Kim S. Cameron is William Russell Kelly Professor of Management and Organizations at the Ross School of Business, University of Michigan.

Robert E. Quinn is Margaret Elliott Tracy Collegiate Professor in Business Administration and professor of management and organizations at the Ross School of Business, University of Michigan.

Diagnosing and Changing Organizational Culture

John Wiley & Sons

Chapter One

No organization in the twenty-first century would boast about its constancy, sameness, or status quo compared to ten years ago. Stability is interpreted more often as stagnation than steadiness, and organizations that are not in the business of change and transition are generally viewed as recalcitrant. The frightening uncertainty that traditionally accompanied major organizational change has been superseded by the frightening uncertainty now associated with staying the same.

The father of modern management, Peter Drucker, concluded that "we are in one of those great historical periods that occur every 200 or 300 years when people don't understand the world anymore, and the past is not sufficient to explain the future" (quoted in Childress and Senn, 1995, p. 3) Unremitting, unpredictable, and sometimes alarming change makes it difficult for any organization or manager to stay current, accurately predict the future, and maintain constancy of direction. The failure rate of most planned organizational change initiatives is dramatic. It is well known, for example, that as many as three-quarters of reengineering, total quality management (TQM), strategic planning, and downsizing efforts have failed entirely or have created problems serious enough that the survival of the organization was threatened (Cameron, 1997). What is most interesting about these failures, however, is the reported reasons for their lack of success. Several studies reported that the most frequently cited reason given for failure was a neglect of the organization's culture. In other words, failure to change the organization's culture doomed the other kinds of organizational changes that were initiated (Caldwell, 1994; CSC Index, 1994; Gross, Pascale, and Athos, 1993; Kotter and Heskett, 1992).

Our purpose in this book is not to offer one more panacea for coping with our turbulent times or to introduce another management fad. We agree with Tom Peters that in the current high-velocity environment, "If you're not confused, you're not paying attention." Confusion abounds, as do prescriptions and proposed panaceas. Instead, our intent in this book is both more modest and, we believe, potentially more helpful. The book provides a framework, a sense-making tool, a set of systematic steps, and a methodology for helping managers and their organizations adapt to the demands of the environment. It focuses less on the right answers than it does on the methods and mechanisms available to help managers change the most fundamental elements of their organizations. It provides a way for managers almost anywhere in the hierarchy of an organization to guide the change process at the most basic level—the cultural level. It provides a systematic strategy for internal or external change agents to facilitate fundamental change that can then support and supplement other kinds of change initiatives.

The Need to Manage Organizational Culture

Most of the scholarly literature argues that successful companies—those with sustained profitability and above-normal financial returns—are characterized by certain well-defined conditions (originally identified by Porter, 1980; Barney, 1991). At least six such conditions are believed to be crucial.

The first is the presence of high barriers to entry. When other organizations face difficult obstacles to engaging in the same business as your organization—for example, high costs, special technology, or proprietary knowledge—few, if any, competitors will exist. Fewer competitors means more revenues for your firm.

A second condition is nonsubstitutable products. When other organizations cannot duplicate your firm's product or service and no alternatives exist—for example, you are the sole supplier of a product or service—it stands to reason that revenues are likely to be higher. Similarly, if your product or service is inimitable, or difficult for others to imitate or duplicate, you will have fewer competitors and therefore more revenues.

Third, a large market share contributes to success by allowing your firm to capitalize on economies of scale and efficiencies. The biggest player in a market can negotiate concessions, sell at a discount, vertically integrate, or even purchase smaller competitors, thereby generating more revenues.

A fourth condition is low levels of bargaining power for buyers. For example, if purchasers of your firm's products become dependent on your company because they have no alternative sources, higher revenues are an obvious result. If I can get natural gas from only one source, I am dependent on whatever price the supplier decides to charge.

Fifth, suppliers have low levels of bargaining power. When suppliers, similar to customers, become dependent on your company because they have no alternative, you will have higher levels of financial returns. They must sell to you, making it possible for your firm to negotiate favorable prices and time schedules, higher levels of quality, or more proprietary features.

