Culture as Competitive Advantage

Presented By

Culture as Competitive Advantage

Dr. Charles O’Reilly, Professor, Stanford Graduate School of Business Charles is a leading expert on Organizational Behavior and Management and Professor at the Stanford Graduate School of Business. His research includes studies of leadership, organizational culture and demography, the management of human resources, and the impact of change and innovation on firms. He has authored more than 100 papers and published several books. Professor O’Reilly has consulted for a variety of public and private firms in the U.S., Europe, Africa, and Asia. He also has developed, directed, and taught in executive programs for senior managers in innovation, technology, leadership, change, and human resources.

Catherine Spence, Co-Founder, Pomello Before founding Pomello Catherine built and managed investment strategies for BlackRock. Inspired by her own experience as a job seeker as well as going through a large corporate merger, she grew to value the role of culture in creating fulfilling workplaces that drive performance. Catherine holds a BA in Political Science from Columbia University and an MBA from Stanford’s Graduate School of Business.

What leaders and employees say about

culture

94% of executives and 86% of employees believe that a strong culture is important to business success

5

 If you’re really going to transform an enterprise, you’ve got to understand culture…It took me to age

55 to figure that out. Culture is everything.

 ~ Lou Gerstner   CEO, IBM, 1993-2002

culture as competitive (dis)advantage

6

 Culture eats strategy

 for breakfast.   ~ Peter Drucker

culture as competitive (dis)advantage

What is “culture” really...

What is “culture” and why should managers care about it?

•  Culture is a social control system that already operates within your organizations. •  If you don’t manage it, this control system can undermine your ability to effectively execute your strategy. •  You can diagnose and manage the culture in your units.

The Bottom Line

Culture as Social Control

Culture is the pattern of behavior that is

reinforced by people and systems over time.

10

 I hate the word ‘culture’. Culture is really just how

we all behave.  ~ Mary Barra  CEO GM

 September 30, 2014

culture

11

 You can’t over-emphasize enough the importance of culture—and what we mean by that is

behavior.   ~ Doug McMillon   CEO Walmart

  February 24, 2015

culture

Values •  Beliefs about what is worthwhile or important

•  The principles or standards that are seen as important by a person or group

Norms •  Expectations about what are appropriate or inappropriate attitudes and behaviors

•  Socially created standards that help us interpret and evaluate behavior

IBMers are defined by what they value.

IBMers value:

Dedication to every client’s success.

Innovation that matters –

for our company and for the world.

Trust and personal responsibility in all relationships.

Our Core Values CUSTOMERS We put the customer at the center of everything we do. We listen intently to our customers’ needs. Each interaction matters. Safety and quality are foundational commitments, never compromised. RELATIONSHIPS Our success depends on our relationships inside and outside the company. We encourage diverse thinking and collaboration from the world to create great customer experiences. EXCELLENCE We act with integrity. We are driven by ingenuity and innovation. We have the courage to do and say what’s difficult. Each of us takes accountability for results and has the tenacity to win.

Our Core Values CUSTOMERS We put the customer at the center of everything we do. We listen intently to our customers’ needs. Each interaction matters. Safety and quality are foundational commitments, never compromised. RELATIONSHIPS Our success depends on our relationships inside and outside the company. We encourage diverse thinking and collaboration from the world to create great customer experiences. EXCELLENCE We act with integrity. We are driven by ingenuity and innovation. We have the courage to do and say what’s difficult. Each of us takes accountability for results and has the tenacity to win.

As a new GM employee, how should I behave?

What is really important?

16

 Values are a misused word. Values are behaviors…the

  behaviors you want to achieve the

mission. Then you measure and reward those behaviors, with the soul or the wallet.

  ~ Jack Welch  2005

culture is about behavior

What is organizational culture?

SOCIAL CONTROL

Values Beliefs about what is

important or worthwhile

The principles or standards seen as

important by a person or group

Norms Expectations about

appropriate behaviors

Socially created standards that help

interpret and evaluate behavior

Behaviors The specific attitudes and behaviors that are needed to successfully accomplish important goals and objectives

Why worry about it?

