Demystifying Corporate
Culture
Why people do what they do
Authors
Ira Gaberman, partner, London
[email protected]
Ingrid Devoi, principal, Amsterdam
[email protected]
Kevin Crump, consultant, Atlanta
[email protected]
Marieke Witjes, consultant, Amsterdam
[email protected]
A
strong organizational culture is a business advantage that helps
generate and maintain top-level performance. This is an obvious,
intuitive statement that all business leaders understand and
discuss. Yet, while many try to create a high-performing culture, few
succeed. Why? Is it that difficult? Not really. The key to culture is understanding that the perceptions of the workforce are as significant in
shaping behaviors as the formal mechanisms.
Given the importance of getting corporate culture
right, many organizations invest heavily in shaping their cultures and influencing the behaviors of
their workforces—but how many organizations
derive maximum value from this investment?
Does the money spent on developing and communicating mission statements and corporate
values really change employee behavior? Or are
there hidden, more powerful forces at work that
make this investment ineffective? And if the
investment in shaping culture does bring about
change, is it promoting behaviors that support
performance and strategy delivery, or is it inadvertently encouraging sabotage behaviors?
The key to developing corporate culture,
particularly one that becomes a source of competitive advantage, requires gaining insight into how
culture is formed, including the important role
that employees’ attitudes and perceptions play in
the process. Organizations that take time to
understand the process and develop a highly
engaged workforce can expect to see significant
performance improvements. For those that create
a culture aligned with their business strategy, the
rewards are greater still: a workforce acting in
unison as a dedicated powerhouse, moving the
organization toward its strategic goals.
Getting Culture Right: Why It Matters
Numerous studies and organizational examples
highlight the relationship between a highly
engaged workforce and company performance.
We know intuitively that highly engaged staff
improve customer service, generate more innovation, advocate more for their organization, deliver
higher quality, have lower rates of absenteeism
and stay with employers longer. Studies by leading
researchers, such as the Corporate Leadership
Council and Gallup Group, support this thinking. We also know that an engaged workforce
generates better financial results. The Employee
Engagement Report by Towers Watson-ISR found
that among companies with high levels of employee
engagement, operating income improved by 19.2
percent, while companies with low levels of
engagement saw their operating incomes decline
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by 32.7 percent over the same 12-month period.1
Essentially, companies with engaged workforces
had 50 percent higher levels of operating income.
Numerous other studies reveal similar results,
and the experience of many organizations further
reinforces this causal relationship. The MacLeod
Report, developed for the U.K. government, for
example, is replete with examples of the benefits
of widespread workforce engagement.2
Aligning Strategy and Culture:
Closing the “Culture Lag”
Having a highly engaged workforce is not
enough, however. It is equally important that
organizational culture and strategy are aligned.
A workforce that is pulling in the wrong direction—one that operates with enthusiasm but
contrary to strategic intent—is detrimental to
performance. A workforce that operates with
enthusiasm and pulls in the right direction delivers improved performance and makes a significant
impact on an organization’s ability to achieve its
strategic goals.
Indeed, getting the right mix of strategy and
culture creates a formula for business success.
Pursuing a strategy of innovation in a dynamic
market can only succeed within an inquisitive
culture where the workforce pushes boundaries
and management encourages new ideas and constructive risk-taking. Similarly, pursuing a strategy of high-volume, low-cost processes can only
succeed within a disciplined culture where the
workforce operates in an efficient, repeatable production environment with a mindset for continual cost improvement.
Many combinations of strategy and culture fit
are broadly intuitive. What is less obvious is the
“culture lag” that occurs when the culture fails to
shift in line with strategy and the performance
risk that arises as a result.
Keeping culture aligned with strategy is a significant challenge given the constantly changing
dynamics of markets and the need to adjust and
re-direct strategy as a result. Cultures cannot
change immediately. Culture change, especially
across large and complex organizations, is often
a slow and gradual process.
Culture misalignment is inevitable with any
significant shift in strategic intent and direction.
