DOES CORPORATE CULTURE CONTRIBUTE TO PERFORMANCE?

Abstract

This article explores connections between corporate cultures and corporate performance in various industries. First, it provides a brief background on the notion of "culture"; second, it sets out a brief typology of corporate culture. Third, it examines various corporate cultural types in relation to industry performance; and finally, some conclusions are drawn on the importance to corporate survival of organizational and cultural adaptation to competitive environments.

INTRODUCTION AND CONTEXT

An expert on cross-cultural management, Geert Hofstede (1984, p.21) defines culture as "the collective programming of the mind, which distinguishes one human group from another ... Culture in this sense includes systems of values, and values are among the building blocks of culture." A few years later, his notion of culture broadened into "mental programming ... patterns of thinking and feeling, and potential acting" (Hofstede, 1991, p.4). Sociologists (Namenworth & Weber, 1987, p.8) see culture as a "system of ideas that constitute a design for living." For our purposes here, culture is viewed as a system of values, norms, and ideas, shared by a group of people, that when taken together provide a design for thinking, living and potential acting.

There are, however, many types of cultures, including national, country or regional (Hofstede, 1984, 1991; Schneider & Barsoux, 1997; Terpstra & David, 1991); global electronic (Targowski, 1990); ethnic; gender; generational; business, professional; occupational; and organizational, or corporate (Bloor & Dawson, 1994). While this paper draws from the international management literature, which has long acknowledged the importance of national cultural characteristics as determinants of management behavior (Farmer & Richmond, 1965; Schneider, 1988), it serves only to position the notion of corporate culture within a broader context.

This paper focuses on corporate culture and, specifically, the effects of corporate culture on a business' performance.

CORPORATE CULTURE: WHO WE ARE, WHAT WE DO, WHAT WE STAND FOR

What then is corporate culture? Why is it important? Does it relate to corporate success or failure?

We reach back a paragraph or so for a definition that can be applied in the corporate context: culture is a system of values, norms, and ideas, shared by a group of people, that when taken together provide a design for thinking, living and potential acting. By values is meant the shared assumptions of what ought to be or, in other words, what a group believes to be right and desirable; norms relate to rules and guidelines that set out expected behavior in various circumstances. So corporate culture reflects the values of the founders, underpins the vision/ mission of the firm, establishes the main operating orientation of the company, and provides the basis for a shared identity for company members. Its importance lies in the fact that not only does culture constitute a kind of inter-personal glue that holds an organization together, but also it can function as an informal control mechanism that may help coordinate employee efforts.

Although it is tempting to speak of "a" corporate culture, organizations have many subcultures. These can vary by business unit, geographical location, division, or department. Subcultures can clash. Again drawing from the international management sphere, a human resources manager from a global pharmaceutical company discovered that a major challenge in China, Korea and Taiwan was to persuade managers there to accept promotions. Among other things, their values were such that they did not wish to compete with their peers for career rewards and did not want to assume cross-national responsibilities (Alexander & Wilson, 1997). This example shows that national cultural values can affect company cultural values and policies. Thus culture has a broad importance to an organization because it can either be an ally or an enemy in the strategy implementation process.

Typology of Corporate Cultures

Each company has a unique culture and its own personality. Each company has its own folklore that illustrates company values, and its own ways of dealing with problems, making decisions, doing things. Ingrained in Wal-Mart culture, for example, is dedication to customer satisfaction, pursuit of low costs (nurtured by stories of the founder's frugality), and employee empowerment. Nordstrom's "response to unreasonable customer requests" is the foundation of that company's exemplary service. These companies seem to have a strong sense of shared values and this seems to lead to better performance. In other words there appear to be links between culture, strategy, and performance in the marketplace. If cultural characteristics are in some sense a determining element in "success" then how can companies create those characteristics?

An essential step is to analyze the company culture across basic dimensions: Weak versus strong, Low-Performance, and Adaptiveness (Rousseau, 1990; Kotter & Heskitt, 1992; Johnson, 1998). We examine these in turn:

Strong Culture. A culture is strong to the extent that employees are held together by widely shared values and beliefs. Further, a culture may be cohesive when business is conducted according to clear principles and when management actively and often communicates these principles and shows how they relate to the operating environment of the business (Deal & Kennedy, 1982). Clearer goals decrease employee uncertainty and this may translate into quicker response to events. Efficiency may be improved through lower monitoring costs because a strong corporate culture provides strategy-relevant operating guidelines.

Three elements contribute to the creation of a strong corporate culture (Sathe, 1985): (1) a leader who establishes strong values and practices which make sense in the light of competitive conditions; (2) company commitment to operating according to established principles; and (3) concern for the well-being of employees, customers and shareholders. Thus a strong culture leads to a close culture-strategy fit and that may be of genuine assistance in strategy implementation. Problems may arise in strong culture organizations when the culture no longer matches the requirements of strategy implementation.

Weak Culture. A culture is weak or fragmented to the extent those widely different values and beliefs are held which leads to employee feelings of separateness from the organization (Smircich, 1983). Allegiance is to one or a few of the many subcultures and there is but small identification with broader corporate goals, although there may be some loyalty toward a department, colleagues, or boss. One consequence is that a weak culture seldom supports strategy implementation.

Low Performance Culture. Low-performance or unhealthy cultures can derail company strategy thereby negatively affecting performance. Kotter and Heskitt (1992) outline several characteristics. First, in a politicized internal environment, fiefdoms can grow at the expense of the organization, issues get resolved on the basis of turf and decisions get made based upon lobbying efforts of key executives. Second, people are hostile to change. People who want to innovate are thwarted and those who don't rock the boat get rewarded. Third, people adept at organizational machinations get promoted over those with entrepreneurial skills and leadership capabilities. Fourth is executive myopia which manifests itself in a "not invented here" syndrome. People are inward looking and averse to any form of benchmarking--comparing themselves to best practices in the industry. Examples of low-performance cultures from the 1970's and 80's include Sears, Kmart, Xerox, and Texaco. A low-performance culture may be strong or weak. Strong low-performance cultures may actively inhibit necessary competitive re-alignment.

