Chapter 1

The Power of Culture

We encounter organizational cultures all the time. When they are not our own, their most visible and unusual qualities seem striking: the look of the traditionally dressed IBM salesman, the commitment to firm and product expressed by employees at Honda or Matsushita, the informality of Apple and many other high-tech companies. When the cultures are our own, they often go unnoticed -- until we try to implement a new strategy or program which is incompatible with their central norms and values. Then we observe, first hand, the power of culture.

The term "culture" originally comes from social anthropology. Late nineteenth- and early twentieth-century studies of "primitive" societies -- Eskimo, South Sea, African, Native American -- revealed ways of life that were not only different from the more technologically advanced parts of America and Europe but were often very different among themselves. The concept of culture was thus coined to represent, in a very broad and holistic sense, the qualities of any specific human group that are passed from one generation to the next. The American Heritage Dictionary defines "culture," more formally, as "the totality of socially transmitted behavior patterns, arts, beliefs, institutions, and all other products of human work and thought characteristics of a community or population."

We have found it helpful to think of organizational culture as having two levels, which differ in terms of their visibility and their resistance to change. At the deeper and less visible level, culture refers to values that are shared by the people in a group and that tend to persist over time even when group membership changes. These notions about what is important in life can vary greatly in different companies; in some settings people care deeply about money, in others about technological innovation or employee well-being. At this level culture can be extremely difficult to change, in part because group members are often unaware of many of the values that bind them together.

At the more visible level, culture represents the behavior patterns or style of an organization that new employees are automatically encouraged to follow by their fellow employees. We say, for example, that people in one group have for years been "hard workers," those in another are "very friendly" to strangers, and those in a third always wear very conservative clothes. Culture, in this sense, is still tough to change, but not nearly as difficult as at the level of basic values.

Each level of culture has a natural tendency to influence the other. This is perhaps most obvious in terms of shared values influencing a group's behavior -- a commitment to customers, for example, influencing how quickly individuals tend to respond to customer complaints. But causality can flow in the other direction too -- behavior and practices can influence values. When employees who have never had any contact with the marketplace begin to interact with customers and their problems and needs, they often begin to value the interests of customers more highly.

Conceptualized in this way, culture in a business enterprise is not the same as a firm's "strategy" or "structure," although these terms (and others such as "vision" or "mission") are sometimes used almost interchangeably because they can all play an important part, along with the competitive and regulatory environment, in shaping people's behavior (see exhibit 1.2). Strategy is simply a logic for how to achieve movement in some direction. The beliefs and practices called for in a strategy may be compatible with a firm's culture or they may not. When they are not, a company usually finds it difficult to implement the strategy successfully. But even when successfully implemented, the behavior patterns that represent a given strategy are not cultural unless most group members tend actively to encourage new members to follow those practices.

Structure refers to certain formal organizational arrangements. Such arrangements may call for behavior that is already pervasive in a firm for cultural reasons. They may call for actions that are not in the culture but are in no way incompatible with it. Or they may call for practices that are at odds with the culture. In this last case, we often find that people differentiate the "formal organization" from the "informal organization."

Although we usually talk about organizational culture in the singular, all firms have multiple cultures -- usually associated with different functional groupings or geographic locations. Even within a relatively small subunit, there may be multiple and even conflicting subcultures. Large and geographically dispersed organizations might have hundreds of different cultures. When people talk of "the corporate culture," they usually mean values and practices that are shared across all groups in a firm, at least within senior management. Using the same logic, a "divisional culture" would be the culture that is shared by all the functional and geographical groups in a division of a corporation.

Firms have cultures because the conditions needed for their creation are commonplace. As MIT's Edgar Schein and others have well demonstrated, all that seems to be required is that a group of employees interact over a significant period of time and be relatively successful at whatever they undertake. Solutions that repeatedly appear to solve the problems they encounter tend to become a part of their culture. The longer the solutions seem to work, the more deeply they tend to become embedded in the culture. Thus, if management increases advertising expenditures whenever revenues cease to grow and that action always appears to increase sales significantly, this behavioral pattern will likely become a part of the firm's corporate culture. Depending upon the specific circumstances, a related value or belief -- perhaps "Ads are great in a downturn," or "Selective advertising is valuable" -- may also become a part of that culture.

