001

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Table of Contents
 
Title Page
Copyright Page
Foreword
Preface
Acknowledgements
Author’s preface to the English edition
 
Part I - Corporate culture and leadership—factors for corporate success
1. Corporate culture: Fashion, fad or a critical factor for staying competitive?
1.1 What is corporate culture?
1.2 What does corporate culture do?
1.3 Corporate culture and performance
1.4 What makes corporate culture critical for a firm’s success?
1.5 Leadership behavior—a key determinant for corporate culture
 
Part II - Mindful design, heedful practice: Exceptional examples of corporate culture
1. BMW Group
1.1 Company history—key influences
1.2 Industry and business environment
1.3 Economic performance
1.4 Corporate culture in action
2. Deutsche Lufthansa Group
2.1 Company history—key influences
2.2 Industry and business environment
2.3 Economic performance
2.4 Corporate culture in action
3. Grundfos A/S
3.1 Company history—key influences
3.2 Industry and business environment
3.3 Economic performance
3.4 Corporate culture in action
4. Henkel KGaA
4.1 Company history—key influences
4.2 Industry and business environment
4.3 Economic performance
4.4 Corporate culture in action
5. Hilti Aktiengesellschaft
5.1 Company history—key influences
5.2 Industry and business environment
5.3 Economic performance
5.4 Corporate culture in action
6. Novo Nordisk A/S
6.1 Company history—key influences
6.2 Industry and business environment
6.3 Economic performance
6.4 Corporate culture in action
 
Part III - Corporate culture: A factor for success
1. The dynamics of the culture development process
1.1 Conscious evaluation of the existing corporate culture
1.2 Starting a conscious process of culture development
1.3 Regular examination of the corporate culture as it is lived
1.4 Continuous cycle of culture development: Maintenance, adjustment, examination
2. Characteristics of a corporate culture that supports success
2.1 Clear identity, understanding of goals and implementation of objectives
2.2 Consistent focus on the customer
2.3 Focus on innovation, learning and development
2.4 Partnership-oriented leadership behavior that conforms to the corporate culture
2.5 Continuity of leadership
2.6 Intrapreneurship
2.7 Acting as corporate citizen
2.8 Committed, transparent and qualified corporate governance
2.9 Focus on profitable and sustainable growth
2.10 Basic beliefs, attitudes and lived values
3. Summary
 
Checklist
References
Web sites
The author
The Bertelsmann Stiftung

Preface
The inexorable march of globalization and digitalization in business and society has placed new demands on the competence, flexibility and mobility of managers and employees in every company. In particular, the internationalization of markets and the resulting challenges to a company’s continuity have fundamentally altered both the responsibilities of leadership and its complexity. Companies that cling to rigid hierarchies, centralized management structures and traditional practices may succeed in the short term, but they face dwindling growth and lost jobs down the road.
At the same time, the way people think about themselves—and about their jobs—has changed fundamentally. Wherever managers rely on fixed rules and authoritarian structures, employees will respond with resentment and resistance, and eventually they will refuse to cooperate. In corporate and government offices alike, today’s leaders must recognize that people want a part in actively developing their workplace. They want to be involved in the decision-making process, and they want work that engages their skills and creativity. Only a corporate culture of partnership and dialogue-oriented management can establish the conditions in which motivation flourishes, creativity thrives and employees identify with their company’s mission and goals. Only when a company and its leaders embrace their social responsibility does its performance contribute to the sustainable development of society.
Like many other business leaders in the period after World War II, I experienced firsthand what a company can achieve when its people have that “we” feeling of working together for a common goal. Granted, times have changed. World politics and the global economy have changed—but the fundamental principles of leader-ship remain as relevant as ever. They rest squarely on decentralized organizations and maximum delegation of responsibility. Thus, no matter how large the company, effective leaders offer talented entrepreneurs scope for creativity. They engage their employees by inviting them to question how the work is done and to share in the company’s success. They respect the diverse cultures and religions represented in their workforce, their communities and their markets.
The key to a company’s success still lies in people working together for a goal they understand and share. Underpinning this are its corporate governance models and its constitution, which set forth the rights and responsibilities of employees and managers alike. Its leaders set the tone. Inevitably, the people in charge bear responsibility for shaping the corporate culture. They must model partnership, dialogue and a strong work ethic. They must live the values they proclaim. Only then can everyone identify with the company and its goals. Many senior managers have yet to recognize the enormous impact of the corporate culture on a company’s continuity, growth and success.
But effective business leaders do not stop at establishing sound governance models and corporate cultures. They also review and adapt them in response to changes in society, the economy and the working world. The case studies presented here offer proof that a partnership-oriented corporate culture and business success are not mutually exclusive—on the contrary, they go hand in hand. Examining each of these exemplary companies and the cornerstones of their corporate cultures should encourage all of us to actively and thoughtfully pursue the same path. To the companies that participated, the researchers at Booz Allen Hamilton and the Bertelsmann Stiftung, and the author of this book, I extend a sincere compliment: I learned a great deal from this study.
 