Adaptive Culture. In adaptive cultures, there is a spirit of doing what needs to be done to meet opportunities and threats to create long-term success, provided that core values and ideals are not comprised. Several characteristics have been identified by Kotter & Heskitt (1992); First, top management orchestrates response to changing conditions; second, top management is committed to "doing the right thing" by relevant stakeholders--employees, customers, stockholders, suppliers, communities--and attempts to satisfy their concerns. Third, due to management's focus on well being, employees are less threatened by job changes and more willing to support change. And, fourth, innovative, entrepreneurial activity is encouraged, protected and rewarded. Adaptive cultures generally are the most adept at supporting strategy implementation.

Once these dimensions of company culture have been analyzed and management has determined the kind of culture that exists, and then comes the task of creating a culture that is a competitive asset--a culture that supports the implementation of strategy.

CULTURE AND PERFORMANCE: WHEN IS CULTURE A COMPETITIVE ASSET?

How important is culture to performance? Two major empirical studies have examined the effects of corporate culture on corporate performance. Their results are summarized below:

Kotter & Heskitt Study

Kotter & Heskitt (1992) studied 180 firms across 19 markets and created a measure of strength for corporate culture and a measure of the firms' economic performance based upon return to invested capital, net income growth, and average yearly increases in stock price. Questionnaires were sent to six top executives in the sample companies, which asked them to rank the strength of culture in other companies selected for them in their industry. Indicators of strong culture were the following: (1) company managers commonly speak of the company's way of doing things, (2) the firm has made its values/ credo known and encourages managers to follow, (3) the firm is managed less by current CEO whim than by long held principles. Ratings (on a one to five scale) were averaged to come up with a measure of cultural strength. For example, in the healthcare industry, Johnson & Johnson received an average rating of 4.61 (out of 5) Economic performance was found to have a significant positive correlation with culture strength across these 180 companies. However, Johnson and Johnson returns were 17.89% over the decade of the 1980s, but the pharmaceuticals industry averaged 20.21%. Therefore, concluded Kotter & Heskitt "... the statement that `strong cultures create excellent performance' appears to be just plain wrong."

Burt, Guilarte & Yasuda Study

Burt et al (1999) carried the Kotter & Heskitt analysis further. They suggest a "contingent" value of culture, meaning that the relationship of culture to performance depends upon effective market competition. Their research shows a shift from culture being economically irrelevant to it being a genuine competitive asset depending upon "market competition" in the industry. Market and culture complement each other. If firms face a low level of competition then it appears that culture is not a competitive asset. There may be competition in dynamic markets, but there is not an association between a strong culture and economic performance. Examples here include healthcare, beverages, and communications. If firms face a high level of market competition then the research suggests that culture is a competitive asset, as it is closely associated with economic performance. Examples here are textiles, apparel, airlines and motor vehicles. At the level of individual firms, Burt (1999) note the following:

   Forty four percent of the variance in company returns to invested capital
   can be predicted by the industry in which they primarily operate, and their
   relative strength of corporate culture accounts for another 23 percent of
   the variance. Culture accounts for half again of the performance variance
   described by industry differences!

The notion "it all depends" is the key here. Whether culture is a competitive asset or not depends upon the market. In a commodity market, culture may be a strong competitive asset. In a complex and dynamic market, culture appears to have no effect on economic performance. "It all depends" makes it critical for managers to think through the role that culture plays in any given industry and how that role may change as industry conditions change.

CONCLUSIONS: LESSONS FOR MANAGERS

Several lessons can be drawn from the discussion.

Perhaps the first lesson is challenge assumptions. What is really known about the culture-strategy-performance links? Answer a lot and a little. Research results may be limited. For example, the work done to date is based upon "static" analysis. But, if the value of a strong culture is truly contingent upon the industry market, then what is the effect of a change in the market? What if your product or service becomes more of a commodity? How does it apply to your firm? How can you guide and encourage your organization to change to meet the opportunity/threats? Is not the key to survival an adaptive culture rather than simply a strong or weak culture?

The second lesson is know thyself and thy industry. This entails three things:

* Aligning Culture-Strategy-Performance - A tight alignment between organizational culture and strategy motivates and channels behavior in two ways: First, it provides a set of informal rules and peer pressures for doing the job. Second, it motivates people to do their jobs in ways supportive of effective strategy implementation. How relevant is culture at this time to economic performance in the industry?

* Diagnosing Strategy-Supportive and Strategy-Non-Supportive Aspects of Company Culture - which characteristics of a firm's culture add to and which detract from managerial ability to implement strategy?

* Changing Non-Supportive Aspects of Culture - Once change elements are identified, managers need to be open about the need for change and implement a program of both symbolic and substantive actions to make the changes. Symbolic examples include managers being role models for lowering cost by cutting perks or honoring people whose performance is exemplary. GE and 3M honor "product champions" with high visibility and support (Schneider, Gunnarson & Niles, 1994). Substantive examples may include replacing old-line executives with more dynamic managers or changing outmoded policies.

The third lesson is know thine industry's driving forces. These forces are where your future is emerging. It is in this future that an organization must compete and achieve success. Will the present culture enable or retard the firm's progress? How can a spirit of high performance be engendered?

REFERENCES

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Douglas N. Ross, Ph.D. Associate Professor, Department of Management Towson University Towson, MD 21252-0001