Corporate culture, business models, competitive advantage, strategic ...

Journal of Human Resource Costing & Accounting Emerald Article: Corporate culture, business models, competitive advantage, strategic assets and the bottom line: Theoretical and measurement issues Eric G. Flamholtz, Yvonne Randle

Corporate culture, business models, competitive advantage, strategic assets and the bottom line Theoretical and measurement issues Eric G. Flamholtz and Yvonne Randle Anderson School of Management, UCLA, Los Angeles, California, USA Abstract Purpose – This paper seeks to enhance understanding of the role and effect of corporate culture as a unique strategic asset on the success of business models. Design/methodology/approach – The paper is a conceptual exploration of several key constructs and their interrelationship. The argument is based on four related notions: that corporate culture is an “asset”; that it is a “strategic asset” in the sense of comprising a source of competitive advantage; that it might well be the “ultimate strategic asset”; and that culture as a strategic asset can be the essence or core of a business model. The paper also uses “empirical examples” of actual companies to study and demonstrate the core constructs and ideas. It also examines issues involving the key dimensions of corporate culture, the measurement of corporate culture, and certain related performance measurement issues. Findings – The paper shows that corporate culture is a strategic asset, which, if managed properly, can be the key differentiating factor in a successful business model. It also shows that when not managed properly, can actually transform into a “liability”. Practical implications – This paper demonstrates that corporate culture is a critical strategic asset because of its role in creating competitive advantage and successful business models. It suggests that corporate culture can also be the single most important source of competitive advantage in business models. Finally, it suggests that practicing leaders as well as investors and academics need to pay attention to corporate culture as a component of business strategy. Originality/value – This paper contributes to the literature and to practice by examining the notion that corporate culture is a strategic asset in depth and examining the relationship between culture as a strategic asset and business models. It also takes steps towards a coherent framework for both scholars and practicing managers to frame and understand the issues involved in the management and measurement of this critical strategic asset. Keywords Corporate culture, Assets, Strategic asset, Ultimate strategic asset, Business models, Performance measurement, Organizational culture Paper type Research paper

1. Introduction Few managers or management scholars would question the critical role of corporate culture in organizational performance (Kotter and Heskitt, 1992; Deal and Kennedy, 1982; Schein, 1992; Flamholtz, 2001; Sackmann, 2006). Culture is well understood to impact human resources, and comprises a key aspect of human resource management. However, what is less recognized is that corporate culture is a true “strategic asset,” and it might well be the “ultimate strategic asset” for many, if not all, companies in todays’ The current issue and full text archive of this journal is available at www.emeraldinsight.com/1401-338X.htm

JHRCA 16,2 76 Journal of Human Resource Costing &

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Accounting Vol. 16 No. 2, 2012 pp. 76-94 q Emerald Group Publishing Limited 1401-338X DOI 10.1108/14013381211284227

economy, especially in the advanced nations. As a result, then, culture is or, at the very least, can be a critical component of a successful business model just as other forms of intellectual capital (Ratnatunga et al., 2004). As Dumay and Cuganesan (2011) state, identifying and measuring intellectual capital is important to contemporary organizations because intangibles create value and “true competitive advantage.” There are four critical interrelated notions here: (1) that corporate culture (“culture”) is an asset; (2) that it is a “strategic asset” in the sense of comprising a source of competitive advantage; (3) that it might well be the “ultimate strategic asset”; and (4) that culture, as a strategic asset, can be the essence or core of a “business model” (Barney, 1986; Flamholtz and Randle, 2011). We will examine each of these notions and their interrelationship in turn. First however, we will define the concept of corporate culture. 2. The concept of corporate culture The concept of corporate culture has become embedded in management vocabulary and thought. In order to manage it, we must first understand what culture is and what it is not. Although there are many different definitions of the concept, the central notion is that culture relates to core organizational values. In turn, values are things which are important to organizations and underpin decisions and behavior. All organizations have cultures or sets of values which influence the way people behave in a variety of areas, such as treatment of customers, standards of performance, innovation, etc. To us, corporate culture consists of “values,” “beliefs,” and “norms”which influence the thoughts and actions (behavior) of people in organizations. Values, beliefs, and norms, are then, the key components or elements that define a corporate culture. Values are the things an organization considers most important with respect to its operations, its employees, and its customers. These are the things an organization holds most dear – the things for which it strives and the things it wants to protect at all costs. Beliefs are assumptions individuals hold about themselves, their customers, and their organization. Norms are unwritten rules of behavior that address such issues as howemployees dress and interact. Norms help “operationalize” actions which are consistent with values and beliefs. These three elements of culture are actually part of an overall mosaic of culture in an organization. They are not necessarily all visible either single or in combination. There are actually several levels or layers of culture in an organization. There is the surface layer which is what we see and observe, mostly in the norms of behavior on a day to day basis. Then there are the core values and related beliefs or assumptions which drive or underlie the behavioral norms. However, below that is what might be termed a set of “cultural attributes,” which are the “DNA” of culture. These cultural attributes are dimensions of “corporate personality.” These are things such as attitudes towards risk, or ethics; propensity towards planning (or not!), systems, processes; attitudes towards professionalism, or entrepreneurialism, or even bureaucracy. These underlying cultural attributes drive the core beliefs, values, and norms which constitute the most observable level of culture.

Assets and the bottom line 77 3. Culture as an asset and/or “liability” The classic notion of an “asset” is that it is something of value owned or controlled by a business enterprise. Assets can be tangible like plant and equipment or intangible like “brands,” “intellectual property,” or “customer loyalty”, the latter being a form of “goodwill.”

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Like “goodwill,” corporate culture is an intangible but very real “economic asset” of business enterprises. For the companies which possess a strong positive culture like Starbucks, Southwest Airlines, Wal-Mart or Google, it is a true “asset,” if not in the strict accounting sense, then in the real economic sense, meaning that it leads to measurable differential profitability. It should also be noted that a case can be made that corporate culture is actually an asset in the accounting sense as well. Specifically, Flamholtz (2005) has proposed that corporate culture is an asset in the accounting sense. The classic measurement of the value of an economic asset or resource is the discounted value of expected future earnings. Flamholtz (2001, 2005) has shown that corporate culture can impact earnings and thereby meets this criterion. Thus, we view “corporate culture” as one of the three components of overall “human capital.” The primary dimension of human capital (and the one generally equated with the notion of “human capital” are the skills or competencies of individuals. In addition to this primary dimension of the individual as a form of human capital, a “traditioned group” (in the true sociological sense) also comprises an asset and another form of human capital (Flamholtz, 1995, 1999). The development of a true team in the sociological sense takes time, effort, and money. Flamholtz (2011) has shown that such a team or group of people can be a positive contributor to organizational effectiveness. The third form of human capital is corporate culture. Culture is an intangible asset, a form of intellectual property. If a “positive” culture exists, it functions as an intangible asset. If a “negative” culture exists, it functions as a drag on performance, and can quite possible lead to an organization’s demise. Thus, when a company like Starbucks or Wal-Mart has a positive corporate culture it can, as we shall see, generate positive differential earnings, which is per se an asset. On the contrary, for other companies with dysfunctional cultures like AIG, K-Mart, and (for the past 50 years or so) General Motors, their corporate cultures are true economic “liabilities,” if not in the accounting sense, then in the colloquial sense of that term. In companies with dysfunctional cultures, earnings are “less than” what they might otherwise be, thereby incurring real opportunity costs. This dual role of culture as an “asset” or “liability” is shown clearly in the examples of two companies: Starbucks and AIG. The former is a classic success story with a strong positive culture that is an economic asset, while the latter is a classic case of a dysfunctional corporate culture that led it to a precipitous decline in economic fortune and was only prevented from bankruptcy by being “too big to fail.” 3.1 Culture as an asset: the example of Starbucks For many people, Starbucks Coffee Company is an enigma. How does a company with a commodity product that has existed for centuries if not millennia rise from nothing to become a firm with more than $10 billion in revenues? When asked to explain the success of Starbucks, one of the great entrepreneurial success stories of the last 20 years, Schultz (1994), founder and CEO, has stated that:

JHRCA 16,2 78 When people ask me about the reasons for Starbucks success, I tell them not what they expect to hear. I tell them that it was the people at Starbucks and the way we managed them that was the true differentiating factor.

Similarly, Behar (2008), former Executive VP of Operations for Starbucks and President of Starbucks International, has stated very clearly in his book about Starbucks that the company’s success is about leadership and culture rather than its product; as the title of the book states: “It’s not about the coffee”! The key point is that the real differentiating factor in Starbucks’ success is not its coffee per se; the coffee comes from beans which are a commodity. Starbucks does not have a proprietary coffee bean, or a proprietary roasting process, which “magically”

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produces a superior coffee bean and beverage; rather, what is does have is a distinctive and superior culture that influences the behavior of people and comprises an intangible but real economic asset. Starbucks has become a global brand, and the leader in its space, with more than $10 billion in revenues in 2011. This has been accomplished by managing its corporate culture, an intangible but real economic asset. 3.2 The liability and cost of a dysfunctional culture: the example of AIG If Starbucks is the apotheosis demonstrating how a positive culture can be an asset, then AIG is one of many examples of how culture can become dysfunctional and lead to severe economic distress if not actual collapse. Once recognized as a leading company, AIG was at the center of the financial crisis that affected not only the USA but also the entire financial system. AIG is almost 100 years old (it was founded in 1919), is listed on the New York Stock Exchange (“NYSE”), and was led for decades by Maurice “Hank” Greenberg, a respected business leader (Flamholtz and Randle, 2011). The precipitous decline of AIG is directly attributable to a toxic corporate culture, which failed to permit people to challenge complex financial transactions. As Dennis and O’Harrow (2009) have observed, the rapid decline of AIG was attributable to overexposure to the now infamous “Credit Default Swap,” one of the financial products referred to by Warren Buffet as a “financial weapon of mass destruction”! Using econometric models based upon years of historical data about the variation in corporate debt, AIG concluded that there was a 99.85 percent chance of never having to pay out any insurance on credit default swaps. Assuming that total economic collapse would not occur, it seemed that AIG could earn millions of dollars with virtually no risk, a classic “economic free lunch,” (which of course is not supposed to exist in the real world and, in fact, was actually a statistical mirage)! In fact, it was not just a failure of statistical analysis at AIG that led to its near ruin; it was “the failure to adhere to a core cultural norm that led virtually to disaster.” Under leadership of Greenburg, the normwhich had been embedded in the culturewas that “just about anyone could question a trade.”This led to a strong-functional culture that helped to avoid undue risks. However, according to people who worked for the firm, under Frank Cassano, the then leader of AIG’s Financial Products Group, the norm that “anyone could question a trade” would change and be abrogated, leading to a dangerous culture which embraced great risks without adequate understanding of the potential consequences (Dennis and O’Harrow, 2009). There were doubters atAIG, who questioned the wisdomof credit default swaps and the magnitude of the company’s commitments to those esoteric financial products; but they remained silent, cowed by Cassano and his enthusiasmfor this spurious notion of an apparently free lunch! The net result was that credit default swaps

Assets and the bottom line 79 became a toxic product for AIG, the poisoned “fruit” of a culture that had transformed from one of “open discussion” into a dysfunctional culture that avoided challenging the powerful leader Cassano and his pet ideas and products. Virtually all that prevented AIG from total economic collapse as a company was that it was deemed to be “to big (to be allowed) to fail.” AIG’s products were so embedded in the financial system that it was deemed to be too great a risk to allow the company to fail. 4. Strategic assets Not all assets are “strategic assets.” For example, a computer might be an asset, but it is not typically a strategic asset, because it is essentially a commodity product that can be purchased by other firms. A “strategic asset” is an asset that provides a source of sustainable competitive advantage. We propose two criteria for something to be a “strategic asset”: (1) it must provide a “competitive difference”; and (2) it must be “sustainable” for at least a period to exceed two years. The first criterion is that to be a strategic asset the asset must provide some differential

