Most people never give company culture a second thought until there is a need to change it. Culture is rarely defined in a business or an organization and, unlike personnel policies or procedures for established workflow, company culture is not something written down. Rather, culture can often be described by any veteran employee to a newly hired recruit as, “just the way we do things around here.”
Tom Davenport defines corporate culture in Management Review as “the DNA of an organization, invisible to the naked eye, but critical in shaping the character of the workplace. It controls the form and function of what the organization ends up being.”
Corporate cultures, like cultures in society, develop over a long period of time. They are often based on a set of principles that have guided the business from the founder’s vision and imprint through a succession of executives and managers who have carried these principles forward.
Business consultant Kate Harrad categorizes corporate culture into three areas in Nelson Consulting News:
- Espoused culture is what the formal organization wants and believes about itself, which would include mission statements, job descriptions and the many other aspects of the company in written form.
- Underlying culture is the informal organization which includes the personalities within the company, working relationships and alliances, and activities which arise from the needs of employees within the organization rather than mandated from above.
- Perceived culture is the company’s reputation in the marketplace among its customers, other businesses and past employees, which can be quite different from the espoused culture of the company itself.
In successful companies, Harrad says the espoused, underlying and perceived cultures will all be aligned.
The Harvard Business Review published a study of successful companies to determine their common characteristics. The research revealed that the most successful companies consistently excelled in the following four areas of management: strategy, execution, structure and culture.
Furthermore, the study found that organizations with clearly codified cultures became better places for employees to work. A company with what the authors called “a sturdy, effective culture” was able to be more selective in choosing prospective customers. Also, the most successful companies periodically revisited and reaffirmed their core values and marketplace behaviors.
James Heskett and W. Earl Sasser who, along with Joe Wheeler, authored the Harvard study, found there were 10 distinct reasons to design a better corporate culture. They are listed as follows:
- Leaders become leaders by setting an example for others by exemplifying the values, vision and organizational purpose for others to follow.
- Strong corporate cultures can be created with an investment in the culture—examples include team building activities and rewards for employees.
- Employees at all levels in an organization notice and validate the elements of culture. When employees see new behavior, they express the value the behavior embodies (e.g., “fairness is my boss”).
- Companies with clearly defined cultures have lower labor costs and:
- Become better places to work;
- Become well known among prospective employees;
- Take ownership in the company and work to make it better;
- Referral rates from existing employees are higher;
- The pool of prospective employees becomes larger; and
- The self-selection process reduces mismatches.Companies with clearly defined and enforced corporate cultures enjoy greater employee and customer loyalty. This in turn leads to greater productivity and lower operating costs.
- Companies with strong and effective corporate cultures are more selective with customers. Companies become strong enough to “fire” customers who abuse employees or make unreasonable demands.
- The result of a strong corporate culture is “the best serving the best.”
- High-performing companies periodically revisit and reaffirm their core values, which prevents the establishment of dogmatic cults within the company with little capacity for change.
- Companies with strong and adaptive cultures foster effective succession in the leadership ranks, preparing successors and easing management transitions.
- Cultures can sour over time, if not attended to by management.
While much of what becomes company culture is not codified or dictated, it can play a crucial role in the success or failure of an enterprise. So too can the failure to change company culture when it is required by either internal changes desired by senior management or external changes thrust upon the company or demanded by marketplace forces. Failure to manage the corporate culture and maintain forward momentum for the growth of the business can be just as fatal as the failure to develop new products in an ever-changing world of business.
When Steve Case of AOL and Jerry Levin of Time Warner announced in 2001 that the two companies were merging to create the largest media company in history, they were focused on their vision of an entirely new media company, combining an established media firm with a new company born in the digital age. The merged media giant of AOL and Time Warner would touch virtually every household in America, either through the 20 million AOL subscribers, the 13 million Time Warner cable subscribers or via Time Warner’s wide reach into the movie business.
At the time the merger was announced, Scott Ehrens, a media analyst with Bear Stearns, said, “Together, they represent an unprecedented powerhouse. If their mantra is content, this alliance is unbeatable. Now they have this great platform that can crossfertilize with content and redistribute.” The combined merger had a market capitalization of $350 billion and an annual revenue stream topping $30 billion.
But the vision of the two media titans was never realized because the cultural clash of the two disparate companies ultimately spelled doom for the success of the merger. While some media analysts were skeptical that the corporate cultures of two vastly different companies could be merged successfully, Case and Levin expressed the belief that corporate cultural problems would be overcome and be almost dismissive of skepticism and concerns. Moreover, neither Case nor Levin foresaw the need to truly create a new culture for the new company to replace the strong, but entirely different cultures that existed at both AOL and Time Warner respectively.
