Xerox: Organizational Culture and Change

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Introduction

Eager to implement organizational change, leaders might leap into change implementation fueled by enthusiasm, offering real and symbolic support, and demanding results. There is a factor, however, too important to overlook: the organization’s culture. Culture might serve as an enabler of change, but it might also erect barriers.

For that reason, this chapter will examine organizational culture and its role in hindering and implementing change. In particular, this chapter will:

• Define organizational culture as an emergent phenomenon in organizations
• Analyze the relationship between culture and organizational change
• Delineate the six cultural traits most associated with organizational adaptation and change
• Suggest how organizations can go about assessing their culture
• Discuss actions that organizational leaders can take to reshape culture

Before doing that, we will examine how attempts by a progression of CEOs intent on change at what once was a premier American company faced a strong, resistant organizational culture.

Culture and Change at Xerox

In some ways, Xerox represented American business at its best. ¹ In 1960 when the company issued its 914 copier, no one understood just how significant that launch would be. Five years later, Xerox’s flagship product generated revenues of over $390 million; it went on to be the most profitable product in the history of the United States. The brand was so popular and ubiquitous that the name itself became iconic: people didn’t “copy” documents, they “Xeroxed” them.

But Xerox became one of the most extraordinary stories of corporate decline as well. As the company gained a near monopoly over the centralized office copier market, employees’ attitudes and behaviors became increasingly insular. Personal aggrandizement, turf protection, and career advancement directed employee behaviors away from the marketplace. The cultural values which pervaded the company in the 1960s and 1970s became “somewhat intolerant of initiatives and leadership from the ranks. Decision making was often centralized. Experimentation was often discouraged, and error was not tolerated well.” ²

The company failed to commercialize many of its own internally developed breakthrough technologies: the personal computer created at Xerox’s Palo Alto Research Center being only the most famous example. The looming threat of high quality/low cost Japanese competitors—Canon would revolutionize the copy market through smaller, decentralized machines that could now be placed in each office—blindsided Xerox executives.

Perhaps most troubling was a culture that treated customers with a contempt bordering on arrogance. One story, small though it might be, captures the prevailing attitude. It used to be that Xerox users were unable to write in blue ink; Xerox machines simply did not reproduce blue very well. Customers wondered why Xerox could not fix the “problem.” When they complained, the company’s response was simple and straightforward: use another color ink! If our processes don’t meet your needs, they were saying, why, you’ll just have to adjust your needs. After all, we set the standards, we will decide how to define effective performance on the part of our products, and our products are high quality because we say they are high quality.

An attempt at strategic renewal—from producing copier machines to providing all-purpose document management for the office space—did nothing to halt Xerox’s slide. The company failed to take advantage of low cost, high quality ink jet printing, allowing Hewlett-Packard to build a printer division that soon dwarfed all of Xerox.

An attempt to compete head-on with IBM in computing generated only huge losses. Finally, Xerox’s board went outside the company for the first time in its history to bring in a leader from IBM. G. Richard (Rick) Thoman worked for 13 months, attempting to instill a new culture of customer focus and aggressiveness. Then he was fired, replaced by his own predecessor, Paul Allaire. “What I see,” said a senior sales executive, “is a retreat back into the comfort zone of the way things used to be before Rick Thoman.” What followed was a decade of severe retrenchment, a battle with bankruptcy, and a return, eventually, as a much diminished company under new CEO Ann Mulcahy.

Culture and Behavior

Xerox’s culture diminished the company’s ability to respond effectively to a dynamic competitive environment. A series of CEOs failed to transform Xerox into an agile, customer-focused company. Numerous business organizations have faced the same challenge. General Motors and Xerox, for example, have struggled against entrenched culture as they attempted to respond to a dynamic competitive environment.

On the other hand, there are many companies—think of Google, Nucor Steel, Southwest Airlines, General Electric, and Starbucks, for example—where leaders proudly proclaim their culture to be supportive of adaptability and sustained outstanding performance. “We’re profitable because of the value system of our company,” proclaimed Starbuck’s Howard Schultz. “I truly believe that Nucor’s success,” claimed the steel company’s chairman, Ken Iverson, “has been 70 percent culture and 30 percent technology.” Louis Gerstner, who spent 25 years as a senior executive at three companies, including IBM, came to see “that culture isn’t just one aspect of the game—it is the game.”

Organizational culture refers to the common and shared values that help shape employee behavior and are typically passed down from current to future employees. Culture serves as the glue that binds an organization or, in the words of Terrence Deal and Allan Kennedy, “the way we do things around here.” ³

In the early days of an organization’s life, founders embed their personal values in the structures, systems, even the strategies of their companies. When two Stanford graduate students, Larry Page and Sergey Brim, created their first algorithm for delivering relevant Internet searches, they simultaneously created the culture for what would soon become Google. The company’s culture, in fact, practically mirrored the personalities of its founders. ⁴

There were three cornerstones to their beliefs:

1. Don’t be evil (never compromise search results but put a sense of individual ethics into advertisements ^* ).

^*The company turned down ads for hard liquor and guns based on the personal values of Page and Brim.

2. Technology matters (the two were, after all engineers).
3. We make our own rules (particularly in terms of earnings reports and earnings guidance reported to analysis).

