Dysfunction in Organizational Culture: Institutionalization & Barriers Video

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  • 0:05 Dysfunction in…
  • 0:48 Institutionalization
  • 1:57 Culture as a Barrier to Change
  • 3:46 Culture as a Barrier…
  • 5:20 Culture as a Barrier…
  • 6:25 Lesson Summary
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Lesson Transcript
Instructor: John McLaughlin
In this lesson, you will learn how the culture of an organization can become a liability by acting as a barrier to change, a barrier to diversity, or a barrier to a merger or acquisition with another organization.

Dysfunction in Organizational Culture

The culture of an organization acts as a uniting force among members of an organization and provides them with a sense of identity. Culture can be among the greatest assets that an organization possesses and if clearly defined, can give an organization a competitive advantage over their competition.

Under certain circumstances, however, the culture of an organization can become its greatest liability. Dysfunction in organizational culture occurs when the existing culture of an organization no longer advances the organization's effectiveness in the marketplace. Before we learn how this can happen to an organization, let's define organizational culture.


Organizational culture is a system of shared assumptions, values, and beliefs, which governs how people behave in organizations. Institutionalization occurs when the culture of an organization becomes so well established that it is understood by people inside and outside of the organization. Companies that become institutions take on a life of their own apart from the members of the organization.

Gray Electric is an American telephone manufacturer that has been making landline phones since the early 1900s. Gray Electric did not become well-known to the American consumer until the early 1950s, when they introduced their 500 series phone. This product became well-known among consumers for its innovative features and durability and was referred to as 'The Black Brick' because it was thought to be nearly indestructible.

Because of their long history of making a quality product that was found in almost every American home and business, Gray Electric became an American institution known by people inside and outside the organization for making durable and well-designed phones.

Culture as a Barrier to Change

Culture can become a liability for a company when the rules and boundaries established by the culture do not advance the effectiveness of the organization. In these instances, culture becomes a barrier to change. This usually happens to established companies with strong cultures that are suddenly forced to operate in an unfamiliar and rapidly changing environment.

Gray Electric is a company with a long tradition of innovation. In 1973, they invented the world's first cellular phone and spent many years trying to understand how this new technology would impact their existing business.

Gray Electric was in a position to become the first company in the world to develop and market a cell phone, but the upper management of Gray Electric had become complacent with making corded phones and could not imagine a world without landline phones. Because they had been the industry leader for decades and had faced very little competition along the way, the culture of Gray Electric had become rule-oriented and placed a high value on stability. Upper management decided that producing cell phones would only hurt their landline phone sales and quickly abandoned their cell phone endeavor.

In 1987, they realized what a bad mistake they had made. Sales of their landline phones were decreasing drastically every year, and Gray Electric was losing money and cutting jobs in all departments. They began to frantically attempt to produce a marketable cell phone.

In 1989, Gray Electric introduced their first cell phone, but their rule-oriented culture did not fit this rapidly changing industry, and their product development process took much longer than the other cell phone manufacturers. By the time their first cell phone was introduced, it was two or three generations behind the competition.

Culture as a Barrier to Diversity

The culture of an organization becomes a barrier to diversity when it restricts the range of people considered during the selection process of new applicants to those with similar backgrounds, experiences, and values.

In order for a company to survive in a fast-paced and rapidly changing business environment, it must recruit and retain a diverse workforce that mirrors the customer base they are trying to serve. A diverse group of people come from different places, have unique experiences, bring fresh ideas to the group, and are collectively much more forward-thinking than a group of people from similar backgrounds.

In 1975, Gray Electric owned 90% of the landline telephone business and consistently reported over a billion dollars in sales per year. At that time, every member of upper management was white, male, and over 50 years of age.

In 1986, they promoted their first female vice president, but every other member of upper management was still white, male, and over 50 years of age. Their culture had become steeped in nostalgia, and walking into their boardroom was like walking into a museum.

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