Reinhard Mohn
Founder and member of the Board of Trustees,
Bertelsmann Stiftung, Gütersloh

Foreword to the German edition
Business leaders at the start of the 21st century face major challenges on all sides. The markets for jobs, products and capital are increasingly international, even global. New technologies call for new business practices. Demographic change brings both structural and human repercussions. In a setting that is rife with uncertainty and constantly changing, it becomes all too easy to lose sight of crucial values. Therefore, we must intensify the search for promising people-oriented approaches to leadership and corporate culture.
There are no easy answers to what makes a successful leader. Furthermore, the range of opinions about corporate culture and the variety of strategies put forth for corporate leaders make it difficult to get to the heart of the matter. Identifying the factors that propel corporate success means more than seeking out what Hermann Simon called the “hidden champions.” It means looking beyond successful strategies to the “hidden cultures” that quietly but unerringly advance those strategies. It means exploring how the leaders of thriving companies articulate and renew that corporate culture. “Better to bloom in the shadows than to wither in the sun’s glare,” said Michael Hilti as he accepted the Carl Bertelsmann Prize 2003. His words very accurately described the philosophy of all the companies nominated for that year’s prize.
What lies at the core of these successful companies? What factors have made them competitive in the first place and keep them so despite external forces? How do they motivate managers and employees to identify with the company’s goals? What organizational and management structures do they establish to unleash creativity and spur dynamic growth? Is there, in fact, a straightforward model for thriving in a globalized world?
When a company fails, explanations come readily to mind. The reasons range from misjudged markets or products, unfavorable cost structures and site aspects and poor planning for succession to lack of leadership and mistakes by employees and managers.
On the other hand, such supposedly soft parameters as a positive corporate culture and effective leadership do not yet spring to mind when people think about the factors that underpin a company’s success. To heighten public awareness of their significance, the Bertelsmann Stiftung investigated leadership and corporate culture in a project for the Carl Bertelsmann Prize 2003. Its researchers studied companies all across Europe that for decades had modeled a consensus-oriented, people-focused culture of leadership and dialogue and achieved success while doing so. The case studies confirmed that this model of success necessarily went hand in hand with a keen awareness of social responsibility. The evaluation of the research and case studies supports the conclusion that corporate culture and leadership are indeed success factors.
Despite the diversity of their approaches to establishing a corporate culture, the best companies all drew their entrepreneurial vigor from a positive attitude, a concentration on success and a focus on their own strengths. Their leaders viewed the competence, motivation, commitment and creativity of the company’s managers and employees as crucial assets. They recognized the firm’s philosophy, leadership values and core competencies as its most important capital. Their leadership depended on self-discipline and trust.
The following structures and practices ran through the case studies like a seam of gold:
1. The commitment to setting transparent and coherent guidelines and following them consistently
2. The internalization and conscious modeling of the corporate culture and management principles
3. Continual attention to the corporate culture at all levels, with purposeful training to maintain it
4. The exercise of social responsibility by enhancing employees’ quality of life and supporting projects that benefit society
5. Participative management and the promotion of communication between employees and their supervisors
6. Emphasis on a culture of innovation and learning, with a willingness to learn from mistakes
7. Insistence on performance-oriented organizational structures that rely on partnership, cooperation and respect
8. Measures to ensure continuity of leadership by planning ahead for succession to top positions as well as selecting senior managers from within the company
9. Training and continuing education within a framework of systematic employee development, taking into account the corporate culture and management practices
10. The rigorous formulation of the rights and responsibilities of managers and employees within the corporate culture
With this book, Success Factor: Corporate Culture, the Bertelsmann Stiftung and Booz Allen Hamilton offer business managers, employees, and economic and social leaders a practical guide to developing the leadership practices and organizational cultures so needed in today’s complex world. We are particularly grateful to the author, Sonja A. Sackmann, an active member of the commission for the Carl Bertelsmann Prize 2003, who systematically evaluated its findings. We also owe special thanks to the companies who participated so constructively in the study.
 
