly, company personnel are usually more receptive to change when their employment security is not threat- ened and when they view new duties or job assignments as part of the process of adapting to new conditions. Should workforce downsizing be necessary, it is impor- tant that layoffs be handled humanely and employee departures be made as painless as possible.

Technology companies, software companies, and Internet-based companies are good illustrations of organizations with adaptive cultures. Such companies thrive on change—driving it, leading it, and capitalizing on it. Companies like Amazon, Google, Apple, Facebook, Adobe, Groupon, Intel, and Yelp cultivate the capability to act and react rapidly. They are avid practitioners of entrepreneurship and innovation, with a demonstrated willingness to take bold risks to create altogether new products, new businesses, and new industries. To create and nurture a culture that can adapt rapidly to shifting business conditions, they make a point of staffing their organizations with people who are flexible, who rise to the challenge of change, and who have an aptitude for adapting well to new circumstances. Wayfair, the largest online retailer of home furnishings in the United States, attributes its rapid growth to an entrepreneurial and collaborative culture that encourages employee innovation. They hire individuals who are willing to solve problems creatively and develop new initiatives, and empower them to take measured risks.

In fast-changing business environments, a corporate culture that is receptive to altering organizational practices and behaviors is a virtual necessity. However, adap- tive cultures work to the advantage of all companies, not just those in rapid-change environments. Every company operates in a market and business climate that is chang- ing to one degree or another and that, in turn, requires internal operating responses and new behaviors on the part of organization members.

As a company’s strategy evolves, an adaptive cul- ture is a definite ally in the strategy-implementing, strategy-executing process as compared to cultures that are resistant to change.

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Unhealthy Cultures That Impede Good Strategy Execution The distinctive characteristic of an unhealthy corporate culture is the presence of counterproductive cultural traits that adversely impact the work climate and company performance. Five particularly unhealthy cultural traits are hostility to change, heavily politicized decision making, insular thinking, unethical and greed-driven behaviors, and the presence of incompatible, clashing subcultures.

Change-Resistant Cultures Change-resistant cultures—where fear of change and skep- ticism about the importance of new developments are the norm—place a premium on not making mistakes, prompting managers to lean toward safe, conservative options intended to maintain the status quo, protect their power base, and guard their immediate interests. When such companies encounter business environments with accelerating change, going slow on altering traditional ways of doing things can be a serious liability. Under these con- ditions, change-resistant cultures encourage a number of unhealthy behaviors— avoiding risks, not capitalizing on emerging opportunities, taking a lax approach to both prod- uct innovation and continuous improvement in performing value chain activities, and responding more slowly than is warranted to market change. In change-resistant cultures, word quickly gets around that proposals to do things differently face an uphill battle and that people who champion them may be seen as something of a nuisance or a trouble- maker. Executives who don’t value managers or employees with initiative and new ideas put a damper on product innovation, experimentation, and efforts to improve.

Hostility to change is most often found in companies with stodgy bureaucracies that have enjoyed considerable market success in years past and that are wedded to the “We have done it this way for years” syndrome. General Motors, IBM, Sears, and Eastman Kodak are classic examples of companies whose change-resistant bureaucra- cies have damaged their market standings and financial performance; clinging to what made them successful, they were reluctant to alter operating practices and modify their business approaches when signals of market change first sounded. As strategies of gradual change won out over bold innovation, all four lost market share to rivals that quickly moved to institute changes more in tune with evolving market conditions and buyer preferences. While IBM and GM have made strides in building a culture needed for market success, Sears and Kodak are still struggling to recoup lost ground.

Politicized Cultures What makes a politicized internal environment so unhealthy is that political infighting consumes a great deal of organizational energy, often with the result that what’s best for the company takes a backseat to political maneuvering. In com- panies where internal politics pervades the work climate, empire-building managers pursue their own agendas and operate the work units under their supervision as autonomous “fief- doms.” The positions they take on issues are usually aimed at protecting or expanding their own turf. Collaboration with other organizational units is viewed with suspicion, and cross- unit cooperation occurs grudgingly. The support or opposition of politically influential executives and/or coalitions among departments with vested interests in a particular out- come tends to shape what actions the company takes. All this political maneuvering takes away from efforts to execute strategy with real proficiency and frustrates company person- nel who are less political and more inclined to do what is in the company’s best interests.

Insular, Inwardly Focused Cultures Sometimes a company reigns as an industry leader or enjoys great market success for so long that its personnel start to believe they have all the answers or can develop them on their own. There is a strong tendency to neglect what customers are saying and how their needs and expectations are changing.

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Such confidence in the correctness of how the company does things and an unflinching belief in its competitive superiority breed arrogance, prompting company personnel to discount the merits of what outsiders are doing and to see little payoff from studying best-in-class performers. Insular thinking, internally driven solutions, and a must-be- invented-here mindset come to permeate the corporate culture. An inwardly focused corporate culture gives rise to managerial inbreeding and a failure to recruit people who can offer fresh thinking and outside perspectives. The big risk of insular cultural think- ing is that the company can underestimate the capabilities of rival companies while overestimating its own—all of which diminishes a company’s competitiveness over time.

Unethical and Greed-Driven Cultures Companies that have little regard for ethi- cal standards or are run by executives driven by greed and ego gratification are scandals waiting to happen. Executives exude the negatives of arrogance, ego, greed, and an “ends- justify-the-means” mentality in pursuing overambitious revenue and profitability targets.15 Senior managers wink at unethical behavior and may cross over the line to unethi- cal (and sometimes criminal) behavior themselves. They are prone to adopt account- ing principles that make financial performance look better than it really is. Legions of companies have fallen prey to unethical behavior and greed, most notably Turing Pharmaceuticals, Enron, Three Ocean Shipping, BP, AIG, Countrywide Financial, and JPMorgan Chase, with executives being indicted and/or convicted of criminal behavior.

