Culture eats strategy for breakfast

(upbeat music) - Culture each strategy for breakfast is one of the most famous and enduring mantras of management. Its meaning can be boiled down to the belief that when it comes to performance, an organization's culture plays a more important role than its strategy. But this is really the case. The phrase first appeared in, of all things, the September 2000 issue of the trade journal North American Paper Maker. But at that time, it wasn't breakfast, it was lunch. It wasn't until much later in 2011 that it was attributed to management group Peter Drucker. The problem is that no one can find any evidence that he actually said it. He certainly never wrote it in any of his 37 books on management. Since he died in 2005, I guess we'll never know. But no matter who came up with the phrase, it has assumed the status of a kind of holy commandment or a universal truth for many in the corporate world. But does it hold up to examination? Or does strategy deserve a bigger place at the table? I'm Michael Wade, a professor at the IMD Business School in Lausanne, Switzerland. And this is management under the microscope. In each episode, we take a widely held assumption about business, management, or leadership, and we put it to the test, giving you an inside look into the facts behind the myths and helping you to become a better, more informed manager. In this episode, we're unpacking culture, strategy, and breakfast. An article published in the April, 2015 edition of the Journal of Organizational Behavior explored the impact of culture on performance. It looked at 95 automobile dealerships over a six-year period. Dealerships are interesting in that they all sell the same products. And since they are independently owned and operated, they can have very different cultures. Therefore, a lot of the variants in performance can be put down to the differences in culture. The researchers focused on two performance measures, customer satisfaction for the service department and new vehicle sales for the sales department. The results were unequivocal. Culture was strongly linked to customer satisfaction in service departments and with vehicle sales in sales departments. Since the data was collected over time, they were able to make a causal link. Positive cultures led to better customer satisfaction and higher sales. Put simply, an engaged culture marked by high levels of involvement, consistency, adaptability, and a transparent mission improved sales and customer satisfaction. I spoke to one of the authors of this paper, Dan Denison, who is also Professor Emeritus at IMD and Chairman of Denison Consulting, a global culture transformation firm based in the United States. I started by asking him how he defines culture. - I think the most basic definition is the way we do things around here, and it's hard to change. It's a representation of what people have learned, what they know how to do, that you can't spell out in an endless series of kind of binders, you gotta get in people's heads. And once you get it in there, it's really hard to change. And that's the background of my research, showing that you can measure culture and that ones that have these characteristics grow faster, have a higher market to book ratio or more profitable or whatever. - Dan Denison has spent a lifetime trying to understand how company culture can influence performance. And it's probably no surprise that he subscribes to the notion that culture eats strategy for breakfast. Or perhaps more precisely, he feels that many good strategies get bogged down in cultural challenges when it comes time for implementation. - Culture definitely can call the shots with respect to a strategy. And if some of your listeners have found a way to implement a strategy without changing the mindset, the leadership, and the system of the organization, please get a hold of me. 'Cause I've been searching for years, decades, and I've never found an example where you could implement a new strategy without changing the mindset and leadership in an organization. - For those of you working in organizations, this perspective may strike a chord. Strategies are built by leadership teams, then rolled out with great fanfare at all hands meetings, on PowerPoint slides, and in conference calls. Yet these strategies often hit a brick wall when it comes to execution. And the mortar that holds that wall together is organizational culture. So the importance of culture is clear. But where does that leave strategy? - Culture is the way things are done around here. And most folks would probably say a good culture would be very much around happiness or wellness, these sorts of things. Is that going to lead to performance? Maybe. In some cases, yes, I would say so. In other cases, definitely not. - That's IMD professor of strategy, James Henderson, who is less ready to overlook the relevance and importance of strategy. We've already established that culture can be defined as the way we do things around here. So I asked him how he would define strategy. - Strategy is not about making people happy. Strategy is about allocating resources to the best opportunities. And that's where there's the fundamental difference between the two concepts, strategy and culture. - Strategy and culture are both important, but perhaps not equally so. The relative importance of each one varies depending on the context. - It's contingent and those situations are primarily an asset-light industries. Where it really matters because there's nothing else for a company truly to gain a competitive advantage. So these are the things where culture truly matters and culture would eat strategy for breakfast. It's clear though that there are other cases that would say that strategy doesn't eat culture for breakfast, but a strategy precedes culture for breakfast. - James Henderson brings up a couple of good points. First is the importance of context. For some industries, culture probably matters more than it does in some others. Asset-light industries that compete by creating a lot of intangible value, for example, professional service firms like consultants or lawyers, or service