Prof. Dr. Dr. h.c. mult.
Heribert Meffert
Chief Executive Officer,
Bertelsmann Stiftung,
Gütersloh
 
Liz Mohn
Vice Chair of the Executive
Board, member of the
Board of Trustees,
Bertelsmann Stiftung,
Gütersloh
 
Dr. Rolf W. Habbel
Senior Vice President,
Managing Partner
for Europe
Booz Allen Hamilton,
Munich
 
Gütersloh/Munich, August 2004

Acknowledgements
A great many people contributed to this book. I would like to extend my sincere thanks to them, for without their dedication and cooperation, this book would never have been published. First and foremost these are the employees, senior managers, works council members and board members of the six firms—the BMW Group, Deutsche Lufthansa AG, Grundfos A/S, Henkel KGaA, Hilti Aktiengesellschaft and Novo Nordisk A/S—who so readily provided information about their companies. In the final phase of reviewing the case studies for the original German edition and for the updated English edition, I received generous assistance from Birgit Hiller and Martina Hatzel at the BMW Group, Oliver Kaden and Christiane Frühe at Deutsche Lufthansa AG, Sune Salling-Mortensen at Grundfos A/S, Ernst Primosch, Dirk Neubauer and Katrin Latki at Henkel KGaA, Klaus Risch at the Hilti Aktiengesellschaft, and Lise Kingo and Susanne Stormer at Novo Nordisk A/S.
The members of the Working Commission who studied potential candidates for the Carl Bertelsmann Prize 2003 engaged in vital discussions that contributed significantly to the development and refinement of the 10 evaluation criteria, as well as intensive debate to recommend a short list of nominees from among the 10 finalists. The research teams from the Bertelsmann Stiftung and Booz Allen Hamilton traveled all over Europe under a very tight deadline to complete on-site interviews with personnel from the finalist firms. These interviews augmented the documents already analyzed with a more in-depth impression of the firm’s corporate culture and management style. The information gathered on site was then condensed and presented to the Working Commission. Maria Akhavan of Gabler Verlag showed remarkable flexibility about publication deadlines for the German edition and offered valuable suggestions for its design. Gabi Trillhaas copy-edited the entire manuscript in short order.
I am very grateful to Tina Böcker of the Bertelsmann Stiftung, who managed the publication process, reviewed the German texts for consistency and style and contributed generously to the success of the project. Courtney Searls-Ridge and her team—Celia Bohannon, Noelle G. Knapp-Lucero and Marissa Wright—of German Language Services in Seattle, Washington, did a wonderful job in translating the book and the updated case studies on a very tight timeline. I would also like to thank the members of the editorial team, Prof. Dr. Dr. h.c. mult. Heribert Meffert, Dr. Detlef Hunsdiek, Erich Ruppik, Klaus Depner and Martin Spilker, for discussions that significantly shaped the writing of the German edition.
Very special thanks go to the members of my team, who put forth such a tremendous effort to meet the final deadline. Petra Eggenhofer and Birte Horstmann played a key role in compiling and reviewing the data for the case studies and additional research, while Fabienne Stellmacher took over from them other assignments that had pressing deadlines during the same time frame. For the English language edition of this book, Birte Horstmann and Fabienne Stellmacher updated the financial data and compiled the companies’ official English publications in regard to their mission statements, corporate values, leadership guidelines and the like. Silke Agricola showed the patience of a saint as I requested revision after revision, and her inimitable creativity and willingness to work unconventional hours contributed greatly to the success of the graphics in the original book and its English version.
Finally, I would like to express my deepest gratitude to the Bertelsmann Stiftung and its Executive Board. Without them and their focus on corporate culture, this book would never have been written.
 
