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What leaders need to know about organizational culture

D. D. Warrick

Graduate School of Business, University of Colorado, Colorado Springs, 1420 Austin Bluffs Parkway, Colorado Springs, CO 80918, U.S.A.

Business Horizons (2017) 60, 395—404

Available online at www.sciencedirect.com

ScienceDirect www.elsevier.com/locate/bushor

KEYWORDS Organizational culture; Culture building; Organizational leadership; Organizational values; Leadership influence

Abstract A major factor in the success of an organization is its culture. Organiza- tional culture can significantly influence the performance and effectiveness of a company; the morale and productivity of its employees; and its ability to attract, motivate, and retain talented people. Unfortunately, many leaders are either unaware of the significant impact culture can have, are aware but overwhelmed by the extensive and sometimes conflicting information available on culture, or are not well informed about how to build and sustain cultures effectively. This article integrates the most consistent findings that leaders need to know about culture and what they can do to build strong, successful cultures that bring out the best in people. Developing organizational culture requires far more than talk about culture and emphasis on its importance. In order to achieve the best results, culture develop- ment requires leaders who see it as one of their key tasks and who understand the importance of aligning organization strategies and decision making with cultural ideals. # 2017 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved.

1. Culture matters

Culture has been the long-time focus of anthropol- ogists as they seek to understand different groups around the globe. However, it has been only recent- ly that organizational researchers have begun to discover the close links between culture, the per- formance of organizations, and the behavior and attitudes of people in organizations. Culture is

E-mail address: [email protected]

0007-6813/$ — see front matter # 2017 Kelley School of Business, I http://dx.doi.org/10.1016/j.bushor.2017.01.011

recognized as such a significant factor in the success of organizations that Fortune’s annual 100 Best Companies To Work For report is based primarily on information employees anonymously report about their workplace culture (Levering, 2016).

Culture is increasingly becoming a concern of skilled leaders. Tony Hsieh, the CEO of Zappos, has said, “At Zappos, our belief is that if you get the culture right, most of the other stuff–—like great customer service, or building a great long-term brand, or passionate employees and customers–—will happen naturally on its own” (Hsieh, 2010, p. 152).

ndiana University. Published by Elsevier Inc. All rights reserved.

396 D.D. Warrick

Lou Gerstner, the former chairman of IBM said, “Culture isn’t just one aspect of the game–—it is the game. In the end, an organization is no more than the collective capacity of its people to create value” (Gerstner, 2002, p. 182). Former CEO of Wells Fargo, John Stumpf, made a similar point about the importance of culture when he said, “It’s about the culture. I could leave our strategy on an aeroplane seat and have a competitor read it and it would not make any difference” (Guerrera, 2008). Later in this article, we will see how even in cases like Wells Fargo (where culture is highly valued), leadership decisions that are not carefully considered in terms of the cultural implications can override the intended culture.

Even if leaders recognize the importance of cul- ture, they are unlikely to be aware of the research indicating the significant role culture can play in an organization’s success or failure, or they do not have the training or knowledge of what it takes to build successful cultures. Because of this, the close relationship between leading and managing an organization well and achieving a winning culture escapes many leaders. It is the purpose of this article to help leaders develop a better understand- ing of culture, the advantages of having healthy cultures, the costs of having unhealthy cultures, and what is involved in building and sustaining strong cultures.

2. Understanding organizational culture

Many definitions are available to describe cul- ture. Formally, culture can be defined as “the [predominant] beliefs, values, attitudes, behaviors, and practices that are characteristic of a group of people” (Warrick, 2015, p. 4). In defining culture, Edgar Schein, a leading authority in the study of organizational culture, uses the word group to de- scribe social units of all sizes (Schein, 1992). In other words, the term group could pertain to a whole organization or any group of people of any size such as a country, sports team, symphony, or family. The point is that groups of people, regard- less of group size, are likely to form specific cul- tures. Organization researchers typically use the term organizational culture in a broad sense to refer to the culture of a whole organization or any unit of people working together within the organization.

In practical terms, organizational culture de- scribes the environment in which people work and the influence it has on how they think, act, and experience work (Warrick, Milliman, & Ferguson, 2016). Cultures can differ significantly within and

between organizations. They can bring out the best in people and create excellent environments for people to work in or they can bring out the worst in people and create dysfunctional environments filled with stress and tension.

