Culture

Which is the best?

In 1994, two researchers from Stanford, James Baron and Michael Hannan, began what turned into an eight year study of tech startups. They eventually published a paper, Organizational Blueprints for Success in High-Tech Start-Ups, where they claimed that the founder's blueprint on the firm dictated the organizational structure, personnel management, and even the culture. While that in and of itself isn’t too surprising, what is very surprising is the impact that the difference these had on the probability of success, as defined by not going out of business and going public. We’ll get to that in a bit.

The researchers used three dimensions to classify the founder’s blueprint:

• Basis of Attachment 

  • Compensation (“money”)

  • Qualities of the work (“work”)

  • Work group as community (“love”)

• Criterion for Selection

  • Skills

  • Exceptional talent/potential

  • Fit with the team or organization

• Means of Coordination

  • Direct monitoring

  • Peer and/or cultural control

  • Reliance on professional standards

  • Formal processes and procedures

These three dimensions (Attachment, Selection, and Coordination) yielded five organization structures (Star, Engineering, Commitment, Bureaucracy, and Autocracy) as outlined in this table below. 

The researchers used quotes from interviews to describe each organization or blueprint:

• Star: “We recruit only top talent, pay them top wages, and give them the resources and autonomy they need to do their job.”

• Commitment: “I wanted to build the kind of company where people would only leave when they retire.”

• Bureaucracy: “We make sure things are documented, have job descriptions for people, project descriptions, and pretty rigorous project management techniques.”

• Engineering: “We were very committed. It was a skunk-works mentality and the binding energy was very high.”

• Autocracy: “You work, you get paid.”

Different blueprints entailed varied approaches to human resource management. For example, Commitment and Star firms were quick to bring in HR expertise, while Engineering model firms saw HR as more of a support function. The blueprint choice also influenced the timing of key activities like hiring the first employee or drafting mission statements​. Over time, many companies altered their blueprints, often moving towards a more Bureaucratic model. Changes in senior management, especially CEO succession, often accompanied these shifts in blueprints. The paper has some super interesting insights such as differences in administrative overhead and labor turnover in the different blueprints that I’ll let the reader explore on their own. One of the most interesting is the differences in likelihood of failure as mentioned in the introduction of this post. The table below, from the original paper, shows the stark differences.  

It’s hard to overemphasize that of the nearly 200 companies studied, the 13.9% that employed the Commitment blueprint, vis-a-vis culture, were 100% less likely to fail than the Engineering blueprint and over 200% less likely than the Autocratic model. Another interesting success metric is post-IPO market capitalization. Companies founded on a Star model fared the best. In comparison, the Autocracy model, in terms of growth in market capitalization post-IPO, was 12% lower than for the Star model firms. I doubt many of us would be surprised that culture matters to performance and outcomes. There are a multitude of studies that have demonstrated the impact of culture on a number of different positive results.

A study highlighted in an Emerald Insight article focuses on the significant impact of cultural diversity on innovation team performance. It stresses the importance of establishing communication standards, principles, and cultural awareness for successful outcomes in innovation teams. This research underscores the creative advantage diversity brings to innovation teams, especially in technology organizations. Another study, this one in the International Journal of Corporate Social Responsibility examines the culture and subcultures at Google Inc. It emphasizes Google's focus on building a great working culture that includes a meaningful work environment and employee freedom. The study also notes Google's culture of tolerating mistakes and encouraging experimentation and failure, highlighting the importance of a supportive and innovative culture in attracting top talent​. A final study that I’ll highlight, published in Frontiers in Psychology discusses the effect of organizational culture’s impact on performance. This study involved 263 managers of state-owned companies in Indonesia and concludes that digital organizational culture has a significant positive impact on firm performance.

So, while we know that culture has a significant impact on a company’s performance, what should leaders do with this knowledge? The study by Baron and Hannah highlights that different cultures maximize the likelihood of different results. Want to focus on long term viability? A Commitment culture is probably best. Want to focus on market capitalization? A Star culture where you recruit top talent, pay top wages, and ensure they have all the resources they need, will increase your chances of maximizing your company’s market cap, post-IPO. Want to ensure your company has lean administrative overhead? Again the Commitment model seems best. These firms were significantly leaner as measured by the number of full-time managers for a given labor force size.

However, before you start thinking about shifting organizational blueprints, the authors caution, “changes in organizational blueprints are in general very destabilizing to young technology start-ups, adversely affecting employee turnover, bottom-line financial performance, and even mere survival.” They even point out that James Collins and Jerry Porras from Built to Last argue that companies that have prospered over the long haul have adhered to enduring values, serving as guideposts over time. I’ve personally experienced a number of different models including a high Commitment culture and a Star blueprint. As you would expect there were pros and cons to both. I describe my time in the Star blueprint as getting to work with some of the smartest people I’ve ever met. Contrast that to how I think about my time in a Commitment culture, where I got to work with some of the nicest and most caring people I’ve ever had the pleasure to work with. 

My advice would be to spend a lot of time thinking about the culture that exists and how necessary it is to shift. Sometimes it is absolutely necessary. If you find yourself in an Autocratic culture, you probably want to shift away from that, no matter the short term costs. Other cultures might work just fine depending on the outcomes that you need to achieve.