Sonja A. Sackmann

Author’s preface to the English edition
Success Factor Corporate Culture appeared first in German (Erfolgsfaktor Unternehmenskultur) in late 2004. That book grew out of discussions and research conducted to determine criteria and identify candidates for the Carl Bertelsmann Prize 2003, which focused on corporate culture and leadership as factors for success. The task of narrowing the roster of exemplary companies to a short list of finalists and ultimately a single winner proved fairly difficult—and equally fascinating. The research team found much to appreciate in the distinctive corporate cultures of the top candidates. We felt that a wider audience would want to know more, not just about the prize winner—Hilti Aktiengesellschaft—but about the others as well.
Corporate culture is a contextual phenomenon, best understood and appreciated in concrete details. Rather than reporting on major themes across industries and borders, therefore, we chose to present case studies about the history and practices of six top-tier firms. This book opens with a brief but thorough overview of corporate culture and leadership as factors for success. The company profiles—the heart of the book—bring these concepts to life. The final chapter synthesizes the major findings: Just how did these companies put corporate culture to work? As a tool for managers who would follow in their footsteps, a checklist summarizes the key lessons about corporate culture and leadership gleaned from this analysis.
Erfolgsfaktor Unternehmenskultur was well-received. Managers liked its clear, readable and detailed accounts of how these firms had built and tended the corporate cultures that underpinned their success. They had but one complaint: Its audience was limited to those who could read German. Like the companies portrayed, their firms operated in an international, multinational or global arena. Corporate leaders who wanted managers company-wide to learn from these case studies needed an English edition. And so the Bertelsmann Foundation decided to commission a translation of the book.
But Success Factor Corporate Culture goes beyond a straight translation. Just as we updated the data gathered in 2003 when we wrote the book, we revisited the material for this English edition. Hence, the six case studies reflect our findings up to autumn 2005. We studied financial reports, pored over published documents and spoke again with contacts at each of the firms.
Our research confirmed our original findings: The six companies continued to pursue and achieve their goal of sustained profitable growth. Their distinctive corporate cultures continued to thrive. Certainly, many of the specifics had changed: At Hilti Aktiengesellschaft, one member of the executive team pointed out right away that much of the case study needed a fresh look. But this came as no surprise—after all, each of these companies prospered precisely because it maintained an adaptable, learning and entrepreneurial culture. We would not have expected Hilti to come to a halt on its culture journey.
The new data did not contradict the earlier portrayals. These companies still model the key characteristics of culturally aware management: They know and live their basic beliefs and expressed values. They pursue a clear corporate purpose with goals that are aligned and cascaded down the organization. They keep their customers squarely in their sights. Employees engage in entrepreneurial behavior within the cultural framework, while leaders take seriously their responsibility as role models. Buttressed by continuity in leadership, these companies value innovation and learning; this helps them adapt to challenges in their business environment. They demonstrate social responsibility and forward-looking corporate governance. Pursuing sustained profitable growth, they achieve financial success that satisfies their shareholders.
Three of the six firms are headquartered in Germany, two in Denmark and one in Liechtenstein. Readers may wonder whether their corporate cultures would take hold and thrive in companies in other national settings. Granted, the basic beliefs, values and attitudes that undergird these corporate cultures reflect their national and regional origins. But all six of these firms operate worldwide, and they have carried their corporate cultures with them, nurturing the transplants as attentively as they cultivate the rootstock. Their basic beliefs, values and attitudes may find expression in different words; they may manifest themselves in different structures, practices or procedures. But the principles of culturally aware management hold true in any setting. We invite readers to explore them in these pages and adapt them to their own circumstances, shaping a corporate culture that leads them to success.
 
Munich and St. Gallen, October 2005

Part I
Corporate culture and leadership—factors for corporate success
The topic of corporate culture received great attention from management scholars and practitioners alike in the 1980s, albeit with differing interests and levels of intensity. Since then, corporate culture has become a fixture in textbooks, popular management literature and even the vocabulary of managers themselves. But have we really tapped its full potential? The many references to corporate culture in a negative context—when change processes run aground, for example, or post-merger integration takes a rocky course—suggest that corporate culture has not necessarily become a conscious part of day-to-day management. Mere rhetoric about the importance of corporate culture—especially from corporate leaders—does not suffice. For it is precisely a company’s senior management that plays a key role in purposefully tending to its corporate culture and practicing culturally aware management (Sackmann 2002).
With this book, we want to shed light on the importance of corporate culture in making and keeping a business competitive, as well as the leadership behavior this requires. In addition to positive corporate examples that can be considered benchmarks in their industry, we offer practical recommendations for using the potential of corporate culture and thereby boosting a company’s ability to be competitive not only in the short but also in the long run.
In Part I, we give an overview of the nature of corporate culture, then focus on its potential contribution to a company’s success. What do we mean by corporate culture? What role does it play for a business? Is working with corporate culture just something that is nice to do—because other companies do it, too—or can it actually influence a firm’s ability to compete? In order to take advantage of the inherent power of corporate culture and its invisible ways of shaping a business, a company’s leaders must be aware of their corporate culture, its strengths and weaknesses, and be conscious of their own actions as they influence the culture that develops. Since this section presents only a basic introduction to the phenomenon of corporate culture and its core characteristics, information on literature for further in-depth study is included for interested readers.
Part II of the book presents six benchmark examples of corporate culture and culturally aware leadership that seem crucial to the firms’ success. Underpinning the discussion are 10 criteria regarded by experts as key to ensuring the survival of businesses in a challenging environment. The six companies (in alphabetical order) are the BMW Group, Deutsche Lufthansa AG, Grundfos A/S, Henkel KGaA, the Hilti Aktiengesellschaft and Novo Nordisk A/S.
Why did we choose to focus on these six particular companies, and why not discuss others as well? We recognize that the very magnitude of the undertaking placed certain limits on the selection process. After extensive research, the six companies presented here were found to demonstrate particularly fine examples of corporate culture and leadership in their respective industries. With their attention to corporate culture and their culturally aware management practices, these six companies have distinguished themselves in their fields, and thus in a variety of competitive environments, despite difficulties and past crises.
Part III explores these diverse benchmark examples of corporate culture to identify the common threads and distinctive features that show promise for culturally aware management in challenging times. In chapter 1 of Part III, we describe how effective companies consciously develop, maintain and care about their corporate culture. In chapter 2, we turn to empirical findings to delineate the specific philosophy, structures and practices that characterize these six companies. The examples drawn from these companies can give interested readers ideas for their own management practices. They can help activate the potential and power of corporate culture more effectively, and thereby improve the ability of other companies to compete and survive. The checklist in the appendix summarizes the key findings from these six outstanding corporate examples. It can provide guidance for the critical evaluation of corporate culture in the reader’s own business.

