How Organizational Culture Affects Strategic Tools ENRIQUE CLAVER, JUAN LLOPIS, AND JOSÉ L. GASCÓ

Culture has a great influence on a

firm's—or product's— life cycle and

experience curve. Here's how.

Dr. Enrique Claver is professor of Business Management and head of the Department of Business Management, at the University of Alicante, Spain.

Dr. Juan Llopis is senior lecturer in Business Management at the University of Alicante, Spain. He is also the University's Vice-Dean of Studies and Secretary of the Faculty of Economics and Business Studies.

Dr. José L. Gascó is senior lecturer in Business Management at the University of Alicante, Spain.

P eople analyzing the relationship between business strate­gy and organizational culture have primarily focused on determining how culture has become a part of the strategic process. In fact, culture has influenced a num­ber of traditional tools of strategic analysis, such as the life cycle and the experience curve.

Before we see exactly how culture comes into strategic play, let's define culture. Corporate culture is a set of values, symbols, and rituals that the members of a certain firm share. It is the way the employees do things within the organization when solving internal managerial problems, as well as external problems related to customers, suppliers, and the environment. This definition dis­tinguishes it from notions such as corporate philosophy, corporate demography, individual managerial style, etc. Culture affects, either directly or indirectly, all the activities of a firm, since it characterizes the personality of any company and is reflected in all its operations.

From a general standpoint, a large number of business activi­ties display cultural influence more noticeably than others, the clearest case being associations between firms. Culture reduces the risks in mergers and takeovers; it permits you to forecast how well employees will adopt new technologies; it lays down the guidelines for the use of information; it determines how entrepreneurial employees are; and it creates cohesion among employees.

Figure 1 shows the traditional vision of culture within the strategic process. As this figure shows, an evaluation of the competition and the markets would be the basis for an external analysis, whereas an internal analysis would center around the firm's know-how and its organizational culture. According to this model, once you've diagnosed what is going on inside and outside the corporation, you would fix the objectives of the

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company, define the strategic potential, and then choose the best course of action. If, for example, the aim is to be a technologically advanced firm, you would make an analysis of whether the pre­sent infrastructure suits the purpose (given the necessary strategic potential). Then you would choose the best option to reach the aim. In this case there are several possibilities, such as decid­ing to purchase outside technology, performing an internal innovation of the firm, or combining both options. Next, you would implement and control the strategy to make sure that it fulfills all previous expectations, and if it doesn't, you

would analyze the origins of the deviations from strategy.

BUILDING ON THE CLASSICAL MODEL As Figure 2 shows, the classical description incor­porates new relationships; indeed, the figure's pur­pose is not to deny the foundations of Figure 1, but to complete them in order to detect the con­nections between culture and strategy. Here, a joint internal-external analysis helps us to describe the present way in which the company operates, but now we may not consider culture as a mere appendix of internal analysis. In this case, the way

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the firm gets things done, that is, its culture, influ­ences all the daily activities of a firm. Culture cre­ates, through everyday rituals and informal com­municat ions , an unders tanding of what is important for a firm, which allows its members to act accordingly. In this way, it generates a certain know-how that differs from one firm to another (hence the reciprocal relationship, in Figure 2, between internal analysis and organizational cul­ture).

Management does not define the objectives of the firm in an arbitrary way. Rather, they are the result of daily experience in an organization. Even in the event that a firm should desire to drastically change what it had been doing every day, you would expect that tradition and the mechanics of past behavior may influence the way the firm defines its objectives. For example, if a firm has been competing by means of quality-based product differentiation, it will not all of a sudden choose to

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compete by reducing prices. This is no doubt a result of the values of the firm (which explains the connection in Figure 2 between objectives and culture).

A similar process would take place concerning strategic formulation, in which, once you have determined the general objectives, you propose dif­ferent ways to reach them by means of searching for concrete options that can be later subject to discussion. Here also deviations may arise; hence you would choose this option as far as it is possible to avoid any strategic confrontation with values. Although this is an intellectual stage, any choice made now will have present economic repercus­sions, which may prove critical if employees do not accept the choice. Therefore, if it is possible to reach the same results, you would choose a strate­gy that does not entail an obligatory change of cul­ture. However, should this not be possible, it is the time to assess whether this choice is suitable. As the firm will later stand by this decision, a correct procedure in each of the previous stages will give rise to a decision that the people will easily and more readily accept. At the same time, the proce­dure followed in strategic formulation will also result in a consolidation of the firm's culture because it will make it easier to determine what is important in a firm. (This is why there is also, in Figure 2, a reciprocal relationship between formu­lation and culture).

Another fundamental stage of any strategic process involves the implementation of all deci­sions management makes. An initial difference with formulation is that the latter was a basically rational question, which therefore implied no great economic expense. However, its implementation will entail a certain investment, both on the pur­chase of the infrastructure required, and on the use of the previously existing one, the sums usually being higher than in previous stages.