When outsider Eric Schmidt joined the company in 2001 as CEO, he was shocked to hear the phrase “don’t be evil” come up during company policy meetings.

Theory into Practice

An organization’s culture is composed of the shared values of its members and the resulting patterns of employee behavior.

Page and Brim are just part of a long list of founders—individuals such as William Procter and James Gamble (Procter & Gamble), Bill Hewlett and David Packard (Hewlett-Packard), Bill Gates (Microsoft), Mark Zuckerman (Facebook) and the trio of Steve Chen, Chad Hurley, and Jawed Karim (YouTube)—whose values become part of the shared DNA of the organization, what Geert Hofstede calls the “software of the mind,” that determines how employees ought to behave. ⁵

When deviations occur, they are quickly criticized based on the values. Shortly after joining Google, Eric Schmidt was faced with an engineer arguing that an idea linking an advertising system into the company’s search was evil. “It was as if he said there was a murderer in the room. The whole conversation stopped, but then people challenged his assumptions.” In the end, Schmidt and the group rejected the idea because, said Schmidt, “it was evil.” ⁶

Employees do not have to wait for procedures to be enforced, for bosses to tell them what to do and how to do it; they define and debate acceptable behavior based on organizational culture. But just what is this phenomenon called culture?

Values and Culture

Culture consists of an interaction between predominant values and patterns of behavior. Values refer to the beliefs and assumptions that individuals bring with them into the workplace. They are deeply held beliefs concerning such fundamental matters as the nature of people and relationships, how to deal with conflict and solving problems, as well as the goals and purpose of the organization.

Values are not so much rules or codes of behavior as they are what Andrew Pettigrew refers to as the logics of action and the invisible rules of an organization. ⁷ When a cohesive set of values becomes predominant in a group or organization, those shared values come to shape patterns of behavior. These are the “social habits” that Lewin addressed (see Chapter 2)—behaviors shaped by values. Now we have an organizational culture: a relatively homogeneous collection of values and the behavioral patterns that emerge as a result.

Culture as an Emergent Phenomenon

Founders embed their values, their beliefs and assumptions about people, about the organization, and about the world. But even they cannot impose a culture. As an organization grows and ages (especially after founders cease to be active), culture emerges from a complex interaction among numerous factors (Exhibit 7-1).

Founder values affect choices made by the next generation of leaders. Past founders and future leaders shape managerial practices and the organizational design of the company: how behaviors will be controlled and rewarded, how decisions will be made, and so on. What emerges from that interaction is the organization’s culture.

Culture and Change

Culture shapes behaviors, behaviors produce results, and results reinforce culture. Particularly when outcomes are positive, an organization’s culture becomes increasingly entrenched and robust. A robust culture, in fact, is a necessary component of adaptation and sustained outstanding performance. ⁸ Robust cultures—those with widely and deeply shared values—bring with them cohesiveness and shared commitment while simultaneously offering channels of communication and coordination. ⁹

Strong, robust organizational cultures enhance organizational performance in three ways:

1. Culture makes an appeal to the “higher ideals and values” of employees, and in doing so provides energy, identity, commitment, and meaning. ¹⁰
2. A strong, robust culture enhances coordination by focusing employee attention on strategic priorities without restricting autonomy and imposing unnecessary controls.
3. A strong, robust culture can help change implementation.

Culture, in other words supports outstanding performance by building commitment and coordination among employees.

That does not mean, however, that all strong, robust cultures are equally suitable to sustained outstanding performance. Culture, as Xerox discovered, may also hinder adaptiveness and change, a problem that can be particularly debilitating in a dynamic external environment. Strong cultures can turn the attention of employees inward as they attempt to preserve old, traditional ways of doing things without responding to the new for new approaches. Cultures that focus attention exclusively on the past while sacrificing the need to respond to the future can be said to be nonadaptive.

In contrast, adaptive cultures encourage adaptation and enable the implementation of change as part of their core values. ¹¹ Nordstrom, Southwest Airlines, Microsoft, and Google all rely on robust, adaptive cultures to remain competitive in a dynamic environment.

Theory into Practice

Strong, internally consistent cultures may resist change; adaptive cultures will embrace, encourage, and enable change implementation.

The adaptiveness of an organization’s culture—its ability to support change implementation in response to a dynamic environment—resides in seven separate but interrelated sets of values and assumptions concerning:

1. The legitimacy of multiple stakeholders
2. The motivation and developmental potential of people
3. Performance expectations
4. Employee participation
5. Learning
6. Diversity
7. A global mindset

We can examine each to analyze how culture can support or hinder change.

Valuing Multiple Shareholders

Turnaround champion Al Dunlop took the view that organizations are accountable only to investors. “Shareholders are the number one constituency,” he said. “Show me an annual report that lists six or seven constituencies, and I’ll show you a mismanaged company.” ¹²

Whatever else might be said about Dunlop’s philosophy and turnaround efforts, he failed to create adaptive organizations capable of transforming themselves in response to external environmental and competitive changes. Most of his “turned-around” companies, in fact, ceased to exist.

Organizations capable of adaptation and change do not emphasize a single stakeholder, whether it is shareholders, employees, or even customers. In the end, organizations whose leaders value the perspectives of multiple stakeholders—with particular emphasis on customers, employees, and shareholders—outperform those that focus on one or two. ¹³

A key source of adaptation is the willingness of organizational leaders to commit time, energy, and resources to tending to the interests of multiple stakeholders; most especially, to shareholders, to customers, and to employees.

