Phase 2 due in 36 hours

Changing Organizational Culture

• Behavioral addition
• Behavioral substitution
• Change visible artifacts

© 2016 Cengage Learning

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One way of changing a corporate culture is to use behavioral addition or behavioral substitution to establish new patterns of behavior among managers and employees.

Behavioral addition is the process of having managers and employees perform a new behavior, while behavioral substitution is having managers and employees perform a new behavior in place of another behavior. The key in both instances is to choose behaviors that are central to and symbolic of the old culture you’re changing and the new culture that you want to create.

The second way in which managers can begin to change corporate culture is to change visible artifacts of their old culture, such as the office design and layout, company dress code, and who benefits (or doesn’t) from company benefits and perks like stock options, personal parking spaces, or the private company dining room.

Corporate cultures are very difficult to change. Consequently, there is no guarantee that behavioral substitution, behavioral addition, or changing visible cultural artifacts will change a company’s organizational culture. However, these methods are some of the best tools that managers have for changing culture, because they send the clear message to managers and employees that “the accepted way of doing things” has changed.

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Waste Management Headquarters, Houston, Texas

Americans generate a quarter billion tons of trash a year, or 4.5 pounds of trash per person per day. Thanks to nearly 9,000 curbside recycling programs, a third of that is recycled. But, that still leaves 3 pounds of trash per person per day to be disposed of. With 20 million customers, 273 municipal landfills, 91 recycling facilities, and 17 waste-to-energy facilities, Waste Management, Inc., is the largest waste-handling company in the world. It generates 75 percent of its profits from 273 landfills, which can hold 4.8 billion tons of trash. And because it collects only 110 million tons a year, it has plenty of landfill capacity for years to come.

You joined the company a decade ago and, after three and a half short years as deputy general counsel and then chief financial officer, became chief executive officer (CEO). Corporations, cities, and households are greatly reducing the amount of waste they generate, and thus the amount of trash that they pay Waste Management to haul away to its landfills. Subaru of America, for instance, has a zero-landfill plant in West Lafayette, Indiana, that hasn’t sent any waste to a landfill since 2004. None! And Subaru isn’t exceptional in seeking to be a zero-landfill company. Walmart, the largest retailer in the world, has also embraced this goal, stating, “Our vision is to reach a day where there are no dumpsters behind our stores and clubs, and no landfills containing our throwaways.” Like those at Subaru and Walmart, corporate leaders worldwide are committed to reducing the waste produced by their companies. Because that represents a direct threat to Waste Management’s landfill business, what steps could it take to take advantage of the trend toward zero waste, which might allow it to continue growing company revenues?

Another significant change for Waste Management is that not only are its customers reducing the waste they send to its landfills, they’re also wanting what is sent to landfills to be sorted for recycling and reuse. For instance, food waste, yard clippings, and wood—all organic materials—account for roughly one-third of the material sent to landfills. Likewise, there’s growing demand for waste companies to manage and recycle discarded TVs, computer monitors, and other electronic waste that leaks lead, mercury, and hazardous materials when improperly disposed of. However, the high cost of collecting and sorting recyclable materials means that Waste Management loses money when it recycles them. What can the company do to meet increased customer expectations on one hand, while still finding a way to earn a profit on high-cost recycled materials?

Finally, advocacy groups, such as the Sierra Club, regularly protest Waste Management’s landfill practices, deeming them irresponsible and harmful to the environment. Everywhere that Waste Management’s top managers look, they see changes and forces outside the company that directly affect how they do business. Should they take on the company’s critics and fight back, or should they focus on business and let the results speak for themselves? Should they view environmental advocates as a threat or an opportunity for the company?

If you were in charge of Waste Management, what would you do?

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The rate of environmental change affects many organizational aspects, particularly decision making.

In stable environments, the rate of environmental change is slow - decision makers can be more deliberate.