Consequently, both stages (formulation and implementation) must be in perfect accordance, and it is not enough to believe that one will auto­matically follow the other. It is crucial that the firm should reach its aims as predicted and within the predetermined term.

Any cultural conflict will arise during imple­mentation; therefore, it is during the formulation stage that, in case a cultural modification should

be necessary, such modification starts to take place. If the firm's values start to change during implementation, you may expect that, as the strat­egy is carried out, the conflict remains, due to the slow evolution of all beliefs.

In this way, the values act successfully as an internal barrier. In other words, the introduction of new strategies may clash with pre-existing values. Imagine a firm based on the notion that handcraft­ed work is what gives quality to a product and is therefore the main component of its added value. If management makes an attempt to apply a strate­gy based on assuming that now technology and mass production will be the main assets of the firm, there will be a logical conflict with the assumed corporate spirit.

Finally, control is the final stage of the strategic process in this model. When there is no consider­able deviation between what you expect and what actually happens, the strategic assumptions were correct and, therefore, the values supporting the corporate culture are the adequate ones. On the other hand, if considerable deviations occur, they may be a sign of disagreement between culture and strategy and, at the same time, a discord between what previously existed and what issues you had detected during internal analysis (the one­way relationship from control to culture in Figure 2). Do not forget the quantitative part of control, that is, the one comparing the results with the external analysis, as an expression of what com­petitors are doing and how markets evolve, in order to find any disagreement between desirable and actual results (the one-way connection from control to external analysis).

As you may observe in this model, the implica­tions of culture within the strategic process go far beyond the mere consideration that it affects strat­egy as a component of internal analysis. On the contrary, each of the strategic stages has a recipro­cal connection with culture, the importance of which you must take into account with a view to the adequate evolution of the firm's plans.

NEW VIEWS OF STRATEGIC INSTRUMENTS

Organizational culture influences two important traditional instruments of strategic analysis: the life cycle and the experience curve.

Life Cycle. Figure 3 depicts the introductory

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stage in the life cycle of a firm in the biotechnolo­gy sector. Whatever strategy the firm chooses, it must take a number of factors into account, name­ly: limited production power, technical problems, distr ibution obstacles, cus tomer re luc tance to modify existing habits, high cost due to low pro­ductivity levels, presence of few competitors, sales to high-income groups, informative advertising, and others.

Concerning the growth stage (such as that of the computer software sector), any future strategy must consider: the increase in competitors, prod­uct improvement, the fight for sales outlets, per­suasive advertising, reductions of costs per unit (because there are fewer imperfections and more customers), etc.

The characteristics of all strategies to follow in a ma tu re stage (such as tha t of the au tomobi le industry) would be the following: price reduction, elimination of weaker competitors from the mar­

ket , p r o d u c t i m p r o v e m e n t , p r i ce un i fo rmi ty between competitors (except when there is real product differentiation) and segmented markets.

If you are dealing with a sector (or rather a product, as is the case of typewriters) that is on the decline, the distinctive issues for strategic deci­sion-making would be that many firms are quitting the sector, there are great changes in consumers' tastes, and, as a rule, all commercial variables decrease (especially price, promotion, and distribu­tion).

These strategies, depending on the position of the sector within the life cycle curve, require a specific organizational culture in accordance with the stage the firm is in.

The double entry matrix in Figure 4 shows in the vertical axis corporate culture taxonomy, with the following key:

I. Innovation-oriented II. Customer-based

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III. Result-search centered IV. Cost-reduction focused As for the horizontal axis, concerning the life

cycle stage, it shows: I. Introduction II. Growth III. Maturity IV. Decline Starting from the top left corner, the biotech­

nology firms should develop an innovation-orient­ed organizational culture with the following fea­tures: relative informality in the relationships among individuals in the firm, together with a favorable disposition toward change and learning; managerial tolerance in case of eventual failure; long-term result planning; favorable disposition toward risk-taking among all managers; and man­agement support for new ideas and an experimen­tation mentality.

The software industry, which is in a growth stage, should adopt a customer-based organiza­

tional culture whose values would dictate that: customers play the main role in the scale of corpo­rate values; there is frequent contact with buyers; customers' problems are carefully analyzed; main­taining delivery terms receives priority; fast service is the purpose of all corporate members; and that employees have established a certain way of acting with customers.

In a mature sector, such as that of the automo­bile industry, cultural values clearly focus on obtaining results; salary raises depend on the power to create revenue; few risks are taken; pro­duction departments usually have a greater impor­tance; and the orientation is practical and empiri­cal, rather than analytic.

Finally, in a declining stage, typewriters in this case, there is a cost-reduction organizational cul­ture, with a savings mentality that is precisely its competitive advantage.

The arrows in Figure 4 moving from one sector to another imply that, as the life cycle progresses,

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the predominant values within the company will change, or at least they should, in order to adopt strategies that conform to the state of the sector, firm, or product.