• By paying attention to customers, companies remain responsive to external markets.
• By paying attention to employees, companies are able to recruit and retain the people who serve customers.
• By taking care of shareholders, companies strive to perform well financially over time. ¹⁴

Adaptation and change is not only made possible by attention to these multiple stakeholders; it is driven by responsiveness to their legitimate interests.

Valuing the Developmental Potential of Employees

Organizational leaders seek to motivate employees to change. But just what do they mean by motivation? Will they achieve motivation through rewards and punishments? Or will they seek to create the conditions to achieve self-motivation?

Nearly half a century ago, MIT’s Douglas McGregor articulated a simple but powerful distinction between these two distinct approaches to motivation. ¹⁵ At their base, the two views represent alternative belief systems about people. The assumptions managers make about the ability and desire of employees to develop motivation consistent with the goals of objectives of the organization can be delineated into two theories: Theory X and Theory Y (Exhibit 7-2).

Exhibit 7-2 Contrasting Managerial Assumptions about People.

When pervasive attitudes support what McGregor called Theory X beliefs, managers seek to impose change down through their organization. When pervasive attitudes support Theory Y beliefs, managers approach change by working to unleash creativity, energy, and drive among employees.

“Above all,” McGregor wrote, “the assumptions of Theory Y point up the fact that the limits on human collaboration in the organizational setting are not limits of human nature but of management’s ingenuity in discovering how to realize the potential represented by its human resources.” ¹⁶ Since effective change implementation rests on the desire to motivate employees to adopt new patterns of behavior, a culture based on Theory Y values supports the belief that employees can be motivated to change their behaviors in order to act on behalf of the organization.

Theory into Practice

When the pervasive values of an organization hold that most employees will exercise self-direction and self-control in the service of objectives to which they are committed, the organization’s culture will be more welcoming to the implementation of behavioral change.

When attitudes become pervasive in a culture, they tend to be reinforced. An individual’s own on-the-job experience helps shape and reinforce values because of the feedback loop that exists between the assumptions of managers and the resultant behaviors of employees. Exhibit 7-3 illustrates what might be considered a self-sealing value loop, the phenomenon that acts like a self-fulfilling prophecy. Values lead to behaviors on the part of managers that, in turn, lead to reactions on the part of employees. The manner in which employees react, in turn, reinforces the original values held by managers.

Theory into Practice

Values tend to be self reinforcing; managers create an environment where employees behave in ways that confirm those managers’ beliefs.

Valuing Outstanding Performance

Effective change implementation aims to alter behaviors in order to support renewed strategies and achieve outstanding performance. The most effective change leaders are driven to produce not modest or incremental performance improvements but outstanding results. Cultures that demand outstanding performance from their employees—and support their efforts to achieve high performance levels—will enable appropriate behavioral change.

Theory into Practice

The most effective change leaders seek to produce outstanding results, not modest or incremental performance improvements.

It is the interconnection between performance goals and employee commitment that forms the basis of this core value. It is the conviction that, given high performance goals—coupled with the requisite levels of autonomy and resources—employees will constantly work to meet those goals as well as to seek improvement in their own performance and the performance of the organization. When change occurs within an organization that values outstanding performance, that change will be aligned with the strategic goals of the organization.

Valuing Employee Participation

Decades of research and experience have confirmed and broadened an understanding of the positive performance impact of employee participation. Participation refers to the ability of employees at all levels to influence decisions concerning the planning and execution of key tasks.

Allowing for employee participation can support change implementation for a number of reasons: ¹⁷

• Participation can improve decision-making quality by involving lower-level employees who have access to important information and by encouraging diverse opinions.
• Participation enhances the commitment of participants to the chosen course of action.
• Participation enhances motivation to achieve performance goals.
• Participation opens avenues of communication and builds coordination among involved employees.
• Participation encourages employees to become self-supervising.
• Participation can improve employee-management relations.
• Participation allows employees to learn and use new skills while enabling an organization to identify individuals with leadership potential.

When employees participate in the identification of a problem as well as the design of a solution, they will be more motivated to achieve the new goals. Additionally, the participation of employees brings forth points of view and information that might trigger the recognition that change is required. By their closeness to customers, especially in service organizations, and their direct involvement in work processes, employees can provide vital knowledge concerning the need for adaptation and change.

Theory into Practice

Managers who are uncomfortable giving up control and responsibility or who do not believe employees have adequate levels of knowledge or motivation will resist allowing for widespread participation in decision making.

Although managers may claim to accept the performance benefits of participation, some may hold beliefs that work against allowing for employee involvement in decision making. Those contrary values can be expressed in a number of concerns summarized in Exhibit 7-4. Managers who harbor such reservations will hesitate to invest decision-making authority in employees. Managers who value participation harbor no such reservations. They believe that the competencies of employees and the quality of decision making will increase, as well as the commitment to the implementation of those decisions.

Exhibit 7-4 Values That Inhibit Allowing Employee Participation.

Valuing Learning

Learning is the process by which individuals receive data from the external environment, analyze that data, and adjust their thinking and behaviors accordingly. A learning culture has both individual and organizational components to it. At the individual level, a learning culture depends on a willingness to admit limitations and vulnerability—I don’t know everything I need to know. Admitting vulnerability opens the individual to the possibility of transforming input from others.