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benefit to a firm. A “brand,” though intangible, can be a strategic asset. It is well established that a brand is an asset, and that a brand can have great economic value. What makes a brand a strategic asset is that it can be a source of preference for present and potential customers. For example, when someone says, as the authors actually overheard, “let’s go to Starbucks” rather than saying “let’s go for a coffee or Cappuccino”; that demonstrates the power and differential benefit of a brand. Similarly, when someone ask for a “Coca Cola” rather than a “carbonated soft drink” or “a Pepsi” that too demonstrates the benefit of a brand. A strategic asset must also be sustainable. Our operational definition of sustainability is that something must be able to last for a minimum of two years for it to be deemed a strategic asset; this is analogous to the criterion for a “fixed asset” in accounting. As a result the so-called “first mover advantage” (which is a real advantage) is not necessarily a source of sustained competitive advantage. It can be countered by “late movers” which improve upon a product and render the first mover advantage meaningless. For example, Apple has severely wounded Rim’s Blackberry, if not rendered it virtually obsolete, or at least it, by its own innovation of the “I-phone”. Another aspect of sustainability is the difficult of imitating the strategic asset. The more difficult something is to copy, the greater the degree of sustainability. Similar to the above discussion, Barney (1986, 1991, 2002) has noted that the resource based view of strategy suggests that something will provide a sustained competitive advantage when it meets three criteria: (1) it is important to the company because it has a positive effect on profits; (2) it is difficult to imitate; and (3) it is scarce. 4.1 The nature of culture as a strategic asset Our proposition is that culture is a strategic asset. Culture functions as a strategic asset in several ways.

JHRCA 16,2 80 One key is the impact culture has upon the ability to attract, motivate and retain people, which comprise the human capital of an enterprise. Some firms are known for being “attractive places to work,” that is having positive cultures. In fact, some companies compete to be recognized as one of the so-called “best places to work.” This, in turn, enables a company to attract “the best and the brightest” talent. The authors have seen this in action at many companies. For example, when Starbucks (already known in its early years as having a “good culture”) was seeking to hire a senior human resources executive and placed, an advertisement in the Wall Street Journal, there were more than 600 applicants, including three from the same firm! Culture not only serves to attract people, if often can serve to retain them as well. In the case of a home builder which was recognized by employees for a very favorable culture, the company was actually able to offer less compensation than competitors without losing people. Since it is costly to recruit and train people, this ability to retain human capital is a strategic asset as well (Flamholtz, 1999). For these reasons, companies are increasingly recognizing that an “employee brand” (the branding of its culture) is a strategic asset or competitive weapon just as important as or even more important than other factors. 5. Culture as a strategic asset: the case of Wal-Mart and K-Mart We believe that culture is a true strategic asset. It is a true source of competitive advantage, and results in differential corporate performance which can be measured in financial results. This can be demonstrated in the example of the success of Wal-Mart versus K-mart below. On the surface, there are no major differences between Wal-Mart and its major competitor K-Mart. Both companies market to the same customers, and there are no products that Wal-Mart has that K-Mart does not have. As a walk through these stores

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will demonstrate to the observer, they both sell exactly the same things: Johnson’s Baby Powder, Allergan lens solution, Colgate Toothpaste, and other consumer disposables and staples. They both have the same kinds of stores and they operate in similar geographic locations. They recruit from the same pool of people. Yet in spite of these similarities, Wal-Mart has produced a vastly different financial result for investors than K-Mart. It is true that today Wal-Mart has a significantly greater scale than K-Mart; however, when Wal-Mart was founded the reverse was true, and yet Wal-Mart has come to dominate K-Mart even though the later had the original “first mover advantage.” In addition, the financial return to investors measured in terms of stock prices differs greatly between the two firms (Flamholtz and Randle, 2011). In the decade of the 1990s, the stock price of K-Mart almost doubled. An original investment of $10,000 would have been worth almost $20,000 by 1999. This was a reasonable return, but possibly less than what might be expected for this type of company. During the same period, the stock price of Wal-Mart increased several fold. Specifically, an investor who made an original investment of $10,000 in 1990 would have seen the value of that investment increase to approximately $280,000! This is an astounding difference, especially when these companies are not like Microsoft or Amgen, where there are proprietary products or proprietary intellectual property. If we carry our analysis a little further to the end of 2003, then the results are even more dramatic. By the end of 2003, K-Mart had gone bankrupt! An investor would have lost all of his

Assets and the bottom line 81 or her investment. While Wal-Mart’s stock price did decline as a result of the market collapse from 1999 to 2003, the original investment of $10,000 would still have been worth just under $200,000. Wal-Mart and K-Mart are selling essentially the same commodities, but with vastly different financial performance results. What explains that? Soderquist (2005), the former Vice Chairman and Chief Operating Officer of Wal-Mart, now retired, attributes the company’s success to its culture. We believe that Soderquist is correct, and that much of the explanation of the differential financial value between these two companies is attributable to cultural differences between the two companies. This is not to suggest that Wal-Mart is a “perfect” or even a model company. There have been numerous criticisms and lawsuits against Wal-Mart. Nevertheless, from an economic standpoint of organizational success; Wal-Mart is clearly a superior organization, clearly the economic victor versus K-Mart, and clearly the dominant player in its market space. It is in this sense that its culture is a true strategic asset for Wal-Mart. Corporate culture is the key competitive difference between the two companies, and is to a very great extent the reason for the difference in success of these two otherwise virtually identical companies. This example also shows that culture also meets the criteria Barney (1991) has articulated for a sustained competitive advantage: . it is important to the company because it has a positive effect on profits; . it is difficult to imitate; and . it is scarce. The Wal-Mart culture haws a positive effect on profitability vis a vis its competitor K-Mart. It is difficult, possibly impossible, to imitate. It is also “scarce” in the sense of being relatively rare as a phenomenon. It also is has scarcity value because culture is difficult and costly to create and manage, especially in larger organizations. We will address this last issue below. 6. The ultimate strategic asset Unfortunately, most assets, even strategic assets, are ultimately perishable. The reason for this is that it they can be copied, or in the case of intellectual property they can be

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“worked around.” For example, even a patented “molecule” in biotech can be “defeated” by another pharmaceutical firm with slightly differentiated products. Most of the things over which organizations compete can be copied or neutralized by competition. Products can be imitated or improved upon. Financial resources are fungible. Many companies have capable people, which neutralize this as a competitive advantages. The “ultimate strategic asset” would need to be something that is not only not-perishable; but it must also be something that cannot be imitated easily if at all by competition. Ideally it would be something that is invisible to competition so that they cannot visualize what it is and therefore increase the difficulty of copying it. 7. The rationale for “culture” as the ultimate strategic asset Barney (1991) has proposed, and we agree, that a company’s culture can be a stronger source of sustained competitive advantage than products or services, because unlike

JHRCA 16,2 82 the latter it cannot be imitated. In our view, however, culture is not just a strong source of sustainable advantage; it is the ultimate source of sustainable advantage, and, in turn, the ultimate strategic asset. Building upon the discussion above, here is our argument in brief: We have explained that organizational cultures, which are inimitable, are a source of sustainable competitive advantage for firms (Barney, 1986). A company’s culture – if well managed – is transmitted to generations of employees through the company’s “DNA,” thus perpetuating this source of competitive advantage. This makes it a sustainable strategic advantage. Corporate culture represents the one thing that a firm has that is ultimately not susceptible to imitation or duplication by another company. Although it is possible to “clone” sheep, it is not simple to do. Similarly, it is not simple, and (we believe) virtually impossible to clone a firm’s culture. Even when a company tries to copy a culture, it is not possible to duplicate it exactly. The unique circumstances of every company’s situation and history make cloning another culture a virtually impossibility. Difference in leadership personalities, size, historical experiences, and a variety of other factors all combine to make a corporate culture unique. Attempts to copy of clone it will lead to “artificial cultures” which do not fit. For example, in one instance with which we are familiar, a competitor to PowerBar (now owned by Nestle) perceived that culture was an asset for PowerBar. Not truly understanding what was being done to create and manage PowerBar’s special culture, the competitor misconstrued what it was and spent more than $1 million trying to copy PowerBar’s physical facilities for employees rather than the invisible culture management process that PowerBar had created with our assistance (Flamholtz and Randle, 2011). Corporate culture is, then, not just a source of competitive advantage; it actually seems to be the ultimate source of true sustainable competitive advantage. This is because of the extreme difficulties, if not impossibility, of replicating culture across organizations. In addition, it is a relatively an invisible strategic asset. The fact that culture is difficult is difficult to “see” relatively makes it function as a “stealth” competitive weapon. The bottom line is that corporate culture can thus be viewed as the ultimate strategic asset because of its unique attributes. 8. Culture as a strategic component of business models In order to explain the role that culture can play in a business model, we must first define what we mean by the term “business model” itself. During the past several years, the concept of a “business model” has received a great deal of both academic and practitioner attention (Zott et al., 2011). The concept of a “business model” is widely used in business and academic literature; however, as Zott et al. (2011) point out in their comprehensive review and critique of the business model literature, it appears that there has yet to develop a generally accepted definition of that term and related language that can be

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used to communicate about and analyze business models systematically. As they state: “[. . .] scholars do not agree on what a business model is.” This means that one person’s business model might not fit with another person conception of what a business model is. As we shall explain below, this has direct relevance to our notion that corporate culture can be the essential ingredient in a business model.

Assets and the bottom line 83 Although there is no generally accepted agreement about the meaning of the construct of a business model, there do appear to be certain common elements in many versions of this construct. The three common elements (either explicit or implicit) are: (1) target (customer) markets; (2) a “mechanism” of delivering a product or service via the use of resources and organizational processes (termed a business architecture); and (3) value derived for the enterprise and its stakeholder’s (Zott et al., 2011; Teece, 2010; Johnson et al., 2008; Timmers, 1998). Consistent with these core elements, as used here, a “business model” refers to the entirety of the processes from the selection of a market to the delivery of a product or service by means of a specified (constructed) “business architecture.” A business model can of itself be a source of competitive advantage, as seen in the many examples of disruptive competition by internet (web) based companies like Amazon.com. For example, the emergence of Amazon.com has literally driven “borders” (retail book stores), with its classic “brick and mortar” business model, into bankruptcy. In addition to competition with business models per se, organizations compete on many levels with many different strategic assets. They compete not only in terms of products and services, but also with brands and other strategic factors of production (such as human capital and intellectual property) as well. One of the key components of a business architecture or “organizational infrastructure” is corporate culture. It is increasingly recognized the culture is a key strategic asset and a basis of competition among firms (Barney, 1986, 1991, 2002; Flamholtz and Randle, 2011). The special features of corporate culture which combine to make it the ultimate strategic asset, in turn, lead to it becoming a powerful basis for a business model. There are three specific attributes of culture that make it a candidate for competitive differentiation in a business model: (1) corporate culture is difficult and costly to develop; (2) once developed it can be maintained and is not inherently perishable; and (3) to a very great extent, it is not readily visible to the casual observer, making it difficult to copy. This has led some companies such as Starbucks, Southwest Airlines, Google and Wal-Mart, among others, to view culture as a core component (if not the core component) of their overall business model and strategy. In effect, their business models are built around culture as the core strategic asset. We will return briefly to the example of Starbucks and provide some additional material. We will also examine how Southwest Airlines, a very different business, utilizes corporate culture in its business model. 8.1 Culture in the business model of Starbucks As we have alluded to above, corporate culture is at the core of Starbucks business model. The company’s product is nominally coffee and coffee beverages; but the real “product” as articulated by Schultz and Jones Yang (1997) is the experience of the

