Differentiation and the Growth of Subcultures

1. Differentiation and the Growth of Subcultures

All organizations undergo a process of differentiation as they age and grow. This is variously called division of labor, functionalization, divisionaliza­tion, or diversification. The common element, however, is that as the num­ber of people, customers, goods, and services increases, it becomes less and less efficient for the founder to coordinate everything. If the organization is successful, it inevitably creates smaller units that begin the process of culture formation on their own with their own leaders. The major bases on which such differentiation occurs are as follows:

• Functional/occupational differentiation
• Geographical decentralization
• Differentiation by product, market, or technology
• Divisionalization
• Differentiation by hierarchical level

1. Functional/Occupational Differentiation

The forces creating functional subcultures derive from the technology and occupational culture of the function. The production department hires people trained in manufacturing and engineering, the finance department hires economics and finance types, the sales department hires sales types, research and development hires technical specialists, and so on. Even though these newcomers to the organization will be socialized into the corporate cul­ture, they will bring with them other cultural assumptions derived from their education and from association with their occupational community (Van Maanen and Barley, 1984). Such differences arise initially from personality differences that cause people to choose different occupations and from the subsequent education and socialization into an occupation (Holland, 1985; Schein, 1971, 1978, 1987c; Van Maanen and Schein, 1979).

The cultures of different occupations, in the sense of the shared assump­tions that members of that occupation hold, will differ because of the core technology that is involved in that occupation. Thus engineers, doctors, lawyers, accountants, and so on will differ from each other in their basic beliefs, values, and tacit assumptions because they are doing fundamentally different things, have been trained differently, and have acquired a certain identity in practicing their occupation. Therefore, in each functional area, we find a blend of the founder assumptions and the assumptions associated with that functional/occupational group.

For example, a powerful occupational subculture based on technology is information technology (IT), built around the core occupation. The IT professional subculture is a prime example of what I labeled in Chapter Four an “engineering culture,” dedicated primarily to improvement and innovation. For example, IT assumes the following:

• Information can be packaged into bits and transmitted electronically.
• More information is always better than less.
• The more quantifiable information is, the better.
• Information can be captured and frozen in time on the computer screen, and so on; hence, a paperless office is possible and desirable.
• Technology leads and people should adapt.
• People can and should learn the language and methods of IT.
• Management will give up hierarchy if IT provides better coordination mechanisms.
• The more fully connected an organization is, the better it will perform.
• People will use information responsibly and appropriately.
• Paper can be replaced by electronically stored information.
• Anything that can be standardized, routinized, and made people-proof should be instituted.

By way of contrast, both the operator culture and the executive culture might hold contrary assumptions. For example, operators and/or executives often assume the following:

• Information relevant to operations must include face-to-face human contact to be accurately understood.
• Information must be extracted from raw data and will be meaningful only in a particular context that is itself perpetually changing.
• Meaning derives only from complex patterns.
• The costs associated with speed may not be worth it.
• Too much connectivity produces information overload.
• The more information you have, the more you need; sometimes having less information is better.
• Certain kinds of information, such as personal feedback in a performance appraisal, should not be quantitative and should not be computerized.
• Not everything should be “paperless”; the ability to see and manipulate paper is intrinsic to many kinds of tasks.
• Technology should adapt to people and be user friendly.
• Hierarchy is intrinsic to human systems and a necessary coordination mechanism, no matter how efficient networked communications are.
• Control of information is a necessary management tool and the only way of maintaining power and status.
• Standardization can inhibit innovation in a dynamic environment.

Note that in many ways these assumption sets are in direct conflict with each other, which explains why IT implementations are often so strongly resisted by employees. If the IT subculture and operator subculture are not rec­ognized as cultures that must be aligned, the organization will flounder. On the other hand, if a CEO understands the different assumptions of these subcul­tures, he or she can create a cultural island in which operator employees and IT professionals can work together to decide how best to implement a new system.

With organizational growth and continued success, functional subcul­tures become stable and well articulated. Organizations acknowledge this most clearly when they develop rotational programs for the training and development of future leaders. When a young manager is rotated through sales, marketing, finance, and production, she or he is learning not only the technical skills in each of these functions but also the point of view, perspective, and under­lying assumptions of that subculture. Such deeper understanding is thought to be necessary to doing a good job as a general manager later in the career.

In some cases, the communication barriers between functional sub­cultures become so powerful and chronic that organizations have had to invent new boundary-spanning functions or processes. The clearest case example is “production engineering,” a function whose major purpose is to smooth the transition of a product from engineering into production. Engineering often designs things that cannot be built or are too expensive to build while production perceives engineering to be unrealistic, lacking in cost consciousness, and too concerned with product elegance instead of the practicalities of how to build the product. Executive leaders must rec­ognize these as subcultural issues that need to be managed. The subcultures of sales/marketing and R&D are often so out of line with each other that organizations have learned to create task forces or project teams that bring all the functions together in the initial product development process.