Individual learning is central to effective change. When learning occurs, writes David Garvin, employees become “skilled at creating, acquiring, and transferring knowledge, and at modifying [their] behavior to reflect new knowledge and insights.” ¹⁸ Learning becomes transformative when it encourages individuals not just to acquire and process new knowledge but also to change their behaviors as a result. When the pervasive values of an organization’s culture nurture learning, change implementation is more likely to be effective.

Theory into Practice

Individuals and organizations learn by receiving and analyzing valid information, then altering thinking and acting as appropriate.

Valuing Diversity

Diversity refers to the willingness and ability of an organization to bring together people of different perspectives who have been shaped by their varied backgrounds and experiences. When coupled with participation and learning, diversity can contribute to effective change implementation.

David Thomas and Robin Ely offer the example of a small public-interest law firm to demonstrate how their valuing of diversity supported strategic renewal. In the mid-1980s, the firm’s all-white legal staff became concerned that the women they represented in employment-related disputes were exclusively white. The firm hired a Hispanic female attorney, thinking she would expand the firm’s client base to include other Hispanic women.

The change brought by the attorney’s inclusion was far more sweeping than anticipated. In particular, the new attorney argued that the firm’s strategy—focusing on traditional affirmative action cases—should be broadened to include employment issues relating to English-only work policies.

The firm, wrote Thomas and Ely, now recognized “a link between English-only policies and employment issues for a large group of women—primarily recent immigrants—whom it had previously failed to serve adequately.” ¹⁹ The willingness of partners to value diversity of ideas as well as diversity of ethnic background allowed the organization to incorporate new perspectives in pursuit of strategic aims. Diversity brought with it new approaches and greater effectiveness.

Theory into Practice

Valuing diversity offers the opportunity for creativity within an organization by encouraging collaboration among people with different perspectives derived from varied backgrounds and experiences.

Valuing a Global Mindset

Back in the early 1990s, Yves Doz, José Santos, and Peter Williamson tell us, Nokia leaders realized that their home base in Finland would not provide them with the needed technology, innovation, and skills to gain dominance in the telephone business. ²⁰ With research expertise in the United Kingdom, advanced technologies and global marketing know-how from the United States, cutting edge electronics capabilities in Japan, and management knowledge specific to low-cost manufacturing and low-margin business in Southeast Asia, Nokia could succeed only by thinking globally.

While Nokia accepted, even embraced, a global mindset, their main competitor remained focused on its domestic know-how. Motorola had every intention, of course, of selling their cellular technology globally. Nonetheless, the company continued to develop its technologies and products based on the capabilities available in its own U.S. backyard.

Motorola was among the first to mass-product mobile telephones and had been leading the world market by projecting from the original cellular technology home. The company lost ground, however, by remaining too parochial: thinking the future could be invented within the United States. Motorola missed the shift to digital mobile telephony and the Global System for Mobile (GSM) standard—an outcome of European cooperation that would be the choice of many countries around the world, even in Asia.

Both Nokia and Motorola intended to complete in a global marketplace, but only one company valued a global mindset. ²¹ Global mindset can be defined as a positive openness to the complexities and opportunities of multiple environments. Because “differences still matter in the world,” organizations that value a global mindset will be better able to cross national borders. ²²

Valuing a global mindset will be an especially significant cornerstone for organizations attempting to compete across national borders. Percy Barnevik, the founding CEO of ABB, suggested why valuing a global mindset would be so critical to managers in an increasingly complex world: “Global managers have exceptionally open minds. They respect how different countries do things, and they have the imagination to appreciate why they do them that way.” But a global mindset involves more than the simple acceptance of difference. Managers with a global mindset, added Barnevik, “are also incisive; they push the limits of the culture… They sort through the debris of cultural excuses and find opportunities to innovate.” ²³

If an organization values a global mindset, it will be able to move beyond parochialism without abandoning local responsiveness. A global mindset allowed Nokia to outpace its competition because it was able first to identify centers of excellence and opportunity within nonhome operations and then integrate those opportunities into a company strategy.

Assessing Culture

Each of the seven values (summarized in Exhibit 7-5) reflects a dimension of corporate culture that impacts the organization’s capacity to change. Whether they are printed on cards, posted on wall plaques, chanted at company gatherings, or proclaimed on banners, values are expressed through words.

• 3M claims innovation (“Thou shalt not kill a new product idea”).
• American Express claims, “Heroic customer service and worldwide reliability of service.”
• Merck Pharmaceuticals claims, “We are in the business of preserving and improving human life.”
• Sony claims as its core values, “To experience the sheer joy that comes from the advancement, application, and innovation of technology that benefits the general public” as well as “To elevate the Japanese culture and national status.” ²⁴

Exhibit 7-5 Values of Adaptive Cultures.

These words represent the espoused values of the organization.

It is useful to remember, however, that culture translates values into action. Employees may claim to hold one set of values; their behaviors, however, might be quite different. Kenneth Lay, the CEO of Enron, hung banners in the Houston corporate lobby proclaiming four core values: communication, respect, integrity, and excellence. “I was always in the forefront of making sure that our people did in fact live and honor those values… Integrity and character are incredibly important to me.” ²⁵ There is overwhelming evidence that those words did little to shape behaviors of Enron employees.