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so-called “third place.” The basic syllogism underlying Starbucks’ culture is: the way we treat our people affects the way they treat our customers, and in turn, our “financial performance.” Stated differently, Starbucks realizes that the key source of its competitive difference is “the way it treats its people,” a key part of its culture. This in turn is influences the way that its people take care of customers (another cultural dimension). Thus, Starbucks is not competing on coffee, as Behar (2008) has noted; Starbucks is competing on the basis of culture. Its business model is built around its culture! 8.2 Culture in the business model of southwest airlines Like Starbucks, Southwest Airlines (or other airlines like Lufthansa, British Airways, Singapore Airlines or United Air Lines) provide what is essentially a commodity “product” – air travel. They use equipment fromone of twomajor aircraft manufacturers: Boeing and Airbus. Since the aircraft for the same routes are virtually identical, airlines devote a great deal of effort to creating a perceived difference in their airlines service and their brand. This is where corporate culture can (and typically does) play a critical role. They way that airline personnel treat their customers is a critical manifestation of its culture. Southwest Airlines, a major US domestic carrier, emphasizes “customer service” not only in its advertising but also to its employees as a key competitive differentiator. Starbucks, Southwest Airlines, Google and Wal-Mart, among others, have built their business models are built around culture as the core strategic asset. It has also led them to superior financial performance in their respective spaces, which is the ultimate measure of the value of an asset. This has important implications for both theory and practice, which we will examine in a subsequent section. 9. The cost and value of corporate culture as a strategic asset As noted above, Barney (1986) has stated that the resource based view of strategy suggests that one criterion of a sustained competitive advantage is that the things under consideration s must have a positive effect on profits. Culture has been shown to have a direct statistically significant impact on the bottom line of corporate financial performance (Kotter and Heskitt, 1992; Flamholtz, 2001). Kotter and Heskitt (1992) provided some of the first empirical evidence of a statistically significant relationship between culture and financial performance. Their intent was to test the prevailing assumption of a link between “strong” cultures and superior financial performance. In their cross sectional research study, they selected 207 firms from 22 different US industries. They constructed a survey index of “culture strength.” They then calculated measures of economic performance for their sample of companies. These included: . average yearly increases in net income; . average yearly increases in return on investment; and . average yearly increases in stock prices. Then they examined the relationship between the performance measures and the culture strength measure. They found a positive correlation between corporate culture and long term economic performance. They stated (Kotter and Heskitt, 1992): “Within the limits

Assets and the bottom line 85 of methodology, we conclude from this study that there is a positive relationship between strength of corporate culture and long term economic performance.” In a related but different type of empirical research study, Flamholtz (2001) found that culture can account for as much as 46 percent of “earnings before interest and taxes” (EBIT). The research by Flamholtz (2001) differed from the prior research by Kotter’s and Heskitt (1992) in that it utilized data from a single company with 15 operating divisions, as opposed to cross sectional data. The intent of his study (the first and to date the only one of its kind) was to determine whether corporate culture

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has a significant impact on financial performance at the level of the firm. The regression equation describing the relationship among variables was statistically significant at the 0.05 level. This means that corporate culture has been shown to impact the so-called “bottom line” of corporate performance – financial results. Flamholtz (2001) and Flamholtz and Narasimhan-Kannan (2005) have identified the specific dimensions of corporate culture which impact financial performance. There are five key dimensions of culture which “have a statistically significant relationship to financial performance”: (1) customer-client orientation; (2) orientation toward employees; (3) standards of performance and accountability; (4) innovation and/or commitment to change; and (5) company process orientation (Flamholtz and Randle, 2011). Flamholtz and Narasimhan-Kannan (2005) conducted factor analytic studies which have supported the validity of the proposed five factor framework. Taken together, the significance of these of dimensions is that, based upon empirical research (Flamholtz, 2001; Flamholtz and Narasimhan-Kannan, 2005), they comprise the core elements or ingredients that a culture must include to create an effective corporate culture. 10. Managing culture as a strategic asset Given the role of corporate culture in the success of companies like Starbucks, Wal-Mart, and Southwest Airlines, and its equally important role in the decline of companies like AIG, it is critical that scholars as well as practicing managers and understand the nature, functioning, evolution of corporate culture, and how to manage it as a strategic asset. 10.1 “Strong” and “weak” and functional and dysfunctional cultures We have previously referred to “positive cultures” as assets, and “negative” cultures as liabilities or handicaps. In this section, we give a more precise definition of positive and negative cultures by identifying their underlying dimensions. This section provides a typology of cultural “types” based upon two key variables that can be used to classify cultures: “cultural strength” and “cultural functionality.” Cultural strength refers to whether a culture is “strong” or “weak,” as explained below. “Cultural functionality” refers to whether a culture is “functional” or “dysfunctional.” Companies differ in the extent to which they make an attempt to “manage” their cultural “messages” (statements, pictures, culture brands, corporate icons, etc.). Organizations that take the time to make explicit statements about their culture and

JHRCA 16,2 86 create “cultural icons” (such as Walt Disney, or Bill Hewlett and Dave Packard) tend to have “strong” cultures. The intention is to have people understand and embrace the company’s history and culture. A “strong” culture is one that people clearly understand, can articulate, and embrace in the sense that they behave according to its dictates. A “weak” culture is one that people will have difficulty in defining, understanding, or explaining what the culture is. They will also not embrace it to the desired extent. Although culture is everywhere and in everything, sometimes you enter organizations where it is not easy to determine what business they are in. In such environments, the de´cor is plain, almost non-descript. There are no clues to suggest what the business does: no culture statements, no pictures about the business, no hint of what business the company is in. This is characteristic of a company whose culture is so ill-defined (almost a “non-culture culture”), a culture devoid of obvious cultural symbols, that it is the apotheosis of a weak culture. It usually occurs by happenstance rather than design. It is a marker (or signature) of a company that does not recognize the importance of culture to people, either to members of the organization or to those whom they do business with. A “cultureless” company is an illusion. Just as an individual must have a

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personality, a company must have a culture, even though it “appears not to exist. A company that appears cultureless is actually a company with a ‘weak’ or ill-defined culture.” It is not possible for an organization to have no culture, just as it is not possible for a person to have no personality. Nevertheless, we are using the term to characterize a special kind of organization that seems devoid of culture. Strong culture companies can be either positive (an asset) or negative (a liability). If the company’s values are constructive, then having a strong culture is an asset. If the company’s values are negative or dysfunctional, then having a strong culture will be a liability. For example, the informal culture at Ford Motor Company during the late 1960s and early 1970s was captured in the statement made among employees that: “if you can get it to drive out the door, we can sell it!” This was not a formal corporate pronouncement, but a statement that was prevalent in conversations at the company. It was a statement that contained an implicit lack of respect for the customer, and suggested the lack of importance of true product quality. It was part of a strong-dysfunctional culture toward customers at Ford. Although Ford later made the pronouncement that “Quality is Job 1,” this was clearly a response to damage to its brand when customers realized that Ford products had declined in quality. Ford has labored for decades to overcome this stigma. In contrast (until recently), Toyota has steadily increased its customer loyalty and overcome the once prevailing view that products “made in Japan” were of inferior quality. It has accomplished this by a culture that emphasizes “perfection” in the customer experience from the product to the sales process and the service process as well (Liker and Hoseus, 2008). This reputation has been severely tarnished by the so-called “sudden acceleration problem” experienced by several makes of Toyota automobiles during the past few years. The two factors of cultural strength (strong and weak) and cultural functionality (functional and dysfunctional) can be combined into a two by two culture management typology matrix, identifying four different combinations as shown in Table I. This tool can be used to identify the type of culture present in a company. We have classified Starbucks, Wal-Mart, and Google as “strong-functional culture” companies. This does not mean that they are perfect companies. We have classified AIG

Assets and the bottom line 87 and GM (prior to its “rebirth” in 2010) as “strong-dysfunctional culture” companies. It remains to be seen what the current culture at GM is. We have classified Toyota prior to 2008 as a “weak-functional company.” On the surface it would have seemed that Toyota was a strong-functional culture company, but its failure to live up to its own cultural standards (expressed in the so-called “Toyota Way”) suggests that the culture was not really as strong as it seemed. Specifically, it appears that the “sudden acceleration problems” was known inside the company bust was not revealed to customers. This led to the unprecedented public apology by Akio Toyoda, amember of the founding Toyoda family (Vartabedian andHamberger, 2009). Specifically, Toyoda said that the “company had reached a moment of crisis” in which they had not adhered to the principles of “The Toyota Way.” In effect, Toyota had lost a critical strategic asset: its culture of perfection in products and services. 10.2 The economic costs of the loss of cultural as a strategic asset at Toyota The failure of people at Toyota to adhere to the “Toyota Way” was not merely an ethereal breach of a set of abstract principles. It has serious practical and financial consequences. For decades Toyota’s strategic mission had been to become the “no. 1 automobile manufacturer in the world.” It achieved that objective but it was a spurious and hollow victory. As a result of the sudden acceleration problem, which was a symptom and consequence of its failure to adhere to its own cultural values and norms, Toyota suffered a decline in market share, in brand loyalty, and in enterprise value (as measured in an approximately 50 percent decline in its stock price). Toyota is also

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vulnerable to customer law suits for damages form its products. Clearly, this is a very significant economic cost attributable to the loss of an intangible but real strategic asset. In addition, Toyota’s stumble has permitted US automobile makers to have another chance to reestablish their own brand equity. Bottom line: the Toyota experience again shows that corporate culture is a strategic asset or liability of great real world economic consequence, and not just a theoretical abstraction. Even though currently the value of corporate culture is not measured and reported in financial statements, it has significant practical importance. The culture typologymatrix shown inTable I can be used bymanagers to assesswhere their company and their strategic business units or subsidiaries would fit in the four quadrants. The ideal place (quadrant) would be “strong-functional.” Any other quadrant suggests the need for action to better manage and improve the company’s culture. 10.3 Cultural assets and liabilities summary As seen above, corporate culture can either be an asset or a liability (in the sense of a strategic weakness or handicap). It is a major asset and source of sustainable competitive advantage if it is a “strong and functional” culture. It is “somewhat” Culture factors Functional Dysfunctional Strong Starbucks AIG Wal-Mart GM (pre-2010) Google Weak Toyota (pre-2008) Toyota (2008-) Table I. Cultural typology matrix

JHRCA 16,2 88 of an asset if it is a “weak-functional” culture. It is a major liability and source of ongoing competitive disadvantage if it is a “strong and dysfunctional” culture. It is “somewhat” of a liability if it is a “weak and dysfunctional” culture. This set of possibilities is summarized in Table II. 11. Critical role of performance measurement of culture As is well recognized in accounting and management generally, measurement is critical to effective management (Kaplan and Norton, 1992; Meyer, 2002; Flamholtz, 2003). However, this is especially true with intangible assets and intellectual property such as corporate culture (Dumay and Cuganesan, 2011). The challenge with including culture in performance measures is, as always, to develop appropriate performance measurements of culture. The measurement of culture can be performed using behavioral measurement tools previously developed (Flamholtz, 2001; Flamholtz and Randle, 2011). 11.1 Measuring corporate culture One precept of management states that if you cannot measure something you cannot manage it. Through our research and experience we have developed methods of measuring corporate culture, which are described below. Culture can be measured using surveys with “Likert type” scales. This is shown in Figure 1. Culture factors Functional (assets) Dysfunctional (liabilities) Strong Sustainable strategic asset Major strategic weakness Weak Strategic asset Strategic weakness Table II. Cultural typology matrix Figure 1. Sample culture survey We keep our commitments to our customers/business partners. Our people are the Company’s most valuable asset. Our company reacts quickly to changes in the marke tplace. Our leaders act and communicate with integrity. People are rewarded based on their

