The impact of leadership on firm success is a hotly debated topic. I have little doubt that the role of luck and serendipity is vastly underestimated (particularly by CEOs when things are going well but then they can’t wait to jump on the role of externalities when things go poorly – self serving bias). There is also a body of research which suggests firm leadership only has around a 30% impact on company performance. Clearly this is a difficult topic to disentangle and what variables are measured in such research will have a huge impact on the estimated percentage. For example, if you look at discrete leadership decisions as a proxy for strategy then you are most likely looking at big moves that are clearly strategic (i.e. M&A, new market entry etc).
This highlights a major problem with strategy and how it is viewed. The dominant approach still seen today is one that can be described as Porterian. This view relies heavily on an analytical view of strategy development which is essentially the domain of top management. Once the strategy is developed it is then communicated and cascaded to the lower levels of the organization for deployment. Culture is hardly considered if at all. This raises some important questions.
What if culture is strategy? What if the most strategic thing leadership can do is focus on culture?
There are a whole host of iconic brands who failed to adapt to changing market conditions despite clearly being aware of the threat of disruption (Blockbuster, Sears, Kodak, Nokia) and others which could easily have been part of that group but managed to change (IBM stands out). The explanations put forward for these failures is the inability of these firms to become ambidextrous. That is, they failed to balance the demands of exploiting their existing business model whilst exploring new business models which would meet the future needs of a changing market.
Research by McKinsey on over 1000 companies found that cultural lock in and the inability to change was the key reason why organizations do not adapt to market changes. Empirical research consistently demonstrates that culture (in the form of a market, learning and knowledge orientation) has the most significant impact on firm performance. In turning around IBM, Lou Gerstner stated that culture is everything. In transforming Microsoft, Satya Nadella said that the ability of the company to change its culture was the leading indicator of its future success. Even though Lou Gerstner stated the issues facing IBM were not a failure of strategy but of a culture which was no longer suitable for the challenges being faced, I believe Gerstner may have missed an opportunity to affect general business lexicon by clearly placing the cultural school of strategy at the heart of strategy discourse. Instead of saying that strategy failure was not the issue, he should have said that it was IBMs view of strategy that was the problem.
I define strategy as:
‘Strategy is the how. A coherent, integrated set of initiatives and concepts that that will move the organization forward in a unified manner to achieve transient advantage. It is fluid in movement but set in direction’.
Whilst analysis and choice remain important parts of the strategy process, the above definition highlights the importance of integration and ‘how’. This means that managing paradox is just as important as managing choice. How means that development and execution cannot be separated as they are both dependent upon each other. The late Edgar Schein, in his seminal book Organizational Culture and Leadership, claimed that the only thing of real importance that leaders do is to create and manage culture. Since we can define culture very informally as the way we do things around here, it is evident then that strategy and culture are inextricably interlinked as culture determines how things get done, and if they get done! Strategy that cannot be executed is worthless – is it even strategy?
This begs the question: what is the right or best culture? Organizations wax lyrical about culture but are often unable to define what it is in any great detail aside from perfunctory statements related to DEI, innovative, strong, or team oriented. Firms often look for employees that fit their culture without even assessing in any great depth whether they have a ‘good’ culture nor whether bringing in people who do not fit the culture may actually be a good thing as the culture needs changing.
John Kotter (a leading researcher of change and a Harvard Professor), studied whether those organizations with strong cultures outperform those with weak cultures. He found no relationship. Upon further analysis he found that cultures which were strategically aligned (with market changes) and adaptive did show a strong association with firm performance. This is an interesting finding as organizations often tout their strong cultures as a source of competitive advantage but it is in fact these very cultures that become core rigidities in times of change.
Culture is not some ethereal feel good nice to have. It is concrete, measurable and operationalizable in the form of a market, learning and knowledge orientation. These orientations identify the behaviours that form the how of strategy and provide the backbone to being adaptable and change capable. Whether you agree that culture is strategy is not important. What is important is understanding that addressing organizational culture is so fundamental to strategy success that it cannot be ignored or considered a side issue.
Strategy & Competitiveness 