Culture clash: When corporate culture fights strategy, it can cost you

March 30, 2011

"Culture is everything," said Lou Gerstner, the CEO who pulled IBM from near ruin in the 1990s. When he took the helm in 1993, Big Blue was on the verge of being diced up division-by-division into a collection of "Baby Blues." Gerstner stopped that transformation but pushed another one -- a transformation of corporate culture. "I came to see in my time at IBM that culture isn't just one aspect of the game; it is the game," Gerstner wrote in Who Says Elephants Can't Dance?, a memoir of those turbulent turnaround days. 

Culture change may have brought IBM back from the brink, but does it always impact corporate effectiveness? Yes, it does, says Angelo Kinicki, professor of management at the W. P. Carey School of Business.
 
Kinicki teamed with researchers Chad Hartnell and Amy Yi Ou to see if different types of corporate cultures achieve the results that management gurus expect. In fact, the team found that sometimes cultures bring surprising outcomes. Even so, Kinicki said this study reaffirmed his belief that leaders "need to create a match between culture and corporate strategies."
 
Our way of doing things
 
In textbook terms, Kinicki defines culture as "the set of shared, taken-for-granted, implicit assumptions that a group holds and that determines how it perceives, thinks about and reacts to its environments." In simpler terms, he says it's "the shared beliefs, values and assumptions we have about where we work."
 
To evaluate culture's impact on organizational effectiveness, Kinicki and his colleagues started with what management scholars call the "competing values framework" (CVF), so named because it measures organizational values  along two axes: The horizontal axis evaluates whether companies are internally or externally focused. The vertical axis looks at degrees of flexibility and self-discretion versus stability and control.
 
Put together, the two axes form four quadrants into which the CVF framers placed four corporate culture types. For instance, flexible but internally focused organizations are said to have a "clan" culture that focuses on collaboration and teamwork, invests in employee development and empowerment and generally results in high employee morale and commitment. "Hierarchy" cultures also are internally focused, but more centered on stability. In such organizations, the focus is on control, the means used to achieve it is process orientation and the result, presumably, is an efficiently run organization.
 
In an "adhocracy" culture, the organization leans toward the flexibly end of the vertical axis, but it is more externally focused. The main goal of such an organization is to create; adaptability, creativity and agility are encouraged, and the result is a high degree of innovation. Finally, there's the "market" culture. It, too, is more externally focused, but it also tends to impose more control on employees. In market cultures, the focus is to compete, the means to succeed includes strong focus on customers, productivity and competitiveness, and the expected result is increased market share and profitability.
 
Considering the CVF, the W. P. Carey School researchers wondered if market cultures really were more profitable and, given their customer focus, more likely to have high quality goods and services. Likewise, were clan cultures more likely to have higher employee satisfaction and commitment than adhocracy and market cultures? Would adhocracy cultures top clan and market cultures in producing  innovation?
 
Such were the questions the team sought to answer because, when they started the research, no one had accumulated research regarding the relationship between culture types and measures of organizational effectiveness. Rather, there were a lot of anecdotal and qualitative conclusions about this important relationship. The team wanted to let the data speak for itself.
 
Paper chase
 
Kinicki and his team used meta-analysis, a statistical methodology in which researchers combine results from all available empirical studies to probe their hypotheses. Noting that there have been some 4,600 papers written on corporate culture since 1980, this team spent three years reading papers, pulling out data that applied to their investigation, assigning numeric codes to the relevant findings so that results could be statistically compiled and then crunching the numbers.
 
All told, the researchers coded results from 84 studies reporting results from a combined total of over 1,000 organizational units or samples.  Meta-analysis requires a variety of studies on a topic to be meaningful and, as Kinicki points out, hierarchy cultures aren't as often studied as other cultures, so the team felt they had insufficient data to include such cultures in the final analysis.
 
But, the other cultures were mapped against nine measures of corporate effectiveness, including employee attitudes of job satisfaction and organizational commitment,  innovation, quality of products and services, and various measures of financial performance.
 
Market leaders
 
"Clan cultures had a more positive relationship with employee attitude variables, like job satisfaction and organizational commitment. There, organizational theory worked," Kinicki says. Adhocracy cultures, where organizational theorists would expect to see the greatest amount of innovation, came in second behind market cultures for this measure.
 
