How exactly does an organization realize that its culture is the reason its strategy is not working?
Discussion Questions
1. Every four years, Americans vote for who gets to be president of the United States. In cases where a new president represents a change in political party, what sort of culture change has to take place in the Executive Branch of government? How is it done?
2. Can an organization with a bureaucratic culture ever change? Why or why not? 3. Some companies replace their CEO as a way of changing their culture quickly. Is this a good idea?
Why or why not?
4. How exactly does an organization realize that its culture is the reason its strategy is not working?
If you, as someone working in the company, noticed this, what would you do? 5. A company needs to change its culture. Which is better—replacing enough people to sever conti-
nuity with the old culture, or going through a culture-change process?
CHAPTER 2Section 2.10 Managing Organizational Change
of a structured period of transi- tion from situation A to situation B in order to achieve lasting change within an organization” (Change- Management-Coach.Com, n.d.b). These are two of many definitions; together, they effectively and con- cisely define a complex process.
To keep pace with external changes going on and to compete effectively, organizations must embrace change. Given the complexity of today’s large and international corporations, managing such continual change is difficult. Not to do so, however, would be to lose competitive viabil- ity and market share, thus corpora- tions have no option but to accept the need to change. Section 1.4 discussed the accelerating pace of change to which all organizations are subject. More than being reactive, corporations need to change proactively to get ahead of their competitors and survive competitive pressures in the long term.
Why Organizational Change Is Necessary Organizational change is difficult because, unless handled properly, it poses a threat to the sta- tus quo and creates immediate resistance. Changes can impact every aspect of organizational life including strategies, culture, structure, control systems, and groups and teams. Vital processes such as communications, motivation, and leadership are also affected. Resistance to change can take many forms, both passive and active, such as blaming others, poisoning the culture, and so on.
Prerequisites to change include recognizing that there is a problem, identifying it correctly, and figuring out how to resolve it. The problem might be something simple such as taking too long to pay vendors, or it could be more complex and dangerous like losing one’s lead in innovation. Per- haps something is not happening the way it should or performance is deteriorating in some way. The need to improve performance and lower costs is unrelenting. The more urgent motivation for change stems from a strategic consideration. A company might need to develop a new technology, adopt a new production process, enter a new market, develop a core competence, or take other vital actions to improve the company’s position in the market, its market share, and performance on other key indicators. In such cases, the status quo is not an option; change is inevitable.
Companies that can manage change, therefore, are ahead of the game. Researchers believe that the highest-performing organizations are those that are constantly changing and have become experienced at doing so (Jones & George, 2007). These organizations’ cultures are either innova- tive, adaptive, or both. They have learned to identify goals and ways of achieving those goals as a result of participative discussions and then pursued them enthusiastically. Any attempt to force doing something or how to do it on a work group will be met with resistance thereby jeopardizing the change process or even preventing it.
Associated Press/Ed Reinke
Car manufacturer Toyota started a suggestion box for employ- ees to generate ideas. Unlike some companies, Toyota reads every employee suggestion and thanks them, encouraging them to suggest another.
CHAPTER 2Section 2.10 Managing Organizational Change
Implementing Change Managers introduce and implement change from either the top down or the bottom up. Top- down change is autocratic; that the need for change and how it is to be implemented is decided at the top of the organization and relayed to those lower down in the hierarchy to implement. Top-down change is valuable when the company needs to act quickly and decisively. It is typically instigated by the CEO. It works because managers at each level of the hierarchy have the author- ity to tell their staffs what to do and what results are expected. For example, the Transportation Security Administration (TSA) is widely recognized as an autocratic, top-down style organization. Airport TSA officers must react and carry out mandates from the agency’s top leaders and have very little to no involvement in change (Jamieson, 2011).
Bottom-up change is more gradual, complex, and evolutionary, but no less effective. More than top-down change, it gets everyone involved, confirms to workers that the “higher-ups” are listen- ing to their ideas and sometimes acting on them. This sense of being a participant in the process minimizes resistance to change. Who else is in a better position to see the need for change or how something can be done better or more efficiently than front-line workers? Bottom-up change can originate anywhere in the organization. For example, Google gives its staff freedom, time, and resources to work on their own ideas and innovations that might be of interest to consumers. In fact, the company reports that about 50% of its new products and features are the outcome of “personal project” time. Instead of change and innovation being created at the top, with lower level employees carrying out the plan, new ideas emanate from the ground up. In some traditional organizations that encourage bottom-up innovation, progress is critically evaluated at each stage of development through a “stage-gate” process where progress is critically evaluated and the proj- ect may be terminated at any stage (Cooper, 1993).