Organizations that understand the resulting lag
and actively work to reduce the time before
culture and strategy are realigned are in the best
position to succeed. The speed with which this lag
is closed improves with an intimate understanding of what drives culture.
Procter & Gamble is a good example. When
A.G. Lafley was appointed CEO in 2000, he
inherited a global business with a large product
range across a diverse consumer population; but
the company had only a 15 to 20 percent commercial success rate of new brands and products.
At the time, most employees viewed their roles
broadly in terms of development and delivery.
Brand and product innovation was left to 12,000
R&D people and engineers and was considered a
core in-house competency that gave P&G market
advantage. That year, only 10 percent of innovation ideas came from external sources.3
Lafley recognized a need to change. He put
customers at the front of all innovation decisions
(prioritizing customer experience over technical
advancements), and he made innovation integral
to the company’s strategy. To succeed, P&G needed
to ensure that innovation reflected deep under-
Performed in 2006, the Employee Engagement Report by Towers Watson-ISR was a global, 12-month study of engagement levels and performance
of 664,000 employees from 50 countries.
2
MacLeod Report “Engaging for success: enhancing performance through employee engagement”
3
P&G’s Secret: Innovating Innovation,” IndustryWeek, 1 December, 2004
1
2
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standing of customer needs and perceptions, and
top executives needed to accelerate the pace of
innovation dramatically. This could not be done
internally only, and it could not be done at all
unless the entire organization embraced new ways
of working. P&G introduced its Connect + Develop
strategy, where innovation is developed collaboratively across the organization and with external
partners.
The strategy required a culture of
trust and open exchange across the organization and with key external players. It
required the workforce to make fundamental changes: increased focus on the
end customer, greater curiosity and
openness to new ideas, and significantly
more internal and external collaboration.
The prevailing culture of “not invented
here” was changed to “proudly found
elsewhere.” Organization structures, systems, communications and even recruitment reinforced the new culture and the
desired behaviors. The result was a closing of the
gap between the old thinking and the new innovation-driven strategy and an organization that was
aligned for success. Today, P&G’s Connect +
Develop strategy has resulted in more than 1,000
active agreements with external parties. During
Lafley’s tenure, sales doubled, profits quadrupled,
and the company’s market value increased by
more than $100 billion.
The ability to connect emotionally with the
workforce and redirect attitudes is a key factor in
closing a culture gap, thus changing commitments and behaviors. Steve Jobs did just that
when he rejoined Apple in the late 1990s as Apple
was struggling with competition, troubled products, manufacturing backlogs, lost market share,
shrinking revenues and loss of employee talent. In
4
1996, Apple failed to make a profit. With frequent changes at the executive level, Apple lacked
a clear strategy. Customers grew uncertain about
what the brand stood for. The company’s culture
became equally unclear. Leadership, management
and the workforce were not aligned. A number of
products seemed out of touch with customer
interests. By 1997, with losses mounting, people
began to speak of Apple having lost its way.
A workforce that operates
with enthusiasm and pulls in
the right direction delivers
improved performance.
When Steve Jobs returned to Apple, he immediately set out to transform the business. In addition to trimming product lines, investing in
product design, terminating licensing agreements
and entering into agreements with Microsoft, he
also created a powerful narrative for the workforce
around the journey they were taking and the
importance of the mission. He re-energized the
innovative culture where the company had its
roots and engaged all employees in an emotional
commitment to drive and deliver the new strategy
of innovation and trend setting. As part of that,
he launched Apple’s first major ad campaign in
a decade —“Think Different”— a slogan that
captured what Jobs wanted both customers and
employees to do with the Apple brand. In 1998,
the company regained profitability.4
Regaining profitability was also partially the result of a downsizing and reorganization program initiated in 1997.
