Journal of Organizational Change Management

How Organisational Culture Can Help to Institutionalise the Spirit of Innovation

in Entrepreneurial Ventures
Robert D. Russell
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To cite this document:
Robert D. Russell, (1989),"How Organisational Culture Can Help to Institutionalise the Spirit of
Innovation in Entrepreneurial Ventures", Journal of Organizational Change Management, Vol. 2 Iss 3
pp. 7 - 15
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 How Organisational Culture Can Organisational
Culture
Help to Institutionalise the Spirit of
Innovation in Entrepreneurial
Ventures 7
by
Robert D. Russell
Rider College, USA
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Editor's Note: This article takes the position that the entrepreneurial
spirit of innovation and change does not have to be diminished by the
growth and stability of the firm. The transition to a professionally
managed firm can be handled by encouraging an organisational
culture that fosters entrepreneurial spirit through mentoring
innovation-supporting behaviours, focusing on the development and
implementation of innovation, creating reward systems for
innovation, and by hiring innovative and entrepreneurial people.
Most views of entrepreneurship incorporate innovation as an essential element
of the definition, describing the entrepreneur as an agent through which a
creative new product, process or service is brought into the marketplace to
better fulfil the needs of customers (Corman et al., 1988; Drucker, 1985;
Olsen, 1987; Schumpeter, 1951). Just as the idea of the entrepreneur as
innovator is deeply engrained in the entrepreneurship literature, so is the idea
that as entrepreneurial organisations become successful and grow, they must
transform themselves, becoming less entrepreneurial and more bureaucratic.
In this vein, Olsen (1987, p. 10) states that in entrepreneurial businesses
"start-up phase characteristics are not equally effective in the growth phase,
which requires planning, organizing and control".
Other authors offer more specific advice on managing growth — entrepreneurs
are told that they must guide their fledgling businesses into an organisational
structure which is more routinised, more specialised and more formalised (Hofer
and Charan, 1984; Olsen, 1987; Ramee, 1987). Systems and procedures must be
designed and institutionalised in order to control the activities of an increasing
number of employees since they can no longer be managed effectively by the
entrepreneur (Greiner, 1972; Hofer and Charan, 1984). "Professional" managers
must be hired so that the organisation can benefit from their specialised expertise
as the business becomes more complex and differentiated (Greiner, 1972).
These practical bits of advice are generally corroborated by organisational life-
cycle theories which trace the development of organisations from entrepreneurial
structures to functional or bureaucratic structures and beyond (Greiner, 1972; Lippitt
and Schmidt, 1967; Scott, 1971). For example, Greiner states that as entrepreneurial
Journal of organisations grow through the successful application of creative ideas, they
Organizational experience a "crisis of leadership''. A steady increase in the number of employees
makes it impossible for the entrepreneur to manage efficiently through informal
Change communication channels. Increased organisational complexity burdens the
Management entrepreneur with additional management responsibilities requiring skills which
2,3 he/she often does not possess. In order to survive the leadership crisis
successfully, the growing business must install a functional organisational
8 structure and hire professional managers who provide "directive" leadership. In
this new structure, communication becomes more formal and impersonal within a
morerigidhierarchy of titles and positions. Job assignments become more
specialised and formal and lower level managers lose autonomy, adopting the role
of "functional specialists". Overall direction is provided by top management.
Although these prescriptions may provide an effective method for managing some
of the routine problems of growth, they also have the potential disadvantage of
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extinguishing the entrepreneurial spirit on which the growing business was founded.
Current empirical innovation research indicates that there is a negative correlation
between degree of innovation and formalised, centralised structures (Burns and
Stalker, 1961; Pierce and Delbecq, 1977; Tornatzky et al., 1983). Moreover, as
information exchange becomes morerigidand hierarchical, the organisation's ability to
initiate innovation appears to decline (Kanter, 1983). Thus, in managing the growth
process towards becoming a "professionally" managed company, the creativity and
innovative spirit which gave the entrepreneurial organisation its initial competitive
advantage may be lost. Accompanying the decline in innovativeness may also be a
decline in the company's capacity to compete successfully against larger, more cost-
effective rivals. The ability to adapt quickly to changing industry conditions and to
bring to market creative new products and services before larger, more resource-rich
rivals is an important strategic asset of entrepreneurial firms. Any change in
organisational structure which may damage this capability may also impair the
competitiveness of the business.
Given the potential importance of innovation to growing firms, more
attention needs to be given to advising the entrepreneur on how he/she can
manage the problems of growth while maintaining a spirit of innovation within
the organisation. As organisational life-cycle models indicate, some structures
must become more formalised and specialised in order to cope with the routine,
