Linking Organizational Culture to the Bottom Line

Introduction

We present here an overview of the latest research linking organizational culture with profitability, sales growth, market value, and customer satisfaction.

The results are based on a study of 102 public companies from a broad range of industries surveyed by Denison Consulting from 1996-2004. Companies are incorporated primarily in the U.S. (89%).

First, an overview of the model…

Adaptability Pattern..Trends..Market

Translating the demands of the business

environment into action

“Are we listeningto the marketplace?”

MissionDirection..Purpose..Blueprin

t

Defining a meaningful long-term direction for the organization

“Do we know where we are going?”

InvolvementCommitment..Ownership

Responsibility

Building human capability, ownership, and responsibility

“Are our people aligned

and engaged?“

ConsistencySystems…Structures…

Processes

Defining the valuesand systems that are the basis of a strong culture

“Does our system create leverage?”

1-3

Links to Performance

Impact on Performance

Return-on-Assets 4.5%

Sales Growth .1%

Market-to-Book Ratio 3.5

Return-on-Assets 6.3%

Sales Growth 15.1%

Market-to-Book Ratio 4.4

If we compare the 102 firms in the top and bottom 25% based on their overall average of the 12 indexes, companies with higher culture scores have greater profitability, sales growth, and market value than those with lower culture scores.

Each of the 12 indexes has a score. It is the percentile score based on our normative database which shows you the percentage of 888 companies that scored lower on the index.

Each color bar indicates the percentile quadrant of the score. The more color the better.

These firms are earning almost $2 more on every $100 spent on assets!

Top 25%Bottom 25%

The market value (share price x #shares) is 440% of book value (which is a company's assets minus liabilities).

Managers in the top 25% are creating more value in the marketplace.

Impact on Sales Growth

16.4%15.2%

16.9%

14.3%

0.7%

3.0%3.0%

-0.1%

-4%

0%

4%

8%

12%

16%

20%

Mission Consistency Involvement Adaptability

Sale

s G

row

th

Top 25% Bottom 25%

Looking at the impact on sales growth, firms in the top 25% of each trait in the Denison model have dramatically higher sales in the year the company was surveyed.

Each bar represents the average sales growth of ~24 firms. For example, the 24 firms with the highest total mission score have a sales growth average=14.3% versus the 24 lowest rated firms which have a sales growth average= -.1%. Therefore, focusing on culture is a great way to improve sales.

What about the Long-Term?Today’s culture impacts tomorrow’s performance! Here we show the return-on-assets* for the

top 25% and bottom 25% of each trait over a three-year period.

*Standardized within industry

Adaptability

45%

50%

55%

60%

65%

70%

75%

Year 0 Year 1 Year 2 Year 3

Ind

ust

ry P

erc

enti

le

Top 25% AdaptabilityBottom 25% Adaptability

Mission

45%

50%

55%

60%

65%

70%

75%

Year 0 Year 1 Year 2 Year 3

Ind

ust

ry P

erc

en

tile

Top 25% MissionBottom 25% Mission

Involvement

45%

50%

55%

60%

65%

70%

75%

Year 0 Year 1 Year 2 Year 3

Ind

ust

ry P

erc

enti

le

Top 25% InvolvementBottom 25% Involvement

Consistency

45%

50%

55%

60%

65%

70%

75%

Year 0 Year 1 Year 2 Year 3

Indust

ry P

erc

en

tile

Top 25% ConsistencyBottom 25% Consistency

These firms are only matching the industry average in ROA.

On average, 72% of firms in their industry rank below these companies in profitability.

Additional Research

Customer SatisfactionIn a separate study of 240 automotive dealerships, firms with higher culture scores have higher customer satisfaction ratings.

N=10 N=12

Average ROE = 6% Average ROE = 21%

Return on Shareholder’s Equity

In a study of 161 publically traded companies from a broad range of industries, we see the contrast in performance of the 10% of the organization with the best culture scores with the 10% with the lowest culture scores. The difference between the average Return on Equity for these organizations is also significant. We found similar results for Return on Investment.

Bottom Five Markets (Customer Sat) Top Five Markets (Customer Sat)

Satisfying Your Customers

This profile shows the top and bottom five performers of a large Fortune 500 construction company. Correlations with customer satisfaction were significant for all twelve indices. There was an average 24 percentile point difference between the top and bottom five in all 12 indices.

Percentile Difference Between Top 5 and Bottom 5 in CSMS

Over 5% Sales Decrease Over 5% Sales Increase

This was a study of retail supermarkets in the US. It includes 12,000 individuals in 2500 stores.

Growing Your Business

Percentile Difference Between Stores with a 5% Sales Decrease and a 5% Sales Increase

Conclusion

Your organization’s culture can have a dramatic impact on your bottom line.

Culture is a controllable aspect of your organization that can improve your profitability, sales growth, market value, and customer satisfaction.

Developing your culture today will improve your performance tomorrow.

For more information, contact us at www.denisonconsulting.com or (734) 302-4002.