March 11, 2010
Data from the Kotter and Heskett study of 32 major American companies over an 11-year period. The data reflects differences in financial performance associated with differences in the cultures of the companies studies mapped to terms used by the OCI and the Spitzer Center to describe the positive and negative behaviors the authors of the original study observed.
Measuring the Impact Culture Has on Long-term Performance
An in-depth look at a seminal study that showed the world how much culture really counts
Most leaders know in their gut that an organization’s culture is bound to affect its performance, but that hunch still leaves some large unanswered questions. How much of an impact does culture have? What types of cultures perform well and which perform poorly?
One of the largest studies undertaken to answer these questions was done by two Harvard Business School professors, John Kotter and James Heskett. Kotter and Heskett’s work was published in their book, Corporate Culture and Performance (The Free Press, 1992), which is often cited (and sometimes miscited; see correction below). While they use terms like adaptive and nonadaptive to describe the behaviors they observed in different cultures, these same patterns of behavior closely match what the Organizational Culture Inventory (OCI) calls constructive and defensive, and what the Spitzer Center calls Level 3 and Level 2.
First, some basic facts. The insights Kotter and Heskett provide are based on a series of studies into the culture and performance of 207 companies over 11 years (1977-1988). The list of companies studied reads like a Who’s Who of American Business, and includes Ford and GM, K-Mart and Wal-Mart, PepsiCo, Xerox, Citicorp, JC Penney, etc.
While Kotter and Heskett use terms like adaptive and nonadaptive to describe the behaviors they observed in different cultures, these same patterns of behavior closely match what the OCI calls constructive and defensive, and what the Spitzer Center calls Level 3 and Level 2. |
The long-term performance data they used was taken from public financial reports; the cultural data came from surveys completed by managers at 207 companies, and in some cases, from additional surveys and interviews. The key findings of the studies are provided in the book’s introduction, with the most startling finding stated first:
Corporate culture can have a significant impact on a firm’s long-term economic performance. We found that firms with cultures that emphasized all the key managerial constituencies (customers, stockholders, and employees) and leadership from managers at all levels outperformed firms that had did not have those cultural traits by a wide margin. Over an eleven-year period, the former increased revenue by an average of 682 percent versus 166 percent the latter, expanded their work forces by 282 percent versus 36 percent , grew their stick prices by 901 percent versus 74 percent, and improved their net incomes by 756 percent versus 1 percent [see chart].
Kotter and Heskett said that the value of what they termed “adaptive” cultures was likely to increase in the future as the pace of change increased. Writing just before the onset of the internet age and the “flattening” of the world, their prediction was right on target.
They also observed that “corporate cultures that inhibit strong long-term performance are not rare; they develop easily, even in firms that are full of reasonable and intelligent people.” Non-adaptive cultures tend to develop slowly during periods of success. When times get tough and old advantages wither, they shackle an organization’s ability to cope with new, harsher realities. Rigid and self-serving behaviors rooted in the good times “are hard to change because they are often invisible to the people involved.” Moreover, they may “support the existing power structure in the firm.”
Strength is not enough
The authors’ initial study (and the only one involving all 207 companies) looked only at the strength of corporate cultures. They asked a sampling of managers at each firm to say the degree to which they perceived and followed a set of cultural norms, encourage employees to follow these norms, and had a distinct “corporate style” that was even acknowledged by competitors. Many companies, like Wal-Mart, IBM, and Johnson & Johnson, reported very strong cultures. Others, like PanAm, TWA, and Honeywell, acknowledged they had weak cultures.
But strength of culture, in and of itself, was a weak predictor of long-term success. Kotter and Heskett concluded that “the statement, ‘strong cultures create excellent performance’ appears to be just plain wrong.”
That’s because “strong” and “effective” are not synonymous. In fact, as the authors observed, “with much success, a strong culture can easily become somewhat arrogant, inwardly focused, politicized, and bureaucratic.”
(To use the language of the OCI, the assessment tool favored by the Spitzer Center, you can have a strongly aggressive-defensive culture, which is arrogant; a strongly passive-defensive culture, which is fear-based; or a strongly constructive culture, which is creative, encouraging, and open to change. Only the latter is adaptive, creative, opportunity-seeking, and open to change – which Kotter and Heskett label as “adaptive.”)
Correction
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The authors did a third study of 32 companies, 12 of which matched the description of adaptive. People interviewed at these companies said their cultures were built on “leadership, entrepreneurship, prudent risk taking, candid discussions, innovation, and flexibility.” They placed a high value on their relationships with all their key stakeholders – employees, customers, and shareholders. Kotter and Heskett compared these constructive cultures to 20 companies which did not share these positive attributes. The performance differences between these two groups are reflected in the graph shown above.
Corporate Culture and Performance was a ground-breaking work in one other crucial respect: it showed that cultures can change in a positive way given time and the right kind of leadership, “which is quite different from even excellent management. That leadership must be guided by a realistic vision of what kinds of cultures enhance performance – a vision that is currently hard to find in either the business community or the literature on culture.”
In the years since Kotter and Heskett published their findings, we’ve learned a great deal about the types of culture that struggle, the types that thrive, and how to move from the former to the latter. We don’t only know that culture counts; we know how to change it in ways that bring results to organizations of all types and sizes.
By John Keenan, Editor
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Last changed: Oct 22 2009 at 10:43 AM