well-defined problems of growth. It is the contention of this article that the
routine problems ofgrowth can be successfully managed by the entrepreneur
while, at the same time, an entrepreneurial, innovative spirit can be maintained
within the growing organisa For this to occur, however, the entrepreneur must
create and institutionalise an innovative organisational culture, just as he/she
must institutionalise systems designed to handle the routine problems caused by
increased size and organisational complexity.
The purposes of this article are threefold: (1) to discuss in more detail how the
creation of more formal organisational systems in a growing small business can
inhibit innovation, (2) to point out the crucial role played by organisational culture in
creating and maintaining an innovative climate in growing organisations, and (3) to
describe briefly how the entrepreneur can establish a culture of innovation while
maintaining those systems necessary for the efficient management of growth.
 How Institutionalisation Threatens Innovation Organisational
It is not surprising that the process of institutionalising routines and practices
in the transition from an entrepreneurial to a bureaucratic organisation tends to Culture
reduce innovation. Formalised routines are the means by which programmable
decisions are implemented within an organisation — they institutionalise a set
of repetitive, established behaviours designed to produce a uniform response
to deal with a recurrent, structured problem (Simon, 1965). Innovation, on the
other hand, requires a non-routine response to a uniquely perceived problem. 9
Once routines are well established in an organisation, it is difficult to generate
the creative problem-solving activity which innovation requires since new
problems are often perceived through the filters of routine response.
Growing organisations will tend to institutionalise those practices which have
proved successful in handling past problems (Schein, 1985). Thus, as an
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organisation becomes successful and grows, the innovative solutions of the past
tend to become the accepted practices of the present. Moreover, as these practices
become a part of organisational routine, a network of values and beliefs is
generated which rationalises the efficacy of the practice for organisational
participants (Berger and Luckmann, 1966). New organisational members are
socialised into these values and beliefs which serve to justify and entrench the
practice as part of the ongoing routine of the organisation (Schein, 1985).
Once a routine reaches the stage of ideological support, it becomes very difficult to
dislodge. Janis' (1982) studies reveal that organisational groups tend to minimise
internal conflict and maximise consensus. Thus, accepted beliefs and norms tend not
to be challenged and innovative practices are often perceived by group members as
threatening to the internal equilibrium of the group. Innovation can be actively
shunned by established groups which exert conformity pressures on innovative
individuals in order to maintain existing, ideologically supported practices.
The emergence of an ideology to support and justify routine practices
creates an ironic situation for the entrepreneur. In routinising and
formalising the innovative practices that have been successful in the past,
the entrepreneur creates an organisation which may not be able to respond
to successive challenges in an innovative, creative manner.
The decline in the capacity to innovate with increasing formalisation and
hierarchical control tends to be confirmed by the empirical research on
innovation. Increased formalisation has been associated with a decline in the
ability of organisations to initiate innovative ideas (Cohn, 1981; Hage and Aiken,
1970; Rosner, 1968; Zaltman et al., 1973). Generally, the explanation for the
negative relationship between formalisation and innovation has been that higher
levels of formality reduce both the freedom of organisational members to try out
new ideas and the horizontal exchange of information within the organisation.
Both of these conditions are characteristic of more bureaucratic forms of
organisational structures which Greiner (1972) and others claim are necessary to
manage the growth of successful entrepreneurial organisations.
The innovation literature also implies that the loss of autonomy experienced by
managers in the transition from entrepreneurial to bureaucratic structures and the
"directive" leadership provided by bureaucratic professional managers will
Journal of reduce innovation. Research indicates that as authority becomes more centralised
Organizational within organisational hierarchies, innovation tends to decrease (Bass, 1970;
Cohn, 1981; Hage and Aiken, 1970; Moch, 1976). The explanation for this
Change
relationship generally has been that with increased levels of centralisation,
Management managers have less leeway to test new ideas as well as fewer opportunities to
2,3 participate in the development of new programmes. Thus, fewer innovations will
be initiated and the commitment to implement those that are will be lacking.
10 The contradiction between bureaucratic structures and the capacity to innovate
has been noted by a number of authors who point out the necessity for designing
dual structures for carrying out innovation and for implementing routine
activities. For example, Zaltman et al. (1973) state that an informal, decentralised
structure is necessary for stimulating the initiation of innovation while a more
formalised, centralised structure is necessary for the efficient implementation and
routinisation of innovation. Duncan (1976) calls for an "ambidextrous"
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organisation comprised of an informal, organic unit for creating innovation and a