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performance. Good planning is rewarded. Company policies are applied consistently. Changes that affect employees are communicated quickly and effectively. Current Culture Desired Culture Current Statement 1. 2. 3. 4. 5. 6. 7. 8. To A Very Slight Extent To A Slight Extent To Some Extent To A Great Extent To A Very Great Extent To A Very Slight Extent To A Slight Extent To Some Extent To A Great Extent To A Very Great Extent

Assets and the bottom line 89 Using this method of measurement, we can present a series of culture statements to potential respondents and collect their assessment of the degree to which they agree with the proposed or desired culture and also the extent to which see those things are actually practiced in an organization (Figure 1). For example, Figure 1 includes the statement: “We keep our commitments to our customers/business partners.” This is a culture statement that would be related to the “customer orientation” dimension of culture. There are two aspects of the survey: (1) the extent to which people agree with the proposed value; and (2) the extent to which they see it practiced in the firm. The output of this measurement method is a set of measurement as of corporate culture. It also enables the measurement of gaps between the desired “strategic culture” and the actual or real culture (Flamholtz and Randle, 2011). These measurement methods are also relevant to the “disclosure gap” with respect to human capital accounting literature identified by Samudhram et al. (2010). 11.2 Measuring the “effectiveness” of a stated culture The culture survey can be used to measure the “effectiveness” of the culture in two ways: (1) the extent to which the stated culture is embraced by people; and (2) the extent to which actual behavior in the organization is consistent with the stated culture. By asking respondents about the extent to which they agree with a value and believe it ought to be part of the “ideal” or desired culture, we have a method for measuring the extent to which the stated culture is embraced by people. By asking respondents about the extent to which they see it actually practiced in the current or existing culture, we have a way to measure the extent to which the behavior in the organization is consistent with the stated culture.

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11.3 Measuring culture gaps This measurement tool also provides a way to measure “culture gaps,” the difference between the proposed (desired) and actual cultures. The culture gap is a measure of the extent to which the company has been successful in helping people embrace and practice its stated culture. 11.4 Performance measurement of culture and the balanced scorecard Drawing upon these behavioral measurement methods, Flamholtz (2003) has previously proposed to include corporate culture in performance measurement in a revised version of the “balanced scorecard.” This, in turn, will help correct some of the limitations of the balanced scorecard, as identified by Meyer (2002) and Flamholtz (2003). The fundamental aimunderlying the so-called “balance scorecard” proposed byKaplan andNorton (1992, 1996), is sound. It attempts to provide amore comprehensive perspective for performance measurement than simply financial results. However, one major limitation of the so-called “balance scorecard” is that its four proposed “perspectives” have not been subjected to empirical test of validity of any kind (Flamholtz, 2003).Without such empirical support, there are merely in effect, hypothesized perspectives. Meyer (2002)

JHRCA 16,2 90 also argues for the need to validate proposed performancemeasures.Another limitation of the Kaplan-Norton version of the balanced scorecard is that it does not include corporate culture. Flamholtz (1995, 2003) has proposed an alternative model for a balanced scorecard. The model proposed by Flamholtz (1995) has been subject to extensive empirical testing, and all empirical tests have supported its validity (Flamholtz and Aksehirli, 2000; Flamholtz, 2001, 2002-2003; Flamholtz and Hua, 2002a, b, 2003; Flamholtz and Kurland, 2005). The model proposed by Flamholtz (1995, 2003) includes “corporate culture” explicitly as a variable relevant to the assessment of balanced performance. Accordingly, Flamholtz (2003) has proposed that the Kaplan-Norton version of the balance scorecard be replaced by a version using his model, which has been subject to considerable empirical testing and support, and also explicitly include corporate culture as a dimension of performance. As Meyer (2002) points out, one major problem with the balanced scorecard version proposed by Kaplan and Norton (1992, 1996) is that it is now used for purposes for which it was not originally intended. As he states: Although the scorecard was conceived as a means of communicating the firm’s strategy rather than a template for performance measurement, today the scorecards dominates discussions of performance measurement, and compensation is routinely based on scorecard measures.

12. Concluding comments Corporate culture – we cannot see it, touch it, smell it, taste it or hear it, but it is there. It pervades all aspects of organizational life and it has a profound impact upon organizational success and failure. If it is managed well, it can be a real economic and strategic asset. If it is managed incorrectly or allowed to deteriorate it can become a true liability or strategic disadvantage. Both of these “states” of culture development can be measured in financial performance and are reflected in differential shareholder value, as we saw with Wal-Mart and K-Mart. Currently corporate culture is not measured or reported in financial statements, either in internal statements or external financial reports to shareholders, potential investors, bankers, or others. However, it is possible to measure corporate culture as a strategic asset. Reporting it as an asset in financial statements for external purposes would require a significant change in accounting methods; but it could be measured and reported for internal purposes (Flamholtz, 2005). It will, however, require new ways of thinking about the role of measurement and perhaps the entire accounting paradigm (Roslender, 2009).

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The development, evolution and management of corporate culture are elusive but critical processes in organizations at all stages of growth. Culture is not static, and it is sometimes an extraordinarily valuable intangible asset, while at others it is a true liability. It can also transform from an asset into a liability, as we have seen with Toyota. This article has attempted to address the theoretical, practical, and measurement issues to explain the role of corporate culture in business models, as a strategic asset, and how it impacts the so-called “bottom line” of financial performance. The management of corporate culture is complex; but the processes that create and sustain this invisible construct can make it potentially the ultimate strategic asset. As we have

Assets and the bottom line 91 seen in the case of Starbucks Coffee, which today totally dominates the retail coffee cafe business throughout the world, culture can be the critical component of a successful business model. References Barney, J.B. (1986), “Organizational culture: can it be a source of sustained competitive advantage?”, The Academy of Management Review, Vol. 11, pp. 656-65. Barney, J.B. (1991), “The resource-based view of strategy: origins, implications, and prospects”, Journal of Management, Vol. 17, pp. 97-211 (Editor of Special Theory Forum). Barney, J.B. (2002), Gaining and Sustaining Competitive Advantage, 2nd ed., Prentice-Hall, Upper Saddle River, NJ. Behar, H., with Goldstein, J. (2008), It’s Not About the Coffee, Portfolio, New York, NY. Deal, T. and Kennedy, A.E. (1982), Corporate Cultures, Addison-Wesley, Reading, MA. Dennis, B. and O’Harrow, R. (2009), “Financial crisis: complex deals led to AIG’s undoing”, Los Angeles Times, Business Section, 1 January, pp. 1, 4. Dumay, J. and Cuganesan, S. (2011), “Making sense of intellectual capital complexity: measuring through narrative”, Journal of Human Resource Costing & Accounting, Vol. 15 No. 1, pp. 24-49. Flamholtz, E.G. (1995), “Managing organizational transitions: implications for corporate and human resource management”, European Management Journal, Vol. 13 No. 1, pp. 39-51. Flamholtz, E.G. (1999), Human Resource Accounting: Advances in Concepts, Methods, and Applications, 3rd ed., Kluwer Academic, Dordrecht. Flamholtz, E.G. (2001), “Corporate culture and the bottom line”, European Management Journal, Vol. 19 No. 3, pp. 268-75. Flamholtz, E.G. (2002-2003), “Towards an integrative theory of organizational success and failure: previous research and future issues”, International Journal of Entrepreneurship Education, Vol. 1 No. 3, pp. 297-319. Flamholtz, E.G. (2003), “Putting balance and validity into the balanced scorecard”, Journal of Human Resource Costing & Accounting, Vol. 7 No. 3, pp. 15-26. Flamholtz, E.G. (2005), “Conceptualizing and measuring the economic value of human capital of the third kind: corporate culture”, Journal of Human Resource Costing & Accounting, Vol. 9 No. 2, pp. 78-93. Flamholtz, E.G. (2011), “The leadership molecule hypothesis: implications for entrepreneurial organizations”, International Review of Entrepreneurship, Vol. 9 No. 3, pp. 1-23. Flamholtz, E.G. and Aksehirli, Z. (2000), “Organizational success and failure, an empirical test of a holistic model”, European Management Journal, Vol. 18 No. 5, pp. 488-98. Flamholtz, E.G. and Hua, W. (2002a), “Strategic organizational development and the bottom line: further empirical evidence”, European Management Journal, Vol. 20 No. 1, pp. 72-81. Flamholtz, E.G. and Hua, W. (2002b), “Strategic organizational development, growing pains and corporate financial performance: an empirical test”, European Management Journal, Vol. 2 No. 5, pp. 527-36. Flamholtz, E.G. and Hua, W. (2003), “Searching for competitive advantage in the black box”, European Management Journal, Vol. 21 No. 2, pp. 222-36. Flamholtz, E.G. and Kurland, S. (2005), “Strategic organizational development, infrastructure and financial performance: an empirical test”, International Journal of Entrepreneurial Education, Vol. 3 No. 2, pp. 117-42.

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16,2 92 Flamholtz, E.G. and Randle, Y. (2011), Corporate Culture: The Ultimate Strategic Asset, Stanford University Press, Stanford, CA. Johnson, M.W., Christensen, C.C. and Kagermann, H. (2008), “Reinventing your business model”, Harvard Business Review, Vol. 86 No. 12, pp. 50-9. Kaplan, R. and Norton, D. (1992), “The balanced scorecard-measures that drive performance”, Harvard Business Review, Vol. 71 No. 1, pp. 71-9. Kaplan, R. and Norton, D. (1996), The Balanced Scorecard, Harvard Business School, Boston, MA. Kotter, J. and Heskitt, J. (1992), Corporate Culture and Performance, The Free Press, New York, NY. Liker, J.K. and Hoseus, M. (2008), Toyota Culture, McGraw-Hill, New York, NY. Meyer, M.W. (2002), Rethinking Performance Measurement: Beyond the Balanced Scorecard, Cambridge University Press, Cambridge. Ratnatunga, J., Gray, N. and Balachandran, K.R. (2004), “CEVITA: the valuation and reporting of strategic capabilities”,Management AccountingResearch,Vol. 15No. 1, pp. 77-105. Roslender, R. (2009), “The prospects for satisfactorily measuring and reporting intangibles: time to embrace a new model of (ac)counting”, Journal of Human Resource Costing & Accounting, Vol. 13 No. 4, pp. 338-59. Sackmann, S. (2006), Success Factor: Corporate Culture, Verlag Bertelsmann Stiftung, Gu¨ tersloh. Samudhram, A., Sivalingam, G. and Shanmugam, B. (2010), “Non-disclosure of human capital based information: theoretical perspectives”, Journal of Human Resource Costing & Accounting, Vol. 14 No. 2, pp. 106-28. Schein, E.H. (1992), Organizational Culture and Leadership, Jossey-Bass, San Francisco, CA. Schultz, H. (1994), Harvard Business School Video, 994-515, Harvard Business School, Boston, MA. Schultz, H. and Jones Yang, D. (1997), Pour Your Heart into It: How Starbucks Built a Company One Cup at a Time, Hyperion, New York, NY. Soderquist, D. (2005), The Wal-Mart Way, Thomas Nelson, Nashville, TN. Teece, D.J. (2010), “Business models, business strategy and innovation”, Long Range Planning, Vol. 43, pp. 172-94. Timmers, P. (1998), “Business models for electronic markets”, Electronic Markets, Vol. 8 No. 2, pp. 3-8. Vartabedian, R. and Hamberger, T. (2009), “AIG woes could be just the start,: critics say AIG took too many investment risks”, Los Angeles Times, Business Section, March 30, pp. A1, A14. Zott, C., Amit, R. and Massa, L. (2011), “The business model: recent developments and future research”, Journal of Management, Vol. 37 No. 4, pp. 1019-42. Further reading Cameron, K.S. and Quinn, R.E. (1999), Diagnosing and Changing Organizational Culture: Based on the Competing Values Framework, Addison-Wesley, Reading, MA. Casadesus-Mananell, R. and Ricart, J.E. (2010), “From strategy to busienss models to tactics”, Long Range Planning, Vol. 43, pp. 195-215. Chesborough, H.W. and Rosenbloom, R.S. (2002), “The role of the business model in capturing value from innovation: evidence from Xerox Corporation’s technology spinoff companies”, Industrial and Corporate Change, Vol. 11, pp. 533-4.

