According to Cameron (1997), as many as three-quarters of reengineering, total quality management (TQM), strategic planning, and downsizing efforts have failed entirely or have created problems serious enough that the survival of the organization was threatened. The most common response for the failure based on the research was neglecting the organization’s culture (Cameron, 1997, Caldwell, 1994; Gross, Pascale, and Athos, 1993; Kotter and Heskett, 1992). It is in fact developing a positive culture marked by focusing on others, collaboration, and empowerment (Bright, Cameron, and Caza, 2006) which is the differentiator in organizations that succeed in the midst of challenges.
Developing a positive culture marked by focusing on others, collaboration, and empowerment is the differentiator for organizations that succeed in the midst of challenges.
The Impact of People Investment on Profitability & Performance
Extensive research regarding the impact of people on performance conducted by Patterson, West, Lawthom, & Nickell (1997) demonstrated the following:
- Job satisfaction and organizational commitment each account for 5% variance in profitability (p.9).
- In relation to change in productivity, job satisfaction explains 16 per cent of the variation between companies in their subsequent change in performance. Organizational commitment explains some 7 per cent of the variation (p. 9).
Therefore, leaders must pay attention to the attitudes of people and seek to influence them toward higher satisfaction which lead to both profitability and productivity. Our approach helps to do this through practical tools that enable us to understand how others are receive communication and what they need to be more satisfied.
Wiete (2013) reported survey data from 784 respondents from over 500 organizations worldwide finding that organizations that value and train their people in self-awareness and effectively understanding how to collaborate with others report 16% more positive revenue growth.
Fry and Matherly (2006) demonstrated that leaders who expressed a leadership style with values, attitudes, and behaviors which helped others to experience meaning in their work, feel understood and appreciated caused a significant increase in organizational commitment (80%), productivity (56%), and sales growth (13%).
When leaders focus on their followers and truly serve them, their followers become more servant like which in turn decreases customer turnover and increases long-term profitability and success (Braham, 1999, Stone, Russell, and Patterson, 2004).
Patterson et al. (1997) reported the following based on their extensive research
- When we examine change in profitability after controlling for prior profitability, the results reveal that people investment practices taken together explain 19 per cent of the variation between companies in change in profitability
- In relation to productivity, people investment practices taken together account for 18 per cent of the variation between companies in change in productivity.
A relevant question when focused on the impact of people investment on performance and profitability is ‘What factors do not account for significant variation between companies?’ Data reported from Patterson et al. (1997) is helpful here as well:
We identified four areas of managerial practices which have traditionally been thought to influence company performance. These are business strategy, emphasis on quality, use of advanced manufacturing technology and research and development investment.
- The results reveal that strategy explains 2 per cent of the change in profitability in companies and less than 3 per cent of the change in productivity in companies. These results are not statistically significant.
- Emphasis on quality explains less than 1 per cent of the change in profitability within companies over time and less than 1 per cent of the change in productivity.
- Emphasis on, and sophistication of, technology explains only 1 per cent of the variation between companies in change in productivity over time, and 1 per cent of the variation between companies in change in profitability.
- Expenditure and emphasis on Research and Development accounts for 6 per cent of the variation in productivity. It also accounts for 8 per cent of the variation in change in profitability between companies.
Compared with these four domains (R&D, technology, quality and strategy) people investment practices which explain 18 per cent of the variation in productivity and 19 per cent of the variation in profitability in companies, are the more powerful predictors of change in company performance. Overall, these results very clearly indicate the importance of people management practices in predicting company performance.
The Impact of Cultural Health on Profitability & Performance
Culture has been treated as an enduring set of values, beliefs, and assumptions that characterize organizations and their members (Cameron and Ettington, 1988). Organizational culture research has increased as a result of internal dynamics (structural changes such as consolidation or mergers) and external dynamics of increasing complexity and change. Schein (1983), one of the key scholars regarding organizational culture noted that organizations develop a dominant culture over time as they adapt to these external challenges. It is vital to understand the culture and improve the health of the culture.
The empirical research has produced an impressive array of findings demonstrating the importance of the health of the culture in enhancing organizational performance (Cameron and Ettington, 1988; Denison, 1990; and Trice and Beyer, 1993). Culture impacts many areas beyond the scope of this research such as the University of Minnesota work (2008) which demonstrated that corporate culture is, above all else, the most important factor in driving innovation.
Gallup’s 2013 research showed that a healthy growing culture can promote above average engagement and can increase performance by up to 240 percent.
Hewitt (2014) found that companies with stronger cultures outperform the average company in revenue growth by 6 percent, operating margin by 4 percent and total shareholder return by 6 percent.
Kotter and Heskett (1992) compared the performance of twelve highly successful financial analyst firms to ten lower-performing firms. Although analysts are stereotyped as focusing almost exclusively on hard data, in all but one case, culture was a critical factor in long-term financial success.
Patterson, West, Lawthom, & Nickell (1997) research demonstrates the following in relation to organizational culture:
- Cultural factors accounted for some 10 per cent of the variation in profitability between companies between the two periods measured during the study. The variable which most explained change in profitability was concern for employee welfare (p. 10).
- In relation to change in productivity, the results were even more striking. We can explain some 29 per cent of the variation between companies in change in productivity over a 3 or 4 year period in human relations terms. This is clear confirmation of the importance of organizational culture in relation to company performance. Concern for employee welfare was by far and away the most significant predictor (p. 10).
The research of Lok and Crawford (2003) demonstrated that both organizational culture and supportive and collaborative leadership styles had an impact on the satisfaction and commitment of people in the diverse contexts of Hong Kong & Australia.
Gordon & DiTomaso’s (1992) study demonstrated that the strength of the organizations culture is a predictor of corporate performance. In this study, strength was described as the consistency of the organization living out it’s values. Understanding and articulating the culture is a skill we help leaders to develop as a part of our work.
Former Harvard professor emeritus Dave Heskett (2011) provides substantive research demonstrating that “Organization culture is not a soft concept. Its impact on profit can be measured and quantified.” Heskett found that as much as half of the difference in operating profit between organizations can be attributed to effective cultures.
“We know, for example, that engaged managers and employees are much more likely to remain in an organization, leading directly to fewer hires from outside the organization. This, in turn, results in lower wage costs for talent; lower recruiting, hiring, and training costs; and higher productivity (fewer lost sales and higher sales per employee). Higher employee continuity leads to better customer relationships that contribute to greater customer loyalty, lower marketing costs, and enhanced sales.”