Bottom-up change is facilitated when a company has an adaptive culture and when its employees are empowered, i.e., when they are intentionally encouraged to act autonomously, with little or no direct control, because they can be trusted to do the right thing and to benefit the organization.
Curiously, monetary rewards for coming up with ideas, especially in innovative companies, are relatively uncommon because such behavior is expected as part of a person’s job. Moreover, if the idea results in a successful product line or business within the company, there is the potential for the creator of the idea to be put in charge of that product line or division. In other words, it can be a fast track to promotion (Block & MacMillan, 1993).
Many companies also have suggestion schemes. If no one reads the suggestions and gets back to the idea-generator, however, people will eventually stop suggesting ideas. Suggestion boxes have been known to gather dust from disuse. Toyota, on the other hand, has become famous for read- ing every single suggestion and replying one way or the other to the senders, thanking them for submitting the idea and encouraging them to submit others.
Managing change demands a high degree of communication and coordination among all organi- zational units. A new technology may require a change in product design, production, and other functional areas. All activities related to the adoption of the new technology must be coordinated, as must all the other change processes that may be ongoing. Change can quickly become a way of life in organizations that embrace change and want to become stronger competitors. As Hiroshi Okuda, Chairman of Toyota Motor Corporation, has said, “Failure to change is a vice” (Miller, 2003).
CHAPTER 2Section 2.10 Managing Organizational Change
Case Study Bottom-Up Suggestions at Toyota
Toyota implements more than 700,000 improvement ideas each year worldwide. That number is incredible, considering that Toyota has been pursuing its mission of decreasing cost and increasing quality for almost 50 years. If every idea were to save Toyota a mere $100, the total would result in a staggering $70 million.
As Toyota cuts production costs by implementing efficient practices on the shop floor and beyond, customers benefit from the savings via price reduction. Between 2000 and 2003, the company proved itself a fierce industry competitor by adding even more features to popular vehicle models while simultaneously reducing prices.
For every idea that saves the company money, Toyota rewards the employee in cash. The greater the cost savings, the greater the employee reward, with bonuses ranging from $5 to $2,000 per idea. After the employee submits a form outlining the idea, a supervisor assesses it, the reward is calcu- lated, and money is added to the employee’s paycheck. This process has been honed over 50 years.
Most employee rewards are in the $5 range. Bonus funds are taken from the training budget, since Toyota believes that self-generated improvement is more effective than traditional classroom training or lectures. Because the money is not taken from the improvement budget, pressure to generate high savings is absent. Toyota’s philosophy is that with quality training and education, good ideas and sav- ings will automatically result.
Because employee ideas are generated and submitted during breaks and after work, rather than “on the clock,” the bonuses provide Toyota a way to appreciate employees who spend their personal time on company advancement.
Discussion Questions 1. You are in charge of a small company and want to institute many changes. Compare the
approaches of telling your employees what you want them to do versus asking them for their ideas before deciding on what to do.
2. You are interviewing for a job in a company. How would you discover whether it had an innova- tive or adaptive culture? If it didn’t, would that be a deal breaker for you? Why or why not?
3. A company is considering whether to install a new technology into its production process. Top management wants to do this because of large savings estimated to accrue in future years, but the functional departments of engineering and production say the difficulties of doing so are huge, and it should not be done. Suggest a way out of this impasse.
4. Your company has decided to change its culture to a more innovative culture with the help of an outside consultant. Innovative cultures never punish failure and sometimes reward it if it was in pursuit of new ideas. How can employees be made to understand this, when in the past, mis- takes were punished and could result in loss of someone’s job?
CHAPTER 2Summary
Summary
An understanding of the human side of corporations is essential to managing strategically. Strate- gic planning and strategic management are the principal drivers of change.
Leaders create change; managers implement change. Leaders are visionary, while managers get things done through other people. Both are responsible for getting things done, but leaders see where change is needed and the direction in which the company should go. Companies run lead- ership-development programs to identify, develop, and evaluate potential leaders and ensure that a qualified person will be available to fill a leadership role when needed. Leaders are best trained in the crucible of experience rather than by attending courses.
Leaders’ power stems from legitimate authority due to their positions in the company, specialized knowledge, respect and charisma, and the ability to bestow or deny rewards. Strategic leaders are most concerned with the company’s long-term ability to endure and prosper. They take the lead in creating a vision statement that articulates where the company should be 5 to 10 years in the future and are responsible for motivating the company to achieve the vision. Vision statements should be concise, inspiring, memorable, and achievable.