In summary, functional subcultures bring into the organization the diversity that is associated with the occupational communities and technol­ogies that underlie the functions. This diversity creates the basic problem of general management, in that the leader now has to bring into alignment organizational members who have genuinely different points of view based on their education and experience in the organization. If these problems are anticipated, the leader can either avoid organizing by function, or bring the different functions together in dialogues that stimulate mutual under­standing of each other’s taken-for-granted assumptions. To facilitate such communication across subcultural boundaries requires cultural humility from the leader and the ability not only to perceive subcultural differences but also to respect them.

2. Geographical Differentiation

As the organization grows geographically, it becomes necessary to create local units for the following reasons:

• Customers in different regions require different goods and services.
• Local labor costs are lower in some geographical areas.
• It is necessary to get closer to where raw materials, sources of energy, or suppliers are located.
• If products are to be sold in a local market, they must be produced in that market area as well.

With geographical differentiation, the question inevitably arises of whether the corporate culture can be strong enough to assert itself in the different regions. If the corporate leadership feels strongly about per­petuating and extending its core assumptions, it sends senior managers from the home country into the regions; or, if it selects local managers, it puts them through an intensive socialization process. For example, I remember meeting in Singapore an Australian who had just been named head of Hewlett-Packard ’s local plant there. Though he had been hired in Australia and was to spend most of his career in Singapore, he was a dedicated HPer. When I asked him why, he explained that shortly after being hired, he had been flown to California, where he had immediately been met by Mr. Packard himself and then spent six hours with all the top managers. In the following two weeks, he was given a thorough indoctri­nation in the “HP Way” and was encouraged to visit headquarters often. What impressed him most was senior management’s willingness to spend time with him to really get to know and perpetuate the central values embodied in the HP Way.

In DEC, the senior managers responsible for large regions and countries were based in those countries, but they spent two to three days of every month in meetings with Olsen and other senior managers at headquarters, so the basic assumptions under which DEC operated were constantly rein­forced, even though most of the employees were locals.

I was once invited to address a group of Ciba-Geigy managers at the U.S. subsidiary to tell them about the Ciba-Geigy culture as I had expe­rienced it in the Basel headquarters. I had had no contact with the U.S. subsidiary group up to that time. After I described the cultural paradigm to them as I saw it (as outlined in Chapter Three), there was a real sense of shock in the audience, articulated by one manager who said, “My God, you’re describing us!” He was particularly shocked because he had believed that the Ciba-Geigy’s U.S. group, by virtue of the fact that most of the members were American, would be very different. Clearly, however, the corporate culture had asserted itself across national boundaries.

On the other hand, the local macroculture inevitably shapes the geo­graphic subculture as well. You find a different blend of assumptions in each geographical area, reflecting the local national culture but also the business conditions, customer requirements, and the like. The process of local influence becomes most salient where business ethics are involved, as when giving money to suppliers or local government officials is defined in one country as a bribe or kickback and is deemed illegal and unethical, while in another country the same activity is not only legal but considered an essential and normal part of doing business.

Geographic variations can operate in basic functions such as R&D. For example, I am familiar with several European pharmaceutical companies that operate in the United States. In each case, the U.S. subsidiary mirrors many of the basic assumptions of the European parent (even if it has an American president), but its day-to-day practices in research and in clinical testing reflect the requirements of the U.S. Food and Drug Administration and the U.S. medical establishment. The U.S. pharmaceutical researchers were saying that the Europeans were much less thorough in their testing of compounds, not because their research was inferior but because many European countries did not require the same amount of testing before a drug was approved. Over time, these different testing methods become habits and become embedded, leading to real conflict between the research organizations in Europe and the United States. In Ciba-Geigy, I encoun­tered a situation in which the U.S. research and development group in one division totally mistrusted the research conducted in the headquarters labs and felt that it had to repeat everything, at enormous cost, to determine whether the results were usable in the U.S. market.

As organizations mature, the geographical units may take over more and more of the functions. Instead of being just local sales or production units, they may evolve into integrated divisions, including even engi­neering and R&D. In those divisions, you then see the additional subcul­tural difficulty of alignment across functional boundaries where the home functional culture is geographically distant. For example, DEC’s various European divisions, typically organized by country, found that the custom­ers in different countries wanted different versions of the basic products, leading to the question of where the engineering for the local needs should be done. On the one hand, it was very important to maintain common engi­neering standards worldwide, but, on the other hand, those common standards made the product less attractive in a given geographical region. Engineering units that were placed in various countries then found them­selves in conflict with local marketing and sales units about maintaining standards and in conflict with their home engineering department over the need to deviate from standards.

