Fundamentals of Business Culture

A core element entrepreneurs face as they develop a new business is cultivating a company culture that can successfully actualize their strategic vision. 

To fulfill a startup's potential, entrepreneurs must establish a strong company culture that clearly identifies the policies and procedures that support the operations of the business in a positive way, and in both economic and human terms.

Economic terms relate what the company must to achieve, while the human terms relate how the objective can be achieved. 

A strong company culture is essential because it produces a powerful sense of purpose, commitment, and cohesion among all of the individual stakeholders that make up the business. 

Cohesion is synonymous with team spirit., and with the right company culture stakeholders can become empowered to grow the company together, grow professionally together, and believe that every individual within the business meaningfully contributes towards the executive vision. 

By achieving these characteristics, a company culture can go so far as to communicate to every stakeholder that the business values their involvement and cares about their broad wellbeing as employees and human beings. 

This effort, with the right strategy, will produce a positive, efficient, and rewarding work environment where people are inspired every day to deliver the best possible results they are capable of and with the resources available to them. 

Here, we examine the essential elements that make up a company culture and why they are so important. 

 

Common Startup Cultures

 

Since the turn of the millennium, professionals from a variety of backgrounds have studied the value and impact distinct company cultures have on the overall performance of small and large businesses. 

Studies have illuminated characteristics about the kind of people who collaborate well together, why individuals are attracted to certain types of businesses, and how the implementation of different business cultures impacts the cohesion of a professional group.

A 2002 study titled, Organizational Blueprints for Success in High-Tech Start-Ups: Lessons from the Stanford Project on Emerging Companies of 200 different startups by James Baron and Micheal Hannan identified 5 distinct company cultures among nascent businesses. 

Broadly speaking, they found that prevalent startup cultures include:

 

Star:

A star culture is one that focuses on recruiting the best possible talent by offering top wages and providing the necessary resources and autonomy to preform their roles.

 

Commitment:

A commitment culture is one that focuses on producing an inclusive professional environment where people want to spend their entire careers, and leave only when approaching retirement. 

 

Bureaucratic:

A bureaucratic culture is one that focuses on rigorously examining and controlling the activities of the business through documentation, implementing policies and procedures, and strict oversight. 

 

Engineering:

An engineering culture is one that focuses on fostering a very high level of dedication and enthusiasm to the work being done, while encouraging almost a scientific approach to how objectives are completed. 

 

Autocratic:

An autocratic culture is one that focuses on motivating individuals through the economic rewards set by management for the work that is done, with very strict oversight and little autonomy. 

 

Among at the 200 companies Baron and Hannon examined in their study, they found that the majority of startups adopted a hybrid or mixture of the 5 common startup cultures, followed by the engineering and commitment models. 

The following chart illustrates the cultural breakdown they found:

 

Common Company Cultural Breakdown

 

 
 

 

Factors That Contribute To Culture

 

To produce their broad results about common business cultures, Baron and Hannan based their analysis on a close examination of the interplay between 10 factors within 3 categories across all of the companies they studied. 

Combined these culture contributing elements produce 36 different possible combinations (3x3x4=36) that meaningfully impact how professional environments are built and cultivated by different executive leaders. 

These categories and their corresponding factors include:

 

The first category represents the “why”, or the motivational factors that lead to people being attracted to specific businesses.

Broadly speaking, the examined founders believed that their employees expressed 3 different kinds of emotional and professional attachment to their company.

 

Basis of Attachment & Retention:

1. Colleagues and community

2. Quality of the work

3. Compensation

 

For the entrepreneurs who pursued establishing a very close family-like community within their company, they found that the most powerful force of attachment was a sense of personal belonging and identification with the organization. 

In this case, employees demonstrated loyalty out of love for their work group. 

For the entrepreneurs who lead technology companies at the frontier of innovation, the powerful force of attachment between employees and the company was the meaningful complexity and challenge of the work demanded of them. 

In this case, employees demonstrated loyalty based on the significance of the project they were working on, rather than the leadership or the organization. 

The remaining entrepreneurs expressed that the strongest binding force between their employees and company was the monetary compensation offered for their labor and time.  

The second category that contributes to a business’s culture represents the “who”, or the criteria for selecting professionals that the organization seeks to bring into the company. 

Here, the interviewed founders expressed 3 specific forces behind their employee selection process.

 

Criterion For Selection:

4. Experience and/or skill set

5. Exceptional talent and potential

6. Fit with the team and company

 

Some entrepreneurs considered the most important criteria was the individual’s ability to execute the tasks demanded of them. This was largely dependent on whether the individual possessed the skill set and experience to fulfill the expectations of their superiors. 