1. Corporate culture: Fashion, fad or a critical factor for staying competitive?
The concept of corporate culture gained prominent attention in management practice and research with the publication of the bestseller In Search of Excellence by Peters and Waterman (1982). Analyses of financially successful businesses in the United States at that time had shown that, in addition to traditional factors of business administration, the “soft” factors grouped under the heading of corporate culture were critical for a firm’s success. The findings led to a boom in this frontier territory in the early to mid 1980s: Researchers tried to explore and specify the various facets of culture in its corporate context, managers wanted to know how to use these soft factors to plan and run their businesses more effectively and consultants offered new services in analyzing and developing corporate culture.
The initial euphoria soon gave way to a sobering realization: Corporate culture could not be as easily managed and manipulated as originally imagined or hoped. The success promised by corporate consultants remained elusive or slow to materialize—for one thing, companies hesitated to allow insight into their inner operations as much as needed for a thorough culture analysis. Researchers turned to new topics, as empirical studies of corporate culture proved time-consuming, complex and not very conducive to advancing their careers. Was corporate culture just a fad, soon to go the way of other management fashions?
By the 1990s, corporate culture cropped up in discussions of re-engineering processes that were considered unsuccessful. Critics pointed to the prevailing corporate culture as an impediment to these processes or blamed management for paying too little heed to its ramifications. The increase in strategic alliances and acquisitions also brought corporate culture back to center stage—though usually in the context of difficulties in the integration process. And as several companies suddenly and unexpectedly experienced major difficulties or even collapsed early in the 21st century, the corporate culture phenomenon drew critical attention.
The study conducted by Collins and Porras (1995), who juxtaposed 18 companies known for sustained success with selected second-tier competitors, as well as a study by Collins (2001) investigating and portraying businesses that mastered a major turnaround, revived interest in corporate culture. However, these studies also showed that we cannot think of corporate culture as a variable to be managed and controlled at will. Instead, culture in its organizational context is a dynamic phenomenon (Sackmann 1992, 2002) that touches all aspects of a company, defining it and being defined in turn by the company’s concrete products and practices.
But before we discuss how a company’s culture may contribute to its sustained competitiveness, we want first to discuss what corporate culture is and what it can achieve.

