Culture Really Matters.
“Culture Eats Strategy for Lunch.”
—Neal Patterson
Background
Culture, in the context of business and investing, is often considered a hard concept to grasp. It can be difficult to quantify, define, or visualize, yet both business leaders and academic research consistently affirm that culture plays a crucial role in determining an organization's success. This is not surprising—an organization’s effectiveness is ultimately shaped by its people, and culture has always been a key factor in deciding how well (or poorly) people collaborate. Researchers specifically cite culture as having outsized effects on the following six areas:
1. Employee Engagement and Productivity: According to a study by Gallup (2017), organizations with high employee engagement—often a byproduct of a positive culture—experience 21% higher profitability. Additionally, a study by Harvard Business Review (2018) found that a positive culture can reduce turnover by as much as 30%.
2. Financial Performance: The Corporate Culture and Performance study by Kotter and Heskett (1992) demonstrated that firms with cultures that emphasized adaptability, innovation, and employee empowerment had four times the revenue growth and 12 times the stock price growth over an 11-year period compared to those with less adaptive cultures.
3. Innovation and Adaptability: Research by McKinsey (2019) shows that companies with a culture that fosters openness, learning, and agility are 1.5 times more likely to experience consistent innovation.
4. Customer Satisfaction and Loyalty: A study by Deloitte (2016) found that companies with a strong culture have a 30% higher customer satisfaction rate than those with a weak culture.
5. Risk Management: Research by the Institute of Business Ethics (2018) found that companies with strong ethical cultures are less likely to face regulatory fines and reputational damage.
6. Sustainable Growth: According to a study by the Barrett Values Centre (2020), organizations with cultures aligned with their strategic objectives are more likely to achieve long-term growth.
In my opinion, culture is a unique, intangible force that cannot simply be replicated from one organization to another. What proves effective in one organization may not work for another, and what constitutes a “good” culture for one organization might be considered “bad” or ineffective elsewhere. All in all, culture is deeply intertwined with an organization’s processes, strategies, and overarching mission, making it an intrinsic element that is unique to each organization’s identity.
To help visualize the importance of culture, let's take a brief detour to explore the basic components that drive an organization’s outcomes using a modified version of the Vision-to-Value formula. I’ve created a visualization below:
The Vision-to-Value formula seen above breaks down the fundamental components that drive an organization’s outcomes: vision, mission, strategy, structure, process, and tools. While it identifies the key elements required for achieving results, in this scenario, there is nothing holding the components together. As you can see, since none of the aforementioned components fit together, there is a lack of results. In other words, when members of an organization all have individual ideas on each of the six fundamental components, but are not aligned, results (or at least desired results) are hard to come by. Let’s see what happens when we add culture to this equation:
When culture is added to the mix, it ensures that everyone within the organization is aligned. This alignment means that all members agree on the vision, mission, strategy, structure, processes, and tools needed to achieve their targeted results. Put simply, culture is the glue that holds an organization together.
What Are We Aligning? (Breaking Down the Vision-to-Value Formula)
So far, we have established the importance of culture and have developed a simple definition of culture: alignment on the vision, mission, strategy, structure, processes, and tools needed to achieve an organization’s desired results or goals.
To wrap things up, I’ll provide a brief breakdown of what vision, mission, strategy, structure, processes, and tools can mean.
1. Vision: Creating Purpose for the Journey
Vision is the articulation of a future state. It is both a purpose and a destination for the organization. A good vision is one that is understandable and believable, but at the same time, beyond the current understanding of how to achieve it. Vision should challenge but ultimately be within the reach of an organization’s abilities.
2. Mission: Action the Vision
Mission is the actionable and achievable extension of the vision. The two are very similar, with the mission being actionable and repeatable. Mission provides a clear direction required to create the future state described by the vision. Additionally, the mission requires more frequent adjustment.
3. Strategies: Big Decisions, Clever Paths
Strategy involves choosing a major pathway for an organization. An organization cannot simply go down every road or path available. Strategy always follows the mission; if an organization has developed a strategy but has yet to define the mission, the organization is either lost or soon will be.
4. Structure: Organizing the Organization
Structure is the way an organization arranges the relationships of people and functions within itself. Structure always follows strategy; however, many organizations end up planning structure before strategies since structure is not as abstract.
5. Processes: The Moving Parts of the Organization
In many ways, success is all about processes. Processes are the defined, repeatable methods used to accomplish tasks predictably. They should be directed by the vision, mission, and strategy and supported by policies and systems. Put simply, processes are systematic connections that produce repeatable, predictable results.
6. Tools: Levers in the Organization
Tools are the constructed (not naturally occurring) aids in achieving results. Processes and tools are closely linked, with tools often designed as the tangible interface into a process.
In the Context of Asset Allocation...
To end this write-up, here are some things I have done in the context of gauging the culture of an investment firm:
- Speaking to junior associates of a firm.
- Speaking to LPs who have not re-upped.
- Speaking to associates who have departed the firm.
- Speaking to past PortCo management and sellers.
- Speaking to buyers of PortCos.