Other entrepreneurs had a more forward thinking perspective. They selected individuals not only based on the the value of their skills and experience in the present, but also on their aptitude or potential to surpass expectations and fulfill needs of the company in the future. 

The remaining entrepreneurs focused primarily on the individual’s alignment to the values of the organization, and how likely their involvement would be a positive cultural fit for the company. 

The third and last category represent the “how”, or the processes that sustain the operations of the company and how they are managed.

Here, entrepreneurs expressed 4 specific factors that contribute to defining an organization’s practices and the means of supervision adopted to monitor the work and behavior of employees.

 

Means of Control & Coordination:

7. Information control

8. Peer and/or cultural control

9. Formal standards, processes and procedures. 

10. Direct monitoring and evaluation

 

A number of founders expressed their belief that effective company supervision rested on managing the extensive amount to information flowing between employees and throughout the hierarchy of the organization. 

Another group of entrepreneurs considered peer to peer interactions and the specific company culture as the driving force of oversight impacting how easily employees could coordinate together and be effectively managed. 

These leaders found that employees are committed to delivering excellent work because they had been professionally socialized or indoctrinated to do so. This attitude was often found in businesses that recruited employees from the same or analogous institutions. 

Some entrepreneurs also advocated that formal standards, processes and procedures represented the most effective guides to control and coordinate employees. Here, leaders found that professional autonomy and independence, within a certain scope, was more valuable than enculturation. 

Lastly, a smaller group of entrepreneurs expressed the opinion that the best method of controlling employees is through direct personal oversight and evaluation. 

While direct control can be very effective in certain instances, many businesses that employ this strategy are found to possess a poor sense of community, a high level of instability, and generally a weak company culture.

 

Cultural Motivations

 

Examining employee motivations more closely, Baron and Hannan discovered distinct motivations, selections perspectives and oversight techniques unique to each of the 5 broad cultural models.

 

Employee Motivations

 

 
 

 

While found a variety of factors contribute to an individuals attraction or attachment to different kinds of enterprises, the most common was the “work being done”. 

The most common selection criteria was “skills”, while “peer/cultural adaptation” was the most common oversight criteria. 

Interestingly, Money was only a relevant factor within autocratic company models, while Love was only a factor for the Commitment cultural model. 

This analysis sheds light on the value of emphasizing purposefulness for both individuals because it motivates, and for businesses because if frames executive objectives. 

Entrepreneurs should attempt to instill purposefulness throughout their companies because the concept is closely aligned with identity, both individually and collectively, and encourages meaningful action. 

 

Cultural Performance

 

The close examinations into company cultures, and what defines them, eventually led Baron and Hannan to consider the probability these cultures exhibited on their respective companies of achieving a measurable degree of success. 

 

They summarized their findings in 3 broad conclusions related to the culture entrepreneurs attempted to instill in their company form the inception of their business, or from transforming their culture over time. 

The conclusions include; the likelihood of a business surviving versus failing, the likelihood and speed of a business going public, and for public companies; the likelihoodof market capitalization growing or declining following an initial public offering. 

To develop their analysis, Baron and Hannan examined a variety of factors including; industry, strategy, changes in revenues and employment levels, venture financing, macroeconomic conditions, volume of IPO activity in their respective industry, historical trends, and correlating changes in the NASDAQ index. 

For each analysis, the Engineering model was selected as a basis to compare the other cultural models.

 

The Percentage Difference in Likelihood of Failure: 

 

 
 

 

This chart illuminates how the Commitment and Star culture model provide the best working environment for startups to achieve early milestones, and avoid bankruptcy. 

The autocratic cultural model was the most likely to fail, which should not come entirely as a surprise considering that teamwork represents among the most important factors for early-stage startups to succeed in the marketplace.

 

The Percentage Difference in Likelihood of going Public

 

 
 

 

Here, the Commitment culture model outperformed the rest again as the most effective model to guide a startup towards it’s IPO when compared to the Silicon Valley default Engineering model.  

 

The Percentage Difference in Annual Growth in Market Capitalization

 

 
 

 

Interestingly, when compared to the engineering model, companies that adopted the Star model faired the best in terms of market capitalization in the public market after an IPO. 

Not surprisingly, the worst performers were companies that adopted Autocratic cultures. 

These 3 studies reveal how important team-work and talent are for companies to succeed at the earliest stages, when entering the public market, and at fulfilling stock holder expectations.

 

Cultural Adaptation

 

 

A prominent belief held among entrepreneur debunked in this study was that adopting the bureaucratic cultural model from the onset was a sound strategy because of its inevitable nature. 

Namely, as business grow it inherently becomes more bureaucratic. 

