Workplace Issues

Corporate Culture Quantified?

In a new book, Harvard professor James Heskett takes a stab at a quite challenging quantification puzzle.
David McCannOctober 4, 2011

James Heskett’s 1992 book, Corporate Culture and Performance, is still considered a classic business work. Heskett and co-author John Kotter had been looking to establish a relationship between corporate culture and performance. They saw that companies with strong cultures had both good and bad performance, which initially led them to conclude that perhaps there wasn’t any such relationship.

But they ultimately found that what really distinguished good and bad performers was the adaptability of cultures. They concluded that organizations need both strong and adaptable cultures to survive over long periods of time.

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In his newly published book, a sequel of sorts called The Culture Cycle: How to Shape the Unseen Force that Transforms Performance, Heskett goes further, including an attempt at the somewhat daunting task of quantifying the impact of culture on performance. An edited version of a recent interview with the Harvard Business School professor follows.

Have there been any fundamental overall changes in corporate cultures over the past two decades?
One of the things that prompted me to do the new book was a finding by The Conference Board that only 45% of the people employed in this country were satisfied with their work. That’s as many as 85 million who were not satisfied, which is a lot of dissatisfaction. And the survey was taken at a time when people presumably should have felt fortunate just to be employed.

Do the causes of that mood go beyond things like low pay raises and poor retirement plans?
It’s much more basic than that. It’s leadership that doesn’t live up to its promises, which leads to low levels of trust, and without trust it becomes difficult to implement policies and practices that are essential to strategies.

In some companies, culture can explain up to half the difference in operating income compared to similar organizations. So it’s a big deal. And yet, unless the importance of culture is quantified, it generally doesn’t get managed in any systematic way, which is why job satisfaction is so poor.

So, here’s the million-dollar question: How do you quantify culture?
You need a lot of different information. When I was collecting the information for my new book, I found that organizations readily had about a third of what I needed to make the necessary calculations. And at least a third of the information I wanted was thought not to exist within the organization. So I had to make some assumptions.

But I quantified the impact of culture on performance by several measures, including the loyalty of a company’s employees, the frequency with which they recommend other people to work for the company, the relative productivity of comparable organizations –  some of which can be attributed to culture – and the company’s relationship with its customers, expressed in terms of their loyalty and willingness to refer other business to the company.

Is much of that data based on employee surveys?
Some of it. The backup information that explains why people are loyal, for example, is provided by employee surveys. Some organizations today are just starting to ask employees whether they trust the person they work for and the people they work with, and whether they get frequent feedback, have the opportunity for personal development, and are given the latitude to deliver results on the job. But at the time I was trying to do my measurements, I didn’t that find much of that explanatory data existed.

What’s the key to winning employees’ trust?
Making some assurances to people when they’re hired and then living up to those assurances. Don’t create too many expectations, but create no expectations that you can’t fulfill. That’s the basis for trust going forward. And I saw huge differences in the level of trust between comparable organizations.

In my book, I don’t prescribe any policies or practices, like delegation or transparency or anything like that. But whatever it is that management deems important to the company’s performance, you’ve got to have trust in order to implement it.

But policies and practices are important, aren’t they?
Sure. The cultures I observed that were particularly effective did implement practices and policies that lead to what we call “learning organizations,” which are innovative and experimental in nature.

3M, a company that almost defined the term, still gets 31% of its income from products that are five or fewer years old. In an age when we celebrate Apple, there’s 3M out there, still pumping away and harvesting the fruits of a learning organization.

But how are such cultures sustained indefinitely? Isn’t it inevitable that they will change as top managers leave and the board turns over?
Cultures are sustained by a certain continuity and leadership. That doesn’t necessarily mean all you do is promote people from within. But it does mean you probably promote people who, regardless of whether they have experience in other organizations, understand what makes your company go. That’s why what’s going on at HP is such a shame.

When we were writing Corporate Culture and Performance, one pair of companies we looked at was Hewlett-Packard and IBM. At that time, HP was the one with a strong and adaptive culture and good performance, while IBM had a strong culture but poor performance. It shows you how things change over time. Bringing in one outsider after another, as HP is doing, can pretty well destroy a culture.

3M has leadership changes, but most occur from the inside. Very few people from outside come in. Instead, the company relies on what I would call the “outside insider” to provide new ideas. These are typically people who have succeeded in some outlying portion of the business, not in the core business, who are brought in to lead the company.

There are companies where “how we do things here” is so deeply engrained that the heroes are the people who epitomize that. That is a very strong source of continuity.

Do employees tend to like that kind of culture, where “how we do things around here” is really well known?
They love it.

There aren’t typically reactions against rigidity and inflexibility?
Ah, but see, you equate it with rigidity. “How we do things around here” is well known at Google, for example. There, find your own job, basically. People are hired with the knowledge that that’s how things are done around there, so they’re not surprised that there is very little structure of a traditional nature imposed on them.

What is it that companies don’t do, or fail at, that creates the need for the information in your book?
First, as I said, the biggest enemy of effective culture is inconsistent leadership behavior: not knowing what’s valued and what isn’t. And leadership turnover leads to a poor sense of mission. But there are lots of other things. Some companies grow too fast. Some don’t grow fast enough. Others experience too much nonorganic growth, bringing in cultures from different industries.

Failure to maintain a small-company feel is another problem. For example, at Nucor Steel, no more than a couple hundred employees are at any one facility, so they will develop the spirit of the company and make sure everybody in this small group pretty much adheres to it.

And there can be a lot of politicization; a rise in bureaucracy. The list of things that can damage or destroy a culture goes on and on.