Culture Fit and Performance

Culture Fit and Performance

“The culture-environment fit in the case of the higher performing firms was usually reported to be significantly better than in the case of the other companies” Kotter & Heskett (1992: 37)

“The culture-environment fit in the case of the higher performing firms was usually reported to be significantly better than in the case of the other companies” Kotter & Heskett (1992: 37)

The idea that organizations perform better than their peers when they have a culture that is aligned to their strategy and appropriate to their industry has a lot of intuitive appeal. After all, it is easy to find examples of organizations with strong and appropriate cultures that are regarded as leaders in their industries. Nordstrom’s, a highly regarded American retailer is rife with stories of employees going above and beyond any reasonable person’s expectations to deliver outstanding customer service[i]. Then there is Westjet, a Canadian airline that has built its brand on the concept that employees are owners and genuinely care about the organization and every customer. Another is Apple, one of the most recognizable and respected companies in the United States; an organization where creativity combined with execution makes it a model for others who are striving to be innovation leaders.

In this article, we examine two factors that have emerged as critical to understanding and getting the most impact from the relationship between culture and performance. The first is the need for culture to fit the strategy and context of the organization. The second is the need to have a culture that is adaptable and able to change in the face of shifting environmental conditions.

Culture Fit to Industry

The idea of culture fit to industry has a solid base of support in organization theory where it has long been acknowledged that the external environment has a significant effect on an organization and, in turn, its culture[ii]. However, this is not a simple cause-effect relationship.

Culture, some have suggested, acts as a mediating or influencing factor that helps an organization develop strategies, structures, processes and so on that are consistent with the assumptions and value systems of its industry and therefore provide it with legitimacy[iii]. At the same time, it is also recognized that organizations within the same industry can have different elements to their cultures so long as they are not in conflict with industry assumptions and values.

Gordon, for example, cites Pepsico and Coca Cola as two organizations in the same industry that have substantially different cultures due to a combination of founder influence, experience with past success, changes in management and other historical contextual events. Both organizations have also been influenced by changes in the industry that have caused them to look to past success to find new ways of working which contributes further to the development of cultural differences[iv]. For the most part, this is conceptual and anecdotal, and while logical, lacked scientific proof… that is until recently.

 

Industry-Specific Cultural Differences Exist Within Societies

In 2004, Robert House and a group of 172 researchers from 62 cultures released the results of a global study of culture and leadership (the GLOBE Study). One of the hypotheses tested in this study was the assumption that industry sector has a significant effect on organization culture. Culture was measured using the GLOBE organizational cultural practices scale which was the result of an extensive and rigorous design and validation process that built on Hofstede’s culture dimensions[v]. The final data set included 3,859 mid-level managers from 208 organizations within 27 societies and three industries (92 organizations from the finance industry, 73 from the food industry and 43 from the telecommunications industry).

This study is one of the few to provide solid empirical evidence that clarifies the effect of industry context on culture. Specifically, analysis of the data revealed “almost no industry-sector effects on organizational practices across societies[vi] (emphasis added). However, when the industry results were compared within societies there was evidence of industry-specific differences. This last finding is consistent with other studies that have examined cultures across industries within a single society. For example, Chatman and Jehn in their study of 15 U.S. organizations representing four industries found that industry membership was significant in explaining cultural differences[vii]. This is the same finding reported by Phillips in her comparative study of six fine art museums and six wineries located in the state of California[viii].

Industry Norms Operate as a Constraint on Change

Given that industry influences the culture of member organizations, understanding industry-specific cultural characteristics can provide valuable contextual information when trying to understand an organization’s culture and assess its potential for change. Specifically, if we think of industry norms as a form of control, it is likely that these are going to act as a constraint on culture change if the intended change conflicts with these deeply established and widely accepted norms[ix]. The reason for this is simple.

Industry-specific assumptions and norms develop from the basic requirements of the market which are influenced by competitive dynamics, customer and societal expectations. If an organization fails to act in a manner that is consistent with these expectations, even when the expectations change, it will face a serious threat to its survival.