3. The impact of organizational culture on performance and other factors

Especially in the late 1980s and thereafter, studies on organizational culture began to provide convinc- ing evidence that culture can have a significant influence on performance, morale, job satisfaction, employee engagement and loyalty, employee atti- tudes and motivation, turnover, commitment to the organization, and efforts to attract and retain talented employees (e.g., Denison, 1990; Fisher, 2000; Marcoulides & Heck, 1993; Rollins & Roberts, 1998; Weiner, 1988).

One study in particular began to catch the atten- tion of leaders. John Kotter and James Heskett (1992) published an 11-year evaluation of company cultures. They found that over an 11-year period, companies with healthy cultures had a 682% average increase in sales versus 166% for comparable com- panies without such healthy cultures. Similarly, Kotter and Heskett found that these companies with healthy cultures saw stock increases of 901% versus 74% for comparable companies. Since then, other studies have identified the characteristics of high and low performance cultures (see Daft, 2015; Kilmann, Saxton, & Serpa, 1985; Lussier & Achua, 2016; Rosenthal & Masarech, 2003; Weiss, 2011). A summary of common themes from these studies is shown in Table 1. What becomes evident in studying the themes is that, to a large degree, healthy cultures are the result of effective leadership and management whereas unhealthy cultures are the result of ineffective leadership and management.

4. Is culture primarily the cause or result of organization practices?

Some culture experts believe that culture is the cure for many organizational problems. In this view, the main remedy for problems at General Motors, the Veterans Administration, the government, and many other organizations is to fix the culture. Others believe that culture is the result of organi- zational practices and an outcome rather than a cause. Among these are Lorsch and McTague (2016, p. 98), who proposed that “cultural change is what you get after you’ve put new processes or

Table 1. Characteristics of high and low performance cultures

High Performance Cultures Low Performance Cultures

Leaders are skilled, admired, and build organizations that excel at results and at taking excellent care of their people and their customers

Leaders provide minimal leadership, are not trusted and admired, and do little to engage and involve their people

Clear and compelling vision, mission, goals, and strategy Vision, mission, goals, and strategy are unclear, not compelling, not used, or do not exist

Core values drive the culture and are used in decision making

Core values are unclear, not compelling, not used, or do not exist

Committed to excellence, ethics, and doing things right Lack of commitment to excellence, questionable ethics, and a reputation for doing what is expedient rather than what is right

Clear roles, responsibilities, and success criteria, and strong commitment to engaging, empowering, and developing people

Unclear roles and responsibilities and little interest in fully utilizing and developing the capabilities and potential of people

Positive, can-do work environment Negative, tense, stressful, and/or resistant work environment

Open, candid, straightforward, and transparent communication

Guarded communication, reluctance to be open and straightforward, and consequences for saying things leaders do not want to hear

Teamwork, collaboration, and involvement are the norm Top-down decision making with minimal teamwork, collaboration, and involvement

Emphasis on constant improvement and state-of-the-art knowledge and practices

Slow to make needed improvements and behind times in knowledge and practices

Willingness to change, adapt, learn from successes and mistakes, take reasonable risk, and try new things

Poorly planned change, resistance to change, minimal learning from successes and mistakes, and either risk averse or risk foolish

Source: Adapted from Warrick (2016)

What leaders need to know about organizational culture 397

structures in place to tackle tough business challenges like reworking an outdated strategy or business model. The culture evolves as you do that important work.”

Each stance presented above possesses an ele- ment of truth, in both that culture significantly affects how an organization is run and organization practices significantly affect organizational cul- ture. In other words, both are important, both affect the other, and both need attention to achieve the best results. Strong cultures cannot be achieved without running an organization well and running an organization well requires efforts on the part of leaders in building and sustaining culture.

5. Insights about culture of which leaders need to be aware

For leaders to sort through and make sense of the many culture articles and books could be a daunt- ing, complex, and at times confusing process. Therefore, an effort is made here to summarize some of the consistent findings about organizational culture of which leaders need to be aware. The

point of making leaders aware of the many factors that can influence culture is not to preoccupy them with concerns about culture but rather to make them better informed and discerning about key factors and decisions that can either build and sustain culture or adversely affect it.