A sixth condition is rivalry among competitors. Rivalry helps deflect attention away from head-to-head competition with your company. Competitors struggle against one another instead of targeting your firm as the central focus of attack. Equally important, stiff competition is likely to raise the standards of performance in the entire industry. Incentives to improve are a product of rigorous competition (see Porter, 1980; Barney, 1991).

Unquestionably, these are desirable features that clearly should lead to financial success. They seem pretty much common sense. However, what is remarkable is that many of the most successful U.S. firms in the past thirty years have had none of these competitive advantages. The top performers in the past three decades—those who literally blew away the competition in financial returns—were not the recipients of any of the so-called prerequisites for success. These highly successful firms, taken from Money magazine's list of the best-performing stocks between 1972 and 2002, include Southwest Airlines (annual average return of 25.99 percent), Walmart (annual average return of 25.97 percent), Kansas City Southern (annual average return of 25.61 percent), Walgreen (annual average return of 23.72 percent), Comcast (annual average return of 21.99 percent), and Kroger (annual average return of 21.16 percent).

Think of it. If you were going to start a business and wanted to make a killing, the markets you would most likely avoid are airlines, discount retailing, transportation, media distribution, and groceries. The list of industries represented by these highly successful firms looks like an impending disaster for new entrants: massive competition, horrendous losses, widespread bankruptcy, virtually no barriers to entry, little unique technology, and many substitute products and services. None of these firms entered the industry with a leadership position in market share. Yet they outperformed all rivals for that thirty-year period, even with no special competitive advantages.

More recently, other examples of highly successful firms have also defied the traditional competitive advantage prescriptions. Apple, a hairbreadth away from bankruptcy as recently as 1998, is now one of the five most valuable firms in the world and has surpassed Microsoft in financial value. Apple took on a marketplace dominated by well-established and highly competitive companies such as Microsoft, Motorola, Nokia, IBM, and Dell without any of the competitive advantages touted to predict successes. Similarly, Pixar, an animation studio, confronted a marketplace long dominated by Disney, and in its less-than-thirty-year history, produced eleven hit movies out of eleven attempts. This record is simply unheard of in the industry. Every film that Pixar has produced has been nominated for an Academy Award, and Pixar has won the award about three-quarters of the time.

What differentiates these extraordinarily successful firms from others? How have they been able to make it when others have failed? How did Walmart take on Sears and Kmart—the two largest retailers in the world—and, figuratively speaking, eat their lunch? While Walmart prospered, its largest rivals were forced to sell off divisions, replace CEOs (more than once), downsize dramatically, and close stores wholesale. How did Southwest Airlines thrive when several of its competitors went belly-up (remember Eastern, Pan Am, Texas Air, PeopleExpress)? How did Apple and Pixar successfully compete in markets so dominated by competitors—Microsoft in Apple's case and Disney in Pixar's case—that no one gave them a shot at success? Yet both Apple and Pixar have dominated their markets and achieved outcomes no one could have dreamed of less than twenty years ago.

The key ingredient in each case is something less tangible, less blatant, but more powerful than the market factors listed earlier. The major distinguishing feature in these companies‐their most important competitive advantage, the most powerful factor they all highlight as a key ingredient in their success—is their organizational culture.

The sustained success of these firms has had less to do with market forces than with company values, less to do with competitive positioning than with personal beliefs, and less to do with resource advantages than with vision. In fact, it is difficult to name even a single highly successful company, one that is a recognized leader in its industry, that does not have a distinctive, readily identifiable organizational culture. Name the most successful firms you know today, from large behemoths like Coca-Cola, Disney, General Electric, Intel, McDonald's, Microsoft, Rubbermaid, Sony, and Toyota, to small entrepreneurial startups. Virtually every leading firm you can name, small or large, has developed a distinctive culture that its employees can clearly identify. This culture is sometimes created by the initial founder of the firm (such as Walt Disney). Sometimes it emerges over time as an organization encounters and overcomes challenges and obstacles in its environment (as at Coca-Cola). Sometimes it is developed consciously by management teams that decide to improve their company's performance in systematic ways (as did Google). Simply stated, successful companies have developed something special that supersedes corporate strategy, market presence, and technological advantages. Although strategy, market presence, and technology are clearly important, highly successful firms have capitalized on the power that resides in developing and managing a unique corporate culture. This power abides in the ability of a strong, unique culture to reduce collective uncertainties (that is, facilitate a common interpretation system for members), create social order (make clear to members what is expected), create continuity (perpetuate key values and norms across generations of members), create a collective identity and commitment (bind members together), and elucidate a vision of the future (energize forward movement) (see Trice and Beyer, 1993).