The leaders at Enron were espousing one set of values but living or enacting another. Gary Hamel noted that the sole responsibility of Enron traders “was simply to find ways to make money.” ²⁶ The real rules of the organization ignored the banners in the headquarters’ lobby and followed the logic of doing whatever needed to be done to make money. Espoused values are the values called upon by individuals to explain or justify their course of action or pattern of behavior. Enacted values are the values that are implicit in that course of action or pattern of behavior. ²⁷

Theory into Practice

Culture is determined by enacted rather than espoused values; but when those two are out of alignment, cynicism and frustration will drain energy away from outstanding performance.

Managers can find themselves tripping over that difference. Aligning enacted with espoused values requires aligning behavior with words. When the words call for a new approach to management, old habits must be changed. When espoused and enacted values contradict themselves, frustration and cynicism can erode employee motivation and undermine effective implementation.

To avoid that erosion of energy, leaders can assess the alignment between words and deeds. Assessment starts with the question: Do our current values and principles align with the requirements of our renewed strategy? No values, regardless of how lofty, appealing, or sincere they may be, are sustainable if they do not support outstanding performance.

The next question to be asked is: Are the behaviors of employees at all levels of the organization largely consistent with our stated values and principles? The degree to which a gap exists between espoused and enacted values can be particularly debilitating to an organization in that it is likely to engender frustration or cynicism. But how does an organization go about assessing the state of its values and especially the consistency between espoused and enacted values?

Ed Schein urges organizational leaders to start with a cultural audit that surfaces the enacted values and principles in their organization. ²⁸ That cultural audit starts not with the culture itself but with an analysis of a real business problem. A business-problem audit would identify patterns of behavior—the role of authority, the process of decision making, patterns of communication, the management of disagreement and conflict, and so forth—and resulting performance outcomes, then explore the underlying values and principles that shaped the behavior. In that way, the audit accesses culture not directly but through patterns of behavior. The focus is placed on enacted rather than espoused values.

The process of articulating values can, in and of itself, be advantageous for an organization. The articulation of values can, and inevitably will, draw attention to inconsistencies between those espoused values and the values enacted by employees—most particularly top management—in their day-to-day behaviors.

Some managers may wish to avoid the discomfort, self-revelation, even potential turmoil that will result from shining a light on these inconsistencies. But organizations that embrace learning will welcome the opportunity to act upon these inconsistencies. Additionally, the explicitness of values can guide the recruitment and development of employees. The point is to achieve a high degree of alignment between the values of individual employees and those of the organization.

Leaders Shape Culture

Reflecting on his 13-year effort to transform Siemens, Heinrich von Pierer recalled his early attention to changing the company’s culture. “Some people told me when I started, ‘It’s nice to talk about culture change, but how long do you think it will take until you really achieve something?’

“I said, ‘Well, two years.’

‘Young friend,’ they laughed, ‘it will take 10 years.’ Unfortunately, they were right.” ²⁹

Von Pierer’s reflection captures the difficulty and challenge of altering an organization’s culture. The actions of leaders can shape culture in powerful ways.

Leaders desirous of shaping their organization’s culture to support a renewed strategy for achieving outstanding performance need to appreciate the degree to which their own decisions and actions resonate throughout the company. Leaders can examine four sets of behaviors that Schein says help create and embed culture in an organization. ³⁰

First, leaders make choices about what to pay attention to, what to measure, control, and reward. Is it the quality of the product or service or the profit margin? Is it the needs and concerns of shareholders or of multiple stakeholders? Is it the innovativeness of the firm’s offerings or the stability of old, dependable lines? These are not either/or choices or options. But they do represent choices in organizational focus and resource allocation that, over time, become embedded as cultural values.

A second set of leader behaviors that helps shape the organization’s culture relates to reactions to critical incidents and crises. Contrast, for instance, the reaction of executives at Source Perrier with those at Johnson & Johnson to crises. When traces of the carcinogen benzene, a petroleum by-product, turned up in Perrier water, the company labeled the incident as isolated, recalling a small number of bottles distributed in the United States. It was only when similar contamination was found in European bottles and it became clear that the problem had existed for months that executives issued a worldwide recall.

At Johnson & Johnson, cyanide-laced Tylenol capsules killed seven people in Chicago in 1982. The company immediately alerted the public and then issued a worldwide recall for over 31 million bottles. Johnson & Johnson chairman James Burke not only salvaged the brand name but embedded, in ways that words or banners could not, the company’s 40-year-old credo to first meet the needs of “the doctors, nurses, and patients, to mothers and fathers and all others who use our products and services.”

A third set of behaviors that leaders call upon to shape their organization’s culture involves the “observed criteria” by which they allocate scarce resources. ³¹ A CEO who extols the virtue of marketplace responsiveness but slices marketing budgets in order to meet short-term financial goals sends a signal about what the company values. The same can be said of a supervisor who repeats her company’s espoused commitment to quality and then urges employees to just “ship it” as monthly deadlines loom. A managing director who refuses to cut training budgets during a downturn emphasizes the extent to which the company values human resources. Making tough choices about resource allocation helps shape the values and resulting culture of an organization.