5.1. The influence of leaders in shaping culture

Although many factors influence culture, organiza- tional cultures primarily reflect their leaders. Lead- ers influence culture through their strategies, practices, values, leadership style, and example (Steers & Shim, 2013). The impact of leaders on culture is particularly influential at the top level. Tony Hsieh was the primary architect of the Zappos culture (Warrick et al., 2016). Jeff Immelt was able to make significant changes in the culture of IBM (Brady, 2005). Tim Cook has reinforced the positive aspects of the Apple culture and has made changes that have improved the Apple culture (Tyrangiel, 2012). Although culture is often thought to be resistant to change, Alan Mulally was able to change the culture of a struggling Ford Motor Company and

398 D.D. Warrick

transform the performance of Ford in a relatively short time span (Hoffman, 2012).

The examples mentioned above are positive examples of a leader’s influence on culture. However, it should be pointed out that leaders can also create unhealthy cultures. An ineffective leader, a leader who is not a good fit for a desired culture, or even a good leader who makes bad decisions that impact an organization’s culture can tear down or damage a culture that took decades to build.

5.2. Dominant cultures and subcultures

When using the term organization to describe the whole of a company or institution, it is important to recognize that while organizations are likely to have an overriding dominant culture that defines them, they are also likely to have a number of subcultures in various parts of the organization that stray from the dominant culture (Martin & Meyerson, 1988). The dominant culture at Southwest Airlines encourages employees to coop- erate with one another, take great care of custom- ers, and have fun. However, within Southwest Airlines there are likely to be some departments or teams where the culture differs from the dominant culture. Fortunately, even in unhealthy dominant cultures, there may be pockets of excel- lence where there are healthy cultures.

5.3. Visible and invisible factors that define culture

Culture can be viewed on two levels (Schein, 1992). There is a visible level that can be observed by artifacts such as dress, office layout, office design, and emphasis on technology. Artifacts could also include leadership style, the nature of the work environment, how people are treated, and how decisions are made and get implemented. There is also an invisible level characterized by expressed values, underlying assumptions, and deep beliefs. Expressed values are consciously held convictions, clearly stated or practiced, that influence the behavior of group members. For example, the expressed values of the U.S. Army are loyalty, duty, and selfless service (Crandall, 2007). These values influence the behavior of soldiers at all levels. Another example may be the expressed value: “It is important to take great care of our people and our customers.” This sentiment will create a different culture than that of an organization with the dominant value: “What we really care about is maximizing bottom line results, no matter what it takes to get there.”

5.4. The impact of traditions and group dynamics

Leaders need to know the past and present history of the groups they lead. Group histories will provide insight into the traditions and dynamics that should be sustained and those that need to change. Tradi- tions are practices that have become common to a group over a period of time. A group, for example, may have a history of great teamwork, group in- volvement in the decision making process, high- level performance, and strong group loyalty. On the other hand, a group might have a history of minimal teamwork, leader-driven decision making with little team involvement, and satisfaction with good but not great performance. The dynamics of a group describe its interactions and practices in terms of how people relate and get things done. Groups may be very cohesive and work well togeth- er to get tasks done effectively and efficiently. However, they may also be characterized by a number of dysfunctional or ineffective dynamics.

5.5. Key internal and external circumstances that may influence culture

There are a number of internal and external circum- stances that can affect culture. Internal circum- stances could include such things as organizational structures, processes, systems, budgets, and lead- ership styles; as well as changes in leadership, team members, budgets, or other key internal decisions. External circumstances could include situations such as an economic recession, government regu- lations, major lawsuits that damage the reputation or resources of a group, acquisition by another company, or an unexpected catastrophe.

5.6. Valued and devalued behaviors

The types of behaviors that are valued and devalued influence the shaping of an organizational culture significantly. People respond to behaviors, good or bad, that are valued and rewarded, while they avoid behaviors that are not valued or rewarded or are devalued. Understanding this makes it important for leaders to be discerning about the desired be- haviors and the behaviors they are actually moti- vating in their subordinates. For some leaders, a careful examination of the reward system may reveal that rewarded behaviors encourage self- serving actions and discourage teamwork or that going the extra mile goes unnoticed or unrewarded. An example of how leadership decisions can have a significant impact on culture involves the high- profile Wells Fargo case. CEO John Stumpf allowed

What leaders need to know about organizational culture 399

the company to become overly sales oriented, and a focus on incentives resulted in aggressive tactics to meet sales targets. Over a 5-year period, 2+ million accounts were opened without customer authoriza- tion by employees who were willing to practice unethical behavior to benefit from the sales incen- tives. Once the practices were uncovered, Stumpf announced a number of actions and remedies to address the issues; however the consequences have been far reaching. Wells Fargo was fined $185 million by the Consumer Financial Protection Bureau (CFPB) and Stumpf forfeited over $41 million in unvested equity awards and resigned. Clearly, it is important for leaders to evaluate the perfor- mance management and reward systems as well as their own decisions to ensure that these are aligned with the desired culture.

