Demystifying Corporate Culture

Why people do what they do

Astrong 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 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-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 ofworking. P&G introduced its Connect + Develop strategy, where innovation is developed collabora-tively 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 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.

Figure 1: Apple reached peak performance by aligning its strategy and culture

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

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 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.

Figure 2: What stands between formal mechanisms and desired behavior?

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 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 top-down 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.

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

A client of ours provides a good example of how to get transformation right. This large national postal organization was undergoing its biggest operational transformation in 20 to 30 years. Changes throughout its operations network—in customer interactions and the collection process, in sorting and delivery facilities, and across post offices—were having an impact on nearly every employee. New technology and equipment were creating fundamental changes to customer interactions and processing, but the workforce was reluctant to support changes it perceived as affecting working hours and pay. (An attitude of "this is how we have always done it" was deeply embedded at all levels.) For transformation to succeed, people needed to embrace, own and drive the change, developing new, more inquisitive behaviors and a desire to improve continually.

Figure 3: Dissecting the corporate culture

As part of a broader transformation initiative with the COO, we advocated establishing a network of transformation lead teams—dedicated delivery and change managers working side by 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 (changing and refining formal mechanisms such as processes, procedures and reward structures) and ensure those changes were consistent and aligned, and (3) develop national and local transformation capabilities to drive and support the change.

All actions were based on knowledge gained in working closely at the local level and understanding workers' perceptions and emotional reactions to the planned changes. This allowed for an intimate understanding of which values, behaviors and commitments to build on and which to influence and change. As a result, the prevailing culture eventually shifted from "how it's always been done" to "how to prepare for what's next."

One year later, when we revisited the business, widespread cultural change was evident. 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 correctly 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.

Authors

Ira Gaberman is a partner in the London office.

Ingrid Devoi is a principal in the Amsterdam office.

Kevin Crump is a consultant in the Atlanta office.

Marieke Witjes is a consultant in the Amsterdam office.

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.