Assets and the bottom line 93 Flamholtz, E.G. and Randle, Y. (2007), Growing Pains: Transitioning from Entrepreneurship to Professional Management, 4th ed., Jossey-Bass, San Francisco, CA. Flamholtz, E.G., Kannan-Narasimhan, R. and Nayar, M. (2006), “Performance management: the art and science of control”, The Human Factor, Vol. 1 No. 1, pp. 23-9. Kotter, J.P. (1996), Leading Change, Harvard Business School, Boston, MA. Peters, T. and Waterman, D. (1982), In Search of Excellence, McGraw-Hill, New York, NY. Corresponding author Eric G. Flamholtz can be contacted at: [email protected]

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Costing & Accounting Emerald Article: Corporate culture, business models, competitive advantage, strategic assets and the bottom line: Theoretical and measurement issues Eric G. Flamholtz, Yvonne Randle Article information: To cite this document: Eric G. Flamholtz, Yvonne Randle, (2012),"Corporate culture, business models, competitive advantage, strategic assets and the bottom line: Theoretical and measurement issues", Journal of Human Resource Costing & Accounting, Vol. 16 Iss: 2 pp. 76 - 94 Permanent link to this document: http://dx.doi.org/10.1108/14013381211284227 Downloaded on: 29-10-2012 References: This document contains references to 45 other documents To copy this document: [email protected] Access to this document was granted through an Emerald subscription provided by Emerald Author Access For Authors: If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service. Information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.com With over forty years' experience, Emerald Group Publishing is a leading independent publisher of global research with impact in business, society, public policy and education. In total, Emerald publishes over 275 journals and more than 130 book series, as well as an extensive range of online products and services. Emerald is both COUNTER 3 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. *Related content and download information correct at time of download.

Corporate culture, business models, competitive advantage, strategic assets and the bottom line Theoretical and measurement issues Eric G. Flamholtz and Yvonne Randle Anderson School of Management, UCLA, Los Angeles, California, USA Abstract Purpose – This paper seeks to enhance understanding of the role and effect of corporate culture as a unique strategic asset on the success of business models.

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Design/methodology/approach – The paper is a conceptual exploration of several key constructs and their interrelationship. The argument is based on four related notions: that corporate culture is an “asset”; that it is a “strategic asset” in the sense of comprising a source of competitive advantage; that it might well be the “ultimate strategic asset”; and that culture as a strategic asset can be the essence or core of a business model. The paper also uses “empirical examples” of actual companies to study and demonstrate the core constructs and ideas. It also examines issues involving the key dimensions of corporate culture, the measurement of corporate culture, and certain related performance measurement issues. Findings – The paper shows that corporate culture is a strategic asset, which, if managed properly, can be the key differentiating factor in a successful business model. It also shows that when not managed properly, can actually transform into a “liability”. Practical implications – This paper demonstrates that corporate culture is a critical strategic asset because of its role in creating competitive advantage and successful business models. It suggests that corporate culture can also be the single most important source of competitive advantage in business models. Finally, it suggests that practicing leaders as well as investors and academics need to pay attention to corporate culture as a component of business strategy. Originality/value – This paper contributes to the literature and to practice by examining the notion that corporate culture is a strategic asset in depth and examining the relationship between culture as a strategic asset and business models. It also takes steps towards a coherent framework for both scholars and practicing managers to frame and understand the issues involved in the management and measurement of this critical strategic asset. Keywords Corporate culture, Assets, Strategic asset, Ultimate strategic asset, Business models, Performance measurement, Organizational culture Paper type Research paper

1. Introduction Few managers or management scholars would question the critical role of corporate culture in organizational performance (Kotter and Heskitt, 1992; Deal and Kennedy, 1982; Schein, 1992; Flamholtz, 2001; Sackmann, 2006). Culture is well understood to impact human resources, and comprises a key aspect of human resource management. However, what is less recognized is that corporate culture is a true “strategic asset,” and it might well be the “ultimate strategic asset” for many, if not all, companies in todays’ The current issue and full text archive of this journal is available at www.emeraldinsight.com/1401-338X.htm

JHRCA 16,2 76 Journal of Human Resource Costing & Accounting Vol. 16 No. 2, 2012 pp. 76-94 q Emerald Group Publishing Limited 1401-338X DOI 10.1108/14013381211284227

economy, especially in the advanced nations. As a result, then, culture is or, at the very least, can be a critical component of a successful business model just as other forms of intellectual capital (Ratnatunga et al., 2004). As Dumay and Cuganesan (2011) state, identifying and measuring intellectual capital is important to contemporary organizations because intangibles create value and “true competitive advantage.” There are four critical interrelated notions here: (1) that corporate culture (“culture”) is an asset; (2) that it is a “strategic asset” in the sense of comprising a source of competitive advantage; (3) that it might well be the “ultimate strategic asset”; and (4) that culture, as a strategic asset, can be the essence or core of a “business model” (Barney, 1986; Flamholtz and Randle, 2011). We will examine each of these notions and their interrelationship in turn. First however, we will define the concept of corporate culture. 2. The concept of corporate culture The concept of corporate culture has become embedded in management vocabulary and thought. In order to manage it, we must first understand what culture is and what it is not. Although there are many different definitions of the concept, the central notion is

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that culture relates to core organizational values. In turn, values are things which are important to organizations and underpin decisions and behavior. All organizations have cultures or sets of values which influence the way people behave in a variety of areas, such as treatment of customers, standards of performance, innovation, etc. To us, corporate culture consists of “values,” “beliefs,” and “norms”which influence the thoughts and actions (behavior) of people in organizations. Values, beliefs, and norms, are then, the key components or elements that define a corporate culture. Values are the things an organization considers most important with respect to its operations, its employees, and its customers. These are the things an organization holds most dear – the things for which it strives and the things it wants to protect at all costs. Beliefs are assumptions individuals hold about themselves, their customers, and their organization. Norms are unwritten rules of behavior that address such issues as howemployees dress and interact. Norms help “operationalize” actions which are consistent with values and beliefs. These three elements of culture are actually part of an overall mosaic of culture in an organization. They are not necessarily all visible either single or in combination. There are actually several levels or layers of culture in an organization. There is the surface layer which is what we see and observe, mostly in the norms of behavior on a day to day basis. Then there are the core values and related beliefs or assumptions which drive or underlie the behavioral norms. However, below that is what might be termed a set of “cultural attributes,” which are the “DNA” of culture. These cultural attributes are dimensions of “corporate personality.” These are things such as attitudes towards risk, or ethics; propensity towards planning (or not!), systems, processes; attitudes towards professionalism, or entrepreneurialism, or even bureaucracy. These underlying cultural attributes drive the core beliefs, values, and norms which constitute the most observable level of culture.

Assets and the bottom line 77 3. Culture as an asset and/or “liability” The classic notion of an “asset” is that it is something of value owned or controlled by a business enterprise. Assets can be tangible like plant and equipment or intangible like “brands,” “intellectual property,” or “customer loyalty”, the latter being a form of “goodwill.” Like “goodwill,” corporate culture is an intangible but very real “economic asset” of business enterprises. For the companies which possess a strong positive culture like Starbucks, Southwest Airlines, Wal-Mart or Google, it is a true “asset,” if not in the strict accounting sense, then in the real economic sense, meaning that it leads to measurable differential profitability. It should also be noted that a case can be made that corporate culture is actually an asset in the accounting sense as well. Specifically, Flamholtz (2005) has proposed that corporate culture is an asset in the accounting sense. The classic measurement of the value of an economic asset or resource is the discounted value of expected future earnings. Flamholtz (2001, 2005) has shown that corporate culture can impact earnings and thereby meets this criterion. Thus, we view “corporate culture” as one of the three components of overall “human capital.” The primary dimension of human capital (and the one generally equated with the notion of “human capital” are the skills or competencies of individuals. In addition to this primary dimension of the individual as a form of human capital, a “traditioned group” (in the true sociological sense) also comprises an asset and another form of human capital (Flamholtz, 1995, 1999). The development of a true team in the sociological sense takes time, effort, and money. Flamholtz (2011) has shown that such a team or group of people can be a positive contributor to organizational effectiveness. The third form of human capital is corporate culture. Culture is an intangible asset, a form of intellectual property. If a “positive” culture exists, it functions as an intangible asset. If a “negative” culture exists, it functions as a drag on performance, and can quite possible lead to an organization’s demise.

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Thus, when a company like Starbucks or Wal-Mart has a positive corporate culture it can, as we shall see, generate positive differential earnings, which is per se an asset. On the contrary, for other companies with dysfunctional cultures like AIG, K-Mart, and (for the past 50 years or so) General Motors, their corporate cultures are true economic “liabilities,” if not in the accounting sense, then in the colloquial sense of that term. In companies with dysfunctional cultures, earnings are “less than” what they might otherwise be, thereby incurring real opportunity costs. This dual role of culture as an “asset” or “liability” is shown clearly in the examples of two companies: Starbucks and AIG. The former is a classic success story with a strong positive culture that is an economic asset, while the latter is a classic case of a dysfunctional corporate culture that led it to a precipitous decline in economic fortune and was only prevented from bankruptcy by being “too big to fail.” 3.1 Culture as an asset: the example of Starbucks For many people, Starbucks Coffee Company is an enigma. How does a company with a commodity product that has existed for centuries if not millennia rise from nothing to become a firm with more than $10 billion in revenues? When asked to explain the success of Starbucks, one of the great entrepreneurial success stories of the last 20 years, Schultz (1994), founder and CEO, has stated that:

JHRCA 16,2 78 When people ask me about the reasons for Starbucks success, I tell them not what they expect to hear. I tell them that it was the people at Starbucks and the way we managed them that was the true differentiating factor.