1.1 What is corporate culture?

Whether it wants to or not, and regardless of fads or preferences, success or failure, every company has a specific corporate culture. Corporate culture emerges when the company is founded and develops more or less distinctively as the company evolves. At its core are the basic beliefs collectively held by a group of people that determine their thinking, actions, feelings and attitudes and that are typical for that group and hence for the company’s management and employees.
These basic beliefs can manifest themselves in verbal and nonverbal behavior, such as how people interact or how they address each other. They can appear in a company’s jargon, its dress code, its products, tools and services. To understand the meaning of these concrete manifestations, however, we must understand the invisible foundation that underlies them, the sense-making mechanisms that attach a specific meaning to them. The cultural iceberg model depicted in figure 1 illustrates this relationship between the visible and easily accessible manifestations of culture and the invisible basic beliefs regarding priorities, processes, root causes and improvements (i.e., learning and adjustment mechanisms).
This definition of the cultural core, or the underlying foundation of corporate culture, has a number of implications. The first concerns the commonly held basic beliefs. These are part of people’s thinking and are thus invisible and not directly discernible. “Basic” means that these beliefs operate like convictions, articles of faith in religion or axioms in mathematics: Once established, they cannot be further reduced or explained. Every subsequent argumentation follows from acceptance of these. In a corporate context, these basic beliefs concern the reason a company was founded, its corporate mission, the “right” kind of business organization with its respective structures and processes, and the business strategy that is considered most appropriate. They apply to the core processes that are considered the most suitable for that business, such as work methods, interactions with people within and outside the company, and the way changes are handled. They have to do with how the company learns and evolves (Sackmann 1991, 2002).
Figure 1: The cultural iceberg model
002
Source: Sackmann 2002: 27
“Collectively held” means that corporate culture is not an individual but rather a group phenomenon. This raises the question of where the boundaries of the “group” should be drawn. Does the group represent the entire company and hence have a single corporate culture, or do a number of groups exist within the boundaries of an organization that differ in their basic beliefs and hence represent subcultures within the company? The larger and more structurally differentiated the company, the greater the likelihood that subcultures develop. These can complement one another in a positive sense, as should happen between different functions or departments, for example. But they can also act independently of one another, such as with the individual companies in a holding. However, there are also examples of companies where subcultures that ought to complement one another instead work against each other, causing inefficiency within the company (Martin and Siehl 1983; Trice and Beyer 1993).
“Decisive influence on the thinking, actions, emotions and attitudes of management and employees” means that these basic, collectively held beliefs influence the thinking and actions as well as the feelings of the people working for the company, thereby guiding them invisibly and serving as frames of reference. Once present, they frame their members’ perceptions and thinking, the selective intake and processing of information. Through their influence on the setting of priorities, they guide and control decisions on both important and unimportant matters. They serve as a guide for selecting the “correct” action or behavior, and thereby set the implicit rules for how to behave in any given situation. This can apply to decisions in general or specifically to management hiring practices, to relations with customers, vendors, lenders and employees, to work methods and quality, and to reactions to unforeseen problems. Furthermore, these basic beliefs influence the emotions that arise in these situations, amplifying the positive or negative effects on behavior and signaling what is important and what is not.
Figure 2: Aspects of corporate culture in a multilevel perspective
003
Source: Adapted from Schein 1995: 30
These basic beliefs, which over time become routine and are then taken for granted, influence the way values promoted by the company are truly practiced. The basic beliefs are passed on to new employees and managers as rules of behavior—“this is the way we do things around here”—that then become the standard for what is considered good and proper in the specific company. They can be seen in the everyday verbal and nonverbal behavior in the company, such as standard expressions, humor, stories and legends, as well as in rituals and artifacts developed within the culture. Artifacts include the company’s products, the design of its buildings and grounds, and even such things as announcements, advertisements and annual reports.
Figure 2 illustrates this relationship between commonly held basic beliefs, proclaimed values, norms and artifacts in a model that further differentiates the cultural iceberg to show the level of accessibility for individual components of corporate culture.

1.2 What does corporate culture do?

Every company has a corporate culture with more or less pronounced subcultures. The question is, what does the corporate culture do for a company? Generally speaking, corporate culture represents the invisible influence of the human system within an organization. Once in place, the basic beliefs shape, guide and organize the collective thinking, actions, attitudes and related feelings within a company. One researcher even went so far as to consider culture “the collective programming of the human mind” (Hofstede 2001: 2).
As the invisible human factor, corporate culture fulfills four key functions that are necessary for the daily operations of a business. Corporate culture
• reduces complexity,
• coordinates actions,
• provides a source of meaning and
• provides continuity.
The ways in which these four key functions are actually enacted and lived influence communication, motivation and identification with the workplace as well as the ability to learn and adapt within a firm. This in turn can have a profound influence on a company’s productivity and economic viability, and thus its ultimate success.

1.2.1 Reducing complexity

Corporate culture enables quick and routine action in a company’s day-to-day business. The basic beliefs serve as a perception filter, rapidly sorting a flood of information into “relevant” and “not relevant.” The collective thought patterns determine what to do with the information, providing situation-specific guidelines that link to established behavior patterns and yield prompt action. These habits of mind function as scripts or role assignments for a certain situation. The BMW Group, for example, claims that the habit of constantly questioning achievements and searching for ways to improve embodies a basic belief that shapes the BMW culture and defines its every process and activity.
Without this mechanism for reducing complexity, meaningful action within a certain timeframe would be impossible. However, reliance on developed routines can lead to problems when new situations arise, especially if it hinders the company’s ability to adapt. Many examples of this can be found in the real business world as well as in findings of empirical studies. Business cases include Barings Bank, Enron, Worldcom, Parmalat and the former Swissair. Once acceptable or even successful practices may slowly go astray and unnoticeably create a culture drift that may cause a firm’s collapse. Research informs us how formerly successful practices may eventually lead to failure (Globocar 1997; Schumacher 1997). The study of a reading society reveals, for example, how a democratic organization can be hampered by the dominance of a few vocal members who stubbornly refused to accept change. Unable to adjust to developments around them, the group eventually dissolved (Eberle 1997).