5.7. Influential members

One or more influential group members can have a significant positive or negative influence on the culture of a group. There are group members who bring out the best in others and contribute to a positive work environment and there are those who impact groups in negative ways. At the wound center of a major medical center that I am familiar with, Fridays are called “Valentino days” by the staff. This is because on Fridays, Dr. Valentino is there and he is known for treating all of the nurses and staff like valued team members and for being caring and uplifting. Wouldn’t we all like to be known for creating Valentino days? Understanding the impact that influential people can have on culture makes it important for leaders to carefully select the right people who are a fit with the desired culture and to correct or deal with behaviors that undermine the culture of groups.

5.8. Strong cultures and weak cultures

The term strong culture describes cultures that have a significant influence on the behaviors and practices of employees. In strong cultures, there is a clear understanding of what the cultural values and norms are. The term weak culture is used to describe cultures where the norms and practices are not well known or are confusing, inconsistent, or not reinforced. Weak cultures are difficult to work in because expectations are unclear and there is little consistency in practices throughout the organization. Strong cultures are generally associated with much higher performance than weak cultures (Jin, Drozdenko, & DeLoughy, 2013; Mushtaq, Ahmad, & Tanveer, 2013). An exception to this occurs when the culture is strong but unhealthy.

In addition to observing the strength of the culture, leaders need to be observant of the types of behaviors and attitudes a culture is driving and whether they are desirable or undesirable.

5.9. Understanding international cultural differences

With the existence of myriad multinational orga- nizations, so many leaders involved in international business, and virtual teams with members from around the world, taking into account international cultural differences is becoming increasingly impor- tant for the success of organizations. Imposing one’s own cultural values and practices may not be suc- cessful in cultures that have a history of doing things differently. Euro Disney experienced substantial losses in its first 2 years of operation at least partially due to a lack of understanding of cultural differences in Europe. To begin with, the name Euro Disney turned out to be a hindrance, as Europeans associated “Euro” with the continental money unit rather than a coverall term for European. As a result, the amusement park’s name essentially translated as “Dollar Disney.” Disney also ignored the necessity to provide kennels in a culture where people often travel with dogs, creating problems for potential guests. Another issue arose in cultural dining differences, as Disney’s plastic utensils failed to impress guests who take great pride in the culinary experience.

The key for leaders, just as would be the case in understanding different domestic cultures, is to take the time to learn as much as possible about the cultures they are dealing with and to involve those who have a good understanding of the culture in making decisions where culture could be an issue. McDonald’s restaurants operate in more than 100 countries. While McDonald’s headquarters is U.S.-based, the company entrusts local operations to managers from the countries in which they operate.

5.10. The vulnerability of culture

Cultures are like precious and prized treasures when they are strong, healthy, and driving the right behaviors. They are among the greatest assets an organization can have. However, they are vulnera- ble assets that can be damaged or lost if leaders are not aware of their value and are not keeping watch over possible culture-changing practices, attitudes, threats, or events.

There are many variables that can impact culture and may need to be dealt with and managed to avoid possible cultural damage. For example,

Table 2. Guidelines for building and sustaining cultures

1. Make strategy and culture important leadership priorities

2. Develop a clear understanding of the present culture

3. Identify, communicate, educate, and engage employees in the cultural ideals

4. Role model desired behaviors 5. Recruit and develop for culture 6. Align for consistency between strategy and

culture 7. Recognize and reward desired behaviors and

practices 8. Use symbols, ceremonies, socialization, and

stories to reinforce culture 9. Appoint a culture team 10. Monitor and manage the culture

400 D.D. Warrick

changes in culture can occur because of budget cuts, rapid market changes, economic downturns, natural disasters, compromises in adhering to core values, and especially changes in ownership, lead- ership, or leadership practices. It will be interesting to see if changes will occur in the well-documented and acclaimed culture of Zappos now that the primary architect of the culture, Tony Hsieh, has introduced Holacracy (a self-management organi- zational system marketed by HolacracyOne). Holac- racy is essentially a boss-less, self-managed form of organization design. The Wall Street Journal (Silverman, 2015) reported that since the introduc- tion of Holacracy, Zappos said that about 14% of its roughly 1,500 employees decided to leave because the new organizational system was not for them. Previously, Zappos had been known for exception- ally low turnover.