Experience Curve. This is another instrument used in strategic analysis, especially in the formu­lation process. The experience effect arises from another one: the learning effect. The latter occurs when, as the production volume increases, work times decrease, and, therefore, so do the costs of productive tasks. The expansion of this effect to other corporate areas (for example sales) results in the experience effect, according to which cost reduction not only concerns the production area, but also all other corporate areas generating an added value.

The same experience effect applies to organiza­tional culture, for the culture is reinforced, as Fig­ure 5 shows. The keys to understanding the influ­

ence between staff satisfaction and cultural strength are:

• Organizational culture, as an element gather­ing all shared values, encourages a compro­mise among all people in the corporation, regardless of the position they have within the corporate structure.

• As a result of this, as collaborators are a sub­group of all persons involved, they must also compromise with those central beliefs.

• Employees, in the same way as any other group participating in economic activity, will have their own aspirations and ideas. The extent to which they become feasible and realized will depend on the cultural toler­ance.

• When these aspirations and ideas become real, there is satisfaction among those who have reached them.

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• This satisfaction gives rise to the experience effect, since it allows employees to detect which actions the corporation rewards most. Thus , they act accordingly to avoid loss of motivation resulting in absenteeism, lack of productivity, etc.

• After this positive experience, workers not only know what is important for the corpora­t ion, bu t they also accept it as the i r own goal. Thus, socialization occurs.

• Thanks to socialization, it is possible to rein­force cu l tu re , because the way things are done within the firm is increasingly uniform.

As Figure 6 shows, the industrial experience curve is based on the notion that an increase in a c c u m u l a t e d p roduc t i on vo lume resu l t s in a reduction in unit costs. On the other hand, the cultural curve shows that an increase in the social­ization level reduces the cost generated by staff dissatisfaction.

Both curves may be an initial barrier to enter t he sector . However, the cu l tu ra l exper ience curve is even more influential than the industrial experience curve, since trademarks or any other type of property register can hardly protect the experience curve. In this way, a firm whose strat­egy lies in copying the leaders in the sector will, for a start, avoid the initial mistakes its competi­

tors made and may even improve its experience curve in the middle term.

On the contrary, in the cul tural experience curve the values are m u c h ha rde r to imi ta te because it is difficult to export values into another firm and because such values take a long time to gain shape and acceptance.

The effects of organizational culture on corpo­rate strategy are complex. Within each of the stages of the strategic process, you can find con­nections with culture.

These relationships also influence product life cycles, for each of the stages of the life cycle of a sector or corporation demands specific cultural val­ues that do not apply to any other stage. At the same t ime, an adequa t e cul tural socialization process reduces the costs of staff dissatisfaction. ●

FURTHER READING C. Ald red , "Globa l S t ra t eg ies E n c o m p a s s

Changing Corporate Culture," Business Insurance, April 17, 1995.

M. Alvesson, "Corporate Culture and Corpo­ratism at the Company Level: A Case Study," Eco­nomic and Industrial Democracy, 12, 1991.

P. Bate, Strategies for Cultural Change, Butter-worth Heinemann (1994).

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C. Camerer and A. Vepsalainen, "The Economic Efficiency of Corporate Culture," Strategic Man­agement, 9, 1988.

R. Deshpande and A. Parasuraman, "Linking Corporate Culture to Strategic Planning," Business Horizons, May-June, 1986.

C.J. Fombrun, "Corporate Culture, Environ­ment and Strategy," Human Resource Management, 22(1/2), 1983.

B. Garratt, Handbook of Management Develop-ment, Cambridge University Press (1986).

P.R. Haiss, Cultural Influences on Strategic Planning, Springer-Verlag (1990).

J. Hassard and S. Sharifi, "Corporate Culture and Strategic Change," Journal of General Man­agement, 15(2), 1989.

M. Hayes and A. Tomes, Practical Operations Management, Philip Allan Publishers (1988).

L. Heracleous and B. Langham, "Strategic Change and Organizational Culture at Hay Man­agement Consultants," Long Range Planning, 29(4), 1996.

G. Johnson, "Managing Strategic Change:

Strategy, Culture and Action," Long Range Plan-ning, 25(1), 1992.

T. Kono, "Changing a Company's Strategy and Culture," Long Range Planning, 27(5), 1994.

J.P. Kotter and J.L. Heskett, Corporate Culture and Performance, Free Press (1992).

M.J. Morgan, "How Corporate Culture Drives Strategy," Long Range Planning, 26(2), 1993.

J.A. Pearce and R.B. Robinson, Strategic Man­agement: Strategic Formulation and Implementa­tion, Irwin (1988).

J. Peters, "Total Strategy," Management Decision, 30(8), 1992.

P. Shrivastava, "Integrating Strategy Formula­tion with Organizational Culture," Journal of Busi­ness Strategy, 5(3), 1985.

M. Sinetar, "Entrepreneurs, Chaos and Creativ­ity: Can Creative People Really Survive Large Company Structure?" Sloan Management Review, 26(2), 1985.

W.E. Rothschild, "Avoid the Mismatch Between Strategy and Strategic Leader," Journal of Business Strategy, 14(1), 1993.

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