The link between culture and competitive advantage
A Global Culture Survey (by PWC)
Culture will pave the path forward
The Katzenbach Center, the institution for culture, leadership, and teaming at Strategy&, PwC's strategy consulting department, has been researching the impact of culture on corporate success for the past 25 years. In 2021, they asked 3,200 survey respondents to reflect on their COVID-19 crisis experiences. According to the findings, for some, organizational culture has been the hero of their pandemic tale. Business executives might get insights into the future by reflecting on lessons learnt during the epidemic.
The fact that many organizations feel their culture provided them with a competitive edge during the pandemic shows that as executives navigate a number of future problems, magnifying the correct components of their culture can provide them with a competitive advantage. However, weaknesses in an organization's culture can also jeopardize its capability to achieve strategic objectives.
According to the poll, the most concerning future worries for leaders are recruiting and retention of talent. This seems reasonable, considering indications that many workers were 'sheltering in job' as economies recovered from the pandemic. In fact, figures from the US Bureau of Labor Statistics suggest that people have already begun to leave their positions in some areas. There are a record number of job opportunities in the United States, and the 'quits rate,' or the proportion of individuals who quit their job, is rapidly rising. People now have numerous options in the labor market and are beginning to behave accordingly. PwC's 24th Annual Global CEO Study, confirms that leadership and talent development are priorities; it's one of the top five areas CEOs anticipate investing in over the next three years. However, executives must also deal with the need to innovate, work more efficiently, adapt digitally, and manage a variety of other concerns.
In this study, researchers will present evidence that organizations may gain a competitive edge by amplifying their cultural attributes. They will also address cultural difficulties revealed by their poll, particularly the crisis of authenticity: a mismatch between what leaders say about culture (particularly in terms of diversity, equity, and inclusion) and what their employees really experience. Finally, they will examine how leaders may activate their culture by controlling cultural traits—specifically, by utilizing a number of culture change 'enablers' that we have identified—to promote change and strategic objectives.
Understanding culture
Behaviours: Patterns within a corporation of how individuals spend their time, make decisions, live relationships, deal with disputes and realities, and execute their tasks; what people 'do' on a daily basis.
Traits: A recognized organizational wide propensity for people to act in a specific manner. The 'neutrality' of a trait suggests that it has both good and negative consequences, reflecting two sides of the same coin.
Enablers: Effective levers for assisting organizations in creating coherence around the qualities and behaviors regarded as most crucial to their success.
Culture’s time has come
At the Katzenbach Center, we define culture as ‘the self-sustaining patterns of behaviour that determine how things are done.’ The culture of an organization is as individual as a fingerprint, yet each different culture can be a source of competitive advantage provided leaders understand how cultural qualities promote or hinder change and take actions to activate the proper behaviors to support strategic goals.
Culture has moved dramatically up the leadership agenda in recent years (see Exhibit 2) and has flourished as a market topic of discussion (see Exhibit 3). It's worth noting that 67% of the C-suite and board members who responded to the study believe that culture is more crucial to success than the organization's strategy or operating model. Strategy, operations, and culture, as well as purpose, are all connected, and culture is what may bring these other components of the firm to life.
However, the poll found that talking about culture and believing in its importance does not necessarily convert into employees experiencing a cultural influence. In a series of questions on how effectively their firm supports diversity, equity, and inclusion (DEI) efforts, for example, there is a 20-percentage-point discrepancy between managers and nonmanagers.
Leaders must bridge this gap in order to fully realize the benefits of a strong organizational culture. And they'll almost certainly need to collaborate with policymakers who can build the groundwork, such as legislation that support flexibility and worker rights and deliver on what CEOs claim they want their culture to reflect. The reasons for doing so are varied, and the epidemic underlined the relevance of culture in firms' capacity to adapt, collaborate, be productive, and care for their people and customers. However, the proof of culture's influence is more than anecdotal. Our survey data supports the link between having a strong culture and being successful in company.