Finally, leaders choose to emphasize certain criteria in their recruitment, selection, and promotion of employees and future leaders. Remember General Motors Livonia plant (see Chapter 1)? Hoping to instill a culture of teamwork and collaborative problem solving, the company and the union applied certain criteria to their selection process. They placed less emphasis in their search on the technical skills of job applicants and far more on their interpersonal competencies. Willingness and ability to commit to overall company goals, to work cooperatively with fellow employees, and to take initiative all became vital screens in the selection process.

Top executives are the most visible embodiment of their organization’s culture. Their behaviors are apparent to both external stakeholders—customers, suppliers, labor markets, and the host community—and to employees. What leaders say matters; what leaders do matters even more. Key choices and decisions, more than speeches and documents posted on walls, embed values and spread culture.

Conclusion

Organizational culture—the values and assumptions that individuals bring with them to the workplace and the resulting behavioral patterns—has a powerful impact on the ability of organizations to implement change. Culture derives mainly from the values of founders as passed on through future generations of leaders. These leaders make decisions about focus and emphasis, about how to respond to a crisis, about which employees to hire and which to promote. That is why culture is an emergent phenomenon: It emerges from those values and the management policies and practices that reflect the values.

Robust cultures—that is, cultures in which a consistent set of values is widely and deeply shared within the organization—can promote outstanding performance by motivating employees to behave in a coordinated manner toward a common strategy. Some robust cultures, however, provide barriers to adaptation and change implementation. Employees seek the comfortable and familiar even as the external environment is demanding new and significantly altered patterns of behavior.

Cultural values that promote adaptation and change include valuing the legitimate perspective of multiple stakeholders, especially employees, customers, and shareholders; valuing the potential of most employees to develop a commitment to achieving the performance goals of the organization; valuing high expectations that encourage employees to stretch their aspirations; valuing widespread employee participation in decision-making processes; valuing learning at both an individual and organizational level; and valuing diversity of perspectives, experience, and background. These cultural traits will help an organization change patterns of behavior in response to the dynamism of the firm’s competitive environment.

A cultural audit can surface the enacted values of an organization. Because the diagnostic process has allowed employees to determine the gap between the status quo of the organization—the existing patterns of employee behavior and the values that underlie those behaviors—and the requirements of the organization’s strategic response to the competitive environment, change implementation can now move to the next stage: redesigning the roles, responsibilities, and relationships of employees.

Discussion Questions

Case Discussion

Read “Balancing Culture and Growth At Starbucks” and prepare answers to the following questions:

Balancing Culture and Growth at Starbucks

Howard Schultz built Starbucks into one of the most successful companies in the United States. ³² Indeed, Starbucks has joined such other iconic American corporations as Disney and McDonald’s in spreading its brand across the globe. Indeed, Schultz has come to symbolize a new breed of high successful entrepreneurs. His 2000 memoir, Pour Your Heart into It: How Starbucks Built a Company One Cup at a Time, became an instant best-seller. People can be forgiven if they believe Schultz was the company’s founder, but this is not the case.

Starbucks, in fact, was founded in 1971. It was already a thriving, albeit small, coffee bean market in Seattle’s Pike Place Market when Schultz first dropped in. At the time, he was selling kitchenware for a Swedish manufacturer. It was, he claims, love at first smell. In 1982, he moved to Seattle and joined the company as director of retail operations. A visit to an espresso bar in Milan convinced him that he had stumbled onto a viable business model that could be brought back to the Unites States. “There was nothing like this in America. It was an extension of people’s front porch. It was an emotional experience. I believed intuitively we could do it. I felt it in my bones.” Current Starbucks’ owners resisted Schultz’s urgings to expand from the bean business, so he left the company. After opening his own espresso bar, Schultz raised $3.8 million to buy the company. Starbucks was now his, and he was ready to expand, first beyond a coffee bean market and then beyond Seattle.

Under Schultz’s leadership, Starbucks became “the fastest-growing retail story of all time. ‘It has grown faster than McDonald’s ever did.’” From nine stores in 1987, Starbucks grew to over 10,000 stores in 30 countries by 2006. In 2005, revenues reached $6.4 billion. Growth, in fact, became a particular passion of Schultz’s. He expressed concern that if Starbucks did not grow rapidly, it risked being cannibalized by another chain. Revenues from his stores climbed above 20 percent annually with same store sales growing at over 10 percent. International expansion began in 1996 in Japan and has continued through Europe. By 2004, the green, familiar Starbucks’ logo could be seen in over 7,500 stores worldwide. It is considered to be “possibly the most dynamic new brand and retailer to be conceived over the past two decades.”

Schultz pursued a number of brand extensions as part of his strategy of growth. Some—Starbucks’ branded premium coffee ice cream, bottled coffee beverages (in partnership with PepsiCo), a Starbucks Visa credit card, and a CD music label (by purchasing Hear Music)—provided quite successful. Others—a magazine named Joe published with Time and a carbonated coffee drink—proved far less so. As the company grew to $1 billion in sales, Schultz brought in professional management from Wal-Mart, Dell, and PepsiCo. “I wanted to bring in people who had experience working at $10 billion companies,” he explained. Schultz’s vision is to grow to 25,000 stores worldwide (McDonald’s has 30,000). The stock market rewarded Starbucks’ growth in spectacular fashion: Between 1992, when Starbucks’ stock went public, and 2007, the stock price rose 5,000 percent.