1.2.2 Coordinating action

Because basic beliefs are held collectively and allow internal integration, they set the stage for coordinated action. On the one hand, they give employees and management a common mindset, which is indispensable to meaningful communication between and across functions, hierarchies, locations, regions and nations, and increasingly important for businesses, according to entrepreneur Reinhard Mohn (2003). On the other hand, these basic beliefs allow coordinated action on the basis of the common mindset that they provide.
The importance of this collectively held frame of reference becomes apparent when people from different cultural groups work together, for example. Without common rules for encoding, decoding or interpreting information, achieving mutual understanding becomes enormously difficult, if not impossible. Similar obstacles to understanding can also arise when people from different companies collaborate, or those from different professions or even different departments. For example, people with different professional backgrounds may respond quite differently to the term “process.” While managers may interpret this concept in a structural sense, engineers may think of workflow while people with a human resources background are more likely to think of interactions when they hear “process,” and frame their decisions and behavior accordingly.

1.2.3 Providing a source of meaning

The specific content of the basic beliefs, their tangible expressions and how they play out in a company’s day-to-day business will influence the extent to which employees derive meaning from their work, and hence the extent to which they identify with it, with their immediate colleagues, their department and the company as a whole. Corporate culture holds the key to a company’s purpose. Why does the business exist—what is its main objective? What sets it apart from other companies? What makes it truly special and unique? Why does it make sense to put effort into this company or a specific job? Depending on the concrete content and ramifications of the company’s mindset, employees will identify with its purpose strongly, moderately, minimally or not at all. Thus, the corporate culture indirectly affects the motivation of employees and managers and their willingness to put effort into the business.

1.2.4 Providing continuity

Developed thought and behavior patterns include a company’s collective learning history and thus constitute its collective memory. They derive from successes in dealing with problems that arise in a company’s everyday business. As we know from the theory of learning, behavior patterns that are associated with success have a high probability of being repeated and are thus positively reinforced, while behavior that does not lead to success is likely to be avoided in the future. Edgar Schein (1995) describes these learning mechanisms in a variety of companies with regard to their corporate culture. This collective learning history underpins the daily routines and carries forward recipes for success and failure. This experience base promotes a sense of knowing, competence, familiarity and continuity, because each task and process does not need to be rethought or started from scratch. When faced with a problem, people draw their solutions from this stock of knowledge and experience base. The kind of successful behavior passed on to new members of the organization and the kind of unsuccessful behavior avoided thus influence a company’s ability to learn and adapt in the future.

1.3 Corporate culture and performance

A number of studies have tackled the issue of whether, and what kind of, connections exist between corporate culture and performance. Ostroff, Kinicki and Tamkins (2003), Sackmann (2006), Siehl/Martin (1990) and Wilderom, Glunk and Maslowski (2000) provide detailed overviews. In the early years of systematically exploring corporate culture and its relation to performance, mainly practice-oriented studies were conducted. While some authors postulated the positive influence of culture on corporate success, these studies tried to describe such a connection, especially for so-called strong corporate cultures (Deal and Kennedy 1982; Denison 1984; Gordon 1985; Ouchi and Johnson 1978; Peters and Waterman 1982).
However, the results across studies are difficult to compare, since they use different measures for culture, for culture strength and for performance. In addition, a closer look at the research design of theses studies raises several questions. The main reason is that corporate culture is such a complex phenomenon. It cannot be fully explored by conducting interviews with a few top executives in a company, conducting opinion surveys or collecting a handful of company data from a specific year. In addition, most studies are based on correlations that do not give information about the direction of the influence.
The results of recent studies that use more sophisticated research designs support the link between culture and performance. Some suggest, however, that so-called strong cultures are only positively related to performance measures in the short run, but not in the long run and not in changing environments. In addition, given the complex nature of culture, influencing processes are likely to be reciprocal rather than unidirectional. Therefore, researchers have increasingly turned to ethnographic case studies that more comprehensively reveal the specific aspects of corporate culture and its—frequently reciprocal—relationship with success and failure (Sackmann 2006), as well as with productivity and satisfaction (Sharpe 1997).
For example, one study that tracked a start-up company in Silicon Valley over several years described how its distinctive culture contributed to its rapid rise, but also how demands placed upon established cultural components by less attentive (new) management actually undermined the established corporate culture, triggering myriad problems, including quality and time to delivery, that finally hurt the bottom line as well (Schumacher 1997).
The resource-based view of strategy suggests that a product or service will provide a sustained competitive advantage when it meets three conditions for a company (Barney 1986, 1991, 2002):
• It is important to the company because it has a positive effect on profits,
• it is difficult to imitate, and
• it is scarce.
Barney (1991) further argues that a company’s culture can be a stronger source of sustained competitive advantage than actual products or services, because unlike products and services, it cannot really be imitated. But whether this potential competitive advantage is in fact exploited depends on the particulars of a corporate culture, as examples from both business practice and academic research have shown. Firms from the same industry frequently offer the same services and products. Nevertheless, customers may experience major differences in the way these products and services are offered and in the way they are treated as customers. Underlying these differences is a specific corporate culture that influences how products and services are delivered, how the company interacts with its customers and what it does in case of a problem.
In general, we can assume that the influencing dynamics of corporate culture—what it can mean for a business, its performance and its viability—increases with the importance of the human system within and for that business. This holds particularly true for knowledge-based companies such as research institutes and departments, consulting firms and service organizations of all kinds, where knowledge constitutes the key product on which services are based. The particular way a company’s corporate culture unfolds can significantly influence its ability to compete—for better or for worse. So what determines whether corporate culture contributes to success or to failure?