An example of this can be seen when regulated industries such as telecommunications and energy have been opened to competition. In these cases, long-standing belief systems such as universal access to products and services are suddenly subject to change and with this many of the assumptions, values and norms that have defined the way that the organization goes about its work. For example, deregulation of long-distance telecommunications in the 1980’s forced organizations to shift from a mindset of universal access and reasonable profit to one that emphasized differentiated services and markets based on profitability[x]. The old norms and values that emphasized slow decision-making, a focus on compliance and life-long employment no longer fit the new competitive reality and, very slowly, began to change[xi].

Conformity versus Differentiation?

The popular tendency to want to compare the culture of one’s organization to others in the same industry only reinforces conformity versus differentiation.

While private sector organizations are subject to a form of social control that accompanies industry membership, they are also competing with other participants in their industries, as well as new entrants from other industries. In a competitive environment, success is associated with the ability to differentiate one’s organization from one’s peers. As such, it has been argued that culture is only a source of competitive advantage when it is valuable, rare and imperfectly imitable”[xii].

If organizations conform to industry-specific cultural characteristics and norms that they share with their competitors, how can their culture be a source of differentiation? If, as Chatman and Jehn argue, there is a great deal of cultural homogeneity within industries then perhaps it is other factors, such as technology or products, and not culture that results in a sustained competitive advantage[xiii]. Furthermore, does this not suggest that the popular tendency to want to compare the culture of one’s organization to others in the same industry only reinforces conformity versus differentiation?

Arguably, there appears to be substantially greater value in comparing the culture of one’s organization to that of others in different industries and even sectors that are pursuing the same or a similar strategic focus such as innovation or providing an outstanding customer experience. It also appears to support the argument that culture fit as it relates to performance is more relevant when examined in the context of factors other than industry such as fit to strategy.

Answer #1 – Culture Fit to Strategy

The crux of the culture fit to strategy perspective is that organizations that have a culture that is in alignment with their strategic context and competitive dynamics in the marketplace outperform those that don’t. In other words, if an organization has a culture that supports innovation in an environment where this provides a competitive advantage, it will outperform those with cultures that are not as innovative.

Apple provides a prime example of this in action.  For a long time, Apple continuously reinvented the computing industry with its string of game changing products such as the iPad tablet computer. This, and many other examples of Apple’s impact, has led Fast Company to write, “Apple’s dominance as a manufacturer suggests that its merest whim can make waves in the rest of the computing industry”[xiv].  Obviously, they have a strategy that is very effective in their industry but there are a lot of organizations that have great strategies that they are unable to execute. The difference, at least in part, is that Apple’s culture is hard-wired for innovation.

The same argument can be made for organizations that have a customer-focused culture in environments where providing an exceptional customer experience leads to a competitive advantage. Disney, the Four Seasons Hotels, and Emirates Airlines are prime examples of this type of culture. There are also those that have quality-oriented cultures in environments where success is defined by the ability to produce products that are more dependable or reliable than their competition. This is one of the pillars of Toyota’s rise to eminence and the reason why its product recalls sent shockwaves around the world. Walmart, it could be argued, has developed a culture that is focused on operational efficiency in order to win in a competitive market where price and value is the name of the game.

The bottom-line is that these organizations have a clear strategy that fits their competitive environment and to which their culture is aligned. However, no matter how appealing this argument, the question remains as to what evidence there is that this is indeed true; that organizations whose culture fits their strategy outperform those that don’t.

Culture Fit to Strategy Impacts Performance

Kotter and Heskett tested the culture strategy fit relationship using a subset of organizations selected from their original 207. They were able to identify a group of twelve outstanding performers and ten good but lesser performing organizations that were rated as having relatively strong cultures which made them useful for studying what, if anything, there is about their cultures that made a difference in terms of performance.

To answer this question, they did a document search seeking information about each company’s culture. They then interviewed 75 industry analysts who closely followed one or more of the companies and asked them about the culture of each company as well as whether they believed the culture influenced its performance.

They discovered a consistent trend showing that the organizations whose culture better fit its context and “especially the competitive situation in its key markets” substantially outperformed those with a weaker fit of the culture to strategy or the strategy to its business context. In addition, they were also able to show that every single one of the lower performing organizations had previously had a good culture-environment fit that eroded in large part due to environmental changes that they had not been able to adjust to.