The effectiveness of a CEO is measured by corporate success over an extended period, the state of the company at the end of the CEO’s tenure, and the preparedness of the CEO’s successor and succession plan. CEO’s compensation packages tend to emphasize short-term results except for the stock they are given.
Organizations need an overarching purpose other than profits, market share, shareholder value, or traditional measure of corporate success. A purpose statement can motivate employees by expressing values with which employees readily identify (e.g., to save and enhance lives). Employ- ees are more inspired to work for a company whose raison d’etre expresses their own values than they are to achieve traditional measures.
Companies are governed by CEOs and their top-management teams. Public companies are required to elect a board of directors to represent the interests of stockholders. Boards of public companies are further required to have an audit committee composed of independent directors, a compensation and benefits committee, and a nominating and corporate governance commit- tee. Boards are comprised of inside members (the CEO and key executives), related outsiders, and independent members. Keeping the board informed and being responsive to its wishes regarding strategic direction is a challenge for the chairman and CEO.
As a company evolves and expands, its organizational design also evolves. In other words, struc- ture follows strategy. Unless the company is organized appropriately, it will not be able to execute its strategies effectively. There are three basic forms of organizational design. Functional organiza- tion is the most common for single-business companies. A matrix organization may be suitable when a company handles many projects or brands and may conduct business in several countries. Divisional organization is primarily for diversified companies and conglomerates.
Besides the CEO and president, top-management teams in a functional organizational design typi- cally consist of all vice presidents and C-level officers. In a matrix organization, top management includes department heads and key staff directors. In a divisional organization, key staff directors and all divisional and subsidiary presidents are members of the management team.
CHAPTER 2Summary
Top-management teams are involved in strategic planning and making strategic decisions for the whole corporation. In addition, as the company’s leadership pipeline is a resource for top execu- tives, they have an obligation to keep it full and give those in it as much cross training as possible.
How people behave in a company and how they treat customers and suppliers is of the utmost importance. Company compliance with all laws and regulations is imperative. Not doing so could be fatal to the enterprise. The company has to treat people fairly, motivate them to be good and to do good. Thus promoting values and making them explicit and modeling them are critical. A culture based on good values will endure, because it will attract people who share those values.
Organizational cultures are built values or “how we do things around here.” Once established, cultures are self-perpetuating and therefore hard to change. When a new strategy is chosen or changing times demand different goals, implementation is hindered if the culture doesn’t change appropriately. Innovative and adaptive cultures are, by their nature, used to constant change and are the kind of cultures companies should strive to develop when their environment and competi- tion is changing rapidly.
In order for a company to transition from its current state to a desired new state, myriad changes may be necessary, and they have to be managed well. The single biggest mistake is not giving those who will be most affected by the change an opportunity to participate in effecting the change. Excluding front-line workers from the process leads to resistance, both passive and overt, making the change process more costly and even impossible. If there’s a problem, it must first be identified before a solution can be crafted. If change is required that is not a direct response to a problem, the reason for the change must be clearly explained before being implemented.
Sometimes change is dictated from the top down. This is particularly true if the issue is urgent, as top-down change can be implemented rapidly. Bottom-up changes take longer but involve those most affected by the change, thus minimizing resistance and increasing the chances of successful implementation. Suggestion schemes can be useful but only if suggestions are read and contribu- tors receive a response.
Key Terms
administrator One who manages others in the attempt to accomplish a goal by the use of certain methods, both of which are specified by a third party.
audit committee A standing committee of the board of directors responsible for hiring and reviewing the performance of the independent public accountants that audit the company’s financial systems and reports, for ensuring the integrity of its accounting practices and con- trols, and for reviewing significant changes in
accounting policies. In addition, it helps the company comply with the Sarbanes-Oxley Act of 2002.
bottom-up change A change process that can begin with anyone in the company (and need not travel upward more than one or two levels), gets results gradually over time, and involves employees, thus minimizing their resistance to change.
change management A structured approach to rearranging and transforming individuals,
CHAPTER 2Summary
teams, and organizations from a present state to a desirable future state. This organizational process aims to cultivate a business environ- ment in which employees can accept and welcome workplace changes.