In dynamic environments, the rate of environmental change is fast - decision makers must be nimble and quick.

While it would seem that companies would either be in stable external environments or dynamic external environments, recent research suggests that companies often experience both stable and dynamic external environments. Punctuated equilibrium theory says that companies go through long periods of stability (equilibrium), followed by short, complex periods of dynamic, fundamental change (revolutionary periods), finishing with a return to stability (new equilibrium).

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As shown in Exhibit 2.1, one example of punctuated equilibrium is the U.S. airline industry. Three times in the last 30 years, the U.S. airline industry has experienced revolutionary periods. The first, from mid-1979 to mid-1982, occurred immediately after airline deregulation in 1978. Prior to deregulation, the federal government controlled where airlines could fly, when they could fly, and the number of flights they could have on a particular route. After deregulation, these choices were left up to the airlines. The large financial losses during this period clearly indicate that the airlines had trouble adjusting to the intense competition that occurred after deregulation. However, by mid-1982, profits returned to the industry and held steady until mid-1989.

Then, after experiencing record growth and profits, U.S. airlines lost billions of dollars between 1989 and 1993 as the industry went through dramatic changes. Key expenses, like jet fuel and employee salaries, which had held steady for years, suddenly increased. Furthermore, revenues, which had grown steadily year after year, suddenly dropped because of dramatic changes in the airlines’ customer base. Business travelers, who typically pay full-priced fares, comprised more than half of all passengers during the 1980s. But now, the largest group is leisure travelers who, in contrast to business travelers, want the cheapest flights they can get. With expenses suddenly up and revenues suddenly down, the airlines responded to these changes in their business environment by laying off 5 to 10 percent of all workers, canceling orders for new planes, and getting rid of routes that were not profitable. Starting in 1993 and lasting until 1998, these changes helped profits return even stronger. The industry began to stabilize, if not flourish, just as punctuated equilibrium theory predicts.

The third revolutionary period began with the September 11, 2001, terrorist attacks. The immediate effect was a 20 percent drop in scheduled flights, and a 40 percent drop in passengers. Losses were so large that the U.S. government approved a $15 billion bailout. By 2005, several major airlines had laid off an average of 25 percent of their workers.

Source: “Annual Revenue and Earnings: U.S. Scheduled Airlines—All Services,” Air Transport Association, [Online] Available http://airlines.org/econ/d.aspx?nid=1034, 15 January 2005.

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The third characteristic of external environments is resource scarcity: the degree to which an organization’s external environment has an abundance or scarcity of critical organizational resources.

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Uncertainty is the extent to which managers can understand or predict which environmental changes and trends will affect their businesses.

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Environmental change, environmental complexity, and resource scarcity affect environmental uncertainty, as shown in Exhibit 2.2.

At the left side of the figure, environmental uncertainty is lowest when environmental change and complexity are at low levels and resources are plentiful. By contrast, the right side indicates that environmental uncertainty is highest when environmental change and complexity are extensive and resources are scarce.

In these environments, managers may not be at all confident that they can understand and predict the external forces affecting their businesses.

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Exhibit 2.3 shows the two kinds of external environments that influence organizations: the general environment and the specific environment.

The general environment consists of the economy and the technological, sociocultural, and political/legal trends that indirectly affect all organizations. Changes in any sector of the general environment eventually affect most organizations. For example, most businesses benefit when the Federal Reserve lowers its prime lending rate, because banks and credit card companies will then lower the interest rates they charge for loans. Consumers, who can then borrow money more cheaply, will borrow more money to buy homes, cars, and flat-screen TVs.

By contrast, each organization has a specific environment that is unique to that firm’s industry and directly affects the way it conducts day-to-day business. The specific environment includes customers, competitors, suppliers, industry regulation, and advocacy groups.

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The current state of a country’s economy affects most organizations operating in it. In a growing economy, more people are working and have more money to spend. A growing economy provides an environment favorable to business growth. In contrast, in a shrinking economy, consumers have less money to spend, and relatively fewer products are bought and sold, making growth for individual businesses more difficult.