As predicted, market cultures did have strong correlations with quality of services and goods. Market cultures beat adhocracy cultures in this area, as expected, but they didn't significantly trump the quality results from clan cultures. The quality-oriented strength of clan cultures was an unanticipated finding. However, market cultures did have "significantly stronger positive associations with profit than clan and adhocracy cultures," the team found.
 
In terms of generating targeted results and proving their effectiveness, "market cultures were the best," Kinicki says. "They had the highest innovation, the second highest quality of products, and they were the most profitable. That was a surprise to us."
 
But, it wasn't a complete surprise. Based on his research and consulting experience, Kinicki says he's seen companies with blends of cultures that should, according to organizational theorists, be in conflict, yet the companies thrive. He believes this occurs when companies learn to mesh different and conflicting culture types into a cohesive esprit de corps.
 
"Take Southwest Airlines," he says, noting that this carrier is one of the few, if not the only, major player in the airline industry that has managed to remain consistently profitable over the last decade . In fact, 2010 was the airline's 38th consecutive year of profitability, and the carrier also has had the lowest ratio of passenger complaints to the U.S. Department of Transportation among domestic carriers since 1987. Although clan and market cultures are supposed to clash according to the management experts, this company makes the two cultures work in harmony.
 
"Southwest turns a plane faster than any other airline and they're making money. They're clearly market focused," Kinicki notes, adding that most market-focused companies reward employees with individual bonuses. "But, Southwest is just the opposite. Their reward is profit-sharing, everybody working as a team … clan culture." 
 
Kinicki believes this is how Southwest and other companies achieve stellar results. "Clan and market cultures are based on conflicting values, but we found they're actually correlated. What this means to me is that companies are figuring out how to overcome incompatible cultural values.  Southwest was able to get competing culture types to work together by making modifications in their policies and procedures," he explains.
 
According to Kinicki, this is the "secret elixir" that could turn any company around. "You really don't want to have just one type of culture," he continues. "You want a combination, but the combination should be based on what the organization is trying to accomplish—it's corporate strategy.  So, if you're interested in innovation, encourage adhocracy and market cultures. Clan won't hurt you on that one either. But, if it's financial performance you seek, I'd say build a market culture, then add cultural characteristics associated with a clan culture to the mix."
 
Rise and fall
 
Building a culture could take three years or more, he adds. And, if you try to make your company change culture too quickly, it will cost you. As an example, Kinicki turns to Bob Nardelli, who was fired as CEO of Home Depot after alienating fellow business leaders and losing market share. "What was he known for at GE? Market culture and centralization of power and authority at the corporate offices. These practices are indicative of  market and hierarchy cultures. But Home Depot's founders believed in empowering the individual stores to make their own policy. Nardelli comes in and pushes his own strategy and guess what? It failed because the culture was inconsistent with his strategy."
 
According to Kinicki, strategies that conflict with culture are bound to fail. "Senior executives need to consciously discuss and evaluate the type of culture that will be consistent with strategies."
 
The same is true on a smaller scale for lower-level managers. "Culture exists at a department or unit level, so if I'm a unit manager, I can create and reinforce the culture I want," he continues.
 
Embedding a culture can be done in big and small ways, he adds. Incentives, for instance is one of the big sticks. Role modeling and story-telling are smaller ways unit-level leaders could influence culture change. "It's incremental," Kinicki says.
 
While companies tend to have an over-riding culture, geographic locations, departments, functional areas or other units are likely to have subcultures, and that's just fine by Kinicki.
 
"What we concluded from this study is that market cultures may be the best from a broad view, but it's really the interactions of the culture types that can lead to the highest success," he notes. The biggest error is under-appreciating corporate culture's importance or ignoring it all together when charting out strategy. "That's a mistake," Kinicki says, adding a popular Peter Drucker quote: "Culture eats strategy for breakfast."
 
Bottom line
  •  Organizational theorists expect different types of corporate cultures to deliver differing results that reflect cultural focus.
  • According to organizational theory, market cultures are expected to be more profitable than others; clan cultures should have higher employee morale and commitment; adhocracy cultures should be more innovative; hierarchy cultures are expected to be more efficient.
  • Researchers at the W. P. Carey School of business examined results from dozens of studies to test organizational effectiveness at created the expected results from various culture types.
  • The team found that clan cultures did produce higher employee satisfaction than others, but market cultures produced the best financial results and innovation, as well as the second highest degree of product and service quality.