C-level officers Executives that are on a par with vice presidents in the organizational hierarchy. “C-level” is shorthand for CFO (chief financial officer), CMO (chief marketing offi- cer), CIO (chief information officer), CSO (chief strategy officer), and so on.
coercive power The ability of a leader or man- ager to punish a subordinate; this could take the form of firing someone, denying a raise or bonus, or reassigning the person to an undesir- able location.
Compensation and Benefits Committee A standing committee of the board of directors responsible for determining compensation packages for the CEO, president, and key top managers and board members, and pension and other welfare policies for all employees.
corporate culture The framework of core ide- als, beliefs, and standards shared by members of an organization.
division A strategic business unit of the com- pany that nevertheless does business using the corporate name.
divisional organizational design A design that is most common in diversified companies, where each division or subsidiary has its own president and functional organization but reports up the chain of command to the CEO.
expert power Power attributed to the unique experience, competence, and expertise pos- sessed by a leader.
functional organizational design A design that groups employees together according to dis- crete functional activities in the belief that by so doing the work will be done more effectively.
governance The mechanism by which a com- pany is steered, managed, and safeguarded.
Public companies must be governed by a board of directors as well as by a CEO and top management.
insider A member of the board of directors with substantial day-to-day experience of running the company, like the CEO and certain other top-level executives appointed by the board.
leader One who conducts and directs others in the voluntary attempt to accomplish a goal by the use of certain methods, both of which are chosen or approved of by the leader’s followers.
leadership pipeline A cadre of highly devel- oped potential leaders capable of filling slots in the organizational hierarchy as and when they become vacant; ideally, this pipeline should be “full” at all times.
legitimate power The authority obtained through the occupation of a position in the company; the higher the position, the more power and authority the individual holds.
level-5 leadership A leader that builds endur- ing greatness (for the company) through a paradoxical blend of personal humility and professional will.
manager One who oversees others in the attempt to accomplish a goal by the use of certain methods specified by the manager. (A more general definition is someone that gets work done through others.)
matrix organizational design A design with both vertical (skills or disciplines) and hori- zontal chains of command (such as projects, distinct brands or product lines, or countries).
Nominating and Corporate Governance Com- mittee A standing committee of the board of directors responsible for reviewing possible candidates to join the board and recommend- ing nominees for election, overseeing the process for performance evaluations of the board and its committees, and reviewing the company’s executive-succession plans.
CHAPTER 2Summary
organizing The deployment of organizational resources to achieve strategic objectives.
outsider or independent A member of the board of directors that has no relationship to the company at all.
overarching purpose A statement that is big- ger than profit or shareholder value or mar- ket share, or even the products the company produces. It motivates employees because it expresses values with which employees identify.
public company A company whose shares can be publicly traded on a U.S. stock exchange and that is regulated by the SEC to ensure accurate and responsible financial reporting.
public-policy committee An optional commit- tee of the board of directors responsible for overseeing the company’s efforts at protecting the environment, health issues, and other pub- lic policies that might affect the company.
referent power Power that is derived from the appreciation, high regard, and loyalty of a leader’s followers and is a direct result of the leader’s character.
related outsider A member of the board of directors not involved with the firm’s day-to- day operations but who may have a relation- ship with the company (for example, a major stockholder).
reward power Based on the ability to give or withhold tangible rewards (like pay raises, bonuses, preferred job assignments) or intan- gible rewards (like verbal praise or respect).
Securities and Exchange Commission (SEC) A United States federal agency that enforces fed- eral securities laws and oversees key partici- pants in the securities world, including stock brokers and dealers, investment advisors, and mutual funds.
servant leadership A form of leadership that focuses on removing obstacles that prevent employees from doing their jobs, thus enabling them to realize their full potential.
stock exchange An independently run exchange that enables the stock of public com- panies to be bought or sold at a price dictated by demand and the performance of those companies.
strategic leadership Involves developing an outlook and strategy that will position the company to become a stronger competitor, in both the short term and the long term.
strategic-planning committee An optional committee of the board of directors respon- sible for keeping the board informed about strategic decisions the company might take and for making sure that the board’s input is taken into account (for example, in the com- pany’s annual strategic-planning process).
top management Typically comprises all the vice presidents and C-level executives in a functional organization, the department heads and key staff directors in a matrix organiza- tion, and key staff directors and all divisional and subsidiary presidents in a divisional organization.
top-down change Change instigated by the CEO when the company needs to act quickly and decisively.
transformational leader A leader that satis- fies the higher needs of the followers and who interacts with followers to raise the organiza- tion to a higher moral plane.
vision statement A concise statement of where the organization would like to see itself 5 or 10 years (sometimes longer) in the future.