March 21, 2024

Top-Performing Companies Say Culture is Responsible for 30%+ of Their Enterprise Value (TPL Insights #214)

By Rob Andrews

By Rob Andrews with italicized content from Hubert Joly’s article in Harvard Business Review on June 10th, 2022

According to Hubert Joly, in his Harvard Business Review article published on June 10th, 2022, while good strategy has traditionally been seen as the key to business success, more recently, purpose has become an essential element of doing business. But something else is missing: culture, or the essential elements of how an organization and its employees behave, as well as its governing beliefs and principles. And yet, culture often receives less attention than purpose and strategy. Joly thinks of purpose, strategy, and culture as a triangle: Each angle connects with and shapes the other two, and if one changes, the other two must evolve and adjust to maintain balance and shape, or the triangle breaks and falls apart. He presents three types of levers companies can use to profoundly shape an effective culture and allow their strategy to come to fruition.

Unfortunately, there is often a large gap between a company’s purpose and the employees’ experience, and a simple communication campaign about the great, new company purpose won’t do much good on its own. As a business leader and a student of other business leaders, Joly now believes that a tight connection between purpose, strategy, and culture is critically important, because culture plays such a powerful role in making purpose and strategy come to life. He also believes that, as leaders, we can shape our companies’ cultures faster and more profoundly than most believe or understand.

The Purpose-Strategy-Culture Triangle

What do successful companies like Microsoft, Netflix, Best Buy, and many others have in common? Culture has been the fertile soil that has enabled both their purpose and their strategy to come to life and drive extraordinary performance at scale. In Joly’s experience, magic happens when purpose, strategy, and culture are tightly connected and aligned, reinforcing each other. Why? Because employees must be willing and able to unleash their individual and collective human genius to support the company purpose and strategy, and this can only happen in a culture perfectly aligned with both. CEOs in these companies report that 30% or more of their total enterprise value can be attributed to their culture.

When Satya Nadella became CEO of Microsoft in 2014, for example, the company was known for its aggressive, combative, and competitive culture. It was losing ground, having missed key waves of technology innovation. Since then, the company has gone through an amazing resurgence. Yes, Nadella and his team did update the company’s purpose from putting a computer on every desk to “empower[ing] every person and every organization on the planet to achieve more.” But Joly believes that the major driver of the company’s amazing resurgence has been the reinvention of its culture in support of that purpose, which implied addressing unmet, unarticulated needs. Central to that strategy was moving from a dominant “know-it-all” culture seeped in a world domination and zero-sum-game mentality to empathy and a growth mindset critical to a more open culture.

With Joly’s triangle of purpose, strategy, and culture, the angle you focus on first or at any given time depends entirely on circumstances. Trying to do everything well at all times is a recipe for “heroic mediocrity.” When Joly became CEO of Best Buy in 2012, for example, the company was in serious trouble. The priority was to act fast, fix operations (meaning execute the existing strategy better), and create the energy, hope, and all-hands-on-deck spirit that would enable them to save the company together. This was not the time to ponder over an elegantly worded company purpose or craft a new long-term strategy. The times called for straightforward operational improvements, which helped reignite the company’s culture around customers and frontline employees. A few years later, once they had stabilized the business, they felt ready to move from survival to growth. This is when they defined the company’s purpose to enrich lives through technology, adjusted the strategy accordingly, and began reshaping the company’s culture to make this purpose come to life.

A Singular, Simple, Powerful Idea

Articulating a succinct formulation that encapsulates culture around a singular, simple, and powerful idea that everyone can connect to makes it easier to shape and spread the culture. Simplicity and emotional connection are powerful because they fuel energy, focus, and action.

At Best Buy, they asked people who knew the company best to think about who they were, as a collective, when at their very best. They also asked: if the company were a person, how would it behave? “As an inspiring friend” was the answer. It came from within organically and aligned beautifully with their purpose of “enriching lives through technology by addressing key human needs.” It also captured how they wanted to behave and who they wanted to be in every aspect of the business. Think of a friend: someone who understands you and cares about you and what you need. Someone who listens. Someone who connects with you on a very human level. Someone who does their very best to help you when you need it. An inspiring friend is someone who possesses the human qualities you most admire and aspire to. This simple yet powerful concept helped transform how every Best Buy employee related to not only each other, but also to customers, suppliers, shareholders, and local communities. It guided their efforts to reshape their business, their management systems, and the environment in which all of them operated. In short, it crystalized their culture for every employee and made it easier for their purpose and strategy to come to life.

The Leader as Role Model

“The way you change behaviors is by changing behavior,” Russ Fradin, the lead independent director at Best Buy when Joly was Chairman and CEO, once told him. Simple, isn’t it? Jokes aside, he meant that leaders clearly signal change and shape the culture through their own behavior and actions. Role modeling starts at the top. When Joly became CEO, for example, he spent his first few days working at one of their stores in a small town near Minneapolis. He wore the same blue polo shirt as their sales associates, with a badge that read “CEO in training.” He observed, asked questions in the store and over a pizza dinner with local staff, and listened. By doing so, he signaled the importance of listening to frontliners to help fix what was broken. Besides setting the cultural tone, he also learned a lot about what worked and what didn’t, which critically informed what they needed to do to turn the business around, including matching Amazon prices, investing in the online shopping experience, and reallocating the space in the stores to accommodate faster-growing product categories.

Satya Nadella also illustrates the power of role modeling. After advising women during a conference not to ask for a pay raise but instead have faith in the system to close the gender pay equity gap resulted in backlash, he sent an email to all Microsoft staff. “I answered that question completely wrong,” he wrote, before saying women ought to get equal pay for equal work and should just ask for a raise if they think they deserve one. He further highlighted that this was a topic he had much to learn about, thereby beginning to shape the culture of empathy and the growth mindset that was instrumental to Microsoft’s resurgence. A few years later, Microsoft reached pay parity between women and men.

To be authentic, role modeling must reflect one’s own values. Leaders should therefore not be shy about connecting their own personal purpose and beliefs with the company purpose and culture they’re shaping. Leadership is less about being the smartest person in the room, and more about creating the environment that will enable the purpose and the strategy to come to life.

Stay tuned for next week’s continuation of these powerful concepts. Give us a call, and let’s talk about the importance of the triangle of purpose, strategy, and culture within your organization.

Warmest Regards,