Similarly, Behar (2008), former Executive VP of Operations for Starbucks and President of Starbucks International, has stated very clearly in his book about Starbucks that the company’s success is about leadership and culture rather than its product; as the title of the book states: “It’s not about the coffee”! The key point is that the real differentiating factor in Starbucks’ success is not its coffee per se; the coffee comes from beans which are a commodity. Starbucks does not have a proprietary coffee bean, or a proprietary roasting process, which “magically” produces a superior coffee bean and beverage; rather, what is does have is a distinctive and superior culture that influences the behavior of people and comprises an intangible but real economic asset. Starbucks has become a global brand, and the leader in its space, with more than $10 billion in revenues in 2011. This has been accomplished by managing its corporate culture, an intangible but real economic asset. 3.2 The liability and cost of a dysfunctional culture: the example of AIG If Starbucks is the apotheosis demonstrating how a positive culture can be an asset, then AIG is one of many examples of how culture can become dysfunctional and lead to severe economic distress if not actual collapse. Once recognized as a leading company, AIG was at the center of the financial crisis that affected not only the USA but also the entire financial system. AIG is almost 100 years old (it was founded in 1919), is listed on the New York Stock Exchange (“NYSE”), and was led for decades by Maurice “Hank” Greenberg, a respected business leader (Flamholtz and Randle, 2011). The precipitous decline of AIG is directly attributable to a toxic corporate culture, which failed to permit people to challenge complex financial transactions. As Dennis and O’Harrow (2009) have observed, the rapid decline of AIG was attributable to overexposure to the now infamous “Credit Default Swap,” one of the financial products referred to by Warren Buffet as a “financial weapon of mass destruction”! Using econometric models based upon years of historical data about the variation in corporate debt, AIG concluded that there was a 99.85 percent chance of never having to pay out any insurance on credit default swaps. Assuming that total economic collapse would not occur, it seemed that AIG could earn millions of dollars with virtually no risk, a classic “economic free lunch,” (which of course is not supposed to exist in the

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real world and, in fact, was actually a statistical mirage)! In fact, it was not just a failure of statistical analysis at AIG that led to its near ruin; it was “the failure to adhere to a core cultural norm that led virtually to disaster.” Under leadership of Greenburg, the normwhich had been embedded in the culturewas that “just about anyone could question a trade.”This led to a strong-functional culture that helped to avoid undue risks. However, according to people who worked for the firm, under Frank Cassano, the then leader of AIG’s Financial Products Group, the norm that “anyone could question a trade” would change and be abrogated, leading to a dangerous culture which embraced great risks without adequate understanding of the potential consequences (Dennis and O’Harrow, 2009). There were doubters atAIG, who questioned the wisdomof credit default swaps and the magnitude of the company’s commitments to those esoteric financial products; but they remained silent, cowed by Cassano and his enthusiasmfor this spurious notion of an apparently free lunch! The net result was that credit default swaps

Assets and the bottom line 79 became a toxic product for AIG, the poisoned “fruit” of a culture that had transformed from one of “open discussion” into a dysfunctional culture that avoided challenging the powerful leader Cassano and his pet ideas and products. Virtually all that prevented AIG from total economic collapse as a company was that it was deemed to be “to big (to be allowed) to fail.” AIG’s products were so embedded in the financial system that it was deemed to be too great a risk to allow the company to fail. 4. Strategic assets Not all assets are “strategic assets.” For example, a computer might be an asset, but it is not typically a strategic asset, because it is essentially a commodity product that can be purchased by other firms. A “strategic asset” is an asset that provides a source of sustainable competitive advantage. We propose two criteria for something to be a “strategic asset”: (1) it must provide a “competitive difference”; and (2) it must be “sustainable” for at least a period to exceed two years. The first criterion is that to be a strategic asset the asset must provide some differential benefit to a firm. A “brand,” though intangible, can be a strategic asset. It is well established that a brand is an asset, and that a brand can have great economic value. What makes a brand a strategic asset is that it can be a source of preference for present and potential customers. For example, when someone says, as the authors actually overheard, “let’s go to Starbucks” rather than saying “let’s go for a coffee or Cappuccino”; that demonstrates the power and differential benefit of a brand. Similarly, when someone ask for a “Coca Cola” rather than a “carbonated soft drink” or “a Pepsi” that too demonstrates the benefit of a brand. A strategic asset must also be sustainable. Our operational definition of sustainability is that something must be able to last for a minimum of two years for it to be deemed a strategic asset; this is analogous to the criterion for a “fixed asset” in accounting. As a result the so-called “first mover advantage” (which is a real advantage) is not necessarily a source of sustained competitive advantage. It can be countered by “late movers” which improve upon a product and render the first mover advantage meaningless. For example, Apple has severely wounded Rim’s Blackberry, if not rendered it virtually obsolete, or at least it, by its own innovation of the “I-phone”. Another aspect of sustainability is the difficult of imitating the strategic asset. The more difficult something is to copy, the greater the degree of sustainability. Similar to the above discussion, Barney (1986, 1991, 2002) has noted that the resource based view of strategy suggests that something will provide a sustained competitive advantage when it meets three criteria: (1) it is important to the company because it has a positive effect on profits; (2) it is difficult to imitate; and

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(3) it is scarce. 4.1 The nature of culture as a strategic asset Our proposition is that culture is a strategic asset. Culture functions as a strategic asset in several ways.

JHRCA 16,2 80 One key is the impact culture has upon the ability to attract, motivate and retain people, which comprise the human capital of an enterprise. Some firms are known for being “attractive places to work,” that is having positive cultures. In fact, some companies compete to be recognized as one of the so-called “best places to work.” This, in turn, enables a company to attract “the best and the brightest” talent. The authors have seen this in action at many companies. For example, when Starbucks (already known in its early years as having a “good culture”) was seeking to hire a senior human resources executive and placed, an advertisement in the Wall Street Journal, there were more than 600 applicants, including three from the same firm! Culture not only serves to attract people, if often can serve to retain them as well. In the case of a home builder which was recognized by employees for a very favorable culture, the company was actually able to offer less compensation than competitors without losing people. Since it is costly to recruit and train people, this ability to retain human capital is a strategic asset as well (Flamholtz, 1999). For these reasons, companies are increasingly recognizing that an “employee brand” (the branding of its culture) is a strategic asset or competitive weapon just as important as or even more important than other factors. 5. Culture as a strategic asset: the case of Wal-Mart and K-Mart We believe that culture is a true strategic asset. It is a true source of competitive advantage, and results in differential corporate performance which can be measured in financial results. This can be demonstrated in the example of the success of Wal-Mart versus K-mart below. On the surface, there are no major differences between Wal-Mart and its major competitor K-Mart. Both companies market to the same customers, and there are no products that Wal-Mart has that K-Mart does not have. As a walk through these stores will demonstrate to the observer, they both sell exactly the same things: Johnson’s Baby Powder, Allergan lens solution, Colgate Toothpaste, and other consumer disposables and staples. They both have the same kinds of stores and they operate in similar geographic locations. They recruit from the same pool of people. Yet in spite of these similarities, Wal-Mart has produced a vastly different financial result for investors than K-Mart. It is true that today Wal-Mart has a significantly greater scale than K-Mart; however, when Wal-Mart was founded the reverse was true, and yet Wal-Mart has come to dominate K-Mart even though the later had the original “first mover advantage.” In addition, the financial return to investors measured in terms of stock prices differs greatly between the two firms (Flamholtz and Randle, 2011). In the decade of the 1990s, the stock price of K-Mart almost doubled. An original investment of $10,000 would have been worth almost $20,000 by 1999. This was a reasonable return, but possibly less than what might be expected for this type of company. During the same period, the stock price of Wal-Mart increased several fold. Specifically, an investor who made an original investment of $10,000 in 1990 would have seen the value of that investment increase to approximately $280,000! This is an astounding difference, especially when these companies are not like Microsoft or Amgen, where there are proprietary products or proprietary intellectual property. If we carry our analysis a little further to the end of 2003, then the results are even more dramatic. By the end of 2003, K-Mart had gone bankrupt! An investor would have lost all of his

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bottom line 81 or her investment. While Wal-Mart’s stock price did decline as a result of the market collapse from 1999 to 2003, the original investment of $10,000 would still have been worth just under $200,000. Wal-Mart and K-Mart are selling essentially the same commodities, but with vastly different financial performance results. What explains that? Soderquist (2005), the former Vice Chairman and Chief Operating Officer of Wal-Mart, now retired, attributes the company’s success to its culture. We believe that Soderquist is correct, and that much of the explanation of the differential financial value between these two companies is attributable to cultural differences between the two companies. This is not to suggest that Wal-Mart is a “perfect” or even a model company. There have been numerous criticisms and lawsuits against Wal-Mart. Nevertheless, from an economic standpoint of organizational success; Wal-Mart is clearly a superior organization, clearly the economic victor versus K-Mart, and clearly the dominant player in its market space. It is in this sense that its culture is a true strategic asset for Wal-Mart. Corporate culture is the key competitive difference between the two companies, and is to a very great extent the reason for the difference in success of these two otherwise virtually identical companies. This example also shows that culture also meets the criteria Barney (1991) has articulated for a sustained competitive advantage: . it is important to the company because it has a positive effect on profits; . it is difficult to imitate; and . it is scarce. The Wal-Mart culture haws a positive effect on profitability vis a vis its competitor K-Mart. It is difficult, possibly impossible, to imitate. It is also “scarce” in the sense of being relatively rare as a phenomenon. It also is has scarcity value because culture is difficult and costly to create and manage, especially in larger organizations. We will address this last issue below. 6. The ultimate strategic asset Unfortunately, most assets, even strategic assets, are ultimately perishable. The reason for this is that it they can be copied, or in the case of intellectual property they can be “worked around.” For example, even a patented “molecule” in biotech can be “defeated” by another pharmaceutical firm with slightly differentiated products. Most of the things over which organizations compete can be copied or neutralized by competition. Products can be imitated or improved upon. Financial resources are fungible. Many companies have capable people, which neutralize this as a competitive advantages. The “ultimate strategic asset” would need to be something that is not only not-perishable; but it must also be something that cannot be imitated easily if at all by competition. Ideally it would be something that is invisible to competition so that they cannot visualize what it is and therefore increase the difficulty of copying it. 7. The rationale for “culture” as the ultimate strategic asset Barney (1991) has proposed, and we agree, that a company’s culture can be a stronger source of sustained competitive advantage than products or services, because unlike

JHRCA 16,2 82 the latter it cannot be imitated. In our view, however, culture is not just a strong source of sustainable advantage; it is the ultimate source of sustainable advantage, and, in turn, the ultimate strategic asset. Building upon the discussion above, here is our argument in brief: We have explained that organizational cultures, which are inimitable, are a source of sustainable competitive advantage for firms (Barney, 1986). A company’s culture –

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if well managed – is transmitted to generations of employees through the company’s “DNA,” thus perpetuating this source of competitive advantage. This makes it a sustainable strategic advantage. Corporate culture represents the one thing that a firm has that is ultimately not susceptible to imitation or duplication by another company. Although it is possible to “clone” sheep, it is not simple to do. Similarly, it is not simple, and (we believe) virtually impossible to clone a firm’s culture. Even when a company tries to copy a culture, it is not possible to duplicate it exactly. The unique circumstances of every company’s situation and history make cloning another culture a virtually impossibility. Difference in leadership personalities, size, historical experiences, and a variety of other factors all combine to make a corporate culture unique. Attempts to copy of clone it will lead to “artificial cultures” which do not fit. For example, in one instance with which we are familiar, a competitor to PowerBar (now owned by Nestle) perceived that culture was an asset for PowerBar. Not truly understanding what was being done to create and manage PowerBar’s special culture, the competitor misconstrued what it was and spent more than $1 million trying to copy PowerBar’s physical facilities for employees rather than the invisible culture management process that PowerBar had created with our assistance (Flamholtz and Randle, 2011). Corporate culture is, then, not just a source of competitive advantage; it actually seems to be the ultimate source of true sustainable competitive advantage. This is because of the extreme difficulties, if not impossibility, of replicating culture across organizations. In addition, it is a relatively an invisible strategic asset. The fact that culture is difficult is difficult to “see” relatively makes it function as a “stealth” competitive weapon. The bottom line is that corporate culture can thus be viewed as the ultimate strategic asset because of its unique attributes. 8. Culture as a strategic component of business models In order to explain the role that culture can play in a business model, we must first define what we mean by the term “business model” itself. During the past several years, the concept of a “business model” has received a great deal of both academic and practitioner attention (Zott et al., 2011). The concept of a “business model” is widely used in business and academic literature; however, as Zott et al. (2011) point out in their comprehensive review and critique of the business model literature, it appears that there has yet to develop a generally accepted definition of that term and related language that can be used to communicate about and analyze business models systematically. As they state: “[. . .] scholars do not agree on what a business model is.” This means that one person’s business model might not fit with another person conception of what a business model is. As we shall explain below, this has direct relevance to our notion that corporate culture can be the essential ingredient in a business model.