more mechanistic unit for implementing routine activities.
Creating dual structures for innovation, however, provides only a partial
solution for the entrepreneur who wishes to both manage growth efficiently
and retain an innovative spirit in the organisation. Dual structures can provide
a method through which the unique, unstructured problems of innovation may
be addressed in isolation from the routine, structured problems of everyday
operations. They do not, however, guarantee that the process of innovation
will be effectively carried out. At best, structure can provide a friendly
organisational context in which the process of innovation can proceed. It
cannot, however, effectively motivate or direct the innovation process. That
can only be accomplished through the values and beliefs of group members.

The Role of Organisational Culture in Stimulating Innovation

The problem of innovation is intractable to a purely structural solution for two
reasons. First, innovation is a highly complex social process which requires the
effective interaction of a large number of individuals and sub-units within the
innovating organisation (Zaltman etal., 1973). Formal organisational structures and
procedures are too cumbersome and inflexible for managing these reciprocal
interactions and the large volume of information that needs to be exchanged between
the actors in the innovation process. Second, innovation, by definition, deals with
uncertain problems. The most effective means for solving uncertain problems are not
known before the problem-solving process is begun and the outcomes of the process
cannot be predicted with any degree of certainty (Zaltman et al., 1973). Therefore,
structural solutions to innovation-related problems such as formalised procedures or
appeals to the experience of a member of the organisation's hierarchy are often
ineffective. The role of organisational structure in innovation is to provide an
uninhibiting context for the social exchanges that comprise the process of innovation.
A relatively informal, decentralised structure may be a necessary condition to allow
the innovation process to proceed but structure alone is not sufficient to motivate the
vital social exchanges necessary for managing the ambiguous problems inherent to the
process of innovation.
 Organisational culture combined with an organic structure can be an effective Organisationa
means for motivating and directing the innovation process. Culture, defined by
Schein (1985, p. 9) as "a pattern of basic assumptions — that has worked well Culture
enough to be considered valid and, therefore, to be taught to new members as the
correct way to perceive, think and feel", can provide an ideology and set of norms
which guide organisational members through the uncertain process of innovation.
Just as ideologies emerge to justify and sustain routine activities that have been
successful for an organisation, an ideology of innovation can help a growing 11
organisation institutionalise innovation as an ongoing practice. An innovation-
supporting culture cannot directly solve the problems of any specific innovation
project — those difficulties must be overcome by the group members involved in
the innovation. Culture can, however, support innovation by creating an
organisational climate which institutionalises innovation as an important activity
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and which rewards innovation-supporting behaviours. More specifically, cultural