Because economic statistics can be such poor predictors, some managers try to predict future economic activity by keeping track of business confidence. Business confidence indices show how confident actual managers are about future business growth. For example, the Fortune Business Confidence Index is a monthly survey of chief financial offices at large Fortune 1000 firms.

Another widely cited measure is the U.S. Chamber of Commerce Business Confidence Index, which asks 7,000 small business owners to express their optimism (or pessimism) about future business sales and prospects. Managers often prefer business confidence indices to economic statistics, because they know that the level of confidence reported by real managers affects their business decisions. In other words, it’s reasonable to expect managers to make decisions today that are in line with their expectations concerning the economy’s future.

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The sociocultural component of the general environment refers to the demographic characteristics and general behavior, attitudes, and beliefs of people in a particular society.

First, changing demographic characteristics, such as the number of people with particular skills, or the growth or decline in particular population segments (marital status, age, gender, ethnicity) affect how companies run their businesses.

Today, with traffic congestion creating longer commutes and with both parents working longer hours, employees are much more likely to value products and services that allow them to recapture free time with their families. Priscilla La Barbera, a marketing professor at New York University, believes that there’s been a “societal shift” in the way people view their free time. She said, “…people are beginning to realize that their time has real value.” Companies, such as CDW in Vernon, Illinois, provide a service that picks up dry cleaning at their employees’ desks. At First Command Financial Planning, Fort Worth, Texas, employees can borrow movies and receive free shoe shining and car washing.

Sociocultural changes in behavior, attitudes, and beliefs also affect the demand for a business’s products and services. Today’s harried worker/parent can find services that have all the supplies you need for children’s birthday parties. These services are a direct result of the need for more efficient time management, which is a result of the sociocultural changes associated with a much higher percentage of women in the work place.

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The political/legal component includes the legislation, regulations, and court decisions that govern and regulate business behavior. In recent years, new laws and regulations have imposed additional responsibilities on companies. Unfortunately, many managers are unaware of these new responsibilities.

Another area in which companies face potential legal risks these days is from customer-initiated lawsuits. For example, under product liability law, manufacturers can be liable for products made decades ago. Also, the law, as it is now written, does not consider whether manufactured products have been properly maintained and used.

From a managerial perspective, the best medicine against legal risk is prevention. As a manager, it is your responsibility to educate yourself about the laws, regulations, and potential lawsuits that could affect your business. Failure to do so may put you and your company at risk of sizable penalties, fines, or legal charges.

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In contrast to the general environment that indirectly influences organizations, changes in an organization’s specific environment directly affect the way a company conducts its business. If customers decide to use another product, a competitor cuts prices 10 percent, a supplier can’t deliver raw materials, federal regulators specify that industry pollutants must be reduced, or environmental groups accuse your company of selling unsafe products, the impact on your business is immediate.

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Customers purchase products and services, and companies cannot exist without customer support. Therefore, monitoring customers’ changing wants and needs is critical to business success.

There are two basic strategies for monitoring customers: reactive and proactive. Reactive customer monitoring is identifying and addressing customer trends and problems after they occur. One reactive strategy is to identify customer concerns by listening closely to customer complaints. Not only does listening to complaints help identify problems, but the way in which companies respond to complaints indicates how closely they are attending to customer concerns. For example, companies that respond quickly to customer letters of complaint are viewed much more favorably than companies that are slow to respond or never respond. In particular, studies have shown that when a company’s follow-up letter thanks customers for writing, offers a sincere, specific response to the customer’s complaint, and contains a small gift, coupons, or a refund to make up for the problem, customers will be much more likely to purchase products or services again from that company.

Proactive monitoring of customers means trying to sense events, trends, and problems before they occur (or before customers complain).

