The Caring Company

A strong 'corporate culture' is said to help firms succeed. Does it?

The greeter at a Wal-Mart store might be surprised to know he is living proof of one of the oldest saws of management theory. Instilled by the late Sam Walton,

Wal-Mart's deeply ingrained corporate culture of frugality, hard work, service to customers and paternalism towards employees has contributed as much to its success as its slick distribution system and 'everyday low prices'.

Management thinkers have long associated a strong corporate culture — the beliefs, goals and values that guide the behaviour of a firm's employees —

with superior long-term performance. The theory is that strong cultures can help workers march to the same drummer; create high levels of employee loyalty and motivation; and provide the company with structure and controls, without the need for an innovation-stifling bureaucracy.

In a new book, John Kotter and James Heskett, both professors at Harvard

Business School, report on their four-year study to examine the link between corporate culture and economic performance. To do this, the authors calculated (from survey responses) 'culture-strength indices' for over 200 big American firms. Companies such as Wal-Mart, J.P. Morgan and Procter & Gamble scored highest; bankrupt, but still operating, American airlines scored among the worst.

Messrs Kotter and Heskett then tried to correlate the strength of the firms' cultures with their economic performance over an 11-year period. Their analysis did show a positive correlation between strong cultures and long-term economic success, but it was a weaker association than most management theorists would have expected. Strong-cultured firms seemed almost as likely to perform poorly as their weak-cultured rivals. The popular view that a strong corporate culture invariably leads to success, they concluded, was 'just plain wrong'.

Perhaps they should not have found this so startling. Strong cultures, even

those which once made a company successful, can also be an obstacle to change — just ask the top managers at IBM. Too strong culture can lead to corporate arrogance and insularity. America's General Motors and Britain's BP are two notorious examples. At its worst, a strong but misdirected culture can lead all of a firm's employees to run, hand in hand, in the wrong direction. So what makes a corporate culture a competitive weapon, rather than a liability?

To find out, the researchers dug deeper. Two smaller groups of strong- cultured companies were selected for closer study. The first comprised high-performing firms whose net profits had, on average, increased by three times as much over an 11-year period as those in the second group. A group of 75 investment analysts, who between them had followed the 22 companies in the two groups, were then asked whether corporate culture had had any impact on each firm's performance. Overwhelmingly — and surprisingly, since culture is the sort of 'soft' information that analysts are thought to ignore — they said that a strong culture ' had helped the high performers. They were equally convinced, however, that the low performers had been hindered by their cultures.

What is it about the cultures of the high-performing companies that makes them successful? The authors' theory is that firms whose cultures seem consistently to produce long-term economic success share one fundamental characteristic: their managers do not let the short-term interests of shareholders override all else, but care equally about all of the company's 'stakeholders'.

Over the long-term, mind you, the authors believe that these interests converge. 'Only when managers care about the legitimate interests of shareholders do they strive to perform well economically over time, and in a competitive industry that is only possible when they take care of their customers, and in a competitive labour market that is only possible when they take care of those who serve customers — employees.' That sort of thinking seemed to go out of fashion in America in the takeover and debt-crazed 1980s, when many firms paid so much attention to the short-term interests of their shareholders that customers or employees often seemed to have been forgotten.

To test their idea, Messrs Kotter and Heskett asked the investment analysts to rate a larger number of firms by how much each valued customers, shareholders and employees. Managers and employees at the companies were also interviewed; their views closely matched those of the analysts. Of these, 12 firms were identified whose cultures stressed all of the three big corporate constituencies — customers, employees and shareholders. A further 20 were identified which did precisely the opposite (whose managers, according to the analysts, cared mostly about 'themselves').

Over the 11-year period, Messrs Kotter and Keskett found that the 12 firms in the first group increased their revenues, on average, by four times as much as the 20 companies in the second group; their workforces expanded by eight times as much; and their share prices increased by 12 times as much (by 901%, against 74% for the second group). Perhaps most impressively, however, the net profits of firms in the first group soared by an average of 756% during the period, compared with an average increase of just 1% for companies in the second group.

The Influence of Globalization on Production and Workforce

From the 1750s to the middle of the nineteenth century, Britain led an industrial revolution that changed manufacturing forever. With other western countries, it produced consumer goods for the rest of the world well into the 1960s. Generations of workers spent their entire careers in the same workplace. Yet, nowadays, most of the consumer goods we buy have been made in the East. If, by magic, our shoes could return to where they were made, most would march all the way back China or Vietnam – and the jobs have gone with them.

Manufacturing gravitates to countries with lower labour costs, or more efficient production methods. Since the US economy started to recover in 2003, unemployment has remained high. This is because two million manufacturing jobs have gone elsewhere.

China is undoubtedly the latest big success story. As well as making 90% of the world’s toys, the country is now responsible for a quarter of global steel production. By contrast, much of the US’s industrial heartland has been a “rust-belt” for years. In Western Europe, too, industry has been declining for decades. European shipyards have been closing one by one ever since South Korean rivals learn how to build more efficiently and cheaply. Nearly all Britain’s coal mines have ceased production since it became cheaper to ship coal all the way from Australia. Since the 1980s, ten of thousands of British workers have lost their jobs in these sectors.

Some workers may have retrained and found jobs in hi-tech industries: however, most have ended up working in services. In the UK, more people are now employed in making sandwiches than in making steel. Even jobs in knowledge-based services are threatened by globalization.

Improvements in telecommunications have allowed firms to outsource work thousands of miles away. Bangalore, with its workforce of highly skilled computer programmers and engineers, has transformed itself into India’s answer to Silicon Valley. Many UK businesses have relocated their call centres there too – an Anglophone Indian worker will work for a fraction of his British counterpart’s salary. This all proves that even though employment in high-tech sectors such as pharmaceuticals and aeronautics remains strong, for most of us the idea of a job for life – or at least a safe job – has been untrue for years.