Corporate Culture and Competitive Advantage

Organizational or corporate culture got the world’s attention in the 1980s when Japan Inc. dominated the business landscape. For starters, what is corporate culture? It is defined as the assumptions, beliefs, behaviors, values, and artifacts passed from one generation to another, with some visible and invisible elements. In many organizations, cultures often reflect their founders’ values, beliefs, and assumptions. At Walmart, Sam Walton emphasized frugality, and at IBM, the culture reflected the values of Thomas Watson Sr., its founder.

Then, later, his son Thomas Watson Jr. articulated and institutionalized it nearly 40 years after its founding with: “Respect for the individual, the best customer service of any company in the world, and the pursuit of all tasks with the idea that they can be in a superior fashion.” In some organizations, the culture is the reflection of their purposes. In others, it is the result of an incremental and deliberate adaptation or change to fit an organization’s business environment or strategy.

On the one hand, we have organizations with great cultures—such as Zappos, Southwest Airlines, Starbucks, Google, IBM, Apple, and 3M—characterized by fun cultures, innovation, strong customer and employee orientation, etc. For instance, 3M generated 31% of its sales in 2010 from products developed in the past five years.

On the other, we have organizations with weak and dysfunctional cultures, such as the defunct Enron, Lehman Brothers, and Xerox in the 1970s. These organizations are characterized by arrogance, fraud, deceit, ethical lapses, inward-looking, stifling of initiatives and customer orientation, and the like. For these reasons, almost all of them went out of business except Xerox, which went through many restructuring in light of its culture to stay alive. However, it is imperative to discern the difference between organizational culture and climate—given that many managers use them interchangeably. This is important because confusing them can be prohibitive!

The former has been explained above. The latter—the organizational climate—is the sense, feeling, or atmosphere people get in the organization on a day-to-day basis or generally. For instance, when you enter a working environment and feel that people are very friendly, it feels positive, energetic, or arrogant. Thus, failure to discern them can be expensive for strategy execution or change.

Indeed, a great culture can result in a great climate, but the climate doesn’t tell you the whole story of your organizational culture—given that it is composed of those elements mentioned above. Also, a great climate doesn’t mean a winning culture.

Why is a Great Corporate Culture so Important in Strategy?

Many studies have found that strong cultures affect business performance. In other words, when there is an incompatibility between the beliefs behind a strategy and a firm’s culture, the strategy execution will face a serious challenge. In addition, it is easier to change strategies than cultures. This quote,  “Culture eats strategy for breakfast.” has become so popular, given the value of corporate culture for strategy execution. While many try to suggest it is a quote by Peter Drucker, that’s not the case.

Again, in his 2011 book “Culture Cycle: How to Shape the Unseen Force That Transforms Performance.” James Heskett, Harvard Business School Professor Emeritus, provided a model that explains how firms’ assumptions (elements of culture) impact performance. He argues that an organization’s assumptions with respect to people, work, motivation, customers, competitors, suppliers, communities, and the legal and regulatory environment have a great influence on an organization’s competitive strategy and execution—which in turn influences its performance.

Similarly, in their research for their book “Corporate Culture and Performance,” based on 207 firms from 22 different industries, John Kotter and James H. Heskett of Harvard Business School—found that corporate culture can have a significant impact on a firm’s long-term economic performance.

Their findings suggest that firms with cultures that emphasize all the key managerial constituencies (customers, stockholders, and employees) and leadership from managers at all levels outperform firms that do not have those cultural traits by huge margins.

Over an eleven-year period, the former (with a great culture) increased revenues by an average of 682% versus 166% for the latter (with a weak culture). Similarly, the former grew their stock price by almost 900% versus 75% for the latter—and improved their net income by nearly 750% versus 1%. Above all, their findings suggest that the culture of adaptability was the key to long-term success. Values alone were not enough—that is, value without leadership appeared not to produce the desired behaviors and results.

In addition, through the lens of a VRIN framework in the resource-based view (RBV) of competitive strategy, a great culture can be considered a valuable intangible asset or know-how—and arguably very difficult for the competition to imitate.

Unlike a patent that, as of June 8, 1995, can last for just 20 years, a great culture can outlast two decades and enhance performance for decades. According to Alfred Lin, Chairman and COO of Zappos, “Our websites and policies all can be copied, but not our special culture.” For this reason, a great culture is the ultimate competitive advantage—when there is a good fit between corporate culture, strategy, and the competitive environment. In other words, a healthy culture should reflect the changing social, legal, and competitive environment.

Similarly, former IBM CEO Lou Gerstner, Jr., reflecting on his experience when he took over as CEO of then-troubled IBM—when he achieved one of the most successful turnarounds in corporate history said: “Until I came to IBM, I probably would tell you that culture was just one among several important elements in any organization’s makeup and success…In my time at IBM, I came to see that culture isn’t just one aspect of the game; it is the game.”

For this reason, many companies making regularly the list of “great places to work” have a chief culture officer. Google gave the title (CCO) to Stacy Sullivan in 2006, who was then director of human resources and North Jersey Community Bank (NJCB), which recently appointed Marie Gendelman as its chief culture officer. Again, it should be clear that an employment brand will attract the best, but only the culture can retain and use this talent pool to deliver results.

However, changing a dysfunctional culture to a performance-enhancing culture entails real leadership. According to Kotter et al., it takes larger organizations 5 to 8 years to get it right.

Consistent with Eric Flamholtz (Prof. Emeritus, UCLA) and Yvonne Randle in their empirical research, the critical areas to defining a corporate culture that our experience with clients suggests are:

1. Customer orientation
2. Orientation toward employee
3. Standard of performance and accountability
4. Innovation and commitment to change
5. Company process and sustainability orientation

They advise that you rate your organization’s beliefs, values, and assumptions with respect to each of these elements of your culture. As a result, your organization can build a winning culture that enhances your performance in a sustainable manner.

However, there are three competing scholarships of corporate culture:

1) Strong culture enhances performance and strategy execution

2) Culture needs variations to fit the specific requirements of a business

3) Adaptive culture suggests that only cultures that can help organizations anticipate and adapt to environmental changes will be associated with superior performance over a long period.