Assets and the bottom line 83 Although there is no generally accepted agreement about the meaning of the construct of a business model, there do appear to be certain common elements in many versions of this construct. The three common elements (either explicit or implicit) are: (1) target (customer) markets; (2) a “mechanism” of delivering a product or service via the use of resources and organizational processes (termed a business architecture); and (3) value derived for the enterprise and its stakeholder’s (Zott et al., 2011; Teece, 2010; Johnson et al., 2008; Timmers, 1998). Consistent with these core elements, as used here, a “business model” refers to the entirety of the processes from the selection of a market to the delivery of a product or service by means of a specified (constructed) “business architecture.” A business model can of itself be a source of competitive advantage, as seen in the many examples of disruptive competition by internet (web) based companies like

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Amazon.com. For example, the emergence of Amazon.com has literally driven “borders” (retail book stores), with its classic “brick and mortar” business model, into bankruptcy. In addition to competition with business models per se, organizations compete on many levels with many different strategic assets. They compete not only in terms of products and services, but also with brands and other strategic factors of production (such as human capital and intellectual property) as well. One of the key components of a business architecture or “organizational infrastructure” is corporate culture. It is increasingly recognized the culture is a key strategic asset and a basis of competition among firms (Barney, 1986, 1991, 2002; Flamholtz and Randle, 2011). The special features of corporate culture which combine to make it the ultimate strategic asset, in turn, lead to it becoming a powerful basis for a business model. There are three specific attributes of culture that make it a candidate for competitive differentiation in a business model: (1) corporate culture is difficult and costly to develop; (2) once developed it can be maintained and is not inherently perishable; and (3) to a very great extent, it is not readily visible to the casual observer, making it difficult to copy. This has led some companies such as Starbucks, Southwest Airlines, Google and Wal-Mart, among others, to view culture as a core component (if not the core component) of their overall business model and strategy. In effect, their business models are built around culture as the core strategic asset. We will return briefly to the example of Starbucks and provide some additional material. We will also examine how Southwest Airlines, a very different business, utilizes corporate culture in its business model. 8.1 Culture in the business model of Starbucks As we have alluded to above, corporate culture is at the core of Starbucks business model. The company’s product is nominally coffee and coffee beverages; but the real “product” as articulated by Schultz and Jones Yang (1997) is the experience of the

JHRCA 16,2 84 so-called “third place.” The basic syllogism underlying Starbucks’ culture is: the way we treat our people affects the way they treat our customers, and in turn, our “financial performance.” Stated differently, Starbucks realizes that the key source of its competitive difference is “the way it treats its people,” a key part of its culture. This in turn is influences the way that its people take care of customers (another cultural dimension). Thus, Starbucks is not competing on coffee, as Behar (2008) has noted; Starbucks is competing on the basis of culture. Its business model is built around its culture! 8.2 Culture in the business model of southwest airlines Like Starbucks, Southwest Airlines (or other airlines like Lufthansa, British Airways, Singapore Airlines or United Air Lines) provide what is essentially a commodity “product” – air travel. They use equipment fromone of twomajor aircraft manufacturers: Boeing and Airbus. Since the aircraft for the same routes are virtually identical, airlines devote a great deal of effort to creating a perceived difference in their airlines service and their brand. This is where corporate culture can (and typically does) play a critical role. They way that airline personnel treat their customers is a critical manifestation of its culture. Southwest Airlines, a major US domestic carrier, emphasizes “customer service” not only in its advertising but also to its employees as a key competitive differentiator. Starbucks, Southwest Airlines, Google and Wal-Mart, among others, have built their business models are built around culture as the core strategic asset. It has also led them to superior financial performance in their respective spaces, which is the ultimate

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measure of the value of an asset. This has important implications for both theory and practice, which we will examine in a subsequent section. 9. The cost and value of corporate culture as a strategic asset As noted above, Barney (1986) has stated that the resource based view of strategy suggests that one criterion of a sustained competitive advantage is that the things under consideration s must have a positive effect on profits. Culture has been shown to have a direct statistically significant impact on the bottom line of corporate financial performance (Kotter and Heskitt, 1992; Flamholtz, 2001). Kotter and Heskitt (1992) provided some of the first empirical evidence of a statistically significant relationship between culture and financial performance. Their intent was to test the prevailing assumption of a link between “strong” cultures and superior financial performance. In their cross sectional research study, they selected 207 firms from 22 different US industries. They constructed a survey index of “culture strength.” They then calculated measures of economic performance for their sample of companies. These included: . average yearly increases in net income; . average yearly increases in return on investment; and . average yearly increases in stock prices. Then they examined the relationship between the performance measures and the culture strength measure. They found a positive correlation between corporate culture and long term economic performance. They stated (Kotter and Heskitt, 1992): “Within the limits

Assets and the bottom line 85 of methodology, we conclude from this study that there is a positive relationship between strength of corporate culture and long term economic performance.” In a related but different type of empirical research study, Flamholtz (2001) found that culture can account for as much as 46 percent of “earnings before interest and taxes” (EBIT). The research by Flamholtz (2001) differed from the prior research by Kotter’s and Heskitt (1992) in that it utilized data from a single company with 15 operating divisions, as opposed to cross sectional data. The intent of his study (the first and to date the only one of its kind) was to determine whether corporate culture has a significant impact on financial performance at the level of the firm. The regression equation describing the relationship among variables was statistically significant at the 0.05 level. This means that corporate culture has been shown to impact the so-called “bottom line” of corporate performance – financial results. Flamholtz (2001) and Flamholtz and Narasimhan-Kannan (2005) have identified the specific dimensions of corporate culture which impact financial performance. There are five key dimensions of culture which “have a statistically significant relationship to financial performance”: (1) customer-client orientation; (2) orientation toward employees; (3) standards of performance and accountability; (4) innovation and/or commitment to change; and (5) company process orientation (Flamholtz and Randle, 2011). Flamholtz and Narasimhan-Kannan (2005) conducted factor analytic studies which have supported the validity of the proposed five factor framework. Taken together, the significance of these of dimensions is that, based upon empirical research (Flamholtz, 2001; Flamholtz and Narasimhan-Kannan, 2005), they comprise the core elements or ingredients that a culture must include to create an effective corporate culture. 10. Managing culture as a strategic asset Given the role of corporate culture in the success of companies like Starbucks, Wal-Mart, and Southwest Airlines, and its equally important role in the decline of companies like AIG, it is critical that scholars as well as practicing managers and

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understand the nature, functioning, evolution of corporate culture, and how to manage it as a strategic asset. 10.1 “Strong” and “weak” and functional and dysfunctional cultures We have previously referred to “positive cultures” as assets, and “negative” cultures as liabilities or handicaps. In this section, we give a more precise definition of positive and negative cultures by identifying their underlying dimensions. This section provides a typology of cultural “types” based upon two key variables that can be used to classify cultures: “cultural strength” and “cultural functionality.” Cultural strength refers to whether a culture is “strong” or “weak,” as explained below. “Cultural functionality” refers to whether a culture is “functional” or “dysfunctional.” Companies differ in the extent to which they make an attempt to “manage” their cultural “messages” (statements, pictures, culture brands, corporate icons, etc.). Organizations that take the time to make explicit statements about their culture and

JHRCA 16,2 86 create “cultural icons” (such as Walt Disney, or Bill Hewlett and Dave Packard) tend to have “strong” cultures. The intention is to have people understand and embrace the company’s history and culture. A “strong” culture is one that people clearly understand, can articulate, and embrace in the sense that they behave according to its dictates. A “weak” culture is one that people will have difficulty in defining, understanding, or explaining what the culture is. They will also not embrace it to the desired extent. Although culture is everywhere and in everything, sometimes you enter organizations where it is not easy to determine what business they are in. In such environments, the de´cor is plain, almost non-descript. There are no clues to suggest what the business does: no culture statements, no pictures about the business, no hint of what business the company is in. This is characteristic of a company whose culture is so ill-defined (almost a “non-culture culture”), a culture devoid of obvious cultural symbols, that it is the apotheosis of a weak culture. It usually occurs by happenstance rather than design. It is a marker (or signature) of a company that does not recognize the importance of culture to people, either to members of the organization or to those whom they do business with. A “cultureless” company is an illusion. Just as an individual must have a personality, a company must have a culture, even though it “appears not to exist. A company that appears cultureless is actually a company with a ‘weak’ or ill-defined culture.” It is not possible for an organization to have no culture, just as it is not possible for a person to have no personality. Nevertheless, we are using the term to characterize a special kind of organization that seems devoid of culture. Strong culture companies can be either positive (an asset) or negative (a liability). If the company’s values are constructive, then having a strong culture is an asset. If the company’s values are negative or dysfunctional, then having a strong culture will be a liability. For example, the informal culture at Ford Motor Company during the late 1960s and early 1970s was captured in the statement made among employees that: “if you can get it to drive out the door, we can sell it!” This was not a formal corporate pronouncement, but a statement that was prevalent in conversations at the company. It was a statement that contained an implicit lack of respect for the customer, and suggested the lack of importance of true product quality. It was part of a strong-dysfunctional culture toward customers at Ford. Although Ford later made the pronouncement that “Quality is Job 1,” this was clearly a response to damage to its brand when customers realized that Ford products had declined in quality. Ford has labored for decades to overcome this stigma. In contrast (until recently), Toyota has steadily increased its customer loyalty and overcome the once prevailing view that products “made in Japan” were of inferior quality. It has accomplished this by a culture that emphasizes “perfection” in the customer experience from the product to the sales process and the service process as well (Liker and Hoseus, 2008). This reputation has

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been severely tarnished by the so-called “sudden acceleration problem” experienced by several makes of Toyota automobiles during the past few years. The two factors of cultural strength (strong and weak) and cultural functionality (functional and dysfunctional) can be combined into a two by two culture management typology matrix, identifying four different combinations as shown in Table I. This tool can be used to identify the type of culture present in a company. We have classified Starbucks, Wal-Mart, and Google as “strong-functional culture” companies. This does not mean that they are perfect companies. We have classified AIG