However, Baron and Hannan found no evidence to suggest that a bureaucratic culture was either inevitable, or an effective cultural model for early stage businesses.

Another interesting insight they uncovered was a belief held by several entrepreneurs that focusing on culture and organizational models right away was a misguided effort. 

These entrepreneurs advocated that before a culture can be defined and cultivated, a company must be economically successful first. 

Without the right economics, there is little reason to consider what kind of work environment culture is worth establishing. Organizational culture is in many cases a privilege successful companies can afford to examine, define and nurture over time. 

This can however be a catch 22 because as the analysis demonstrate, the kind of culture adopted by a startup from the onset can meaningfully impact it’s probability of success. 

Therefore, early-stage startup entrepreneurs would be wise to keep their desired organizational culture close to mind without clearly defining what the company culture effectively is for a relatively significant period of time.

This approach this provides the necessary flexibility to adapt to significant internal and external changes that may redefine the business and how it operates. 

 

Challenge of Success

 

Another challenge many startups face when trying to cultivate a distinctive culture, almost paradoxically, is achieving too much success. 

In the same way that a failing company can produce a negative and harmful culture, too much success can bring about 2 different cultural challenges. 

First, a high rate of change within a business can destabilize the fabric of a team and create instability within a company culture. With instability comes uncertainty, which breeds doubt and possibly resentment toward colleagues and a company's leadership. 

This can be particularly true for technology startups that must be flexible and adapt to changing market conditions and disruptive innovations. 

Responding to market changes can not only affect the viability of a company’s solution, but also its organizational structure because innovation often outpaces labor mobility and employee qualifications.   

Second, when a company achieves its corporate objectives and experiences “success”, the organization can suffer from a drop in motivational levels. Without clearly defined objectives that bind the entire team, individuals can experience a loss of drive, a drop in productivity, and even possible detachment from the group and the mission of the business. 

For this reason, entrepreneurs should practice continuously outlining new and actionable objectives to maintain a high level of focus and motivation among all stakeholders. 

This approach can ensure a lastly sense of belonging and purpose, capable of overcoming difficult periods when innovation and direction are sometimes lacking. 

 

 

Organizational Evolution

 

A final common threat facing companies both large and small is the possible need to transform the organizational blueprint or structure of a company and it’s culture to facilitate growth. 

This is an area where the perceived value and role of Human Resources can have dramatic implications on the sustained health of a business.

Particularly for young companies, adopting new HR strategies to alter the staff and leadership structure of the business can adversely affect the cohesion of the group, employee turnover, performance of the company and in some cases the survival of the business.

Moreover, any dramatic affect change has on a business will exhibit how the business’s culture perceives the responsibility of HR.

The Star model places significant value on HR because of the vital role it plays in recruiting the best possible talent to join the enterprise. 

For the Commitment cultural model, the key imperative for HR is to find individuals who will fit seamlessly with the company culture. 

The Engineering model considers HR to be a sustaining force, designed to ensure that a high level of energy is maintained to support the procedures of the business. 

Under the Bureaucratic cultural model, HR represents the administrative apparatus designed to deliver the policies and procedures that frame the operations of the business. 

And lastly, Autocratic models tend to deliberately avoid implementing a strong human resource department because they consider it to be an unnecessary cost. Within autocratic cultures, all HR issues are typically handled by the business’s executive leader and his/her direct associate. 

What reigns true, no matter the cultural model, its that significant structural change often results in damaging employee relations, a corruption of the leadership’s authority, and calls into question the underlying assumptions of the business.

Of all the 5 organizations cultures examined, the commitment model demonstrates the highest degree of resilience to forces of change, while the autocratic model demonstrates the least resilience.

When Barron and Hannon studied the possible outcomes of a structural changes within the business they analyzed their results were alarming.

 

Predicted Outcome from Changes in Organizational Structure

 

 
 

 

They uncovered that structural changes result in a high level of employee turnover, which is a common indicator of instability and uncertainty. 

Enterprises that changed their organizational structure were found to be 2 times more likely to experience bankruptcy compared to similar companies in the same industry. 

Moreover, they found that structural changes after an IPO resulted in a reduction of growth in market capitalization by around 3% per month, which cumulatively results in a potentially devastating impact on the viability of any business. 

Conversely, companies that maintained their organizational structure and company culture were likely to grow at triple the rate compared to businesses with altered blueprints. 

Overall, and for startups in particular, a “stay the course” strategy is the best approach to ensure that a company’s structure, human resources strategy, and culture remain a positive force that sustains and/or enhances the economic performance of the business. 

Of the companies who did transform their organizational culture, Barron and Hannon found that the most small business, particularly the Star and Commitment models, transitioned towards the Bureaucratic model. 