Ideas or solutions that become embedded in a culture can originate anywhere: from an individual or a group, at the bottom of the organization or the top. But in firms with strong corporate cultures, these ideas often seem to be associated with a founder or other early leaders who articulate them as a "vision," a "business strategy," a "philosophy," or all three.

Once established, organizational cultures often perpetuate themselves in a number of ways. Potential group members may be screened according to how well their values and behavior fit in. Newly selected members may be explicitly taught the group's style. Historical stories or legends may be told again and again to remind everyone of the group's values and what they mean. Managers may explicitly try to act in ways that exemplify the culture and its ideals. Senior members of the group may communicate key values over and over in their daily conversations or through special rituals and ceremonies. People who successfully achieve the ideals inherent in the culture may be recognized and made into heroes. The natural process of identification between younger and older members may encourage the younger members to take on the values and styles of their mentors. Perhaps most fundamental, people who follow cultural norms will be rewarded but those who do not will be penalized.

rdCultures can be very stable over time, but they are never static. Crises sometimes force a group to reevaluate some values or set of practices. New challenges can lead to the creation of new ways of doing things. Turnover of key members, rapid assimilation of new employees, diversification into very different businesses, and geographical expansion can all weaken or change a culture.

Sufficient crises and turnover, coupled with the lack of perpetuating mechanisms, can destroy a culture or make it very weak. But conversely, cultures can grow to be extremely strong -- where there are many common values, behavior patterns, and practices, and where the levels of culture are tightly interconnected. Continuity of leadership, stable group membership, geographical concentration, small group size, and considerable success all contribute to the emergence of strong cultures.

Cultures can have powerful consequences, especially when they are strong. They can enable a group to take rapid and coordinated action against a competitor or for a customer. They can also lead intelligent people to walk, in concert, off a cliff. One of the very earliest examples of modern business research concluded that work groups in organizations could develop their own unique cultures and that those cultures could hurt or help a firm's performance. This idea received limited attention outside academia until the late 1970s when an interrelated group of people, most of them associated with a small set of universities and consulting firms (Harvard, Stanford, MIT, McKinsey, and MAC), began asserting the importance of what they called "corporate" or "organizational" culture. Their claims were based mostly on three kinds of research: of Japanese firms that consistently outperformed their American competition; of U.S. firms that were doing well despite the increasingly competitive business environment that began to emerge in the 1970s; and of companies that were trying to develop and implement competitive strategies to cope with that new environment, but were having difficulty doing so.

In each of these cases, despite differences in initial research focus, terminology, and methodology, the fundamental conclusions were very similar and very dramatic: all firms have corporate cultures, although some have much "stronger" cultures than others; these cultures can exert a powerful effect on individuals and on performance, especially in a competitive environment; this influence may even be greater than all those factors that have been discussed most often in the organizational and business literature -- strategy, organizational structure, management systems, financial analysis tools, leadership, etc.; the very best American and Japanese executives often devote time and energy expressly to creating, shaping, or maintaining strong corporate cultures.

The first book-length reports of this work received a great deal of attention. After a decade of increasing competitive intensity in most U.S. industries, an environment in which firms did not perform as well as they did in the 1950s and 1960s, many people were looking for new answers and new ideas, and something in these books rang true. Despite somewhat radical, or at least unconventional, conclusions, the four books published in 1981 and 1982 -- Ouchi's Theory Z, Pascale and Athos's The Art of Japanese Management, Deal and Kennedy's Corporate Cultures, and Peters and Waterman's In Search of Excellence -- all became best sellers. In Search of Excellence broke nonfiction book sales records.