industries that rely on high levels of employee engagement like hotels or airlines. But then there are industries for which culture may matter a little less. Highly regulated industries or those that rely on patents like pharmaceuticals or resource industries like mining and energy. For organizations in these sectors, culture may matter, but making the right strategic decisions matters more. After all, making the wrong call about which drug to develop, where to locate a mine, or what interest rate to offer can make or break a company in these sectors. The second point is that strategy precedes culture and not the other way around. Decisions have outcomes, and those outcomes impact the culture that is created. If the decisions are good and performance subsequently improves, then that leads to a better culture. Conversely, if the decisions are poor and performance deteriorates, then the culture can be negatively impacted. Dan Dennis, however, disagrees, noting that culture often precedes strategy and that changes in culture can impact performance, sometimes in places where you least expect it. - This is a 57th Street 7th Avenue bound Q express train. The next stop is Times Square 42nd Street. - We've written several case studies on that, including one on the New York City subway, where what started with like survey information about how much top leadership was connected from the front line morphed into a discussion about maintenance, where they started to question the fact that they did maintenance on the subway on evenings and weekends. And so they would try to do all the repairs while the trains were like going by slower, which really, really limiting, extremely dangerous. And that led them to develop an approach where they took the radical step of shutting the station, the line, the tunnel down four nights in a row from 10 p.m. to 5 a.m. So that they could get in there and do maintenance work that hadn't been done for years. In some cases had never been done, was much safer, was much faster. And it's a great story because they did this shortly before Hurricane Katrina hit. Flooded the whole city. And that's one time when the New York City subway system got great press because they got 80% of the system back online in three days. - Previously, the culture within the New York City Department of Transportation revolved around service. They would make decisions that were in line with keeping services like the subway system operating at all times. The culture was built around the keystone topic of efficiency. Then they made the important switch to focus on safety rather than efficiency. And the culture began to revolve more around how to conduct operations in the safest possible manner. This cultural shift was important as it served to improve the morale of employees who become frustrated with the previous approach as they saw it as pushing profits at the expense of their welfare. A focus on safety resulted in improved morale which in turn led to better, more robust operations. Let's take a look at the interesting case of Microsoft's remarkable turnaround. In the 1990s and early 2000s, Microsoft was consistently one of the most valuable companies in the world. Then it went into a steady decline as it clung onto old revenue models and traditional ways of doing things until it hit a low in 2009. Since then, it has enjoyed a remarkable rise and as of early 2021 was once again among the most valuable companies in the world. What happened? Ladies and gentlemen, Steve Ballmer! In the 2000s, Microsoft was led by Steve Ballmer, an early employee and head of sales who succeeded co-founder Bill Gates. He had a high-octane, intimidating, hyper-competitive leadership style. Developers, developers, developers, developers, developers! Sales and profits rose throughout much of his tenure as CEO. But with his singular focus on short-term performance, Microsoft missed out on many of the biggest trends of the decade, including smartphones, search engines, social media, and the cloud. Ballmer doggedly held on to the CD-licensed revenue model for software and spearheaded some highly dubious acquisitions like Nokia's handset business. All these factors and more led Forbes to rate him as the worst CEO of a large publicly traded company in 2012. Further, he was a proponent of the rank and yank system of employee classification, where employees were forced to classify their peers into one of three categories. The top 20% of workers were considered the cream of the crop and set up for promotion. 70% received adequate ratings and were encouraged to improve. While the bottom 10% were characterized as underperformers, many of whom were subsequently fired. The system reportedly led to a highly charged political environment within the company. In 2014, Microsoft appointed a new CEO, Satya Nadella, with a very different style. He got rid of the ranking system and pushed an agenda for Microsoft to work more harmoniously together so that the competition would be external rather than internal. He also prioritized building a learning culture. - Take two kids in school. One of them has a lot of innate capability and the other one has a less innate capability. But the person who has less innate capabilities will learn it all. And the first one who has more innate capabilities will know it all. We know how that story ends. The learn it all does better than the know it all. And I said, God, this is powerful. This applies to me as much as anybody else. And so I said, I gotta become a learn it all. And I said, well, it applies to us as a company. So we took this growth mindset meme and adopted it. - Nadella focused on transforming Microsoft to meet the needs of future competitiveness that was based on different products like cloud solutions, different capabilities, like agile and collaborative working methods, and a different mindset based on learning, empathy, and long-term thinking. In other words, he pushed an agenda for cultural change. And the company's successful shift to the cloud is unlikely to have happened under Ballmer's aggressive, short-term, performance-oriented culture. But that's not the only way to tell the