The evidence that culture is a competitive advantage
The survey results are resounding: 81% of respondents who firmly feel their business was able to adapt in the 12 months preceding the poll also believe their culture has been a source of competitive advantage (see Exhibit 4). 72% of respondents in senior management positions agree that their culture facilitates effective transformation efforts. Respondents who said their firm had a distinct culture and that culture is a priority on the leadership agenda were also more likely to indicate revenue, employee happiness, and customer satisfaction grew during the pandemic (see Exhibit 5).
The poll also revealed that organizations with a distinct culture found it simpler to maintain performance and pivot if necessary throughout the crisis. During the pandemic, 73% of these organizations say making decisions immediately grew simpler (or kept the same), 64% say communicating with colleagues was easier or stayed the same, and 66% say reacting to customer demands was easier or stayed the same (see Exhibit 6).
On the other hand, the survey results reveal that when culture is not prioritized, various ways of functioning are not as easy or successful. This viewpoint is critical when leaders consider attracting and keeping the best talent, which is critical to establishing and sustaining a competitive edge.
Cultural incoherence - the authenticity gap
Employees' emotions are influenced by their level of connection to the organization, its purpose, and other employees. Positive emotions also energize work and allow for growth and flexibility. According to the findings, authentic leadership and cultural cohesiveness are associated with higher levels of connectedness (see Exhibit 7).
According to the poll, the favorable influence of culture is seen most strongly in organizations where the whole workforce perceives their leaders performing authentically. Among poll respondents who feel their organization's executives are "role models of value, purpose, and culture," 83% also believe that culture provided a competitive edge during the pandemic, and 83% believe that their organization's culture enabled transformation initiatives to take place.
These findings highlight an ongoing problem for leaders: how to transform rhetoric about culture into actions felt on a daily basis at all levels of the organization.
In 2018, they identified a gap between C-suite and board members' perceptions of their organization's culture and their employees' experiences. They have observed in their work with clients that the disconnect between what executives claim they want the culture to be and how employees feel it has a negative influence on one critical emotion: trust. Without trust, it is far more difficult to effect change, inspire employees, and encourage appropriate behavior inside the organization.
The 2021 poll reveals that the gap between leaders' and employees' perceptions remains, affecting nearly every aspect of culture (see Exhibit 8). This disparity provides a significant barrier to reaping the advantages of investing in culture. The issue of authenticity lies at the heart of this mismatch; corporate executives feel they are a living incarnation of the organization's culture, values, and purpose, but their workers disagree. Closing these perception and authenticity gaps is critical, because authenticity is associated with not just positive sentiments but also quantitative business outcomes.
One of the most noticeable differences between employees and leaders in our poll is in questions about DEI. Only 21% of respondents overall believe that DEI has to be improved in their organization, and there is a significant gap between the perspectives of executives and lower-level employees (see Exhibit 9). This disparity exists across all geographies.
According to their statistics, many workers today believe they are not completely seen or heard, and that their workplaces are not as inclusive as leaders believe. This has ramifications. Some people who don't feel comfortable being themselves at work may turn to code-switching—changing their behavior, mannerisms, or speech patterns to fit in or because they believe they will be treated more fairly and given more chances as a consequence. This danger may be amplified further in the future mixed work model. Employees that are uneasy are unlikely to remain long. An organization will struggle to retain the talent it requires until this issue of workers not feeling involved or recognized is addressed and DEI ideals are firmly established in culture.
Their findings demonstrate that consistency is important not only in leaders' words and deeds, but also in the behaviors of employees throughout the organization. This is referred to as cultural coherence. Respondents in organizations where there is consistency between what is said about culture and how people behave perform far better in terms of revenue, employee and customer happiness, and so on (see Exhibit 10).
