Measuring and Managing Corporate Culture: The Invisible Key to Organizational Success

1. Measuring and Managing Corporate Culture: The Invisible Key to Organizational Success Presented to: University of Lugano MScom Excellence-in-Communications Lecture Series Presented by: Eric G. Flamholtz, Ph.D. Professor Anderson School of Management University of California at Los Angeles

2. Corporate Enigmas: The US • How does a little company headquartered in Bentonville Arkansas become one of the largest retailers in the world with more than $288 billion in sales (Wal*Mart)? • How does a company selling a commodity product grow from $122 million in sales to more than $5 billion in slightly more than a decade (Starbucks)? • How does a company retain its vitality for more than 100 years (GE)? • How does a company with a dominant market position (more than 42% market share) fall from grace over a period of 20 years (General Motors)?

3. Corporate Enigmas: Europe • Why have the acquisitions by Allianz worked well while the acquisitions of Baskin Robbins and Duncan Donuts by Allied-Domecq experienced difficulties? • What caused Reuters to lose its dominant market position? • Why does the Movenpick web site just mention Ueli Prager and its history, while Disney has an entire “Walt Disney Family Museum” on its web site?

4. The Answer is Corporate Culture: The Invisible Asset (Or Liability!)

5. The Corporate Culture Enigma • You can not see it • You can not touch it • You can not taste it • You can not hear it • You can not smell it

6. Culture: The Invisible Asset • But it is there, and although it is invisible, it is a fundamental reason why some organizations are successful and others not over the long run.

7. OUR PURPOSE • What is the role of corporate culture in organizational success? • How can we measure and manage corporate culture to utilize it as an organizational asset? • What companies manage corporate culture well? • What are some of the significant differences in culture in US and European organizations?

8. Perspective: Practical Management Theory • Theory which is empirically sound and scientifically validated, but is relevant and practical for leaders, managers, and investors to use. • Derived from research on organizational success and failure.

9. Research on Organizational Success and Failure: • What role does Culture play in organizational Success?

10. Successes Failures/Difficulties Starbucks Boston Market PacifiCare MaxiCare Southwest People Express Nike L.A. Gear Wal*Mart K-Mart Research on Organizational Success and FailurePaired Comparisons

11. What is Success? • There are varying degrees of corporate success: • Survival, including the ability to continue to employ people • Continuing to grow • Becoming a market leader • Becoming the market leader • Increasing shareholder value

12. What is the Role that Corporate Culture Plays in Organizational Success?

13. Role of Culture in organizational Success • Culture is the ‘secret’ ingredient in organizational success

14. The Enigma of Wal*Mart Versus K-Mart • In 1960 Sears was the largest US retailer and K-Marts’ parent company was the number 1 discount retailer? • How did Wal*Mart from humble beginnings become the largest U.S. retailer with more than $288 billion is sales revenue?

15. Wal*Mart vs. K-Mart, 1990’s * Adjusted for splits

16. Wal*Mart vs. K-Mart, 2000-2003 * Adjusted for splits ** K-Mart filed for Chapter 11 bankruptcy during 2002.

17. The Enigma of Wal*Mart Versus K-mart • There are no products that Wal*Mart has that K-mart cannot have. • The explanation for the difference in success must be somewhere else. • The explanation is inside “the black box” of how Wal*Mart operates, which includes its culture.

18. The Secret to Wal*Mart’s Success: Its Culture Two key Dimensions of “The Wal*Mart Way” • Respect for the individual, and • Focus upon the customer.

19. The Growth of Starbucks? • How does a company producing a commodity product (Coffee) grow so rapidly to become the market leader? • In 1993 Starbucks had $122 million in sales and 220 stores. • In 1994 when they had $165 million in revenues, Starbucks set the goal to grow to $2 billion in revenues and 2000 stores by the year 2000. • Starbucks has more stores in California than all of its competitors combined have throughout the US!

20. Starbucks Success is Not Just About Coffee • The real reason for Starbuck’s success is its culture, which is invisible to the outside observer. • Howard Schultz says that when people ask him to tell them the reasons for Starbuck’s success, he tells them something that they are surprised to hear: “The most important single reason for Starbuck’s success is its people.” • One of Starbuck’s core beliefs is: “The way we treat our people affects the way they treat our customers and, in turn, our financial performance.”

21. Starbucks Cultural Principles • Provide a great work environment and treat each other with respect and dignity. • Embrace diversity as an essential component in the way we do business. • Apply the highest standards of excellence to the purchasing, roasting, and fresh delivery of our coffee. • Develop enthusiastically satisfied customers all of the time. • Contribute positively to our communities and our environment. • Recognize that profitability is essential to our future success.

