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Evidence of the relationship between Culture and Performance


Michael Daun - - 0 comments

“Culture eats strategy for breakfast”

Peter Drucker

Peter Drucker famously stated that “culture eats strategy for breakfast”. But what is the evidence that culture has a positive impact on performance? We spend some time looking around and this is what we found:

Summary

There are a number of studies that have been done by academic researchers on the relationship between culture and performance, and the general conclusion is that there is a relationship between “strong cultures” and various business-related outcomes.

 

In addition, there are more studies and surveys done outside of the academic domain, which support the positive relationship between “strong cultures”, attractive employers or employee engagement and performance. Also, surveys of business leaders reveal their own conviction about a positive relationship between culture/engagement and performance. 

 

While these studies point to a positive relationship, often with a dramatic difference in outcome between “strong cultures” and “weak cultures”, these studies have been criticized for their methodology, specifically for the definition and measurement of “strong culture”; the casual direction of the relationship; and the variation over time. Nonetheless, very few results prove the opposite – that there is no link between culture and performance.

Measuring relationship between culture and performance

For decades it has been argued that there is a relationship between culture and performance, specifically between “strong cultures” and performance. Several studies have shown a positive relationship between certain features of culture and various measures of performance. (Jaques, 1951; Pettigrew, 1979; Ouchi, 1981; Peters & Waterman, 1982; Kotter & Heskett, 1992; Denison, 1984, 1990 & 1995; Brown, 1998; Ogbonna & Harris, 2000; Hartnell, Ou & Kinicki, 2011; Sackmann, 2011). Such studies have not been without criticism for their methodology ((Rousseau, 1990; Siehl & Martin, 1990; Lim, 1995))

 

In order to measure the relationship between culture and performance, both culture and performance have to be defined. There is some variation in how this has been done, both in academic papers and in the many reports done by consultants. There is no standard approach to measure culture and there is no single measurement for performance.

 

Early studies referred to strong cultures are mostly defined as a culture where espoused values are consistent with behavior and where all (or most) employees share the same view of the firm. Later studies sought to link performance to certain cultural traits. Recent studies are also taking into account the environment, looking to the various types of cultures traits effect on performance in different environments. Here below is a list of different approaches taken by researchers studying correlations between measures of culture & performance indicators (Sackmann, 2011):

 

  • Shared goal orientation & humanistic values – financial performance (Ouchi/Jaeger, 1978)
  • “Strong” CC – (short-term) performance (Peters/Waterman, 1982) Culture fit to environment. 
  • “Strong” CC – strong growth (Calori/Sarnin, 1991)
  • “Strong” CC – long-term economic performance (Kotter/Heskett, 1992)
  • “Strong” CC & adaptability – short-term performance (Gordon/TiMaso, 1992)
  • Involvement – short- and medium-term performance (Denison, 1990)
  • Competitive, entrepreneurial CC – performance (Deshpandé et al., 1993)
  • Mission/consistency in large firms – profitability (Denison/Mishra, 1995)
  • Involvement/adaptability – growth in sales (Dension/Mishra 1995)
  • Teamwork – high level of performance (Petty et al., 1995)
  • Innovative culture, goal orientation –high performance work practices (Den Hartog, 2004)

 

Combined, the studies don’t yield one simple straightforward answer that can serve as evidence about the relationship about culture and performance. Despite the fact that some authors have argued against the link between the two, most of the researchers claim evidences of a link between the organization’s culture and performance of the company. Results from a few are listed below:

Denison (1990)

A sample of 127 companies in a wide variety of industries incorporated primarily in the US, were studied from 1995 to 2010. From this Denison proves a link between culture and performance: Not only a short-term impact on performance but a lasting effect as a competitive edge and a making a difference in financial performance. 

 

Performance measureBottom 25%Top 25%
Return on Assets1,2%3,5%
Sales Growth7,5%24,8%
Market to Book ratio2,54,0

 

www.denisonconsulting.com/docs/provingTheLink.pdf

Kotter & Heskett, Corporate Culture and Performance (1992)

John P. Kotter and James L. Heskett’s study presented in the book “Corporate Culture and Performance” (1992) documented results for 207 large U.S. companies in 22 different industries over an eleven-year period. Kotter and Heskett reported that companies that managed their cultures well saw revenue increases of 682% versus 166% for the companies that did not manage their cultures well – stock price increases of 901% versus 74% – and net income increases of 756% versus 1%. 