Incompatible, Clashing Subcultures Company subcultures are unhealthy when they embrace conflicting business philosophies, support inconsistent approaches to strategy execution, and encourage incompatible methods of people management. Clashing subcultures can prevent a company from coordinating its efforts to craft and execute strategy and can distract company personnel from the business of business. Internal jockeying among the subcultures for cultural dominance impedes teamwork among the company’s various organizational units and blocks the emergence of a col- laborative approach to strategy execution. Such a lack of consensus about how to pro- ceed is likely to result in fragmented or inconsistent approaches to implementing new strategic initiatives and in limited success in executing the company’s overall strategy.

Changing a Problem Culture When a strong culture is unhealthy or otherwise out of sync with the actions and behaviors needed to execute the strategy successfully, the culture must be changed as rapidly as can be managed. This means eliminating any unhealthy or dysfunctional cultural traits as fast as possible and aggressively striving to ingrain new behaviors and work practices that will enable first-rate strategy execution. The more entrenched the unhealthy or mismatched aspects of a company culture, the more likely the culture will impede strategy execution and the greater the need for change.

Changing a problem culture is among the toughest management tasks because of the heavy anchor of ingrained behaviors and attitudes. It is natural for company per- sonnel to cling to familiar practices and to be wary of change, if not hostile to new approaches concerning how things are to be done. Consequently, it takes concerted management action over a period of time to root out unwanted behaviors and replace an unsupportive culture with more effective ways of doing things. The single most visible factor that distinguishes successful culture-change efforts from failed attempts is competent leadership at the top. Great power is needed to force major cultural change and over- come the stubborn resistance of entrenched cultures—and great power is possessed only by the most senior executives, especially the CEO. However, while top management must lead the change effort, the tasks of marshaling support for a new culture and

• LO 12-3 Identify the kinds of actions management can take to change a problem corporate culture.

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instilling the desired cultural behaviors must involve a company’s whole management team. Middle managers and frontline supervisors play a key role in implementing the new work practices and operating approaches, helping win rank-and-file acceptance of and support for changes, and instilling the desired behavioral norms.

As shown in Figure 12.2, the first step in fixing a problem culture is for top man- agement to identify those facets of the present culture that are dysfunctional and pose obstacles to executing strategic initiatives. Second, managers must clearly define the desired new behaviors and features of the culture they want to create. Third, they must convince company personnel of why the present culture poses problems and why and how new behaviors and operating approaches will improve company performance— the case for cultural reform has to be persuasive. Finally, and most important, all the talk about remodeling the present culture must be followed swiftly by visible, forceful actions to promote the desired new behaviors and work practices—actions that com- pany personnel will interpret as a determined top-management commitment to bring- ing about a different work climate and new ways of operating. The actions to implant the new culture must be both substantive and symbolic.

Making a Compelling Case for Culture Change The way for management to begin a major remodeling of the corporate culture is by selling company personnel on the need for new-style behaviors and work practices. This means making a compelling case for why the culture-remodeling efforts are in the organization’s best interests and why company personnel should wholeheartedly join the effort to do things somewhat differently. This can be done by

• Explaining why and how certain behaviors and work practices in the current cul- ture pose obstacles to good strategy execution.

FIGURE 12.2 Changing a Problem Culture

Step 1

Step 2

Step 3

Step 4

Identify facets of the present culture that are dysfunctional and impede good

strategy execution

Follow with visible, forceful actions—both substantive and symbolic—to ingrain a new

set of behaviors, practices, and norms

Explain why the current culture poses problems and make a persuasive case

for cultural reform

Specify clearly what new actions, behaviors, and work practices should characterize the new

culture

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• Explaining how new behaviors and work practices will be more advantageous and produce better results. Effective culture-change leaders are good at telling stories to describe the new values and desired behaviors and connect them to everyday practices.

• Citing reasons why the current strategy has to be modified, if the need for cultural change is due to a change in strategy. This includes explaining why the new stra- tegic initiatives will bolster the company’s competitiveness and performance and how a change in culture can help in executing the new strategy.

It is essential for the CEO and other top executives to talk personally to personnel all across the company about the reasons for modifying work practices and culture-related behaviors. For the culture-change effort to be successful, frontline supervisors and employee opinion leaders must be won over to the cause, which means convincing them of the merits of practicing and enforcing cultural norms at every level of the organization, from the highest to the lowest. Arguments for new ways of doing things and new work practices tend to be embraced more readily if employees understand how they will benefit company stakeholders (particularly customers, employees, and shareholders). Until a large majority of employees accept the need for a new culture and agree that different work practices and behaviors are called for, there’s more work to be done in selling company personnel on the whys and where- fores of culture change. Building widespread organizational support requires taking every opportunity to repeat the message of why the new work practices, operating approaches, and behaviors are good for company stakeholders and essential for the company’s future success.

Substantive Culture-Changing Actions No culture-change effort can get very far when leaders merely talk about the need for different actions, behaviors, and work prac- tices. Company executives must give the culture-change effort some teeth by initiating a series of actions that company personnel will see as unmistakably indicative of the seriousness of management’s commitment to cultural change. The strongest signs that management is truly committed to instilling a new culture include