Organizational culture is the personality of an organization -- the "way things are done." It is defined as the informal values, norms and beliefs that control how individuals and groups interact internally and externally. An organizational culture is strong when there is a high shared commitment to core values, and weak when control has to be exercised through administrative orders. Organizational cultures serve two major functions: external adaptation and internal integration.
In his book "Organizational Culture and Leadership," Massachusetts Institute of Technology professor Edgar H. Schein outlined five elements: The first is mission. In a strong culture, groups are committed to the company’s mission and strategy to deal with the competitive environment and other external forces. The second and third elements are goals and means. Goals are derived from the mission but are more specific. For example, a company's mission could be to gain market share, but the goals would include specific percentages and schedules. The third element is the means to achieve the goals, including labor specialization, compensation systems and organizational structure. A consensus on the means leads to fewer turf wars. The fourth and fifth elements are measurement and correction. Using hard data (such as financial statements) and through internal and external consultations, a company's performance is measured against its mission so that corrective measures can be taken to address deficiencies. Correction is a gradual process of culture change by managing internal resistance and building consensus.
Organizational culture also plays an important role in internal integration. According to Schein, there are six key elements for integrating individuals and groups: The first is common language. To communicate effectively, group members develop a common set of actions and words. The second element is group boundaries -- there should be consensus on who is or is not a member. Leadership may formally set these boundaries but the group ratifies them. In a mature organization, a person may belong to multiple groups and, for each group, he makes the transition from being an outsider to an insider. The third element is the distribution of power and status, which is the process governing how power is earned and how to deal with authority and peers. The fourth element is the development of friendships, norms and customs within groups. The fifth element is a system of rewards and punishments for obeying and disobeying rules. The sixth element is that groups have ways -- using religion, ideology, beliefs and myths – to explain the unexplainable, such as a sharp change in business conditions, a tragic accident or a natural disaster.
Mechanisms for influencing organizational culture include how management responds to crisis and allocates resources, the design of formal systems and procedures, and a clear statement of the company’s operating philosophy and core values.
A strong organizational culture could be a barrier to change and may discourage diversity of thought, leading to "groupthink" where group members hide their differences in order to fit in.