“Even contextually or strategically appropriate cultures will not promote excellent performance over long periods unless they contain norms and values that promote innovation and change.”

John Kotter and James Heskett Corporate Culture and Performance Harvard Business School Press, 1992

The Cultural Challenge

WEAK CULTURE

Research corroborates the financial importance of a strategically aligned and innovation-based culture

Revenues rise 166% Workforce expands 36% Stock price increases 74% Net income boosts 1%

Revenues rise 682% Workforce expands 282% Stock price increases 901% Net income boosts 756%

STRONG CULTURE VS

Culture and Performance

WEAK CULTURE STRONG CULTURE

SiliconValleyStudy

FY 2012: •  87% are Fortune 1000 firms •  Generated $1.26 trillion in

revenue •  74% of Fortune 1000 hi-tech

revenue •  Collective market cap: $2.8

trillion

Between 2009-2012, firms with more ADAPTIVE cultures (i.e., quicker to opportunities, willingness to experiment, more innovative, more risk taking, faster) also had:

•  Higher revenue growth •  Higher Tobin’s Q (Market-to-book ratio) •  Higher employee ratings (Glassdoor ratings) •  Ranked by Fortune as More innovative •  More analyst “buy” ratings

SiliconValleyStudy-Results

Study of 44 Irish Companies

1.  Culture (adaptability and collaboration) predicts revenue growth (2010-2014).

2. The correlation between current and needed culture also predicts revenue growth (i.e., alignment matters). 3. Culture change efforts also strongly and positively predict revenue growth.

Culture change efforts are associated with higher revenue growth

% R

even

ue G

row

th

1 2 3

-

20

40

60

80

100

120

ChangeEfforts

Change Efforts (1 = no explicit efforts, 2 = some attempts, 3 = explicit efforts)

Firms that made more

explicit culture-change efforts*

averaged 111% revenue growth over

several years--2X the

average.

* Note: Culture-change efforts were likely informed by the culture feedback reports indicating where gaps between the current and needed (per strategy) culture existed. R = .37 (p<.03)

Culture impacts firm performance and employee turnover

100

0.65 0.7 0.75 0.8 0.85 0.9 0.95

Perfo

rma

nce

Ra

ting

Predictive Compatibility Score

High

Low

Time Since Hiring

% o

f Ne

w H

ires

Still

at C

om

pa

ny

Top Score Quartile

Bottom Score Quartile

Difference in turnover = 50%

Culture Fit and Performance Predict long term performance -- YES

Employee Attrition Curves Stronger fit leads to lower turnover -- YES

Meta-analysis of 84 empirical studies

Culture is important in creating employee engagement…

Medallia © Copyright 2016.

Culture, Employee Engagement and Performance

5.0X less likely

Likely to recommend company

Likely to leave co. in next 6 months

Customer-centric Culture and Work Practices

Bottom 25% both

Top 25% both

5.1X more

Bottom 25% both

Top 25% both

1.3X

Employees

2.3X more likely to be engaged

(compared to baseline)

1 Baseline

engagement

2.0X

•  Bottom 25% Top 25%

Top 25%

Cus

tom

er-c

entr

ic C

ultu

re

Customer-centric Work Practices

Customer-centric Engagement

5.0X less likely

Likely to recommend company

Likely to leave co. in next 6 months

Customer-centric Culture and Work Practices

Bottom 25% both

Top 25% both

5.1X more

Bottom 25% both

Top 25% both

How can you measure and manage culture?

How is culture managed?

1. Recruiting and selecting people who fit the culture you’re trying to create

2. Training and developing people initially and through

their careers. 3. Rewarding and recognizing people to create a vivid

picture of what success looks like 4. Leading intentionally and visibly to help people

learn to make strategically relevant, tough tradeoffs

How is culture managed?

Aligning Organizational Culture Identify Your Strategy - Why should any customer prefer your product/service?