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The journeys P&G and Apple took are not
unusual. Markets change, organizations must
realign their strategies to accelerate or recover performance, and cultures must be adjusted to help
realize new strategies. Getting this right leads
to improved performance. Getting this wrong,
including failing to move swiftly to close the culture lag, saps performance. The simple matrix in
figure 1 highlights these movements at Apple.
Leaders understand and, even better, predict the
possible misalignments that occur at points in
their organizational journey and act quickly to
correct them.
The triggers that make strategic change and
therefore cultural change necessary can be external or internal. A typical external trigger might
be new regulations on pricing that prompts an
increased focus on value-added services and
Strong strategic fit
Weak strategic fit
The extent to which the
strategy fits the market
Figure 1
Apple reached peak performance by aligning
its strategy and culture
Average performance
Peak performance
(great strategy, but not
aligned with the culture)
Late
1990s
Mid
2000s
Mid
1990s
Late
1980s
Weak
W
k performance
f
Average
performance
A
f
(great culture, but not
aligned with the strategy)
Weak culture
alignment
Strong culture
alignment
The extent to which the culture
aligns with the strategy
Source: A.T. Kearney analysis
4
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competition and forces a shift from mid-market
products to low-cost leadership. Internal triggers
that disrupt organizations and cultures include
mergers, corporate carve-outs and new product
and market entries.
It is one thing to anticipate and recognize the
triggers likely to cause a culture lag, but how does
an organization measure and evaluate a force as
abstract as culture? The answer resides in understanding how corporate culture is created and
how it shapes workforce behaviors.
Dissecting Corporate Culture
At a visible level, corporate culture is defined by
a range of formal mechanisms used to set direction, tone and pace. These mechanisms, which
include the strategy, organization structure, rules,
mission statements, values and role model descriptions, are designed and framed to encourage
desired behaviors. Yet the link between formal
mechanisms and desired behaviors is not a direct
one. There is a complex set of interpretation and
emotional filters that stand between them (see figures 2 and 3). Presented with the visible components of corporate culture, employees will first
interpret them and then formulate an emotional
response before consciously or subconsciously
deciding if and how to act on them.
Organizational rules provide a good example
of how formal mechanisms pass through the
filters of interpretation and emotion in a business
setting. In every organization, every rule introduced is assessed by the workforce in terms of how
serious management is in enforcing compliance,
the benefits of compliance, the effort to comply
and the costs of non-compliance. That interpretation is influenced by observation and experience of the way rules are or are not monitored and
how lack of compliance is addressed. Everyone
has a story about how they managed to operate
Figure 2
What stands between formal mechanisms
and desired behavior?
A.T. Kearney corporate culture framework
Formal (identity)
organizational mechanisms
Perceptions
and judgments
Attitudes
and feelings
Visible mechanisms
Behaviors
Visible mechanisms
Emotional layer
Interpretation layer
Articulated layer
Source:
A.T. Kearney analysis
around the rules. In many cases, management
purposely ignores non-compliance. Stories about
“the way things get done here” get shared and
quickly become the unwritten rules by which
people operate.
The challenge in defining and developing
a culture is to understand that the perceptions,
judgments, attitudes and feelings of the workforce
are as significant in shaping actual behaviors as the
formal mechanisms. Any change to formal mechanisms must acknowledge the filtering layers that
shape actual behavior. Companies often get this
wrong. Leadership and management form a topdown view of changes required and invest in changing the formal mechanisms and identities without
first establishing an intimate understanding of
workforce perceptions and attitudes. Some fail to
consider the unintended reactions likely to result
from their actions and neglect to ensure that formal
and informal mechanisms are correctly aligned.
Figure 3
Dissecting the corporate culture
Formal
tion
organization
Formal
ident
identity
Strategy, goals,
measures
Perceptions
and judgments
Organization
structure and JDs
Attitudes
and feelings
Rules and
procedures
Visible
e mechanisms
Formal
Form organization drivers
Behaviors
Mission
statements
Corporate
values
Behavior of leaders
and role models
Formal identity drivers
vers
Processes
and systems
Visible mechan
mechanisms
Promoted
successes
Emotional layer
Rewards and
recognition
Strategic
partners
Interpretation layer
ted
Articulated
layer
Notes: The list is not exhaustive; CSR stands for corporate social responsibility.
