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Corporate Culture and Performance

By John P. Kotter & James L. Heskett

All change agents should be voracious in their appetite for good research that demonstrates a link between the "soft side" of management and corporate performance. That is why I strongly recommend you get a copy of Corporate Culture and Performance. It is a well-researched book that includes four related studies, examining over 200 cultures and their relationship to performance.

The authors think of culture at two levels. At the deeper, less visible level, culture refers to values that tend to persist over time even when group membership changes. This level of culture is extremely hard to change. The second level of culture refers to behaviors, style, and the way "things get done around here." This level is more visible and nearly as difficult to change.

How do cultures emerge? One common pattern in the emergence of cultures according to the authors is the following:

  • Top managers in a new company develop and attempt to implement a vision/philosophy and/or business strategy. The implementation works, and people behave in ways that are guided by the philosophy and strategy that have lead to success.
  • The firm achieves results and succeeds by most measures, and that success continues over a period of years.
  • A culture emerges that reflects the vision, strategy and the experiences people had in implementing them, and is reinforced by the success of the organization.

The cultures that emerge can be either adaptive or unadaptive. This is described in the chart below.

Adaptive Cultures
Unadaptive Cultures
Core Values
  • Managers care about customers, stockholders & employees
  • Value people and processes that create meaningful change
Core Values
  • Managers focus on themselves, their work group or their products Value orderly, risk reducing management processes
Common Behaviors
  • Managers pay close attention to constituents especially customers & will take risk to meet their legitimate needs
Common Behaviors
  • Managers behave insularly, politically, & bureaucratically
  • They do not change strategies quickly to take advantage of changes in business environment

What key findings should you be aware of?

First, "…firms with cultures that emphasized all the key managerial constituencies (customers, stockholders, and employees) and leadership from managers at all levels outperformed firms that did not have those cultural traits by a huge margin." 'Huge' is captured in the table below.

THE ECONOMIC AND SOCIAL COSTS OF LOW PERFORMANCE CULTURES
(1977-1988)
(from page 78)
Average for Twelve Firms with Performance Enhancing Cultures (%)
Average for Twenty Firms without Performance Enhancing Cultures (%)
Revenue Growth
682
166
Employment Growth
282
36
Stock Price Growth
901
74
Tax Base (Net Income) Growth
756
1

Second, an adaptive culture, one that responds well to changes in the business environment, is the key to performance enhancement, not the strength of the culture. A value system that is lived and competent leadership at multiple levels of the organization are key ingredients in adaptive cultures. The authors feel that unadaptive cultures will have an even more negative impact in the decade ahead, because they inhibit firms from adopting needed strategic and tactical changes. Third, corporate cultures that inhibit strong financial performance are not rare; they develop easily. Fourth, holding on to a performance enhancing culture requires being inflexible about core adaptive values and flexible regarding most other practices and values. Executives must be intolerant of arrogance in themselves and others in the organization.

My favorite quote: "If the managers at the lower performing firms do not value highly their customers, their stockholders, or their employees, what do they care about?…Themselves."

This book is a must if you want ammunition to help influence the process of change.



Copyright © 2008 Richard M. DiGeorgio & Associates. All Rights Reserved.

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