 

Average increase for 12 firms with performing-enhancing culturesAverage increase for 12 firms without performing-enhancing culturesDifference
Revenue growth682%166%516%
Employment growth756%1%755%
Stock price growth282%36%246%
Net income growth901%74%827%

 

In his later book The Culture Cycle of 2012, Prof. James L. Heskett, effective culture can account for 20-30 percent of the differential in corporate performance when compared with “culturally unremarkable” competitors.

Boyce (2015), Which comes first, organizational culture or performance?

The only study who has been able to show causality in the relationship between culture and performance is a study by Boyce, Gillespie et al published in 2015 in the “Journal Of Organizational Behavior“. This study collected data from 95 franchise automobile dealerships over 6 years and focused on longitudinal “culture – performance” interactions to determine which one had causal priority. The researchers found that “a positive culture boosts performance, but performance alone does not create a positive culture”.

Rajgopal et al, (2015) Executives’ opinion about culture - performance

Over 13 months, Rajgopal with co-authors Jillian Popadak, John Graham, and Campbell Harvey, surveyed almost 2,000 CEOs and CFOs around the globe, and then additionally interviewed executives at nearly two dozen mostly large firms with average sales of $50 billion. Executives overwhelmingly indicate that an effective corporate culture is essential for a company to thrive in the modern business world:

  • More than 90 percent of executives said culture was important at their firms;
  • 78 percent said culture is among the top five things that make their company valuable;
  • And more than 50 percent of executives said corporate culture influences productivity, creativity, profitability, firm value and growth rates;
  • Only 15 percent said their own corporate culture was exactly where it needed to be;
  • And 92 percent said they believed improving their firm’s corporate culture would improve the value of the company.

 

The researchers claim the study provides systematic evidence that companies with effective corporate cultures are less likely to be associated with unethical behavior, short-termism, or using real earnings management to pad quarterly earnings.

 

More: www.youtube.com/watch?v=7g-BLzjEbXU

Further popular reports linking attractive workplaces (work climate, engagement) to performance.

  1. 13 companies that have appeared on Fortune’s annual 100 Best Companies to Work For list every year also see higher average annual returns, with cumulative returns as high as 495% instead of 170% (Russel 3000) and 156% (S&P 500).
comparative cumulative stock market returns

2. Using data over a ten-year period of employee engagement surveys and company results, Queen’s University Centre for Business Venturing found the following for organizations that possessed an engaged culture:

  • 65% greater share-price increase
  • 26% less employee turnover 
  • 100% more unsolicited employment applications 
  • 15% greater employee productivity
  • 30% greater customer satisfaction levels.


www.smith.queensu.ca/magazine/winter-2014/features/engaging-employees

 

3. Companies named to Glassdoor’s “Best Places to Work” list broadly outperformed the S&P 500 from 2009 to 2014. A simple portfolio of each new class of winners exhibits higher returns than the overall market in 5 out of the past 6 years. Since 2009, a portfolio of Fortune’s “Best Companies to Work For” companies outperformed the S&P 500 by 84.2 percent, while a similar portfolio of Glassdoor’s “Best Places to Work” outperformed the overall market by 115.6 percent. A portfolio with the 30 lowest-rated public companies in terms of employee ratings, broadly underperformed the market from 2009 to 2014 in terms of stock returns. These results suggest an important economic link between company intangibles, such as employee satisfaction, and broader financial performance among large publicly held companies.

Glassdoor: Relative value of best places to work stock portfolios vs the s&p 500

4. Grant Thornton LLP and Oxford Economics did a study on organizational culture and its correlation to business outcomes and financial performance, based on survey data of 1,000 professionals from U.S. companies. The study showed that cultural factors such as collaboration, employee engagement, employee retention, and customer satisfaction have a clear relationship with revenue growth.

Executives who said their culture is extremely healthy are 1.5 times more likely to report average revenue growth of more than 15 percent over three years. Among the public company survey respondents, those with extremely healthy cultures are nearly 2.5 times more likely to report significant stock price increases over three years.

www.grantthornton.com/library/press-releases/2019/april/culture-cash-connection.aspx

 

If we have missed any relevant study giving evidence for or against the relationship between culture and performance, please let us know!

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