Physical
identity
CSR* statements
and commitments
Artic
Articulated
layer
Source: A.T. Kearney analysis
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Yet the alignment of formal and informal
mechanisms—a consistent golden thread running through messages and actions—is crucial.
Despite best intentions, changes to formal policies
will always be distorted by employees’ experience
of what actually happens in the workplace.
A mission statement may be framed to encourage
innovation; but if employees observe that, in reality, they are penalized for risk-taking, no amount
of corporate coffee mugs or mouse pads emblazoned with the new mission statement will deliver
the desired result.
Corporate Culture: How One
Organization Got It Right
side in each operational geographic area. The
teams’ roles would be to gain local insights, collaborate closely with the workforce and secure
widespread commitment to transformation. We
also highlighted the importance of establishing a
thorough understanding of workforce views and
attitudes about the change. We helped the transformation lead teams to (1) identify and translate
local perceptions and concerns into targeted
messages and interventions, (2) act nationally
to address common perceptions and concerns
The ability to connect emotionally
A client of ours provides a good
with the workforce and redirect
example of how to get transformation right. This large national
attitudes is a key factor in closing
postal organization was undergoing its biggest operational
a culture gap.
transformation in 20 to 30 years.
Changes throughout its operations network — in customer
interactions and the collection process, in sorting (changing and refining formal mechanisms such
and delivery facilities, and across post offices— as processes, procedures and reward structures)
were having an impact on nearly every employee. and ensure those changes were consistent and
New technology and equipment were creating aligned, and (3) develop national and local transfundamental changes to customer interactions formation capabilities to drive and support the
and processing, but the workforce was reluctant to change.
support changes it perceived as affecting working All actions were based on knowledge gained
hours and pay. (An attitude of “this is how we in working closely at the local level and underhave always done it” was deeply embedded at all standing workers’ perceptions and emotional reaclevels.) For transformation to succeed, people tions to the planned changes. This allowed for an
needed to embrace, own and drive the change, intimate understanding of which values, behavdeveloping new, more inquisitive behaviors and iors and commitments to build on and which to
a desire to improve continually.
influence and change. As a result, the prevailing
As part of a broader transformation initiative culture eventually shifted from “how it’s always
with the COO, we advocated establishing a net- been done” to “how to prepare for what’s next.”
work of transformation lead teams—dedicated One year later, when we revisited the busidelivery and change managers working side by ness, widespread cultural change was evident.
6
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A.T. Kearney
In the past, hierarchical, top-down management
had prevailed. Now, ideas were generated from the
bottom up and collaborative problem-solving was
taking place in well-attended innovation and best
practice forums. Much of the transformation success was a result of understanding workforce attitudes and investments in transformation tools to
help change employees’ views and perceptions.
Moving From Insight to Action
Shaping corporate culture is as much about
understanding the emotional and interpretive
activity that takes place among employees as it is
about ensuring that formal mechanisms are cor-
rectly framed to encourage desired behaviors.
Assumptions, unwritten rules, rituals, personal
goals and feelings that develop over time may be
more difficult to grasp than the formal, visible
components of corporate culture. Nevertheless, it
is possible to analyze these less tangible components and target the formal mechanisms of corporate culture to make positive change happen.
Armed with an understanding of how corporate culture is formed, the path to aligning culture
and strategy becomes clear. Leaders can invest with
confidence—demystifying the concept of culture
and bringing the full weight of their workforce
behind improving organizational performance.
This paper is the first in a series from A.T. Kearney’s Organization and Transformation experts. The second
paper, “How Organizations Get Where They’re Going,” presents a practical methodology for bringing about
cultural change. A third paper will focus on the culture of innovation — what it is, how companies have
leveraged it successfully, and lessons learned from the leaders.
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