5.11. Successes and Challenges

In general, success is likely to unite and instill pride in a group and make a culture stronger. Therefore, celebrating and communicating successes can build culture. While success typically strengthens cul- ture, leaders need to be sensitive to the impact of success as it could also lead to complacency, overconfidence, and possible erosion of positive cultural norms. Marginal or declining results tend to undermine positive cultural norms. During chal- lenging times, it is important for leaders to make efforts to maintain strong cultural norms and to turn difficulties into opportunities. For observant lead- ers, difficulties, setbacks, and challenges can be used to unite and build culture as people rally and bond together to face the challenges.

6. Guidelines for building and sustaining organizational cultures

Culture can be built by design or default. In other words, culture can either be built in a purposeful way or left to chance. Leaders play a key role in building and sustaining cultures. To build culture by design takes intelligent and focused work. CEOs such as Bill Gates of Microsoft, Herb Kelleher (for- merly) of Southwest Airlines, and Jeff Bezos of Amazon have all been known for their emphasis on culture and willingness to take specific culture-building actions. Often, other leaders mistakenly think that by talking a lot about culture, posting cultural values on walls, passing out books on culture, and placing cultural values on coffee mugs, the desired culture will happen.

There are also leaders who pay little attention to culture and may do so at a high cost. While there are many payoffs and advantages to having a healthy, high-performance culture, there are also many potential costs to neglecting culture or having a less than desirable culture. It is estimated that 60% of all mergers fail to achieve their anticipated goals or fail altogether because of cultural differences that were not dealt with (Hellriegel & Slocum, 2011). Unhealthy cultures are also likely to have a negative impact on many other factors such as performance, morale, motivation, teamwork, cus- tomer relations, service, and loyalty. In some cases, unhealthy cultures have been a significant contrib- utor to the failure of organizations. Table 2 summa- rizes 10 guidelines leaders can use in building and sustaining organizational cultures.

6.1. Make strategy and culture important leadership priorities

Leaders throughout an organization need to under- stand the importance of strategy and culture in building a successful organization and to make both a top priority in their decision making and practices. It is especially important for the top level leader to set the example for making strategy and culture important. The vision, mission, core values, design, plans, systems, and processes of an organization, along with the practices and decisions of leaders, begin to shape the culture. The more leaders are able to create strategies that achieve the desired results while also creating a great place to work and conduct business, the more likely that a healthy culture will be the result. A poorly run organization will not result in a healthy and vibrant culture no matter how much the leaders may talk about the

What leaders need to know about organizational culture 401

importance of culture and spend time trying to build a healthy culture.

It is also important for leaders to identify the type of culture that is likely to achieve the best results and to ensure that the strategy and desired culture are aligned to reinforce and strengthen one another. Culture can be defined by core values or by identifying cultural ideals. Zappos defined the desired culture through its core values (Hsieh, 2010, p. 154), which are:

1. Deliver Wow Through Service

2. Embrace and Drive Change

3. Create Fun and a Little Weirdness

4. Be Adventurous, Creative, and Open-Minded

5. Pursue Growth and Learning

6. Build Open and Honest Relationships

7. Build a Positive Team and Family Spirit

8. Do More with Less

9. Be Passionate and Determined

10. Be Humble

Zappos recruits people with these values in mind, trains all employees on the values, and uses the values in decision making. Culture can also be defined by identifying cultural ideals such as: de- veloping knowledgeable and empowered employ- ees at all levels; decentralizing decision making; emphasizing collaboration, cooperation, and team- work in getting things done; striving for simplicity in how things get done; and encouraging open, candid, two-way communication.

Walt Disney was a master at creating a winning strategy and making the Disney culture a high pri- ority. The wholesome family values that he es- poused and even the job titles that he used, renaming engineers “imagineers,” helped shape the Disney culture that, along with a winning strat- egy, has made the Disney organization so successful (Dumaine, 1990).

6.2. Develop a clear understanding of the present culture

In building culture, leaders need to understand the present culture so the strengths can be reinforced and any weaknesses, inconsistencies, and gaps be-

tween the desired culture and the present culture can be identified

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