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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 CULTUREVS
Culture and Performance
WEAK CULTURE STRONG CULTURE
Silicon	Valley	Study	
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
Silicon	Valley	Study	-	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
%RevenueGrowth
1 2 3
	-		
	20		
	40		
	60		
	80		
	100		
	120		
Change	Efforts	
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
Performance
Rating
Predictive Compatibility
Score
High
Low
Time Since Hiring
%ofNewHiresStillatCompany
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%
Customer-centricCulture
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
Culture	is	not	monolithic,	and	different	groups	within	an	organiza=on	
can	have	significant	differences	in	cultural	cohesion	or	strength
Consistency: Know Your Culture
Culture	is	not	monolithic,	and	different	groups	within	an	organiza=on	
can	have	significant	differences	in	cultural	norms	and	behaviors	
	
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	
Performance
Rating
Predictive Compatibility
Score
High
Low
Time Since Hiring
%ofNewHiresStillatCompany
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
One	Fortune	500	company	compared	their	current	leadership	culture	to	
their	aspira=onal	(or	future)	leadership	culture	in	order	to	iden=fy	what	
behaviors	they	need	to	emphasize	to	meet	future	strategic	ini=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
Culture	analy=cs	technology	will	integrate	with	your	exis=ng	
HR	workflows	and	soQware	throughout	the	employee	life	cycle	
ASrac=on		
	
	
Ensure	that	you	are	
accurately	adver=sing	your	
authen=c	workplace	culture	
in	all	job	pos=ngs	
	
SoQware	Integra=ons:	
	
•  Applicant	tracking	system		
Selec=on	
	
	
	
Bring	consistency	to	your	
selec=on	process	by	capturing	
data	about	candidates	
preferred	norms	and	
behaviors.	
	
SoQware	Integra=ons:	
	
•  Applicant	tracking	system	
Reten=on/
Development	
	
Understand	how	culture	is	
impac=ng	performance	and	
reten=on	by	tracking	culture	
analy=cs	throughout	the	
employee	life	cycle.	
	
SoQware	Integra=ons:		
	
•  Performance	Management	
System	
•  HRIS	System
Q & A
Data	Driven	Culture	Measurement	
Additional Questions or Inquiries:
catherine@pomello.com
+1-650-741-4348

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Pomello - Culture as a Competitive Advantage

  • 1. Culture as Competitive Advantage Presented By
  • 2. 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.
  • 3. What leaders and employees say about culture
  • 4. 94% of executives and 86% of employees believe that a strong culture is important to business success
  • 5. 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. 6 ​ Culture eats strategy ​ for breakfast. ​  ~ Peter Drucker culture as competitive (dis)advantage
  • 8. 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
  • 9. Culture as Social Control Culture is the pattern of behavior that is reinforced by people and systems over time.
  • 10. 10 ​ I hate the word ‘culture’. Culture is really just how we all behave. ​ ~ Mary Barra ​ CEO GM ​ September 30, 2014 culture
  • 11. 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
  • 12. 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
  • 13. 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.
  • 14. 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.
  • 15. 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. 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
  • 17. 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
  • 19. “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
  • 20. 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 CULTUREVS Culture and Performance WEAK CULTURE STRONG CULTURE
  • 21. Silicon Valley Study 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
  • 22. 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 Silicon Valley Study - Results
  • 23. 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.
  • 24. Culture change efforts are associated with higher revenue growth %RevenueGrowth 1 2 3 - 20 40 60 80 100 120 Change Efforts 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)
  • 25. Culture impacts firm performance and employee turnover 100 0.65 0.7 0.75 0.8 0.85 0.9 0.95 Performance Rating Predictive Compatibility Score High Low Time Since Hiring %ofNewHiresStillatCompany 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
  • 26. Culture is important in creating employee engagement…
  • 27. 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% Customer-centricCulture 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
  • 28. How can you measure and manage culture?
  • 29. How is culture managed?
  • 30. 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?
  • 31. 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.
  • 32. 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
  • 33. What is the role of HR technology in managing culture?
  • 34. 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?
  • 35. Consistency: Know Your Culture Culture is not monolithic, and different groups within an organiza=on can have significant differences in cultural cohesion or strength
  • 36. Consistency: Know Your Culture Culture is not monolithic, and different groups within an organiza=on can have significant differences in cultural norms and behaviors 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.
  • 37. Scaling: Hiring for High Performance Requires Culture 0.65 0.7 0.75 0.8 0.85 0.9 0.95 Performance Rating Predictive Compatibility Score High Low Time Since Hiring %ofNewHiresStillatCompany 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
  • 38. Evolution: Managing Culture Change with Technology One Fortune 500 company compared their current leadership culture to their aspira=onal (or future) leadership culture in order to iden=fy what behaviors they need to emphasize to meet future strategic ini=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
  • 39. How to Integrate Culture Technology into Existing HR Workflows Culture analy=cs technology will integrate with your exis=ng HR workflows and soQware throughout the employee life cycle ASrac=on Ensure that you are accurately adver=sing your authen=c workplace culture in all job pos=ngs SoQware Integra=ons: •  Applicant tracking system Selec=on Bring consistency to your selec=on process by capturing data about candidates preferred norms and behaviors. SoQware Integra=ons: •  Applicant tracking system Reten=on/ Development Understand how culture is impac=ng performance and reten=on by tracking culture analy=cs throughout the employee life cycle. SoQware Integra=ons: •  Performance Management System •  HRIS System
  • 40. Q & A
  • 41. Data Driven Culture Measurement Additional Questions or Inquiries: catherine@pomello.com +1-650-741-4348