Leadership & Management

Charles O’Reilly: Finding a Corporate Culture that Drives Growth

Adaptive cultures minimize predictability and encourage innovation.

October 23, 2014

| by Lisa Holton


CEO of Ford Motor, Alan Mulally

As CEO of Ford Motor, Alan Mulally took on Ford’s culture. | Reuters/Brendan McDermid

Corporate leaders and academics have been debating the connection between institutional culture and growth for more than three decades. Yet most can’t really put their finger on the single aspect of an organization’s culture that’s most effective at driving financial performance.

Stanford Graduate School of Business Professor Charles A. O’Reilly and fellow researchers have found the answer lies in a key word: adaptability.

You’ll see culture mostly talked about as stories or anecdotes. It’s a vague concept that people sort of know is important, but they don’t quite know how to apply.
Charles O'Reilly

In his recent research update published in the August 2014 Journal of Organizational Behavior, O’Reilly teamed with colleagues Jennifer A. Chatman and Bernadette Doerr at the University of California–Berkeley and David F. Caldwell at Santa Clara University to examine whether corporate culture had a positive impact in the fastest growing companies — specifically high-technology firms. The team noted that the supremely adaptive cultures in Silicon Valley and beyond contain transformative medicine for most companies, no matter what the industry.

O’Reilly can recite a long list of corporate culture success and failure stories, noting that some traditional companies, like Ford Motor Company, provide excellent illustrations of failure on the road to success. O’Reilly suggests that Ford’s recently departed CEO Alan Mulally succeeded where previous leaders failed because he realized the automaker’s problems began with its rigid, outdated corporate culture.

“Can the leader get the people, structure, metrics, and culture aligned with the strategy?” asks O’Reilly. “Ford attempted three turnaround efforts over the last 15 years. Two of them failed abysmally. This last one, under Mulally, finally worked.” Quoting Bryce Hoffman’s 2013 book American Icon about Mulally’s turnaround at Ford, O’Reilly said Mulally succeeded because he attacked “the root of the problem: Ford’s corporate culture.”

What Does “Adaptability” Really Mean?

O’Reilly and his colleagues define culture as a social control system that drives certain kinds of behaviors. “Adaptive” cultures are those that encourage:

  • Risk-taking
  • A willingness to experiment
  • Innovation
  • Personal initiative
  • Fast decision-making and execution
  • Ability to spot unique opportunities

Yet adaptive cultures are also notable for the behaviors they choose to minimize, O’Reilly notes. “There’s less emphasis on being careful, predictable, avoiding conflict, and making your numbers.”

Pointing to Hewlett-Packard’s Oct. 5 announcement that it would split into two companies — one focused on PCs and the other on corporate hardware and services — O’Reilly noted HP’s move to a more results-focused culture under former CEO Carly Fiorina in 1999 and continued under successor Mark Hurd through 2010 crippled its ability to grow and innovate. (The greatest irony, of course, being that Stanford graduates Bill Hewlett and Dave Packard created high-tech’s adaptive management culture back in the 1940s.)

O’Reilly and his co-researchers used an update of 1991 research to identify cultures among participants in the United States and Ireland. Next, the team focused on the intensity of adaptability within their cultural norms and, finally, investigated the responses of adaptability-inclined companies and other cultural norms on overall financial performance.

The research found that corporate cultures that emphasize adaptability generally produce “revenue growth, market and book value, ‘most admired’ ratings, employee satisfaction, and stock analysts’ recommendations.”

The essential mechanism, O’Reilly says, “is the alignment of culture with strategy.”

Embracing Conflict, Speed, … And a Bit of Mess

O’Reilly says even though Amazon chairman Jeff Bezos gets criticized for the razor-thin margins that have produced spotty profitability at the world’s largest online retailer over the last 20 years, Amazon is a model of a long-term, adaptive growth culture.

“The Amazon culture is characterized by frugality, decentralized decision-making, and taking risks outside their core business,” he said, noting how Amazon’s Kindle initially threatened the company’s legacy book business. Amazon’s willingness to experiment — such as starting a Hollywood studio and a more recent move toward opening a brick-and-mortar store in Manhattan — allows for plenty of clashing viewpoints amid strict policies regarding honesty and protecting employee ideas.

That is a very different approach than many companies take, O’Reilly explains.

“If you think about the culture that develops in most large successful firms, you can see how what’s required for success in mature businesses is almost the opposite. That is, an emphasis on making your numbers, not taking risks, staying focused on today’s customers, incremental improvement, and increased centralization,” he explains. “In these circumstances, managers and systems reward behaviors that while successful in the short term don’t encourage the experimentation that’s needed for long-term success. The result? We see companies like HP missing new markets.”

Becoming the Chief Cultural Officer

Companies fail to grasp the link between culture and performance for several reasons, but O’Reilly says one is paramount: In less successful organizations, managers generally can’t agree on what the culture is.

“You’ll see culture mostly talked about as stories or anecdotes. It’s a vague concept that people sort of know is important, but they don’t quite know how to apply,” said O’Reilly. “For example, a recent Deloitte survey showed that 94 percent of executives believed that a strong culture was important to business success. But if you asked them who was responsible for managing culture or how they would manage it, most wouldn’t have a clue.”

The research found the most powerful corporate cultures embrace “nonuniform behaviors and adaptability in particular,” demonstrating they “perform better financially than will organizations characterized by lower consensus, lower intensity about adaptability, or both,” O’Reilly said.

Culture represents norms in the organization that shape behavior, he adds. These norms should signal to employees and others what matters to the company or organization.

“Parsing organizational culture: How the norm for adaptability influences the relationship between culture consensus and financial performance in high-technology firms” was published in the August 2014 issue of the Journal of Organizational Behavior.

Charles A. O’Reilly is the Frank E. Buck Professor of Management at Stanford Graduate School of Business. He is currently studying how the alignment of organizational culture and strategy predicts subsequent firm performance.

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