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Corporate culture meets competitive advantage

Corporate culture meets competitive advantage

19-10-2016 | Research

Cultural change is very difficult to accomplish. If a company’s competitive advantage is backed by corporate culture, is will be sticky and can lead to long-term value creation. We aim to identify companies that have the right cultural building blocks, which ultimately leads to better shareholder returns.

  • Chris Berkouwer
    Chris
    Berkouwer
    Equity Analyst
  • Michiel  Plakman
    Michiel
    Plakman
    Portfoliomanager Robeco Global Stars Equities

Speed read

  • A competitive advantage that is rooted in corporate culture is sustainable
  • A sustainable competitive edge leads to better free cash flow generating capabilities
  • It’s hard to quantify culture, but there are some good methods to analyze it

Business management guru Peter Drucker once remarked that “Culture eats strategy for breakfast”: a company can proclaim to have a particular strategy, but if that strategy is not rooted in its culture, it is destined to fail.

In our sustainability approach, we research whether a company’s culture is aligned with its strategy and whether the corporate culture reinforces or detracts from a company’s strategy. We aim to identify companies that have a corporate culture that supports a strategy of sustainable long-term value creation, and where the competitive advantage is rooted deeply in the corporate culture.

This is important, because a company’s culture is extremely difficult to change and if a company’s competitive advantage springs from a cultural advantage, it will last long. A sustainable competitive advantage leads to better free cash flow generating capabilities, which is of key importance in finding attractive investment candidates.

When we research the academic literature on this topic, we find that most attempts to ‘quantify’ culture are misguiding and leading to wrong conclusions. However, analysts can use several lenses to assess a company’s culture. There are three that we find useful: the Steward Brand model, anomaly analysis and the stakeholder checklist.

The Stewart Brand model

The Stewart Brand model is a simple change framework that helps us understand how society may change over time. Stewart Brand suggests that some changes, or ‘societal layers’, are much different from others. He specifically six types of competitive changes from ‘Nature’ on the bottom as the hardest to affect and therefore the slowest to change to ‘Fashion’ at the top which changes fairly easily and often. The spectrum runs from Nature to Culture to Governance, Infrastructure, Commerce and then finally to Fashion.

The point is that when a competitive advantage is rooted in the deeper layers of the Stewart Brand model, i.e. in ‘Culture’, or in ‘Governance’ (i.e. regulation), it may be very hard to overcome and may therefore last a very long time. Hence, competitive advantages that are rooted in ‘Culture’ may lead to long periods of sustainable returns. As the CEO of Southwest Airlines, Herb Kelleher, once mentioned: “Culture has everything to do with it, because everything you said today, our competitors could copy tomorrow. But they can’t copy the culture and they know it.” The reverse is also true, a competitive advantage that is purely rooted in ‘Fashion’ or ‘Commerce’ may not be sustainable for a very long time, as ‘Fashion’ can change rapidly.

Take tech giant Apple, for example. When it launched the iPod (in 2003), a lot of market watchers scratched their heads, as there were a lot of other MP3 players on the market, and at much more attractive prices. Apple also used a proprietary version of the MP3 standard, where customers had to convert their existing music collection to the Apple format, and upload their music to iTunes – Apple’s music store. However, with iTunes, Apple created an infrastructure layer, that made the product a lot more sticky. Apple customers had to ‘invest’ in the Apple platform by uploading their music, and by legally purchasing music online, through the iTunes Store. Rather than a fashion item, the iPod became a piece of infrastructure, with very strong customer lock-in, making it rooted in the ‘Infrastructure’ layer, rather than in the ‘Fashion’ layer. As a consequence, Apple’s competitive advantage became much stronger, and its free cash flow generation from this business model much more sustainable.

Anomaly analysis

In investigating corporate culture, we also look for  ‘anomalies’ or behavior that looks somewhat atypical, in order to understand why these anomalies might reflect a cultural advantage. If we see an interesting piece of evidence which seems out of the ordinary, it may reflect a culture that does many things distinctively. Of course, if such a cultural distinctiveness is a source of competitive advantage, it’s a vapor trail of data worth exploring.

Stakeholder analysis

It is also important to think about how a company balances different stakeholder interests. A checklist is therefore useful. Our checklist contains questions such as: ‘Is the company co-operative in nature?’, ‘How does it treat lower rank and file employees? and ‘How does it deal with its shareholders?’

By using a stakeholder checklist we can assess whether a company strategy is rooted in its culture and whether there is a consistent message to all these stakeholders. Management that acts with integrity to one particular group of stakeholders (clients, suppliers, employees), is likely to act with integrity to other parties as well (shareholders).

Culture also needs to evolve

A culture is not static. It needs to evolve as well. An example is UPS, the world’s oldest and largest package delivery company. For decades, its drivers mapped their daily routes with pins and clipboards. Drivers loved these clipboards; it was part of the company’s history and culture. However, about ten years ago, one of UPS’ engineers (Jack Levis) wanted to make those clipboards obsolete by using new technology. Some considered this blasphemy as the company survived for over a century using pins and clipboards. Jack’s project consumed eight years of his life, but he succeeded, and the system he helped develop made the UPS route network much more efficient. So far it has already saved UPS over 10 million gallons of fuel, USD 300 million in costs and reduced CO2 eamissions by 100,000 tons. It’s a good thing UPS did not follow the pheromone trail of cultural stubbornness and let this engineer pursue his goal.

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