The Impact of Corporate Culture on Economic Performance

The Impact of Corporate Culture on Economic Performance

Summary: Does culture have a real and tangible impact on the bottom line? You bet it does! This tip offers a business case for the economic impact of culture on revenue, stock price and ROI. Four factors describe what makes for a “right” culture.

I recently heard Mitch Weatherly, an Executive Vice President at Pier 1 Imports, make the statement that half of the hires that fail at the Director Level and above fail because they do not fit the culture.  At Pier 1, culture is important.  It is healthy and well managed and you can`t make it there unless you learn to work within it.

When we talk about corporate culture, it is helpful to think of it at two levels.  The first is more invisible and harder to change.  This includes important values, beliefs and ideology that are shared by most of the people.  This underlies the second level which is more visible. This level includes common or pervasive ways of behaving.  These behaviors persist because group members teach these practices to new members, reward those who fit in, and sanction those that do not.

While we all know that culture is important, does it have a real and tangible impact on the bottom line?  You bet it does.

The Numbers

Organizations with the “right” kind of culture significantly outperform firms that do not have these cultural traits by a huge margin.  Examples from an 11 year Harvard Business School study show a variety of areas in which companies with the “right” culture outperformed their counterparts:

  • Revenues   4.1 times higher
  • Stock price:  12.2 time higher
  • Net income: 756% improvement vs. 1%
  • Return on investment:  15 times higher

In a Stanford University study, higher performing companies matched to a top competitor compared favorably in the following ways.

  • In 61% of the higher performing companies, there was stronger indoctrination of new hires into the Culture, Guiding Principles, and Practices
  • In 72%: Greater tightness of fit around their Culture – “Buy In or Get Out”
  • In 72%: Greater emphasis on elitism and living the Guiding Principles to create a sense of pride and belonging to something special and superior
  • In 75%: Employees are more satisfied, more loyal, and have a greater sense of pride in their company than do employees in other organizations. They look forward to coming to work.
  • In 78%: Greater alignment between their culture and what the company believed it needed strategically to succeed in the market place now and in the future.
  • In95%: Winning companies involve their people. Ninety-five percent of the improvements at National Quality Award winning companies come from the recommendations of their own people.

What makes for the “right” culture?

While there is no prescription, the following Four Factors Make the Difference. The keys to success are:

  1. A strong Culture: clearly articulated values or guiding principles that are deep and pervasive throughout the organization.
  2. A Strategically Appropriate Culture: The values and operating practices of the organization are strategically appropriate.  They represent what must happen behaviorally for the organization to be successful.
  3. An Adaptive Culture: This means that it is risk taking, proactive and trusting.  Non adaptive cultures are reactive, risk averse, and slow to share information and make decisions.
  4. “Stakeholders are King” philosophy”: Leaders passionately identify, balance, and meet the needs of key constituencies including customers, employees and shareholders.

Note that even if you have a strong culture, if it is not strategically appropriate, it does not enhance performance!  All of these factors must work together to produce outstanding results.

Over the next few months, I`ll share some corporate examples of extraordinary efforts to build a performance enhancing culture.  I believe you will find some exciting ideas and applications to your own organization.

2 Responses to The Impact of Corporate Culture on Economic Performance

  1. […] took on their journey to build healthy workplace cultures.  These buyers already realized what Harvard University had empirically proven in an eleven year study; organizations with healthy cultures out […]

  2. Efremov says:

    Very clear explanation and to the point!

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