story. It took that vision and that reallocation of resources to make that happen. Now, couple that with the cultural aspect of, yes, we're a learning organization. We're much more around trying new things, less about the performance, a lot more about the learning and making the mistakes, and so on and so forth. This is where there is a nice balance. But again, the argument is the fundamental drive to start it was from a vision and a reallocation of resources. It's easy to work with an organization that's growing to say we have a great culture. When the organization is not doing well and they have to do significant shifts and changes, then do you work on the culture? I mean, seriously, if you're challenged and you're a leader, do you really think that you're going to be working on the culture and therefore culture eats strategy for breakfast? I would like to say and I would like to tell my dear colleagues in the cultural area that they're smoking something. Once again, that's strategy professor James Henderson. Is it possible that Microsoft's turnaround was really the result of hard choices to reallocate money, people and management attention away from traditional business areas like windows and office towards emerging areas like business services and cloud solutions? Was all that talk about cultural change really just a smokescreen for some good old-fashioned strategic decision making? Culture eats strategy for breakfast is a nice sound bite, but it's really an oversimplification. Perhaps a better analogy would be an outdoor trek. Strategy is the journey in the destination. It's the decisions we make about where we want to go, how we train for the journey, what food and equipment we bring with us, and so on. Culture is the landscape. Are there mountains to climb, rivers to cross? Are there well-prepared paths to follow? Or do we need to clear a new path through the jungle? The terrain influences the preparation and the destination. Both need to be considered. Microsoft charted a new destination, but it couldn't have made it through the old cultural landscape. The problem with culture, however, is that it's a lot harder to change than strategy. Terrain takes a long time to reshape without some very heavy equipment. If you have a problem with your strategy, you can define a new one. If you have a problem with your culture, what do you do? I asked this question to Dan Denison. Culture is how we take notes in our head about how to make an organization work, how we share that, how we pass that along to the next generation, how we scale up something that worked great with a small team. But now we need to do it with 12,000 people. In my experience, when people start kind of mumbling about, well, it's the culture, it kind of means that they've hit their head against three things at once. And that's the mindset of the people, the skills and capabilities of the leaders, and the system that they have to create. And those all have to get aligned to meet a need. The world of digital transformation provides a common contemporary example of this difficulty. Many organizations today are faced with digital disruption. Banks, retailers, telecommunications companies, broadcasters, and many others are up against new threats and opportunities due to advances in digital technologies and new disruptive business models. And one of the most extreme examples comes from the media industry. Traditional print publishers have been heavily disrupted by digital media companies. How many of you still buy a daily newspaper or reprint magazines? Old revenue models such as subscriptions, classifieds, and print advertising have all fallen dramatically. One such company is Germany's Axel Springer Group, owner of some of the premier German-language print media brands of the 20th century, including Bild, Die Welt, and many local newspapers and magazines. By the 21st century, however, the company was facing falling revenues across all of its business lines. And in response, launched an ambitious digital transformation strategy. Their bold goal was to achieve 50% of revenues and profits from digital sources within 10 years. The company was clever enough to recognize that its culture was going to be a barrier to achieving this objective. So it embarked on a large cultural transformation program, recognizing that strengths of the past could easily become weaknesses of the future. Here's Axel Springer's former head of corporate human resources, Alexander Schmidt-Losberg, talking about the influence of cultural change. You have to employ new talents. You have to develop, qualify the people you have on board. You have to implement new processes and structures. And of course, the cultural change should be sensed. You should reach the heart of the people. Many topics behind that, that was also our challenge of my team to come up with ideas, with activities in this field, because it is very obviously crucial that we need to get our employees on board in this transformation process. Axel Springer took a very structured approach to changing its culture. If you want to modify or navigate your terrain, first you need a map. The company benchmarked its culture on factors that it saw as being relevant to reaching its strategic goals. For example, its analysis revealed that it had a strong culture of perfection. It's understandable that spelling mistakes can't be tolerated in newspaper articles, but this attitude pervaded the organization so that no errors were tolerated anywhere. Therefore, few people took risks in case they made mistakes and decisions were taken very slowly and deliberately. In the digital world, speed is often more important than perfection. It's okay to be wrong as long as you learn quickly from your mistakes and adjust. Recognizing this, Axel Springer made a number of adjustments to its processes, incentives, communication policies and reporting lines to prioritize speed over perfection. They replicated this approach across six key areas of their culture. The landscape needed to change to make the digital transformation journey easier. In the end, they reached their target of 50% of revenues and profits on digital sources