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Often, the difference between business success and failure comes down to whether your company is doing a better job of satisfying customer wants and needs than the competition. Consequently, companies need to keep close track of what their competitors are doing. This is called competitive analysis.

Managers tend to make two mistakes when they do competitive analysis:

• They tend to focus on only two or three well-known competitors with similar goals and resources.
• They underestimate potential competitors’ capabilities. When this happens, managers don’t take the steps they should to continue to improve their products or services. The result can be significant decreases in both market share and profits.

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Suppliers are companies that provide material, human, financial, and informational resources to other companies.

A key factor influencing the relationship between companies and their suppliers is how dependent they are on each other.

Supplier dependence is the degree to which a company relies on a supplier because of the importance of the supplier’s product to the company and the difficulty of finding other sources of that product.

Buyer dependence is the degree to which a supplier relies on a buyer because of the importance of that buyer to the supplier and the difficulty of selling its products to other buyers.

A high degree of buyer or seller dependence can lead to opportunistic behavior, in which one party benefits at the expense of the other. Opportunistic behavior between buyers and suppliers will never be completely eliminated. However, many companies believe that both buyers and suppliers can benefit by improving the buyer-supplier relationship.

Relationship behavior focuses on establishing a mutually beneficial, long-term relationship between buyers and suppliers.

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Opportunistic behavior is when one party benefits at the expense of the other. Although opportunistic behavior between buyers and suppliers will never be completely eliminated, many companies believe that both buyers and suppliers can benefit by improving the buyer-supplier relationship. In contrast to opportunistic behavior, relationship behavior focuses on establishing a mutually beneficial, long-term relationship between buyers and suppliers.

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The industry regulation component consists of regulations and rules that govern the practices and procedures of specific industries, businesses, and professions.

Regulatory agencies affect businesses by creating and enforcing rules and regulations to protect consumers, workers, or society as a whole.

Overall, the number and cost of federal regulations have nearly tripled in the last 25 years. However, businesses are not just subject to federal regulations. For every $1 the federal government spends creating regulations, businesses spend $45 to comply with them. They must also meet state, county, and city regulations. Surveys indicate that managers rank government regulation as one of the most demanding and frustrating parts of their jobs.

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Advocacy groups are groups of concerned citizens who band together to try to influence the business practices of specific industries.

Unlike the industry regulation component of the specific environment, advocacy groups cannot force organizations to change their practices. However, they can use a number of techniques to try to influence companies, including public communications, media advocacy, Web pages, blogs, and product boycotts.

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The public communications approach relies on voluntary participation by the news media and the advertising industry to get an advocacy group’s message out, such as the public service announcements for World No Tobacco Day.

A media advocacy approach typically involves framing issues as public issues (i.e., affecting everyone); exposing questionable, exploitative, or unethical practices; and obtaining media coverage by buying media time or creating controversy that is likely to receive extensive news coverage. PETA’s actions are a good example of this approach.

A product boycott is a tactic in which an advocacy group actively tries to convince consumers to not purchase a company’s product or service. Such groups are now using the Web to get “the word out” on boycotts, as evidenced by Ecopledge.com.

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In Chapter 1, you learned that managers are responsible for making sense of their business environments. However, our discussions of the general and specific environments indicate that making sense of business environments is not an easy task.

Because external environments can be dynamic, confusing, and complex, managers use a three-step process to make sense of the changes in their external environments: environmental scanning, interpreting environmental factors, and acting on threats and opportunities.

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Environmental scanning is searching the environment for important events or issues that might affect an organization.

Managers scan the environment to stay up-to-date on important factors in their industry and reduce uncertainty.

Organization strategies also affect environmental scanning. Managers pay close attention to trends and events that are directly related to the company’s ability to compete.

Environmental scanning contributes to organizational performance, and helps managers detect environmental changes and problems before they become organizational crises. Furthermore, companies whose CEOs do more environmental scanning have higher profits. CEOs in better-performing firms scan their firm’s environments more frequently and scan more key factors in their environments in more depth and detail than do CEOs in poorer-performing firms.