List the Key Success Factors - What actions must occur to execute your strategy?

Current Culture - What are the norms that exist today in your organization?

Needed Culture What are the norms you need to execute that currently don’t exist?

Culture Gaps - Norms that are needed but don’t exist; norms that exist to be changed

Design Actions/Programs for Change

1.

2.

3.

4.

5.

6.

How can you do a quick culture diagnosis in your own business?

Focus Groups This approach involves forming a set of focus groups and asking them to assess the current culture (see Chapter 5 in Winning Through Innovation, 2002) for a description of this approach. This works best for within business unit diagnoses. Organizational Culture Profile This approach uses a web-based tool and is most useful for getting a large sample to do corporate level cultural diagnoses.

Surveys, Interviews Consulting firms offer a variety of survey and interview techniques to do culture diagnoses.

Culture Diagnosis

What is the role of HR technology in managing culture?

1. Consistency – Organizations require a consistent framework for understanding, communicating and measuring culture in order to manage it effectively.

2. Scaling – While culture can be managed person-to-

person at smaller companies, larger companies require a mechanism that collects and distributes culture data efficiently especially during periods of rapid growth.

3. Evolution – Company strategy is not static over time,

and so culture cannot be static over time. Technology enables evolution of culture over time.

Why does culture need technology?

Consistency: Know Your Culture Cultureisnotmonolithic,anddifferentgroupswithinanorganiza=oncanhavesignificantdifferencesinculturalcohesionorstrength

Consistency: Know Your Culture

Cultureisnotmonolithic,anddifferentgroupswithinanorganiza=oncanhavesignificantdifferencesinculturalnormsandbehaviors

Comparative View – Values Analysis

There is a very high degree of alignment across many of the values within these 2 teams, indicating elements of a common culture core …

… Yet signs of sub-cultural differences were also observed, the largest gap occurring around the value placed on Results.

Scaling: Hiring for High Performance Requires Culture

0.65 0.7 0.75 0.8 0.85 0.9 0.95

Perfo

rma

nce

Ra

ting

Predictive Compatibility Score

High

Low

Time Since Hiring

% o

f Ne

w H

ires

Still

at C

om

pa

ny

Top Score Quartile

Bottom Score Quartile

Hiring to optimize for culture alignment leads to higher performance and lower turnover

Compatibility vs. Performance Predict long term performance --

YES

Employee Attrition Curves Stronger fit leads to lower turnover --

YES

Evolution: Managing Culture Change with Technology OneFortune500companycomparedtheircurrentleadershipculturetotheiraspira=onal(orfuture)leadershipcultureinordertoiden=fywhatbehaviorstheyneedtoemphasizetomeetfuturestrategicini=a=ves

Adaptability emerged as the largest gap to the desired future state … by a wide margin

While not requiring a tradeoff across most other values…

FUTURE CULTURE

… except Precision, which emerged as the lowest value in the future state

Leadership Team Current vs. Future Culture Gap Analysis

CURRENT CULTURE

How to Integrate Culture Technology into Existing HR Workflows

Cultureanaly=cstechnologywillintegratewithyourexis=ngHRworkflowsandsoQwarethroughouttheemployeelifecycle

ASrac=onEnsurethatyouareaccuratelyadver=singyourauthen=cworkplacecultureinalljobpos=ngsSoQwareIntegra=ons:•  Applicanttrackingsystem

Selec=onBringconsistencytoyourselec=onprocessbycapturingdataaboutcandidatespreferrednormsandbehaviors.SoQwareIntegra=ons:•  Applicanttrackingsystem

Reten=on/DevelopmentUnderstandhowcultureisimpac=ngperformanceandreten=onbytrackingcultureanaly=csthroughouttheemployeelifecycle.SoQwareIntegra=ons:•  PerformanceManagement

System•  HRISSystem

Q & A

DataDrivenCultureMeasurement

Additional Questions or Inquiries:

catherine@pomello.com

+1-650-741-4348