Eric Flamholtz

January 12, 2012

Eric Flamholtz' Book Describes Corporate Culture as a Strategic Asset

Mismanaged or ignored, culture becomes a liability

By Paul Feinberg

"Corporate culture is corporate personality. Every company has a personality, just like every person has a personality. There are actually a few companies that have said to me, "We don't want a corporate culture." I tell them, "You don't understand, whether you want one or not, you have one. The problem is, you have several, you have a schizophrenic culture." Okay, so corporate culture is corporate personality. More formally, it's values, beliefs, and norms. Values are what are important. Beliefs are assumptions and norms are the practices.

Professor Emeritus Eric Flamholtz' book "Growing Pains" is considered a classic. First published in 1986 (the fourth edition was released in 2007 by Flamholtz and his wife/collaborator Yvonne Randle), "Growing Pains" is the bible for successful impresarios making the transition from entrepreneur to effectively-managing a company while sustaining the start-up spirit that motivated them from the get go. "Growing Pains" has been so impactful to more than a generation of UCLA Anderson students-turned-entrepreneurs, that it remains one of the most common responses to the query: "What from your business school experience continues to inform your work today."

Now, Flamholtz and Randle have authored a new book titled, "Corporate Culture - the Ultimate Strategic Asset," (Stanford University Press, 2011) based on one of the six building blocks of the organizational pyramid familiar to "Growing Pains" readers.

Flamholtz believes that companies win with infrastructure - and a key component of infrastructure is corporate culture. "I had become increasingly convinced that corporate culture, was the 'ultimate strategic asset' because it's not 'copyable,'" Flamholtz says. "It's invisible to competitors, it's a stealth asset." Several articles followed, including "Human Capital of the Third Kind: Corporate Culture" and 2001's "Corporate Culture and the Bottom Line." In 2008, he wrote a book on strategy called "Leading Strategic Change: Bridging Theory and Practice." Then came his latest tome.

There are two kinds of books out there about corporate culture. They're either totally theoretical or they're sort of books basically for practitioners. (This book contains) my thoughts are on corporate culture. No one had done the systematic and empirical research on culture (with one exception) besides myself. In addition, no one had really developed a method of how to manage it, you know, how to really manage it effectively and give in-depth examples of companies who are good at certain aspects of corporate culture and that's what we've done in the book. So, that took some time to put together.

In "Corporate Culture," Flamholtz and Randle identify and explain the five key dimensions of corporate culture. They interviewed dozens of executives and explored the corporate cultures - for better or worse - of dozens of companies of various sizes. "Corporate Culture" is rife with real-world examples of corporate cultures, those that work and some that do not. The companies he looked at read like a Who's Who of Multi-National Corporations, including IBM, HP, Walmart, Walt Disney Company, Google and Johnson & Johnson. Flamholtz' initial research went straight to the bottom line, finding that companies that have a unified corporate culture had a superior financial performance than those that didn't.

Number one is, you have to articulate the way you want clients or customers to be treated. Number two, you have to articulate the way you want people to be treated inside the company. Number three, you have to articulate standards of performance and accountability. Number four, you have to value innovation (and be) open to change. And the fifth area is something we now call 'company process orientation,' the decision making processes, planning processes (and) communication processes. That one's a little trickier, but what you find is some companies will say 'Here's what our culture is, here are our core values.' (But) they're not looking at this list, they're just coming up with things. If you look at Hewlett-Packard's culture -- and Hewlett-Packard is known as an excellent company -- they don't have anything in their culture about customers, or didn't until recently. I don't know if they have it now or not. The reason is, when the culture was beginning, (coming) from the DNA of Bill Hewlett and Dave Packard, they were the customers. It was engineers for engineers, they understood it. Later on, when it went from measurement equipment to computers, they didn't have it in the culture and that's what got them into some trouble. Very few companies have something about innovation and change in their culture, very few. Some companies have something about standards performance, but nothing about accountability.

Flamholtz believes that much of a company's corporate culture is an extension of the founder(s). The values of those who nurture a company from its inception pervade the organization - their values become the values of the firm. He calls this a company's "cultural DNA." As examples, Anita Roddick, founder of natural beauty products manufacturer The Body Shop; 99 Cents Only Stores' Dave Gold, the aforementioned Dave Packard and Bill Hewlett and Starbucks' Howard Schulz.

Schulz' example raises a caution. Founders become CEOs, but eventually CEOs retire or move on to other ventures. What happens to a company's corporate culture when the source of its DNA retires or seeks new ventures? Starbucks brought in an experienced executive from the outside, Jim Donald, and terminated him a few years later, prompting Schulz to return. When Flamholtz asked Schulz about it, Schulz deflected, simply saying "We will never again go outside for a CEO. We'll promote our own, because we have to have someone who understands and embraces the core Starbucks culture." Which is not to say that a company should never go outside its own hallways to hire a CEO. Flamholtz says it's fine to go outside when a company needs to change its corporate culture. "But if it doesn't need to change, if it's a successful culture, you need someone who understands and embraces it," Flamholtz says. "And it's very hard to come in from the outside to understand and embrace it."

Corporate culture is more than just compiling a list and memorizing it. A company and its people must accept and embrace - even live - the values of the firm.

First, you have the stated culture and the real culture and they have to be in alignment. Second thing, I have a way of measuring culture. I believe if you can't measure something then you can't manage it. My whole career has been about creating measurements for virtually un-measurable things, one of which is how to measure corporate culture and gaps. We've created a way to measure what culture is (because) to define what culture is you have to measure gaps between it. You ask people to what extent do you buy in to (their corporate) culture and to what extent is it being practiced? The greater the gap between them, the greater the problem. It's a credibility problem. So if you building a credibility problem there, its fundamental to everything else. It's like, 'If I can't believe you on the core values, what can I believe?' It (becomes just a) wink and a nod.

Flamholtz classifies corporate culture on two-dimensions: strong and weak and functional and dysfunctional. A strong culture is one where people understand it and have a deep understanding of the culture and embrace it. A weak culture is where people either do not understand what the culture is or do not embrace it. A functional culture is one that is positive, leading to high performance while a dysfunctional culture is one that leads to low performance. "Corporate Culture" contains a chapter called "The Dark Side of Corporate Culture" (which he says was the most fun to write) that talks about the types of "dysfunctional culture syndrome" that exists. With names like "The Arrogant Company," "The Gambler," and "Politics R Us Corp.," the chapter details the types of dysfunctional cultural syndromes that exist and should be avoided. Flamholtz calls AIG "the poster child for the financial debacle," in part because the one immutable core cultural value of the Hank Greenberg era - that anyone could challenge any trade - was violated by his successor, who believed no one could challenge him.

On the other hand, there are many examples of "corporate culture done right."

Everyone has imperfections, but I have a high regard for Johnson & Johnson; they're not perfect, but J&J is one. IBM to a great extent, although I've used IBM in The Dark Side of Culture, as well. There's a lot I admire about the IBM culture, but they screwed up, they became too political. Other companies in terms of learning from, depend on the size. If you want to pick some more family businesses, Bell Carter Foods in California is one. At General Electric, they have a matrix with two variables. One is performance and the other is cultural acceptance. The superstars are the people who have high performance and accept the GE culture.

Flamholtz' final point is straightforward: Your company has a corporate culture. Managed correctly, it's an asset, strategically and economically. Handled incorrectly - or ignored altogether - your corporate culture morphs from asset to liability.

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