three years ahead of schedule and have continued to transform ever since. Cultural change is a combination of adapting old ways of doing things while adding new ones. Dan Denison describes it this way. - It's really helps to look at culture as a big bundle of habits and routines. You can divide habits into four different categories. One of them is good old habits. That's the foundation of the organization. It made it great in the past, it'll make it great in the future. But there's also some bad old habits. Those are things that may have worked great in the last generation, but they're not helpful at all. Now they belong in the museum, not in the strategic plan. And then there's also new habits. You have to look at a blank sheet of paper and say, by God, to compete in this new environment, what do we have to create that's different, that's new? And you've got to define those and then you've got to perfect those. And we don't always get it right the first time. So we also had a lot of fun with the category that we call bad new habits, where in response to a new environment, you try something new, but you don't hit the target right the first time. And so you got to rethink and try again. Clearly, strategy and culture both matter and neither eats the other for breakfast, lunch, or dinner. Like a journey and a landscape, both matter. And it seems to me that the relative importance of each depends on at least four different factors. First, industry. As James Henderson pointed out, culture seems to be especially important in asset-light industries, such as those that build a competitive advantage around superior knowledge or services. This makes sense, as the main resources within these organizations are people. And thus maintaining a positive culture is important to attract the best talent, stimulate better performance, and reduce turnover. So if you're a professional service firm, digital giant, hotel chain, or a university, you better spend a lot of time fine-tuning your culture. Conversely, if you're in an asset-heavy industry, such as mining, forestry, manufacturing, or transportation, culture still matters, but it's probably more important to make the right strategic decisions around which markets to compete in and how to allocate your assets. Bad strategy can quite literally sink your ships. Second, your objectives can make a big difference. If your goals are around employee engagement, customer satisfaction, or corporate well-being, then culture is pretty critical. If you're more focused on short-term financial performance, however, then strategy might take the lead. Third, organizational context and history can play a large role. Some organizational cultures are really ingrained and super hard to change, at least proactively. It took a new CEO and some not-so-great results to push cultural change at Microsoft and an existential threat of digital disruption to convince Axel Springer to change his culture. Finally, the fourth factor to take into consideration is the prevailing external environment. Sometimes, this is relatively stable and predictable. At other times, it's dominated by fast-paced, unpredictable change. In those cases where the companies have been under a significant stress, that then exposes those assets and businesses that are not doing particularly well, then it gives a great opportunity to reallocate resources to their best use. Hotel chains, right? What are they going to do? Yes, service is unbelievably important. No doubt about it, service is the most important thing in a hotel business. However, in crises like this, where you have occupancy rates down at 20% or less, the hotels are making zero, they're losing money like crazy, they have to reallocate resources to the best use. You know, we can't focus on having happy employees. It's impossible because those happy employees are going to be out of a job. The COVID-19 pandemic has really put a lot of pressure on organizations, both positively and negatively. While culture can play an important part in dealing with this pressure, it's probably strategy that takes a leading role. Decisions need to be made quickly, assets need to be reallocated, and objectives need to be revised and reset. Culture without strategy is like a landscape without a destination. It may be nice to look at, but it's not going anywhere. Strategy without culture is like trying to cross the Alps in flip-flops. You need to consider both, and the extent to which they are prioritized depends completely on your situation. So, if someone asks you if you think culture eats strategy for breakfast, tell them that if it does, it's going to have indigestion for the rest of the day. You've been listening to Management Under the Microscope, written and presented by me, Michael Wade, and produced by Pete Norton. We're a production of the IMD Business School in Lausanne, Switzerland, one of the world's leading providers of insights and education for executives. To find out more about the school and to read our new magazine, I Buy IMD, which has pieces on everything from the post-pandemic future of the workplace to the social cost of video gaming, follow the links in the show notes of this episode. Next week, we'll be turning our attention to a piece of corporate lore that has made a small handful of people rich beyond their wildest dreams. It's the idea that CEO's are largely responsible for a company's success or failure. To see if this thinking holds water, we speak to a board chairman who chooses CEOs, a researcher and leadership coach who advises them, and a finance professor who studies them, and we'll take an unexpected lesson from the tenures of Steve Jobs and Tim Cook and Apple. Hit subscribe or follow wherever you're listening to this to be sure to hear it as soon as it comes out. And finally, if you're enjoying this show, please consider leaving us a rating and a review. To make this easy, we've included a link in the show notes which will bring you straight to our page on Apple Podcasts. From there, all you have to do is tap the stars to rate us. Thanks for listening, and I hope you can join us for the next edition of Management Under the Microscope.