Assets and the bottom line 87 and GM (prior to its “rebirth” in 2010) as “strong-dysfunctional culture” companies. It remains to be seen what the current culture at GM is. We have classified Toyota prior to 2008 as a “weak-functional company.” On the surface it would have seemed that Toyota was a strong-functional culture company, but its failure to live up to its own cultural standards (expressed in the so-called “Toyota Way”) suggests that the culture was not really as strong as it seemed. Specifically, it appears that the “sudden acceleration problems” was known inside the company bust was not revealed to customers. This led to the unprecedented public apology by Akio Toyoda, amember of the founding Toyoda family (Vartabedian andHamberger, 2009). Specifically, Toyoda said that the “company had reached a moment of crisis” in which they had not adhered to the principles of “The Toyota Way.” In effect, Toyota had lost a critical strategic asset: its culture of perfection in products and services. 10.2 The economic costs of the loss of cultural as a strategic asset at Toyota The failure of people at Toyota to adhere to the “Toyota Way” was not merely an ethereal breach of a set of abstract principles. It has serious practical and financial consequences. For decades Toyota’s strategic mission had been to become the “no. 1 automobile manufacturer in the world.” It achieved that objective but it was a spurious and hollow victory. As a result of the sudden acceleration problem, which was a symptom and consequence of its failure to adhere to its own cultural values and norms, Toyota suffered a decline in market share, in brand loyalty, and in enterprise value (as measured in an approximately 50 percent decline in its stock price). Toyota is also vulnerable to customer law suits for damages form its products. Clearly, this is a very significant economic cost attributable to the loss of an intangible but real strategic asset. In addition, Toyota’s stumble has permitted US automobile makers to have another chance to reestablish their own brand equity. Bottom line: the Toyota experience again shows that corporate culture is a strategic asset or liability of great real world economic consequence, and not just a theoretical abstraction. Even though currently the value of corporate culture is not measured and reported in financial statements, it has significant practical importance. The culture typologymatrix shown inTable I can be used bymanagers to assesswhere their company and their strategic business units or subsidiaries would fit in the four quadrants. The ideal place (quadrant) would be “strong-functional.” Any other quadrant suggests the need for action to better manage and improve the company’s culture. 10.3 Cultural assets and liabilities summary As seen above, corporate culture can either be an asset or a liability (in the sense of a strategic weakness or handicap). It is a major asset and source of sustainable competitive advantage if it is a “strong and functional” culture. It is “somewhat” Culture factors Functional Dysfunctional Strong Starbucks AIG Wal-Mart GM (pre-2010) Google Weak Toyota (pre-2008) Toyota (2008-) Table I. Cultural typology matrix

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JHRCA 16,2 88 of an asset if it is a “weak-functional” culture. It is a major liability and source of ongoing competitive disadvantage if it is a “strong and dysfunctional” culture. It is “somewhat” of a liability if it is a “weak and dysfunctional” culture. This set of possibilities is summarized in Table II. 11. Critical role of performance measurement of culture As is well recognized in accounting and management generally, measurement is critical to effective management (Kaplan and Norton, 1992; Meyer, 2002; Flamholtz, 2003). However, this is especially true with intangible assets and intellectual property such as corporate culture (Dumay and Cuganesan, 2011). The challenge with including culture in performance measures is, as always, to develop appropriate performance measurements of culture. The measurement of culture can be performed using behavioral measurement tools previously developed (Flamholtz, 2001; Flamholtz and Randle, 2011). 11.1 Measuring corporate culture One precept of management states that if you cannot measure something you cannot manage it. Through our research and experience we have developed methods of measuring corporate culture, which are described below. Culture can be measured using surveys with “Likert type” scales. This is shown in Figure 1. Culture factors Functional (assets) Dysfunctional (liabilities) Strong Sustainable strategic asset Major strategic weakness Weak Strategic asset Strategic weakness Table II. Cultural typology matrix Figure 1. Sample culture survey We keep our commitments to our customers/business partners. Our people are the Company’s most valuable asset. Our company reacts quickly to changes in the marke tplace. Our leaders act and communicate with integrity. People are rewarded based on their performance. Good planning is rewarded. Company policies are applied consistently. Changes that affect employees are communicated quickly and effectively. Current Culture Desired Culture Current Statement 1. 2. 3. 4. 5. 6. 7. 8. To A Very Slight Extent To A Slight Extent To Some Extent To A Great Extent To A Very Great Extent To A Very Slight Extent To A Slight Extent

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To Some Extent To A Great Extent To A Very Great Extent

Assets and the bottom line 89 Using this method of measurement, we can present a series of culture statements to potential respondents and collect their assessment of the degree to which they agree with the proposed or desired culture and also the extent to which see those things are actually practiced in an organization (Figure 1). For example, Figure 1 includes the statement: “We keep our commitments to our customers/business partners.” This is a culture statement that would be related to the “customer orientation” dimension of culture. There are two aspects of the survey: (1) the extent to which people agree with the proposed value; and (2) the extent to which they see it practiced in the firm. The output of this measurement method is a set of measurement as of corporate culture. It also enables the measurement of gaps between the desired “strategic culture” and the actual or real culture (Flamholtz and Randle, 2011). These measurement methods are also relevant to the “disclosure gap” with respect to human capital accounting literature identified by Samudhram et al. (2010). 11.2 Measuring the “effectiveness” of a stated culture The culture survey can be used to measure the “effectiveness” of the culture in two ways: (1) the extent to which the stated culture is embraced by people; and (2) the extent to which actual behavior in the organization is consistent with the stated culture. By asking respondents about the extent to which they agree with a value and believe it ought to be part of the “ideal” or desired culture, we have a method for measuring the extent to which the stated culture is embraced by people. By asking respondents about the extent to which they see it actually practiced in the current or existing culture, we have a way to measure the extent to which the behavior in the organization is consistent with the stated culture. 11.3 Measuring culture gaps This measurement tool also provides a way to measure “culture gaps,” the difference between the proposed (desired) and actual cultures. The culture gap is a measure of the extent to which the company has been successful in helping people embrace and practice its stated culture. 11.4 Performance measurement of culture and the balanced scorecard Drawing upon these behavioral measurement methods, Flamholtz (2003) has previously proposed to include corporate culture in performance measurement in a revised version of the “balanced scorecard.” This, in turn, will help correct some of the limitations of the balanced scorecard, as identified by Meyer (2002) and Flamholtz (2003). The fundamental aimunderlying the so-called “balance scorecard” proposed byKaplan andNorton (1992, 1996), is sound. It attempts to provide amore comprehensive perspective for performance measurement than simply financial results. However, one major limitation of the so-called “balance scorecard” is that its four proposed “perspectives” have not been subjected to empirical test of validity of any kind (Flamholtz, 2003).Without such empirical support, there are merely in effect, hypothesized perspectives. Meyer (2002)

JHRCA 16,2 90 also argues for the need to validate proposed performancemeasures.Another limitation of the Kaplan-Norton version of the balanced scorecard is that it does not include corporate

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culture. Flamholtz (1995, 2003) has proposed an alternative model for a balanced scorecard. The model proposed by Flamholtz (1995) has been subject to extensive empirical testing, and all empirical tests have supported its validity (Flamholtz and Aksehirli, 2000; Flamholtz, 2001, 2002-2003; Flamholtz and Hua, 2002a, b, 2003; Flamholtz and Kurland, 2005). The model proposed by Flamholtz (1995, 2003) includes “corporate culture” explicitly as a variable relevant to the assessment of balanced performance. Accordingly, Flamholtz (2003) has proposed that the Kaplan-Norton version of the balance scorecard be replaced by a version using his model, which has been subject to considerable empirical testing and support, and also explicitly include corporate culture as a dimension of performance. As Meyer (2002) points out, one major problem with the balanced scorecard version proposed by Kaplan and Norton (1992, 1996) is that it is now used for purposes for which it was not originally intended. As he states: Although the scorecard was conceived as a means of communicating the firm’s strategy rather than a template for performance measurement, today the scorecards dominates discussions of performance measurement, and compensation is routinely based on scorecard measures.

12. Concluding comments Corporate culture – we cannot see it, touch it, smell it, taste it or hear it, but it is there. It pervades all aspects of organizational life and it has a profound impact upon organizational success and failure. If it is managed well, it can be a real economic and strategic asset. If it is managed incorrectly or allowed to deteriorate it can become a true liability or strategic disadvantage. Both of these “states” of culture development can be measured in financial performance and are reflected in differential shareholder value, as we saw with Wal-Mart and K-Mart. Currently corporate culture is not measured or reported in financial statements, either in internal statements or external financial reports to shareholders, potential investors, bankers, or others. However, it is possible to measure corporate culture as a strategic asset. Reporting it as an asset in financial statements for external purposes would require a significant change in accounting methods; but it could be measured and reported for internal purposes (Flamholtz, 2005). It will, however, require new ways of thinking about the role of measurement and perhaps the entire accounting paradigm (Roslender, 2009). The development, evolution and management of corporate culture are elusive but critical processes in organizations at all stages of growth. Culture is not static, and it is sometimes an extraordinarily valuable intangible asset, while at others it is a true liability. It can also transform from an asset into a liability, as we have seen with Toyota. This article has attempted to address the theoretical, practical, and measurement issues to explain the role of corporate culture in business models, as a strategic asset, and how it impacts the so-called “bottom line” of financial performance. The management of corporate culture is complex; but the processes that create and sustain this invisible construct can make it potentially the ultimate strategic asset. As we have

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JHRCA 16,2 92 Flamholtz, E.G. and Randle, Y. (2011), Corporate Culture: The Ultimate Strategic Asset, Stanford University Press, Stanford, CA. Johnson, M.W., Christensen, C.C. and Kagermann, H. (2008), “Reinventing your business model”, Harvard Business Review, Vol. 86 No. 12, pp. 50-9. Kaplan, R. and Norton, D. (1992), “The balanced scorecard-measures that drive performance”, Harvard Business Review, Vol. 71 No. 1, pp. 71-9. Kaplan, R. and Norton, D. (1996), The Balanced Scorecard, Harvard Business School, Boston, MA. Kotter, J. and Heskitt, J. (1992), Corporate Culture and Performance, The Free Press, New York, NY. Liker, J.K. and Hoseus, M. (2008), Toyota Culture, McGraw-Hill, New York, NY. Meyer, M.W. (2002), Rethinking Performance Measurement: Beyond the Balanced Scorecard, Cambridge University Press, Cambridge. Ratnatunga, J., Gray, N. and Balachandran, K.R. (2004), “CEVITA: the valuation and reporting of strategic capabilities”,Management AccountingResearch,Vol. 15No. 1, pp. 77-105. Roslender, R. (2009), “The prospects for satisfactorily measuring and reporting intangibles: time to embrace a new model of (ac)counting”, Journal of Human Resource Costing & Accounting, Vol. 13 No. 4, pp. 338-59. Sackmann, S. (2006), Success Factor: Corporate Culture, Verlag Bertelsmann Stiftung, Gu¨ tersloh. Samudhram, A., Sivalingam, G. and Shanmugam, B. (2010), “Non-disclosure of human capital based information: theoretical perspectives”, Journal of Human Resource Costing & Accounting, Vol. 14 No. 2, pp. 106-28. Schein, E.H. (1992), Organizational Culture and Leadership, Jossey-Bass, San Francisco, CA.

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Assets and the bottom line 93 Flamholtz, E.G. and Randle, Y. (2007), Growing Pains: Transitioning from Entrepreneurship to Professional Management, 4th ed., Jossey-Bass, San Francisco, CA. Flamholtz, E.G., Kannan-Narasimhan, R. and Nayar, M. (2006), “Performance management: the art and science of control”, The Human Factor, Vol. 1 No. 1, pp. 23-9. Kotter, J.P. (1996), Leading Change, Harvard Business School, Boston, MA. Peters, T. and Waterman, D. (1982), In Search of Excellence, McGraw-Hill, New York, NY. Corresponding author Eric G. Flamholtz can be contacted at: [email protected]

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