Member of the Department of Managerial Economics & Decision Sciences faculty until 2017
E.D. Howard Professor of Political Economy; Professor of Managerial Economics & Decision Sciences
The online retailer Zappos is known for having fast, free shipping, free returns for a year, and no shortage of service representatives who go above and beyond—sometimes outlandishly so—to make customers happy. But according to a former Zappos director of business development and brand marketing, customer service is not the point—it is the byproduct.
“I read about how Zappos is focused on customer service,” Aaron Magness says in an interview with strategy+business. “It isn’t. It’s focused on company culture, which leads to customer service.”
Of course, Zappos is not the only firm to use its culture to distinguish itself. Southwest, Nordstrom, Wegmans, and Enterprise have all famously relied on a strong corporate culture to deliver great customer service—as well as more engaged employees, better productivity, and ultimately, increased profitability.
But what makes a strong culture so effective? And are there times when a strong culture can work against an organization?
New research by Willemien Kets, an assistant professor of managerial economics and decision sciences at the Kellogg School, suggests that a strong culture serves a utilitarian purpose: it sets expectations, increasing the likelihood that, faced with uncertainty, members of a team will all be on the same page.
Kets, along with her coauthor, Alvaro Sandroni, a professor of managerial economics and decision sciences at the Kellogg School, argues that cultural norms make interactions easier—a good thing much of the time. But in fast-changing industries, or in a tumultuous economy, the broader diversity of viewpoints that a weaker company culture engenders can lead to fewer missed opportunities.
Successful collaboration requires us to accurately gauge other people’s beliefs and intentions. In doing so, we tap into something called “theory of mind.” “It means I’m trying to think about your mind,” Kets says. “I’m trying to put myself into your shoes, to think about what you would do. To do that, I use my own experience as a guide.”
Imagine that you have traveled to a foreign country where you do not understand the cultural conventions. Is it a society where people say what they mean or communicate more subtly, relying in part on nonverbal gestures? When conversing with locals, how much are you expected to take what you hear at face value or read between the lines?
“Excessive conformism hampers the ability of an organization to adapt.”
The more you understand about the culture, the easier it will be to communicate effectively, because your own thoughts and preferences will guide you well regarding those of the people around you. Conversely, a lack of understanding will make it difficult to internalize others’ viewpoints, which can have a range of consequences—from something as trivial as missing a joke to failing to recognize when you are in a potentially harmful situation, such as a robbery.
Culture works the same way in corporations. A strong corporate culture sets the rules of engagement. As Kets explains, a manager can choose to communicate with her team in a variety of ways: tersely, or diplomatically, or even passive-aggressively. Someone who can accurately gauge her intent will be in a good position to succeed on her team. Moreover, an entire team or company that communicates fluidly—everyone anticipating how everyone else will respond—is ideally situated to handle a crisis.
Using game theory, the researchers modeled how people might decide which groups to join. Researchers assumed that, within each group, it would be easier for pairs of individuals to coordinate on a task when they shared a common culture, as they would also share a common vision for how the task should proceed.
The researchers demonstrated that when coordination was rewarded, and when a group’s culture was strong, its members became increasingly like-minded: individuals who were a good “fit” for the culture were disproportionately attracted to that group, while individuals with a different vision opted to go elsewhere.
In other words, over time, a strong company culture increases “homophily”—the well-known tendency to gravitate to like-minded people. “You see it everywhere,” says Kets. “People like to interact with people like themselves.”
But is homophily desirable?
With their model, researchers were able to characterize broad situations in which high homophily, and thus a strong common culture, exerts a positive influence. Specifically, where there is a stable economic environment—and the status quo is working quite fine, thank you—having a strong shared culture can be beneficial, as it enables members of a group to better work together.
Consider, for instance, the homophilous corporate cultures that served industrial giants like IBM or General Electric well early in the 20th century. Such companies, says Kets, “thrived” under well-defined expectations and conformity.
The same principle applies outside of the corporate world, too. “Europe after the Industrial Revolution is a typical example where people didn’t move very much, and there was not much technological innovation. Everything was kind of settled,” says Kets. “You have something that works and you just want to employ it.” She explains that newly formed nation states in 19th century Europe were focused on crafting national “cultures,” complete with history museums and other cultural hallmarks. “In our theory, that is indeed what you would want to do. You don’t want conflict; you want it to be very clear what the norms are.”
But Kets and Sandroni found that homophily may not benefit all types of interactions. In situations marked by high stakes and constant upheaval, says Kets, “excessive conformism hampers the ability of an organization to adapt.”
The IBM of the early nineties, for instance, was not prepared for change. “That’s the story that people tell. Having people work together well and communicate effectively—it creates an entrenched culture. You’re not open to outside ideas,” says Kets. “There may be a better option, but I won’t [pursue] it because that isn’t how things are done around here.”
Alternatively, a weaker company culture—one that is unconstrained, a little chaotic—will lead to less conformism. An organization composed of diverse viewpoints, and even dissent, may not run as smoothly or efficiently as possible. In a crisis, everyone may not be on the same page; there will be mishaps and misreadings. But the lack of an established way of doing things—the sheer unpredictability of every encounter—increases the likelihood that, if there is a better outcome, people will find it.
“Anytime there doesn’t appear to be dissent, it means that the corporate culture has just shifted way too much toward consensus,” argues David Sacks, co-founder and former CEO of the corporate social networking service Yammer. “That means the leadership doesn’t welcome dissent enough.”
For a fast-changing Silicon Valley company, after all, there may be far more danger in doing the status quo well than in missing out on a better opportunity.
Kets, Willemien, and Alvaro Sandroni. 2014. “A Belief-Based Theory of Homophily.” Working paper.