Rather, Case and Levin managed the merged companies from the top, oblivious to the cultural clash taking place at the bottom, which would ultimately undermine the entire merger. Within a few short years, the cultural disharmony was so dysfunctional to realize the broad vision of its architects that both Case and Levin were forced out by the new board of directors, as the benefits were never realized with improved bottom-line performance. Furthermore, in a stunning reversal, the merger was undone in 2009 with AOL spinning off as a separate company after expected gains never materialized and stock prices cratered never to recover after the dot-com bubble burst.
When it was all said and undone in a corporate divorce, the media observers concluded that the deal to merge old media with the new was one of the largest business blunders in American corporate history.
The culture clash was evident within the ranks from the very beginning. James Surowiecki wrote in The New Yorker that the two sides clashed early and often. “The posturing of AOL executives, with their rhetoric about injecting ‘Internet DNA’ into the company, played badly with their new colleagues,” Surowiecki wrote. “‘These people were beyond arrogant,’ one Time Warner executive said last week. ‘They had this intolerable holier-than-thou attitude, running around with these Superman complexes, talking about AOL, AOL, AOL everywhere, and promising to save us, when we knew our businesses didn’t need saving.'”
In a Business Week review of the book, Stealing Time: Steve Case, Jerry Levin, and the Collapse of AOL Time Warner, by author Alec Klein, the magazine published the following:
Klein is effective, however, in depicting the culture clash between the arrogant AOLers and staid Time Warnerites that ultimately rocked the merger. Ideas that AOL executives saw as forging synergies were repeatedly shot down by the Time Warner side, which seemed intent on demonstrating that it had its own way of doing things. What about using a set-top-box vendor who was a prospective AOL advertiser? No, said Time Warner people; they had their own source. What about delivering the company’s movies online? Time Warner said it was already working on that on its own.
While it was the clash of cultures that undermined the merger and doomed it to failure, it was also the lack of foresight by top management in both companies to put in place a proactive corporate strategy to mold the two disparate cultures into a cohesive business with a new corporate culture.
Though the AOL Time Warner failed merger is the most visible failure of corporate culture clashes to bring down a company, the lessons to be learned are relevant to every company going through a culture change.
So, how does a company successfully change its corporate culture? Tim Klabunde, a marketing director who contributes to the online business site cofebuz.com, wrote that there are four steps to changing corporate culture.
Step 1–Educate and encourage
According to Klabunde, “Education and encouragement are the foundational step of any cultural change.” Without proper training and knowledge provided by management, employees will find it difficult to be successful in moving toward adopting the new corporate culture. Employees need knowledge, training and encouragement if management is to be successful in creating a new corporate culture to erase the old.
Step 2—Define expectations
New expectations need to be clearly defined so everyone not only knows what is expected, but can move forward in meeting those expectations in a positive environment without the threat of coercion. Too often, as corporate cultures are changing, a failure to move quickly enough is met by management threats when the root cause for the failure can be traced to a lack of clearly defined expectations set by management. I’m reminded of the humorous sign posted in a fictitious business: “The beatings will continue until morale improves.” New behavior sought by management requires both clearly defined expectations for employees and positive reinforcement for progress along the way to meeting those expectations.
Step 3—Acknowledge and celebrate success
According to Klabunde, “Acknowledging and celebrating success is the most important step in changing corporate culture.” Changes in corporate culture can only take root within the employee ranks if it is acknowledged and celebrated by senior management. Putting out a memorandum encompassing a new set of principles forming a new corporate culture will soon be forgotten if the principles are not honored in both words and actions by top management.
Step 4—Reward success
Every business can begin the process of changing its corporate culture. The businesses with a high probability of succeeding are those that recognize the need to reward success. Klabunde wrote that this can be done using bonuses, raises, title changes, coveted office locations, prime parking spaces and incentives linked to short-term culture change achievements to ensure the long-term success of the initiative.
Peter Bregman, who advises CEOs and their leadership teams, stated the key to accelerating the pace of corporate change within a company involves two simple actions. First, do dramatic story-worthy things that represent the culture you want to create and then let other people tell stories about it. Then, find other people who do storyworthy things and tell stories about them, and so on and so forth.
“We live by stories,” wrote Bregman. “We tell them, repeat them, listen to them carefully, and act in accordance with them. We can change our stories and be changed by them.”
That is my story on how to effectively initiate a corporate culture change that will be transformative, meaningful and successful for the long-term benefit of the company.