This was particularly the case when a startup founder was replaced by a new CEO from outside the company. 

The best way entrepreneurs can anticipate and manage significant change is to cultivate a culture that allows for change without meaningfully altering the genetic identity of the business. Achieving this requires balancing what came before, or what the status quo is, with what is needed or likely to happen in the future to the business. 

One way of ensuring that a company culture sustains change is by framing the business around milestones, and adapting the organizational culture incrementally depending on whether or not the milestones are achieved. 

In this way, change is absorbed gently over time, thereby allowing the business to maintain a high level of adaptability in the marketplace, while also ensuring that the organizational structure remains relatively constant. 

For this approach to work, a clear conception of where the company came from, it’s core values, and it’s underlying purpose, must be clearly identified. Doing so ensures that the company’s stakeholders understand the evolving trajectory of the company, and helps absorb dramatic change without significantly altering the business’s identity. 

Ultimately, to lead an organization and effectively manage future changes, a company’s leadership must be acutely aware of it’s origin. 

 

Conclusion

 

The risks associated with selecting a harmful cultural model, and transitioning between different cultural and organization models, demands that entrepreneurs carefully select a cultural blueprint. 

Any chosen model should be easily malleable to adapt to market changes in order to ensure the long-term viability of the business, while at the same time consistent with the underlying mission of the company. 

Balancing these opposing forces is the real challenge entrepreneurs face. 

To maintain harmony, business leaders should adopt a cultural blueprint that adequately suits the company’s needs in the present and that anticipates future changes. Such a strategy will be highly adaptive, while at the same time, provide a comfortable degree of consistency. 

Above all, entrepreneurs should avoid selecting a cultural model that effectively suits their company’s present status, but will likely fail their business in the future.

For entrepreneurs, choosing the right business culture demands balancing 3 interrelated components.

 

A. The core values of beliefs of the founders

Namely, what the founders believe to be an effective cultural philosophy for their business. 

 

B. Industry Standards

What the founders consider to be an effective cultural blueprint based on the previous experience of similar businesses in their market. 

 

C. Philosophy of Success

What the founders believe represents a path towards success, and the practices that can support their journey. 

 

Most importantly, entrepreneurs should be comfortable to develop their own cultural identity that either falls within or outside of the 5 common industry cultures. After all over 30% of business described their company culture as “other” when offered the 5 distinct cultural models.  

Moreover, no one specific culture has proven to be without their own specific drawbacks. 

While the Commitment and Star cultures have proven to be the most resilient, they are also prone to being fragile and are typically harder to scale when compared to the Engineering and Bureaucratic cultures. 

Star models are particularly difficult to scale because of the high dependency on top talent. This dependency often results in a high level of employee turnover to screen out the non-stars. 

In some cases even the star turnover is high because of the disillusionment that occurs when companies mature, and the barriers to success drop. 

Stars love a challenge, andwhen executing the work is made easy, or when the company’s milestones become less ambitious, stars often loose the motivational drive to deliver the kind of work that was so impactful during the startup stage.  

The Engineering culture can induce so much focus on the specific task at hand, that it’s leadership loses sight of the broad trajectory of their business. 

Similarly, entrepreneurs who adopt the Bureaucratic model can become so focused on developing and documenting policy and procedures that they fail to analyze whether their strategy is effective and impactful. 

Autocratic cultures simply fail to adapt to market changes from a lack of diverse thinking.

Finally, Commitment cultures are prone to developing an enculturation that is too distinct. This can result in a work environment of too many likeminded individuals, which damages creativity and at the extreme blocks innovation. In this case, fitting in becomes more important that successfully executing the work.  

Nevertheless, the commitment culture has proven to weather the challenges it’s own model proposes better than the rest. This is undoubtably due to it’s fundamental emphasis on team-work. 

Therefore, entrepreneurs should be comfortable to take several if not many facets of various company cultures to define their own unique blueprint. 

Lastly, clearly articulating a company culture at every stage, even when brainstorming the underlying solution or composing a business plan is important. 

Cyclically defining and redefining a company culture can facilitate establishing a common understanding among every stakeholder about what the business achieves, why it matters, and how it will go about achieving it’s objectives. 

The best culture not only defines the atmosphere of the enterprise it represents, but it parallels the financial, technological, and growth milestones established by the company’s leadership. 

While it may seem like an unrewarding exercise, it is never too early to carefully consider the kind of culture you aim to create and grow over the course of your business’s life-cycle.

Fundamentally, each individual component of a company can be thought of as a cultural artifact, that together form a distinct narrative about the business with strong cultural, sometimes even philosophical, overtones.

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