22. What is Corporate Culture?

23. What is Organizational Culture? • Culture is “corporate personality.” • The underlying values, beliefs, and norms which govern the behavior of people as members of an organization. • Example of Values, Beliefs, and Norms: Ritz Carlton

24. Ritz-Carlton Values • The Ritz-Carlton Hotel is a place where the genuine care and comfort of our guests is our highest mission. • We pledge to provide the finest personal service and facilities for our guests who will always enjoy a warm, relaxed yet refined ambience. • The Ritz-Carlton experience enlivens the senses, instills well-being, and fulfills even the unexpressed wishes and needs of our guests.

25. Ritz-Carlton Beliefs “We are Ladies and Gentlemen Serving Ladies and Gentlemen”

26. Ritz-Carlton Norms • A warm and sincere greeting. Use the guest’s name, if and when possible. • Anticipation and compliance with guest needs. • Fond farewell. Give them a warm good-bye and use their names, if and when possible.

27. IBM Core “Values” • Respect for the individual. • Excellence in customer service. • Excellence in everything we do.

28. American Century Guiding Principles • Providing value for our investors. • Challenging and inspiring the best people. • Personal responsibility. • Organizational commitment. • Teamwork. • Building a financially sound company. • Being adaptable and innovative. • Working with integrity.

29. Why is Culture Important?

30. Why is Culture Important? • Culture influences the success of people in organizations.

31. Culture Influences The Success of People Microsoft Reorganizes; President Belluzzo is Out “The reorganization ends an awkward 2 1/2 year relationship between the software behemoth and Belluzzo, a veteran of Silicon Valley hardware stalwarts Hewlett-Packard Co. and Silicon Graphics Inc. Since joining Microsoft in September 1999, insiders say he failed to embrace the company’s distinctive corporate culture - a shortcoming the led to his ouster. Source: Los Angeles Edition, April 4, 2002, Section C, Business, p. 1.

32. Why is Culture Important? • Culture influences the success of people in organizations. • Research has indicated that culture is one of the six “key strategic building blocks” of successful organizations.

33. Corporate Culture Financial Performance Resources Products Markets Culture is a Key Building Block of Success Management Systems Operational Systems

34. Why is Culture Important? • Culture influences the success of people in organizations. • Culture is one of the six “key strategic building blocks” of successful organizations. • Culture is an invisible key to organizational success.

35. Culture is an Invisible Key to Success • Culture is a sustainable competitive advantage. • It is invisible to competitors. • It cannot be copied easily.

36. Why is Culture Important? • Culture influences the success of people in organizations. • Culture is one of the six “key strategic building blocks” of successful organizations. • Culture is an invisible key to organizational success. • Culture has a direct impact upon financial performance.

37. Culture Has a Direct Impact On Financial Performance • Our research has shown that the extent to which there is an agreement between the culture of organizational units and overall corporate culture has a statistically significant impact upon financial performance. • Culture accounts for 46% of EBIT.

38. Research at Banner Corporation • Approximately $800 (US) million in revenue. • 18 business units or divisions. • All divisions with revenues between $25 - $100 million (Stage III). • Most divisions with revenues of $25 - $50 million.

39. 20 15 10 EBIT 5 0 -5 25 35 45 55 65 75 85 Approval with Culture Divisional Cultural Buy-in vs. EBIT

40. What You Need to Know for Effective Culture Management • There are “strong” and “weak” cultures.

41. Strong and Weak Cultures • A “strong” culture is one where there is a high level of understanding of what the culture is as well as a strong commitment to the core values. • A “weak” culture is where there is not a high level of understanding of what the core values are or a high degree of commitment to them.

42. What You Need to Know for Effective Culture Management • There are “strong” and “weak” cultures. • There are “functional” and “dysfunctional” cultures.

43. Functional and Dysfunctional Cultures • A functional culture is one which enhances organizational performance and success. • A dysfunctional culture is one which leads to suboptimal or underperformance.

44. Examples of Companies of Each Culture Type:Strong and Weak; Functional and Dysfunctional

45. Where would you place the following:Nestle? Allianz? Unilever?

46. What You Need to Know for Effective Culture Management • There are “strong” and “weak” cultures. • There are “functional” and “dysfunctional” cultures. • There is sometimes a difference between “Stated” and “Real” Culture.

47. The Difference Between “Real” and “Nominal” Cultures Nominal (Stated) Culture: What we say our culture is with respect to how we treat our customers, our people, and the standards we have. Real Culture: The culture that our employees “live and breathe.”

48. IBM Stated versus Real Culture • Stated Culture: • Respect for the individual. • Excellence in customer service. • Excellence in everything we do. • Real Culture (“Organizational Reciprocity”): • “Your take care of IBM, and IBM will take care of you.”

49. What are the Key Dimensions of Corporate Culture?

50. Five Key Aspects of Culture • Customer-Client Orientation. • Employee Orientation. • Performance Standards/Accountability. • Openness to Change. • Company Norms.