In 2005, Jim Donald became CEO after spending 3 years as president of North America. Donald grew up in the supermarket business, having worked closely with Sam Walton to develop Wal-Mart’s supermarket expansion. Schultz had first ceded the CEO position to Orin Smith in 2000 so he could focus his own energies on global strategy. Donald announced his goal as “building stores, adding emerging growth drivers, and adding to the product pipeline. We’ll always be attempting to do things that are new. And if we stop doing that, then the whole entrepreneurial culture and spirit fails.” Donald established a long-term goal of 30,000 stores, compared to 9,200 in April 2005. “We’re going to open 1,500 this year. We’re looking at top line growth of 20 percent annually in the next three to five years—and bottom line 23 to 25 percent.”

In November 2006, Schultz told a CNBC reporter, “We’re headed to 40,000 stores.” Where will the growth occur? “We’re just now getting to smaller cities. And there are 165,000 miles of U.S. roadway that haven’t been tapped. I just got back from a four-market tour: Spain, Germany, Amsterdam, and Zurich. We’re just scratching the surface in China. We have 1,590 stores and the potential for more than 2,000 there. We’re not in India, but we’re looking at it. We’d love to be in Wal-Mart parking lots with company-operated stores.”

The “Third Place”

“We’re profitable because of the value system of our company,” insists Schultz. “American companies have failed to realize that there’s tremendous value in inspiring people to share a common purpose of self-esteem, self-respect and appreciation.” His stated goal was to create a culture that created a kind of partnership between employees and customers. The cozy environment of each Starbucks was meant to create what Schultz called a third place. “The first place is home,” he said. “The second place is work. We are the place in between. It’s a place to feel comfort. A place to feel safe. A place to feel like you belong.” And, of course, to buy coffee, pastries, books, and music.

To make sure the Starbucks’ culture was being maintained, the company conducted regular audits. Every 18 months, employees are asked to fill out a Partner View survey. Participation, which is voluntary, runs as high as 90 percent, because employees fill out survey on-line during company time. Plus, says the president of Starbucks Canada, “People have seen tangible results from providing us feedback.”

The Tensions of Growth

Donald recognized the inherent tension between rapid growth and maintaining the culture that had been so instrumental to Starbucks’ success. “I want to grow big and stay small at the same time. We want to run the company just like we did when we were one store in Pike Place Market in Seattle.” A February 14, 2007 internal memo titled “The Commoditization of the Starbucks Experience” written by Howard Schultz appeared on the Starbucks Gossip blog [the memo can be found in Exhibit 7-6]. The trade-off between growth and culture, Schultz worried, had tilted too far toward growth. “Over the past ten years, in order to achieve the growth, development, and scale necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of decisions that, in retrospect, have lead to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand.”

Exhibit 7-6 Valentine’s Day Memo.

Schultz was especially concerned with the lack of in-store coffee scent and the cookie-cutter feel of the stores. Automatic espresso machines “solved a major problem in terms of speed and service,” but “eliminated the smell of beans being ground.” Those decisions, all of which had been approved by Schultz himself, were giving Starbucks the feel of a chain store rather than a third place. Schultz concluded with a call for Starbucks to “get back to the core. Push for innovation and do the things necessary to once again differentiate Starbucks from all others.”

Throughout 2007 Starbucks’ stock plummeted (from $36.29 in January 2007 to 18.38 in January 2008). Coffee competition from both McDonald’s and Dunkin’ Donuts ate into same store sales. In January 2008, conceding that “we lost the focus that we once had, and that is the customer,” Schultz removed James Donald and placed himself in the CEO role. He would slow down domestic growth, Schultz promised, shift resources to international expansion. “Starbucks is not a broken company,” he said. “Just as we created this problem, we can fix it.”

In his first month, Schultz took a number of specific steps: closing 100 under-performing stores, scaling back on domestic expansion plans, and eliminating the sale of heated breakfast sandwiches whose aroma overpowered the smell of the coffee itself. His most dramatic step came in February 2008 when all 7,100 U.S. stores closed simultaneously for three hours to conduct an in-store training session for employees. Employees first watched a video massage from Schultz. “This is not about training,” he said. “This is about the love and compassion and commitment that we all need to have for our customers.” Employees then talked about new approaches to improve taste and texture and to improve the customer’s experience. One store manager commented immediately after the session, “It’s really inspiring to talk about the quality of our expresso when we’re here all in the same room.”

Rival Dunkin’ Donuts took advantage of the well-publicized shutdown of all Starbucks stores by offering $1 lattes during the same three-hour period.