The resulting impact on both management and public opinion was unusually large. In 1989, less than a decade after the term "corporate culture" came into general use, Time, Inc., blocked a hostile bid by Paramount by arguing that its culture would be destroyed or changed by the takeover, to the detriment of its customers, its shareholders, and society. When the chancery judge ruled in Time's favor, he said (in part) "that there may...be instances in which the law might recognize a perceived threat to a 'corporate culture' that is shown to be palpable (for lack of a better word), distinctive, and, advantageous."

The successes of the first four "culture" books encouraged dozens of additional studies. Some of these subsequent studies offered theories about the relationship of culture and performance that depart radically from those found in the first four. A few scholars have even questioned whether there is any generalizable relationship between culture and performance. This more recent work was also critical of earlier ideas about cultural change. Some people have even questioned whether a firm's management can successfully manipulate a corporate culture, especially since it is difficult to find convincingly documented cases of cultural change.

It was against this background that we launched our research in 1987.

Between August 1987 and January 1991, we conducted four studies to determine whether a relationship exists between corporate culture and long-term economic performance, to clarify the nature of and the reasons for such a relationship, and to discover whether and how that relationship can be exploited to enhance a firm's performance.

Many factors influence the performance of firms. Here, we are interested in the potential impact of one element only -- corporate culture (not subunit cultures). Because of the complexity of the relationships involved and the difficulty of measuring various factors, research of this sort is almost impossible to do with great rigor. Nevertheless, we tried in our four studies to be as systematic and precise as possible.

Our first inquiry was focused on the largest 9 or 10 firms in twenty-two different U.S. industries. We attempted to test the most widely accepted theory linking corporate culture to long-term economic performance. The results of this work are reported in Chapter 2. In the second study, we tested two more culture/performance theories, this time by examining in more depth a small subset (22) of the original 207 firms. This work is discussed in Chapters 3 and 4; Chapter 5 is a detailed description of one of those cases. The third study examined 20 firms that appear to have had cultures that hurt their economic performance. The results of that inquiry can be found in Chapter 6. Our last project focused on 10 firms that seem to have changed their corporate cultures within the recent past and then benefitted economically. That study is discussed in Chapters 7 and 8; Chapters 9 and 10 are descriptions of two of those ten cases.

In total, our studies strongly suggest that the early corporate culture books were very much on the right track, although they failed in some important ways -- not unusual in the case of pioneering work. More specifically, our studies show that:

1. Corporate culture can have a significant impact on a firm's long-term economic performance. We found that firms with cultures that emphasized all the key managerial constituencies (customers, stockholders, and employees) and leadership from managers at all levels outperformed firms that did not have those cultural traits by a huge margin. Over an eleven-year period, the former increased revenues by an average of 682 percent versus 166 percent for the latter, expanded their work forces by 282 percent versus 36 percent, grew their stock prices by 901 percent versus 74 percent, and improved their net incomes by 756 percent versus 1 percent.

2. Corporate culture will probably be an even more important factor in determining the success or failure of firms in the next decade. Performance-degrading cultures have a negative financial impact for a number of reasons, the most significant being their tendency to inhibit firms from adopting needed strategic or tactical changes. In a world that is changing at an increasing rate, one would predict that unadaptive cultures will have an even larger negative financial impact in the coming decade.

3. Corporate cultures that inhibit strong long-term financial performance are not rare; they develop easily, even in firms that are full of reasonable and intelligent people. Cultures that encourage inappropriate behavior and inhibit change to more appropriate strategies tend to emerge slowly and quietly over a period of years, usually when firms are performing well. Once these cultures exist, they can be enormously difficult to change because they are often invisible to the people involved, because they help support the existing power structure in the firm, and for many other reasons.

4. Although tough to change, corporate cultures can be made more performance enhancing. Such change is complex, takes time, and requires leadership, which is something quite different from even excellent management. That leadership must be guided by a realistic vision of what kinds of cultures enhance performance -- a vision that is currently hard to find in either the business community or the literature on culture.

What kinds of corporate cultures enhance long term economic performance? We address this basic issue next.

Copyright © 1992 by Kotter Associates, Inc. and James L. Heskett