1.4 What makes corporate culture critical for a firm’s success?

It is impossible to identify one single element that makes corporate culture a factor for corporate success. As Reinhard Mohn has pointed out, a number of factors must work together in synergy (impulse 1996). The pivotal elements are the distinct collectively held beliefs that underpin the corporate culture, along with their manifestation in concrete behavior that, in the end, leads to specific products and services. In general, we can make the following propositions about the relationship between corporate culture and economic success.
The positive contribution of corporate culture to the success of the company is greater
• the more the company’s commonly held basic beliefs and hence its mindset make it attuned to external developments and the needs of potential customers;
• the more effectively the processes, structures and practices shaped by the corporate culture enable the company to transform these recognized needs into products and services that customers want and will purchase at a price that yields a profit, and
• the more effectively the company—influenced by its collectively held basic beliefs—invests the profit in developments that secure its future.
We can now take a closer look at these conditions, which may be investigated in future empirical research.
Corporate culture is not simply created or invented from scratch. Rather, it emerges and evolves, shaped by the characteristics and thoughts of the company’s founders or founding team as well as a host of environmental and contextual factors. The nature of the industry, the attitude of financial investors, the quality of existing technologies, the economic, institutional, political and sociocultural conditions—they all have an impact. Once established, the fundamental collectively held beliefs that constitute the core of the corporate culture influence how the company’s leaders perceive and interpret these environmental factors and how they end up affecting the company.
Figure 3 depicts the interplay between a corporate culture and its relevant business environment. On the one hand, external factors such as the institutional environment influence corporate culture. At the same time, these external factors are filtered through the culture lens, then interpreted and transformed within a company’s specific cultural context. In addition, this transformation process is also influenced by the corporate culture: A specific strategy is developed to take advantage of opportunities and challenges. Implemented through the company’s particular human system with its related structures and processes, the strategy yields specific results that factor into future performance. In order to have these performance factors reflect and generate success, the company must find the right fit, interpreting and transforming the relevant external factors effectively within and through the framework of its corporate culture.
Figure 3: Corporate culture: Influences and performance factors
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Among the factors that influence the specific content of corporate culture in their filtered way are industry-specific characteristics such as its level of maturity and competition, current technologies, the typical half-life of products and thereby the speed of change perceived as necessary, supplier characteristics—all the specific aspects of an industry as a whole, also described in the literature as “industry recipes” (Phillips 1994; Spender 1989; Catellani, El Hage and Erdönmez 2004).
Specific customer needs further affect the corporate culture. Granted, these are also influenced to some extent by the industry and its maturity, as well as by sociocultural factors, but they are so important to a business that they deserve a separate listing. Do companies recognize their customers’ actual underlying needs and desires? Can they meet or even surpass them with the products and services they develop?
What about the company’s financial backers and investors? Is there just a handful, as may happen in a family business? Is the majority shareholder an institution, as has been common in Germany? Or are a company’s stockholders scattered and anonymous, as is generally the case with publicly held companies located in the United States? Do the financial backers or investors expect a quick return on investment, or are they more interested in retaining and growing value over the long term?
How does the economic situation look? Is the economy as a whole on an upswing, in decline or in a stagnant phase? What kind of purchasing power do potential customers enjoy?
What is the legal and institutional setting? How much freedom does a business have in a specific institutional environment? To what extent does legal security exist? China, for example, offers enormous opportunities as both a production location and a market, but fear of the uncertain legal situation has kept many companies from investing there. In Germany, by contrast, foreign companies in particular complain about the vast number of regulations—some restrictive, some excessively so. But once a company knows the rules and has learned how to work with them constructively, as with the works council, for example, then this can prove to be a strength of that particular business environment.