beliefs and norms can support innovation in five basic ways:
(1) they can focus the attention of organisational members on innovation
as an appropriate and expected strategy for solving external competitive
problems,
(2) they can grant legitimacy to actions designed to produce innovation
by creating a reinforcing network of values and beliefs,
(3) they can motivate organisational members to act in innovation-producing
ways of defining innovative behaviour as approved and expected,
(4) they can be used to provide both intrinsic and extrinsic rewards for organisational
members who participate in innovation-producing activities, and
(5) they can help to induce a commitment to support innovative change
among all organisational members.
By focusing attention on and legitimating innovation, a supportive culture helps to
motivate and sustain the complex, interactive process of social exchange necessary
for successful innovation. Individuals and organisational units with diverse
perspectives and goals can be unified in a common objective of carrying out a
successful innovation-based strategy if cultural values and beliefs support the effort.
Additionally, an innovation-supporting culture will generate norms which
tend to guide group members into innovation-producing rather than
innovation-resisting behaviours. Recent research by the author has identified
eight dimensions of innovation norms which have been positively correlated
with successful entrepreneurial (innovation-based) strategies. Norms
associated with each of these dimensions serve to create the types of
interactions that support the innovation process and to channel behaviour
towards producing innovative change. The normative dimensions are:
(1) supporting the creative activities of organisational members,
(2) recognising innovation as an appropriate solution to strategic
organisational problems,
(3) providing free and open exchange of information within the organisation,
Journal of (4) maintaining close contact with external groups that may provide
Organizational information about potential innovations,
Change (5) maintaining an open-minded consideration of new ideas,
Management (6) providing psychological and resource support for idea champions,
2,3 (7) supporting moderate risk taking in new ventures, and
(8) supporting the effective implementation of change.
12
The importance of the norm dimensions is supported by a 1985 Arthur Young
study on innovation management practices in 400 US companies. In a survey of
506 senior executives, several factors which encouraged or discouraged
innovation were identified. According to the report (1985, p. 15), "a positive,
supportive management atmosphere which includes commitment, leadership and
the encouragement of risk-taking" was the most frequently mentioned factor
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supporting innovation. Almost as important in fostering innovation was the

provision of rewards and incentives for innovative ideas. Some of the specific
recommendations given by the report to increase innovation include establishing
entrepreneurial thinking and behaviour in the organisation and formulating
innovative strategies and plans. The Arthur Young survey supports the
importance of culture in stimulating innovation and reinforces the relevance of
the eight normative dimensions to motivating innovation-producing behaviour.
The activities of innovative firms can be used to illustrate how important some
of the norm dimensions are to successful innovation. For instance, Lewis Lehr,
CEO of 3M Corporation, describes an "informal practice" at 3M which permits
research scientists to use company resources and 15 per cent of their work time to
pursue their own creative ideas. Lehr also points out how important it is for 3M
managers to keep open communication channels between researchers, production
managers, marketing people and customers in the development of a new product.
Reinforcing the importance of unrestricted information exchange during the
development of innovative products is the Xerox Corporation practice of holding
a series of round table discussions involving development engineers, corporate
planners, marketers, production managers, suppliers and customers in order to
learn what characteristics the next generation of copiers should have. Finally,
James Burke (1988), Johnson and Johnson CEO, in a recent Fortune interview
credits his company's success in innovation to "close contact with customers and
a corporate culture that encourages risk".

How the Entrepreneur Can Create an Innovative Culture

Most analysts of organisational culture claim that it is a long-term, difficult-to-
change phenomenon (Hofstede, 1980; Schein, 1985; Schwartz and Davis, 1981).
Schein (1985), however, points out that the entrepreneurial founder of a small
business may be in a unique position to help create the organisation's culture.
Organisational founders are a major influence in shaping the work-related values,
beliefs and attitudes of employees. The values and beliefs held by the founder which
are associated with successful group performance tend to be reinforced and
transmitted to organisational members as elements of the group culture (Schein,
 1985). Since the success of a growing entrepreneurial organisation is due to some Organisation
form of innovation, the entrepreneur has a unique opportunity to incorporate Culture
innovation-supporting values and beliefs in the nascent culture of the growing
business.
In creating an innovative culture, the leadership ability of the entrepreneur is
vitally important. It will be the responsibility of the entrepreneur to establish
innovation as a legitimate organisational activity and to focus the attention of group
members on those actions most likely to generate successful innovation. In doing 13
this, the entrepreneur should focus behaviours related to the eight innovation norm
dimensions listed above. By consistently reinforcing innovation-related behaviour
the entrepreneur will help to create group norms that support rather than resist
innovation.
An important point for the entrepreneur to keep in mind, however, is that he/she
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cannot dictate an innovative culture into existence. As seen above, innovation