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After scanning the environment for information, managers must make sense of the data they have gathered.

Threats mean potential harm to an organization and managers take steps to protect the company from further damage.

By contrast, when managers interpret environmental events as opportunities, they will consider strategic alternatives for taking advantage of the event to improve company performance.

After scanning for information on environmental events and issues and interpreting them as threats or opportunities, managers have to decide how to respond to these environmental factors. However, deciding what to do under conditions of uncertainty is difficult. Managers are never completely confident that they have all the information they need, or that they correctly understand the information they have.

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External environments are external trends and events that have the potential to affect companies. The internal environment consists of the trends and events within an organization that affect the management, employees, and organizational culture.

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Organizational culture is the set of key values, beliefs, and attitudes shared by organizational members.

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A primary source of organizational culture is the company founder. For example, Thomas J. Watson (IBM), Sam Walton (Walmart), and Bill Gates (Microsoft) created organizations in their images that they imprinted with their beliefs, attitudes, and values.

When the founders are gone, the organizational culture is sustained through stories and heroes.

Organizational stories make sense of organizational events and changes and emphasize culturally consistent assumptions, decisions, and actions. For example, at Walmart, stories abound about the thriftiness of Sam Walton.

Second, organizational culture is sustained by recognizing and celebrating heroes, admired for their qualities and achievements.

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Preliminary research shows that organizational culture is related to organizational success. As shown in Exhibit 2.4, cultures based on adaptability, involvement, a clear vision, and consistency can help companies achieve higher sales growth, return on assets, profits, quality, and employee satisfaction.

Adaptability is the ability to notice and respond to changes in the organization’s environment.

In cultures that promote higher levels of employee involvement in decision making, employees feel a greater sense of ownership and responsibility.

A company mission is a company’s purpose or reason for existing. In organizational cultures in which there is a clear organizational vision, the organization’s strategic purpose and direction are apparent to everyone in the company. And, when managers are uncertain about their business environments, the vision helps guide the discussions, decisions, and behavior of the people in the company.

Finally, in consistent organizational cultures, the company actively defines and teaches organizational values, beliefs, and attitudes. Consistent organizational cultures are also called strong cultures, because the core beliefs are widely shared and strongly held.

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As shown in Exhibit 2.5, organizational cultures exist on three levels.

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One way of changing a corporate culture is to use behavioral addition or behavioral substitution to establish new patterns of behavior among managers and employees.

Behavioral addition is the process of having managers and employees perform a new behavior, while behavioral substitution is having managers and employees perform a new behavior in place of another behavior. The key in both instances is to choose behaviors that are central to and symbolic of the old culture you’re changing and the new culture that you want to create.

The second way in which managers can begin to change corporate culture is to change visible artifacts of their old culture, such as the office design and layout, company dress code, and who benefits (or doesn’t) from company benefits and perks like stock options, personal parking spaces, or the private company dining room.

Corporate cultures are very difficult to change. Consequently, there is no guarantee that behavioral substitution, behavioral addition, or changing visible cultural artifacts will change a company’s organizational culture. However, these methods are some of the best tools that managers have for changing culture, because they send the clear message to managers and employees that “the accepted way of doing things” has changed.

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Camp Bow Wow: The Environment and Corporate Culture

In ten years, Camp Bow Wow has grown from a single kennel in Denver, Colorado to a $40 million dollar business, with more than 150 locations. The transition from a small family business to a national chain, however, required a shift from a family-based culture to a business- and performance-based culture. A key element of of Camp Bow Wow’s culture is the staff’s deep emotional connection with animals. The connection is immediately apparent at corporate headquarters, where offices are bustling with employees and pets alike. According to founder Heidi Ganahal, “What we do is focus on what’s important to us, and that’s the animals.”