3. Differentiation by Product, Market, or Technology

As organizations mature, they typically differentiate themselves in terms of the basic technologies they employ, the products this leads to, and/or the types of customers they ultimately deal with. Founders and promoted lead­ers in older companies must recognize and decide at what point it is desir­able to differentiate products, markets, or technologies, knowing that this will create a whole new set of cultural alignment problems down the line. For example, the Ciba-Geigy Company started out as a dyestuffs company, but its research on chemical compounds led it into pharmaceuticals, agri­cultural chemicals, and industrial chemicals. Though the core culture was based on chemistry, as described previously, subcultural differences clearly reflected the different product sets.

The forces that created such subcultural differences were of two kinds. First, different kinds of people with different educational and occupational origins were attracted into the different businesses; second, the interac­tion with the customer required a different mindset and led to different kinds of shared experiences. I remember at one point suggesting a market­ing program that would cut across the divisions and was told: “Professor Schein, do you really think an educated salesman who deals all day with doctors and hospital administrators has anything in common with an ex­farm boy slogging around in manure talking farmers into buying the newest pesticide?”

One of the most innovative and culturally evolutionary steps Ciba- Geigy took in its efforts to become more of a marketing-based organization was to promote a manager who had grown up in the agricultural division to head of the U.S. pharmaceutical division. It happened that this man was such a good manager and such a good marketer that he overcame the stereotypes based on where he had grown up in the business. Although he was ultimately successful, he had a tough time winning the respect of the pharmaceutical managers when he first took over.

Alpha Power delivers primarily electricity to its city, but it also has a gas unit and a steam unit that use different technologies in delivering their service. In addition, the company has geographical regions within its urban environment leading to a large number of suborganizations that have developed their own subcultures. These are labeled as “silos” in the organization and are viewed as problematic for total corporate safety and environmental programs because local conditions often require modifica­tions of the programs.

Contact with customers is also a very powerful force in creating local subcultures that can appropriately interact with the customer ’s culture. A vivid example was provided by Northrop, a large aerospace company that prided itself on its egalitarianism, high trust, and participative approach to its employees. An analysis of the company ’s artifacts revealed that the headquarters organization based in Los Angeles was very hierarchical; even the architecture and office layout of the headquarters building strongly reflected hierarchy and status. The managers themselves felt this to be anomalous, but upon reflection they realized that they had built such a headquarters organization to make their primary customers, representatives of the U.S. Defense Department, feel comfortable. They pointed out that the Pentagon is highly structured in terms of hierarchy and that customer teams on their visits to Northrop were only comfortable if they felt they were talking to managers of a status equivalent to or higher than them­selves. To make this visible, the company introduced all kinds of status symbols, such as graded office sizes, office amenities, office locations in the building, private dining rooms, and reserved parking spaces.

A trivial but amusing example of the same phenomenon occurred in DEC, when a young employee who ordinarily drove vans to deliver mail or parts internally was assigned to drive board members and other outsid­ers with high status to special meetings. On one such an occasion, he was allowed to drive the one fancy company car, and he dressed for the event by putting on a black pinstriped suit! The visitor could well draw the wrong conclusion about the DEC culture based on this one observation.

4. Divisionalization

As organizations grow and develop different markets, they often “division­alize” in the sense of decentralizing most of the functions into product, market, or geographical units. This process has the advantage of bringing all the functions closer together around a given technology, product set, or customer set, allowing for more alignment among the subcultures. To run an integrated division requires a strong general manager, and that manager is likely to want a fair amount of autonomy in the running of his or her division. As that division develops its own history, it will begin to develop a divisional subculture that reflects its particular technology and market environment, even if it is geographically close to the parent company.

Strong divisional subcultures will not be a problem to the parent orga­nization unless the parent wants to implement certain common practices and management processes. Two examples from my own experience high­light this issue. In the first case, I was asked to work with the senior man­agement of the Swedish government-owned conglomerate of organizations to help headquarters decide whether or not it should work toward develop­ing a “common culture.” This conglomerate included ship building, min­ing, and, at the other extreme, consumer products such as Ramlosa bottled water. We spent two days examining all of the pros and cons and finally decided that the only two activities that required a common perspective were financial controls and human resource development. In the financial area, the headquarters staff had relatively little difficulty establishing com­mon practices, but in the human resource area, they ran into real difficulty.