Most organizational scholars and observers now recognize that organizational culture has a powerful effect on the performance and long-term effectiveness of organizations. Empirical research has produced an impressive array of findings demonstrating the importance of culture to enhancing organizational performance (for reviews, see Cameron and Ettington, 1988; Denison, 1990; Trice and Beyer, 1993).

Kotter and Heskett (1992) interviewed seventy-five highly regarded financial analysts whose job is to closely follow certain industries and corporations. Each analyst compared the performance of twelve highly successful firms to ten lower-performing firms. Although analysts are stereotyped as focusing almost exclusively on hard financial data, only one of the seventy-five indicated that culture had little or no impact on firm performance. All acknowledged culture as a critical factor in long-term financial success. In Appendix A, we summarize several scientific studies that report a positive relationship between dimensions of organizational culture and organizational effectiveness. For those interested in empirical evidence that supports the assessment procedures and culture change methodology explained in this book, Appendix A will be a helpful review of the academic literature.

In addition to organization-level effects, the impact of organizational culture on individuals (employee morale, commitment, productivity, physical health, emotional well-being) is also well documented (for a review, see Kozlowski, Chao, Smith, and Hedlund, 1993). With health care costs still skyrocketing, burnout at an all-time high, erosion of employee loyalty to firms costing millions of dollars a year in replacement and retraining, organizational secrets lost due to sabotage and defections, and lawsuits and other forms of retribution by disaffected employees, the impact of an organization's underlying culture on individuals is also an important area of concern. Moreover, we explain later in the book that culture change, at its root, is intimately tied to individual change. Unless managers are willing to commit to personal change, the organization's culture will remain recalcitrant.

Our main focus in this book is on helping managers, change agents, and scholars facilitate and manage organizational culture change. Our purpose is to help individuals adopt effective ways of diagnosing and changing culture in order to enhance organizational performance. We provide a framework as well as a methodology for implementing this change process, and we integrate a model of individual-level change as a way to foster cultural transformation and align personal managerial behavior with the culture change. Since culture is such a crucial factor in the long-term effectiveness of organizations, it is imperative that the individuals charged with studying or managing organizational culture be able to measure key dimensions of culture, develop a strategy for changing it, and begin an implementation process. This book helps accomplish those aims.

We begin by discussing the critical need for culture change in most organizations. Frequent and chaotic vacillations in the external environment create the risk that the existing organizational culture will inhibit rather than contribute to future corporate success. We also briefly address the meaning of the term organizational culture. To understand how culture change can boost organizational performance, it is important that we make clear what is and isn't culture. All of this establishes a groundwork for introducing our framework of the core dimensions of organizational culture.

Along with that framework, we introduce an instrument and a method for diagnosing and initiating cultural change, and we supplement that with a personal management competency assessment instrument and improvement tool that is congruent with the framework. We provide some examples of companies that have successfully implemented our methodology, and we provide some practical hints for how others might successfully implement culture change.

This book, in other words, serves as both a workbook and a source guide. It is a workbook in the sense that it assists managers and change agents in working through a systematic culture diagnosis and change effort. It helps profile the current state of organizational culture and a preferred culture for the future, and it outlines a process for moving from the current to the preferred state. It also links a personal change methodology to an organizational change methodology.

The book serves as a source guide in the sense that it helps explain the core dimensions of culture and presents a theoretical framework for understanding culture forms. That is, it explains what to look for when initiating culture change and the ways in which individual change and organizational change are linked. For individuals interested in examining the validity of this approach to culture change, a summary of scientific evidence is presented in Appendixes A and B.

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Excerpted from Diagnosing and Changing Organizational Cultureby Kim S. Cameron Robert E. Quinn Copyright © 2011 by John Wiley & Sons, Ltd. Excerpted by permission of John Wiley & Sons. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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