Culture Impacts Performance
Updated: Feb 5
This is the second in a series of blog posts about our 10 Culture Principles. Many of those in today’s modern business world have somehow replaced the impact of human behavior on business performance with an almost maniacal focus on numbers, budgets, variances, costs, EBITDA and profit margins. We tend to manage with spreadsheets instead of managing and interacting with the people who actually produce the goods, buy the goods, and pay for the goods. The invisible hand of corporate culture has a great deal of influence on business performance. Culture embodies the human activity in an organization, and directly impacts costs and profits. For example, the following are the knock-on cost impacts of corporate culture:
Job satisfaction and employee engagement help in recruiting potential employees with similar characteristics.
Recruiting, hiring, and training costs are reduced when a large percentage of new hires come from referrals by current or former employees.
A strong culture fosters openness to new ideas and suggestions for cost savings and innovative ways of doing things.
New employees who join because they are attracted to the organization’s values and culture improve retention rates and lower turnover costs.
Greater retention rates keep wage levels more stable. High turnover tends to inflate wage scales for everyone, particularly at higher levels of management.
Employees who remain longer deliver higher productivity per dollar of compensation, or in economic terms, Returns-To-Labor.
Higher employee continuity leads to better relationships with customers, which in turn produces higher sales levels, customer retention and more word-of-mouth customer referrals, resulting in lower overall marketing costs.
One of the few research studies on a causal link between culture and business success comes from data collected from 95 franchise automobile dealerships over a six-year period. The study determined that the measure of current culture consistently predicts future ratings of both customer satisfaction and car sales, but not the other way around. The "Jaws of Culture" We can look at Culture through the analogy of Jaws, the 1975 Hollywood movie. In the film, a Great White Shark overcomes numerous attempts to banish or kill him. We can use him as an example in our “Jaws of Culture”.
Many business improvement initiatives, with extensive market research, followed by specific plans and milestones are regularly launched inside companies, but few make it through the “Jaws of Culture”.
A corporate culture whose default behaviors, mindsets and business practices are out of alignment with new initiatives being introduced, will quickly find ways, often covert, to block the required changes. Corporate Culture lies at the heart of most failed corporate initiatives, and in certain cases even corporate failures. On the other hand, a culture designed to be agile and receptive to change can actually help propel the uptake and delivery of new initiatives. Strategy – Structure - Culture The relationship between an organization’s culture and business performance is easy to see with the understanding that strong performance comes when strategy, structure and culture are aligned and interlinked.
In top-performing companies, these three critical business elements are in alignment. Everyone knows where they are going (strategy), it’s clear who does what in the organization (structure), and everyone understands the ground rules for working together and getting things done (culture).
With the explosion of technology, globalization, aggressive new competition and shifting regulations, companies are often forced to develop and implement new strategies quickly. In order to adapt successfully, it is often necessary to reorganize in order to line up the organization to match the new strategy. The problem is, that’s as far as most senior teams take it; thinking that improved performance should naturally follow. Because most CEOs and senior executives are often insulated from the real internal culture within their organization, it becomes difficult to see the link between culture and performance. It also becomes difficult to see when the existing culture is no longer aligned with the new demands of the business. Many organizations get into trouble not because of a failed strategy, but because of a rigid culture. Unless there is work done to reshape corporate culture, the old culture can act as an anchor, slowing down and in some cases even stopping what might otherwise be an effective strategy execution. To fully implement a new strategy or to rebuild your organization to be effective in a changed world, it is also critical to reshape your corporate culture. Those who understand the relationship between culture and business performance also see culture as a competitive advantage. Southwest Airlines, with a record of 44 consecutive years of positive net income, stands out in an industry plagued by losses and bankruptcy. The founder, Herb Kelleher, believes the Southwest culture, which is a combination of a low-cost business model, teamwork by all staff to reduce turnaround time, hiring for cultural fit, and an ethos of making flying fun, is their major competitive advantage. To those interested in competitive advantage and company performance, culture can be either an enabler or a barrier. Corporate culture is not just physical work behaviors, but also company mind-sets and habitual ways of thinking. And many successful and growing companies are built on a strong foundation and an adherence to their stated culture, which is often described as behaviors or truths or operating principles and are built in to every aspect of the organization. “My main job today? I work hard at helping to maintain the culture” ~ Jeff Bezos