From the point of view of headquarters, it was essential to develop a cadre of future general managers, requiring that divisions allow their high- potential young managers to be rotated across different divisions and head­quarters functional units. But the division subcultures differed markedly in their assumptions about how to develop managers. One division considered it essential that all of its people be promoted from within because of their knowledge of the business, so its members rejected out of hand the idea of cross-divisional rotation of any sort. In another division, cost pressures were so severe that the idea of giving up a high-potential manager to a development program was unthinkable. A third division’s norm was that an individual rose by staying in functional “stovepipes” so managers were rarely evaluated for their generalist potential. When the development pro­gram called for that division to accept a manager from another division in a rotational developmental move, it rejected the candidate outright as not knowing enough about the division’s business to be acceptable at any level. The divisional subcultures won out, and the development program was largely abandoned.

In the other case, a similar phenomenon occurred in relation to the introduction of information technology. Interviews of a large number of CEOs in different industries revealed that one of the biggest problems in multidivisional organizations was trying to introduce an e-mail system across all the divisions. Each division had developed its own system and was highly committed to it. When the corporate IT department proposed a common system, it encountered strong resistance, and when it actually imposed a common system, it encountered subversion and refusal to use the system. Several CEOs commented that information technology was the sin­gle hardest thing to get implemented across autonomous divisions.

One of the significant facts about DEC’s evolution is that it did create product lines, but never divisions, which allowed functions such as sales and engineering to remain very dominant. In contrast, HP divisionalized very early in its history. Many managers within DEC speculated that the failure to divisionalize was one of the major reasons for DEC ’s ultimate economic difficulties.

With globalization, a growing problem will be the imposition of com­mon human resource processes. The assumptions of the parent organiza­tion may be that everyone should be treated the same way with respect to pay and benefits, but the realities in other macrocultures may make that impossible. In the United States, we believe that people should be paid for their skills regardless of formal rank or family connections (status is gained through achievement); but many other countries consider it appropriate to hire and pay family members regardless of level of achievement. U.S. com­panies give out bonuses and stock options while many non-U.S. companies stick to very strict salary guidelines.

A dramatic example of misunderstanding at the macrocultural level concerned performance appraisal. In the 1970s, HP had an international human resource manager who imposed on the entire organization a feed­back process that required a boss to tell a subordinate to his or her face how to improve performance. I heard her announce to a meeting of inter­national managers in a University of Hawaii executive development program that the program was now in place worldwide. That evening I happened to have dinner with some of the participants, including several Japanese managers from HP. When I asked them how they implemented the program, they said emphatically that “of course we would not tell our subordinate negative things to his face, we have other ways of getting a message across.” Yet they had signed off that they were now using the corporate system.

5. Differentiation by Hierarchical Level

As the number of people in the organization increases, it becomes increas­ingly difficult to coordinate their activities. One of the simplest and most universal mechanisms that all groups, organizations, and societies use to deal with this problem is to create additional layers in the hierarchy so that the span of control of any given manager remains reasonable. Of course, what is defined as reasonable will itself vary from five to fifty; nevertheless, it is clear that every organization, if it is successful and grows, will sooner or later differentiate itself into more and more levels.

The interaction and shared experience among the members of a given level provides an opportunity for the formation of common assumptions— a subculture based on rank or status (Oshry, 2007). The strength of such shared assumptions will be a function of the relative amount of interaction and the intensity of the shared experience that the members of that level have with each other as contrasted with members of other levels.

For example, the executive subculture that I described in Chapter Four has been shown in a study by Donaldson and Lorsch (1983), to make all decisions through a “dominant belief system” that translated all the needs of their major constituencies—the capital markets from which they must borrow, the labor markets from which they must obtain their employees, the suppliers, and most important, the customers—into financial terms. Executives had complex mental equations by which they made their deci­sions. There was clearly an executive culture that revolved around finance. Middle management has been identified as a subculture because they have neither the power nor the autonomy and so must learn how to live in this ambiguous authority environment. Similarly, first line supervisors have often been identified as a distinct subculture because they are identified both with the rank-and-file and management.

The subculture at each level of the organization will, over time, struc­turally reflect the major issues and tasks that must be confronted at that level. Thus all first-line supervisors will develop assumptions about human nature and how to manage employees, but whether they develop idealis­tic assumptions or cynical assumptions will depend more on the industry and actual company experience. Similarly, all sales managers will develop assumptions about human motivation on the basis of their experience in managing salespeople, but whether they come to believe in salary plus com­mission, pure commission, bonus systems, or individual or team reward sys­tems will again depend upon the industry and the company.

Source: Schein Edgar H. (2010), Organizational Culture and Leadership, Jossey-Bass; 4^th edition.