Answer #2 – Adaptability

“…with much success, that strong culture can easily become arrogant, inwardly focused, politicized, and bureaucratic. In an increasingly competitive and rapidly changing world, that kind of culture unquestionably undermines economic performance” Kotter & Heskett (1992: 24).

Perhaps the most interesting discovery Kotter and Heskett made was in determining that the twelve outstanding performers had also faced significant changes in their environments however these organizations, unlike their lower performing peers, were able to adapt even though they too had strong cultures[xv].

This is consistent with the view held by detractors of the culture fit perspective. These people suggest that culture fit works for the short-term but is a detriment for the long-term. This is because strong cultures create inertia that stops firms from adapting to changing conditions.

Some members of the financial community even suggest that there is an inverse relationship between strong cultures and long-term performance. They argue that a strong culture gets in the way of the organization’s ability to adapt to changing external conditions which negatively impacts financial performance[xvi]. They do this by stifling the flexibility and adaptability required to stay in step with external and internal developments (such as a change in the method of business)[xvii]. Simply put, cultural change is too slow to prevent substantial deterioration of economic performance especially in volatile and dynamics environments. Economic events had to threaten the very existence of the organization for managers to seriously question the culture. In response, proponents of culture fit believe that culture change can be managed in a way that allows the organization to adapt to changing conditions. This begins with making learning and adaptability part of the organization’s culture[xviii].

The Case for Adaptive Cultures

As far back as 1968 (and likely earlier) academics were writing about the increasing rate of change and complexity, often related to technology, and the need for organizations and societies to be able learn and adapt if they are to survive[xix]. Specifically, they urged leaders to create organizations that were in reality ‘learning systems’ – organizations capable of transforming themselves while avoiding intolerable disruption.

A learning system… must be one in which dynamic conservatism operates at such a level and in such a way as to permit change of state without intolerable threat to the essential functions the system fulfils for the self. Our systems need to maintain their identity, and their ability to support the self-identity of those who belong to them, but they must at the same time be capable of transforming themselves.[xx]

These insights lay the groundwork for the emergence of the learning organization and organizational learning movement that took off in the 1990’s with the publication of Peter Senge’s book, The Fifth Discipline[xxi]. Senge and many others[xxii] provide models and prescriptions aimed at helping leaders to transform the culture of their organizations into one where learning, adapting and generating new knowledge is embedded in the belief systems and values of the organization and its members. The objective, these theorists suggest, is to create an “organization that facilitates the learning of all its members and continually transforms itself”[xxiii].

This thinking is echoed in the strategic management literature (specifically the resource-based view of the firm) where organizations are urged to develop ‘dynamic capabilities’ or the “ability to integrate, build and reconfigure internal and external competencies to address rapidly changing environments”[xxiv]. The underlying argument is that organizations are no longer operating within stable and predictable environments where a structured way of managing and working is effective in producing the desired outcomes. Instead, the pace of change in the external environment is increasing and with it the complexity and unpredictability of the challenges and opportunities that organizations are facing. In this turbulent environment, organizations need to be able move swiftly to identify and take advantage of emerging opportunities and challenges in the external environment while continuing to exploit their existing markets[xxv]. The means to achieve this is, they suggest, in the ability to develop and effectively use organizational routines specifically related to the coordination and integration of work, learning and reconfiguration/ transformation[xxvi].

Similar to the learning organization, a number of suggestions are provided to make dynamic capabilities a reality. Interestingly, while there are some specific differences, the two perspectives are fundamentally similar in that they emphasize transforming the organization into an ideal form that emphasizes adaptive and generative learning. Of course, this makes complete sense when one considers that they have a shared objective of helping organizations to survive and thrive in the face of constant and often unpredictable external change. Specifically, they share the belief that organizations can be designed to effectively react to, anticipate and even facilitate change leading to a competitive advantage in the marketplace and/or long-term sustainability.

The Challenge

While this is intellectually and intuitively appealing, the challenge of making it a reality is very much another thing as many leaders have discovered[xxvii]. For organizations that are faced with a threat to their very existence and/or the need to implement rapid and major change, transforming into a learning organization can appear to be an unrealistic, Pollyanna-like aspiration. For starters, organizations don’t have the luxury of taking years to implement a change that is perceived by many managers to be far removed from current business realities.