There is proof that a lack of cultural consistency in organizations is contributing to another major issue. Employees are losing faith in the power of culture, according to our survey this year: while the number of C-suite and board members who believe culture is more important than strategy or operating model has increased, the number of frontline workers who believe the same has decreased since their 2018 survey, from 66% to 46% in 2021.
The solution: Purposeful management of culture
Organizations that are clear and aligned on what they believe organizational culture will help them achieve are better positioned to harness the power of culture. Understanding culture—and the levers that may be pulled to influence it—begins with a list of the characteristics that people use to define it, as well as the behaviors that individuals routinely engage in.
With a few exceptions, their survey data suggests that the features or traits that organizations desire to implant in their culture have stayed pretty stable over time. Digitization and health and safety have replaced agility and customer-centricity as CEOs' top five cultural goals. According to PwC's 24th Annual Global CEO Poll, digitalisation is among executives' top five objectives, and a PwC US survey confirms leaders' attention on workers' well-being—so these trends are likely to continue. This year, executives picked recruiting and retention as the cultural goal they need to address the most (see Exhibit 11).
However, the need for improvement was considerably larger for organizations that respondents said had not demonstrated the capacity to pivot and adapt through COVID-19: 45%, compared to 37% who had. Furthermore, cooperation was a considerably bigger necessity among organizations that respondents said did not adapt effectively to COVID-19: 41% versus 31% (see Exhibit 12).
However, organizations may be unaware of which cultural traits and behaviors are closely related to those goals. For example, by asking survey participants to choose points on a scale that best characterize their organization's prominent qualities (see Exhibit 13), they might conclude that the majority of people who participated in the survey believe their organizations are hierarchical. However, based on their study of these cultural attributes findings, as well as survey respondents' responses to questions about what parts of their organization they need to improve, they can see that being non-hierarchical corresponds with greater recruitment and retention.
If conflicting cultural qualities support opposing strategic aims, leaders may have to conduct a difficult balancing act. In their investigation, they discovered that organizations that indicate they need to enhance recruiting and retention also report that some of their cultural qualities include making decisions through single points of accountability and supporting an incremental approach to change. This means that these two characteristics may be harming recruiting and retention efforts. However, before leaping to judgments, it is vital to recognize that those same characteristics may actually help with other aspects of an organization's strategy. For example, they discovered in the 2018 Global Culture Survey that having single points of responsibility is beneficial if a firm strives for operational excellence.
If organizations are to traverse the difficulties ahead, they must first establish and prioritize their strategic goals, then determine which traits and behaviors support those goals, and then activate and begin to transform their culture through the use of key organizational levers, or enablers.
This poll provided participants with nine enablers—both formal and informal—that we know from experience are helpful in assisting organizations in creating coherence in the qualities and behaviors recognized as most critical to their success.
The survey findings analysis also revealed that organizations should employ as many of these enablers, whether formal or informal, as feasible. According to their findings, organizations with more unique cultures and coherence activate more of these cultural change facilitators. When more than four enablers were active during the pandemic, for example, the survey results revealed a considerable increase in culture as a source of competitive advantage and an organization's ability to adapt (see Exhibit 14).
During the pandemic, organizations who used more of these enablers were also more likely to observe improvements in key performance measures such as revenue, customer happiness, and employee satisfaction (see Exhibit 15). In other words, an actively managed culture gives individuals the reinforcing nudges and support they need to build momentum around the essential few behaviors that drive corporate success.
Final words: Culture as a catalyst
An organization's culture is deeply entrenched and difficult to change. However, 2020 demonstrated that, when necessary, organizations may achieve quick transformation by focusing on a crucial few behaviors. As executives face a slew of business imperatives, such as digital transformation and adjusting to shifting working styles, organizational culture may be a valuable ally.
Of course, more work is needed if organizations are to translate leaders' good intentions about culture into quantitative benefits in staff retention, DEI, and transformation programs. Culture, however, can be a strong force that encourages retention and functions as an insurance policy against future disasters provided it is linked with strategy, purpose, and the operating model.
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