486 • Chapter 14 • Environment, Power, and Culture

from their colleagues. Given the complexity of these firms’ operations, any single formal database approach to knowledge management will be inadequate. Firms incorporate knowledge management issues into how they design their firm structures and how they organize the positions and careers of their consultants. Many firms use a variety of matrix structures, often involving three or more dimensions, to reflect client, disciplinary, and even geographic areas of emphasis.

Consulting firms complement these structural approaches through culture, training, and periodic review. For example, McKinsey consultants are given incentives to both generate and distribute knowledge; consultants are rewarded for the number of position papers accepted into their internal system and the number of times these papers are accessed within the systems. Furthermore, McKinsey consultants are encouraged to actively respond to requests for assistance from other teams throughout the firm, with an expectation that requests for assistance receive quality and timely responses. This knowledge sharing is part of the firm’s culture, and assistance is provided to projects when requested and where possible from those in a position to help anywhere in the world.31

Communication norms are important parts of knowledge management not only for management consulting firms but also for firms whose activities are distributed geographically and for whom knowledge sharing is critical to the accomplishment of the firm’s mission—what Catherine Cramton calls “the mutual knowledge problem.” These include software development firms, investment banks, or other professional service firms with national and international clients, as are common in law, real estate, or public relations.32

Culture Facilitates Cooperation and Reduces Bargaining Costs

Gary Miller argues that culture mitigates the detrimental effects of power dynamics within firms by creating “mutually reinforcing” norms.33 These norms permit mutually beneficial cooperative activities to emerge that would not be likely among selfinterested actors outside the organization. Miller builds on the work of David Kreps, who examines the problems of securing cooperative outcomes in repeated games. Both Miller and Kreps are interested in the implications of a result called the folk theorem.

The folk theorem concerns the possibilities for achieving an equilibrium result in repeated play of games, such as the prisoners’ dilemma (discussed in earlier chapters). Its general result is that multiple equilibria are possible in infinitely repeated games. Some can be conflictual, combining expectations of opportunistic behavior with threats of strong retaliation if the other player responds inappropriately. The folk theorem implies that it may not be possible to arrive with certainty at a cooperative organizational arrangement—cooperation is only one of many possible arrangements. Even if cooperation was possible, the costs of reaching it, in terms of the bargaining costs involved in choosing one arrangement over others, are likely to be high.

Miller argues that attempts to solve organization problems through contracts, incentives, and formal controls will entail large influence costs, as the individuals involved expend much time and effort to arrive at an organizational solution that provides them with the greatest benefits. To the time and effort involved in finding an organizational solution must be added the further costs of organizing that result from conditions in the firm that posed problems of asset specificity or that raise the costs of monitoring and measurement for any solution that is reached. The problem with hierarchical organization is that, although it mitigates transactions costs associated with market coordination of economic activity, it creates dilemmas of its own that can be significant, depending on the technology and business environment of the firm.

Culture • 487

For example, just because a supplier to a firm has been internalized through backwards vertical integration does not mean that problems involved in working with the supplier have gone away. Managers in the new subsidiary can still withhold information from managers in other units, fail to fulfill commitments, and take advantage of the commitments made by other units. The ways in which the parent firm addresses these issues can be more or less effective, but it is unlikely that internal management and governance arrangements will be sufficiently complete to eliminate these problems in firms possessing any significant degree of complexity. Miller’s point is that these dilemmas cannot be resolved by recourse to formal governance mechanisms or by increased controls over employees. He argues that any hierarchical organization will have serious principal–agent problems built into its structure.

Most real organizations arrive at some acceptable organizational arrangements, despite these problems. They do so by supplementing formal structures and controls with informal norms and social conventions, which provide a focus for actors around which a consensus can form. This set of norms and conventions is the organization’s culture. Echoing David Kreps, Miller states that corporate culture is “the means by which a principle [of group decision making] is communicated to hierarchical inferiors.” It says “how things are done and how they are meant to be done” in the firm. Miller argues that a firm’s culture resolves these problems if its norms stress cooperation and not conflict. A cooperative culture modifies individual expectations and preferences and allows actors to expect cooperation from others. These mutually reinforcing values and norms allow firms to reach solutions to agency problems that would not be possible in markets.

Miller also recognizes the difficulties managers encounter in intentionally influencing a firm’s culture. On the one hand, managers can exercise leadership that fosters cooperation rather than conflict among employees. On the other hand, a cooperative culture is also likely to be fragile, so that attempts to modify it to gain advantage could backfire and result in employees becoming more uncooperative. Cultivating and using power and influence may be more feasible for managers than cultivating culture, even though a cooperative culture may be more desirable.

Culture, Inertia, and Performance

The values of a firm’s culture must be consonant with the values required by its strategic choices. Poor fit between culture and strategy can develop for several reasons. For example, start-up high-tech companies often have a culture that rewards creativity and risk taking. But initial success and resulting growth can increase formality and bureaucracy and discourage further innovation. One example of this is Clay Christensen’s Innovator’s Dilemma, which we described in Chapter 11. According to the Innovator’s Dilemma, the success and subsequent commitments of firms pursuing a given technology become resistant to change in the face of disruptive technologies.

Conversely, a cultural misfit could occur when a firm’s culture stresses routines, efficiency, and stability, while the firm’s environment changes in ways requiring innovative, entrepreneurial, and flexible responses. This requires the firm to shift from a cost-based strategy to one of differentiation. An example of this situation can be seen with the firm of James Hardie, the world leader in the manufacture of fiber cement products for construction sectors. The firm has over $1.2 billion in annual sales and serves markets in the United States, Canada, Europe, Australia, New Zealand, and the Philippines. The firm’s current strategy and culture are based on significant research and development in high levels of product differentiation. The strategy developed out