requires autonomy and unstructured interaction among group members involved
in innovative projects. The entrepreneur must provide autonomy and freedom of
interaction to organisational members while structuring the interactions so that
group members are motivated to initiate and develop innovations. To accomplish
this, the entrepreneur must impart his/her vision of innovation to group members
through frequent personal interactions and by example. In forming an innovative
culture, the entrepreneur must inspire organisational members to innovation through
his/her leadership role — an innovative organisation cannot be commanded into
creation.
There are four leadership activities that the entrepreneur can use to shape
an innovative culture.
(1) Mentor and coach group members in innovation-supporting behaviours. By encouraging
employees to engage in activities related to the eight normative dimensions listed above, the
entrepreneur can help to establish innovation-producing behaviour as an accepted and approved
response to strategic problems. Over time, specific norms will emerge to guide succeeding group
members into innovation-producing activities. As an example, James Burke relates a story about
one of
his first meetings with the legendary General Robert Wood Johnson. Following,
the failure of an innovative product which he had championed, Burke was called
into Johnson's office. Fearing the worst, Burke was surprised to be congratulated
by Johnson on his failure. According to the General, "If you are making mistakes,
that means you are making decisions and taking risks. And we won't grow unless
you take risks" (Burke 1988, p. 60). Such mentoring is a powerful force in
establishing a culture of risk taking in the innovative organisation.
(2) Focus the attention of group members on the successful development and implementation of
innovation. Although direct mentoring is a powerful influence on group member behaviour, the
entrepreneur may not have the time to coach every member of the business. Group members,
however, tend to model their behaviour and thinking after a respected leader. What the leader
regards as important and what he/she emphasises in interactions with group members will
be perceived as important. By consistently emphasising innovation-related activities
and by acting as an innovation role model, the entrepreneur can help to shape
Journal of the innovation-producing behaviour of other group members. For instance, in
Organizational order to reinforce the importance of research and development in producing new
Change products, Monsanto's chief executive Richard Mahoney spends several days each
year working in the company's biotechnology labs. Such role modelling points out
Management how important creative research and development is to Monsanto.
2,3 (3) Create a reward system which rewards both successful innovation and
innovation-supporting behaviour. Using another Monsanto example, the company
14 awards a $50,000 annual prize to the scientist or team of scientists who develop the
most successful commercial innovations. Such a sum of money can be a powerful
incentive to think creatively and to take some developmentrisks.The entrepreneur,
however, cannot confine rewards to commercially successful innovations only.
Since the process of innovation is so uncertain, a large number of new ideas must
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be generated to produce relatively few successful innovations. Therefore, both

tangible and intangible rewards should be used to reward not only successful
innovation, but also innovation-supporting activities.
(4) Recruit, hire and promote innovative people. It is always easier to
establish a culture of innovation in an organisation comprised of individuals
whose personalities support innovation-related values.
Conclusion
There is an extensive body of management writing that advises the entrepreneur on
how to handle the problems of growth and increasing organisational size. Most of this
advice urges the entrepreneur to establish a more "professional" organisation
characterised by increased specialisation, formalisation and centralised decision
making. Although this advice is relevant and necessary to the continued success of
the growing business, it often ignores a possible consequence of becoming more
professional — that entrepreneurial organisations can lose their capacity for
innovation as they become more formal and centralised. If the entrepreneur wishes to
retain innovation as an important element of the organisation's competitive strategy,
then he/she must manage the creation of a culture of innovation in the growing
business just as he/she must manage the creation of a "professional" organisation to
deal with the routine problems of growth. Although the culture of an established
organisation may be difficult to change, the culture of a young, growing business is
often in the process of formation and the entrepreneur is a major influence in its
creation. By establishing innovation as an important organisational value and
stimulating innovation-producing practices through modelling and direct support, the
entrepreneur can help to manage the institutionalisation of innovation as an ongoing
organisational practice.
From the academic perspective, more must be done to develop comprehensive
programmes of managing growth in entrepreneurial organisations. These
programmes must include prescriptions for managing the structured, relatively
routine problems of growing organisations as well as the unstructured problems
which require innovative solutions. Just as organisational growth creates the need for
more formal, specialised management systems to deal with the structured problems
of increasing size, growth also necessitates an informal, culturally based system to
support continued innovation. Both types of systems need to be defined
 and detailed by organisational researchers analysing the problems of Organisational
entrepreneurial growth. Additionally, more research effort needs to be directed at
defining and explaining the cultural variables which most directly affect the Culture
process of innovation in organisations.
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