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Exclusive Column
 
CORPORATE CULTURE: THE SECRET PILL
Is Corporate Culture The Ultimate Strategic Asset?

Issue Date - 21/07/2011
 
Some Companies Believe Strongly in their culture – they swear by it. And while many have brushed aside this concept of culture as just another soft factor, the truth remains – corporate culture can become the very reason why your company performs well at the stock market and why it creates bottomlines which are far superior than those of industry peers.

During the past few decades, the term “corporate culture” has become widely used in business. It is now well-recognised that corporate culture is a significant aspect of organisational health and performance [Read: Siehl, C. and Martin, J. “Organizational Culture: A Key to Financial Performance?; Kotter, J. and Heskitt, J (1992), Corporate Culture and Performance, New York, NY: The Free Press].

what is “corporate culture”?
Although there are many different definitions of the concept of “Corporate Culture,” the central notion is that culture relates to core organisational values. All organisations – regardless of size – have cultures which influence the way people behave in a variety of areas, such as treatment of customers, standards of performance, innovation, et al.

“strong” and “weak” cultures
Companies where there is a clearly-defined culture, where the company invests time in communicating and reinforcing this culture, and where all employees are behaving in ways consistent with this culture are defined as having “strong cultures.” A “strong” culture is one that people clearly understand and can articulate. A “weak” culture is one that employees have difficulty defining, understanding, or explaining. The culture may not have been defined and/or it is not being actively “managed.” As a result, employees are let to interpret the company’s values for themselves, which sometimes results in the company having not one, but many different cultures.

functional and dysfunctional cultures are assets or liabilities
Strong culture companies can be either positive (an asset) or negative (a liability). If the company’s values are constructive and support its goals, then having a strong culture is an asset. We define this as a “functional” culture. If the company’s values are negative or dysfunctional, then having a strong culture will be a liability. We define this as a “dysfunctional culture.”

 
impact of culture on financial performance: wal-mart vs. k-mart
Culture can impact financial performance, so that a culture can truly be an “asset” in the technical accounting sense of “things of value-owned or controlled.” To see this, compare the performance of Wal-Mart with its (at least on the surface) “identical” competitor K-Mart. There is virtually no product that Wal-Mart has that K-Mart does not have; have the same kinds of stores and they operate in similar locations. They market to the same customers and recruit from the same pool of people. Yet in spite of these similarities, one of them (Wal-Mart) has produced a vastly different financial result for investors than the other.

Examining the financial returns to investors measured in terms of stock prices, we see a very clear story of the different performance of Wal-Mart and K-Mart. For the decade of the 1990s, the stock price of K-Mart almost doubled. An original investment of $10,000 would have been worth almost $20,000 by 1999. During the same period, the stock price of Wal-Mart increased several-fold. An investor who made an original investment of $10,000 in 1990 would have seen the value of that investment increase to approximately $280,000! This is an astounding difference, especially when these companies are not like Microsoft or Amgen, where there is proprietary intellectual property. These companies (Wal-Mart and K-Mart) are selling essentially the same commodities, but with vastly different results. They are both into retail, are exposed equally to the downturn issue, and yet, both of them performed so very differently. One shone bright, the other just fizzled out.

If we carry our analysis to the end of 2003, K-Mart had gone bankrupt! An investor would have lost all of his or her investment. While Wal-Mart’s stock price did decline as a result of the market collapse from 1999-2003, the original investment of $10,000 would still have been worth just under $200,000.

In brief, there are no real differences between Wal-Mart and K-Mart, except in their management and culture. And the key difference is the intangible but real asset of Wal-Mart – its corporate culture!

impact of culture on financial performance: emp. research
In the first empirical research study of its kind, I found that culture can account for as much as 46% of “EBIT” (Earnings Before Interest and Taxes; read: Eric Flamholtz, Culture and The Bottom line, European Management Journal, 2000). The intent of this study was to determine whether corporate culture has a significant impact on financial performance. Although there are several potential measures of financial performance that might be used (such as ROI, Economic Value Added, cash flow, etc), this particular study used EBIT because that was the performance measure actually used to evaluate and rank the divisions on a monthly basis at Wal-Mart.

Culture is a strategic asset
Another implication of the analysis of Wal-Mart and K-Mart is that culture is a true strategic asset, a source of competitive advantage. Most of the things over which organisations compete, can be copied or neutralised by competition. Products can be imitated or improved upon. Financial resources are fungible and most companies have capable people. However, corporate culture is not easily replicated. Corporate culture is then not just a source of competitive advantage; it might actually be the ultimate source of true sustainable competitive advantage. This is because of the extreme difficulties of replicating culture across organisations. In addition, the fact that is it relatively “invisible” to observers, makes it function as a “stealth” competitive weapon.

Coordinated By : Sanchit Verma

          

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