Endnotes

1. This case is based on information from Douglas K. Smith and Robert C. Alexander, Fumbling the Future: How Xerox Invented, Then Ignored, the First Personal Computer (New York: Morrow, 1988); John P. Kotter and James L. Heskett, Corporate Culture and Performance (New York: Free Press, 1992); Bert Spector, Taking Charge and Letting Go: A Breakthrough Strategy for Creating and Managing the Horizontal Company (New York: Free Press, 1995); and Anthony Bianco and Pamela L. Moore, “Xerox: The Downfall,” BusinessWeek Online, 2001, p. 2.
2. Kotter and Heskett, Corporate Culture and Performance, pp. 76–77.
3. Terrence E. Deal and Allan A. Kennedy, Corporate Cultures: The Rites and Rituals of Corporate Life (Reading, MA: Addison-Wesley, 1982), p. 4.
4. John Battele, The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed Our Culture (New York: Penguin Books, 2005); David Vise and Mark Malseed, The Google Story (New York: Delacortte Press, 2005); and Thomas R. Eisenmann and Kerry Herman, Google, Inc. (Boston: Harvard Business School Publishing, 2005).
5. Geert Hofstede, Cultures and Organizations: Software of the Mind (New York: McGraw-Hill, 1991).
6. John Battele, “The 70 Percent Solution,” Business 2.0, 2005, p. 134.
7. Andrew Pettigrew, The Awakening Giant: Continuity and Change in Imperial Chemical Industries (Oxford: Blackwell, 1985).
8. Kotter and Heskett, Corporate Culture and Performance.
9. Daniel R. Denison, Corporate Culture and Organizational Effectiveness (New York: Wiley, 1990), p. 2.
10. Jennifer A. Chatman and Sandra Eunyoung Cha, “Leading by Leveraging Culture,” California Management Review 45 (2003), p. 21.
11. This finding is documented in Kotter and Heskett, Corporate Culture and Performance.
12. Quoted in Ross Petty, Virginia Soyberl, Phyllis Schlesinger, and Al Anderson, Albert Dunlop and Corporate Transformation (A) (Boston: Babson College, 1999), p. 6.
13. Kotter and Heskett, Corporate Culture and Performance.
14. Ibid., p. 46.
15. Douglas McGregor, The Human Side of Enterprise (New York: McGraw-Hill, 1960).
16. Ibid., p. 48.
17. Frank Heller, Eugen Pusic, George Strauss, and Bernhard Wilpert, Organizational Participation: Myth and Reality (New York: Oxford University Press, 1998), p. 10.
18. David A. Garvin, “Building a Learning Organization,” Harvard Business Review (1993), p. 80.
19. David A. Thomas and Robin J Ely, “Making Differences Matter: A New Paradigm for Managing Diversity,” Harvard Business Review (1996), p. 85.
20. Information on Nokia is from Yves Doz, José Santos, and Peter Williamson, From Global to Metanational: How Companies Win in the Knowledge Economy (Boston: Harvard Business School Press, 2001).
21. The notion of global mindset is explored in Anil K. Gupta and Vijay Govindarajan, “Cultivating a Global Mindset,” Academy of Management Executive 16 (2002), pp. 116–126; Thomas M. Begley and David P. Boyd, “The Need for a Corporate Global Mind-Set,” Sloan Management Review 44 (Winter 2003), pp. 25–32; Nina Nummela, Sami Saarenketo, and Kaisu Puumalainen, “A Global Mindset—A Prerequisite for Successful Internationalization?”Canadian Journal of Administrative Sciences 21 (2004), pp. 51–64; John O’Connell, “Global Mindset,” Blackwell Encyclopedia of International Management (2005), p. 179; and Catherine Bolgar, “Corporations Need a Global Mindset to Succeed in Today’s Multipolar Business World,” Wall Street Journal, 2007.
22. That phrase is from Panda Getaway, Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter (Boston: Harvard Business School Press, 2007).
23. Quoted in William E. Taylor, “The Logic of Global Business: An Interview with ABB’s Percy Barnevik,” Harvard Business Review 69 (1991), p. 94.
24. Quoted from Collins and Porras, Built to Last, pp. 88–90.
25. Brian Gruley and Russ Smith, “Keys to Success Left Kenneth Lay Open to Disaster,” Wall Street Journal, 2002, p. A5.
26. Gary Hamel, Leading the Revolution (Boston: Harvard Business School Press, 2000), p. 213.
27. Chris Argyris and Donald A. Schön, Organizational Learning II: Theory, Method, Practice (Reading, MA: Addison-Wesley, 1996), p. 13.
28. Edgar H. Schein, The Corporate Culture Survival Guide: Sense and Nonsense About Culture Change (San Francisco: Jossey-Bass Publishers, 1999).
29. Thomas A. Stewart and Louise O’Brien, “Transforming an Industrial Giant: An Interview with Heinrich von Pierer,” Harvard Business Review (2005), p. 117.
30. Ibid., pp. 97–99.
31. Ibid., p. 98.
32. This case is based on the following publications: Naomi Weiss, “How Starbucks Impassions Workers to Drive Growth,” Workforce 77 (August 1998); Kate Bonamici, “Hot Starbucks to Go,” Fortune, January 26, 2004; Kristen Millares Bolt, “Jim Donald Brings New Energy to Starbucks CEO Post,” Seattle Post-Intelligencer Reporter, March 31, 2005; Calvin Leung, “Culture Club,” Canadian Business, October 9, 2006; Matthew Creamer, “Starbucks Wakes Up and Smells the Death of Its Brand Experience,” Advertising Age, February 26, 2007; Joe Nocera, “Talking Business: A Double Shot of Nostalgia for Starbucks,” New York Times, March 3, 2007; and Michael M. Grynbaum and Andrew Martin, “Starbucks Takes a 3-Hour Coffee Break,” New York Times, 2008, p. C1.

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