A similar argument can also be made with respect to the development of dynamic capabilities. This is not to say that the characteristics and capabilities recommended by these experts aren’t worth aspiring to or pursuing. The challenge is that most leaders are caught up in the realities of performing day-to-day operations and delivering financial results.

What organizations need is the ability to effectively and efficiently overcome the ‘dynamic conservatism’ that holds us back from reaping the benefits of changes we make to our way of doing business, our structures, processes, technology and so on. To accomplish this requires that we can quickly make fundamental changes to the assumptions and beliefs that guide the way people think, act and make decisions. In other words, we need to be able to accelerate the rate of culture change which is something that many renown experts have argued is impossible[xxviii]. In addition, we need to be able to do this in a planned and intentional manner that is aligned with our strategy and/or solves a business problem or need. At the same time, it must protect the existing, complementary strengths of the current culture and its subcultures as these often provide an important source of identity as well as diverse capabilities.

Seeking the solution to these challenges has been the focus of my research and practice for the past thirty years and counting. The quest to help leaders intentionally design and create adaptive cultures that support an organization’s strategy and/or solve a business problem. This includes accelerating culture change so that it occurs in a matter of months achieving sufficient progress to overcome the challenges caused by dynamic conservatism.

 

[i] See for example Chatman & Cha (2003)

[ii] This is based in the open-systems perspective of organization put forward by Katz and Kahn in their influential 1966 article.

[iii] Abernathy & Chua (1996); DiMaggio & Powell (1983); Meyer & Rowan (1991); Abrahamson & Fombrun (1994)

[iv] Gordon (1991)

[v] Information on the development of the GLOBE organizational cultural practices scale is provided in Chapter 8 of Culture, Leadership and Organizations: The GLOBE Study of 62 Societies by Robert House and his associates (Hanges & Dickson, 2004)

[vi] Brodbeck, Hanges, Dickson, Gupta & Dorfman (2004: 664)

[vii] Chatman & Jehn (1994)

[viii] Phillips (1994)

[ix] Gordon (1991)

[x] Tunstall (1985)

[xi] Pennings &  Gresov (1986)

[xii] Barney (1986)

[xiii] Chatman & Jehn (1994)

[xiv] Eaton (2011)

[xv] Kotter & Heskett (1992: 37-40)

[xvi] Kotter & Heskett (1992)

[xvii] Sorensen, 2002; Tushman & O’Reilly, 1997

[xviii] Gordon & DiTomaso (1992)

[xix] Hutchins (1970)

[xx] Schӧn (1973: 57)

[xxi] Senge (1990)

[xxii] Easterby-Smith, Burgoyne & Araujo (1999); Pedler, Boydell, & Burgoyne (1991); Nevis, DeBella & Gould (1995)

[xxiii] Pedler, Boydell & Burgoyne (1991)

[xxiv] Teece, Pisano & Shuen (1997)

[xxv] There is an extensive body of literature on the subject of dynamic capabilities and the importance of ambidexterity and resilience for organizational survival. Most of it can be traced to the influential writing of James G. March (1991) and his paper titled ‘Exploration and exploitation in organizations’. More recent articles that have built on his original argument and framework include: Simsek,  Heavey, Veiga &  Souder (2009); O’Reilly, Harreld  & Tushman (2009); Simsek (2009); Raisch & Birkinshaw (2008); Wang & Li (2008); Uotila, Maula, Keil & Zahra (2009); Harreld, O’Reilly & Tushman (2007); Gupta, Smith, & Shalley (2006); He & Wong (2004); Gibson & Birkinshaw (2004); Zollo & Winter (2002); Eisenhardt & Martin (2000)

[xxvi] Teece, Pisano & Shuen (1997); Zollo & Winter (2002); Nelson & Winter (1982)

[xxvii] Grieves (2008); Finger & Brand (1999); Weick & Westley (1996); Salaman & Butler (1994)

[xxviii] Best known for his insights and perspective on culture, Edgar Schein (1999)