Does Culture Eat Strategy For Lunch?

Last week, I was at a presentation by Professor James Schrager of Chicago Booth.  He was on a board of directors and the CEO said that culture eats strategy for lunch.  It got him thinking about the topic.  So, which is more important, culture or strategy?

It’s a topic that has been written about a lot.  In startups, oftentimes investors and CEO’s will worry an awful lot about the culture they are creating.  We hear about work/life balance.  We see the bro culture. We see the discriminatory culture at companies like Google.  We hear about the culture at Uber.  It’s top of mind.

What do you think is more important?  Think about it for a hot minute.

Here is a quote to ponder as you think about which is more important:  “A puzzle well represented is half solved.”–Herbert A. Simon Simon was the father of artificial intelligence and a Nobel Prize winner.

Schrager looked at several companies in several industries.  In his case studies, he tried to hold some variables constant across companies so that he could tease out the differences.  For example, in the airline industry, he examined Southwest an United.  He held constant massive federal regulation and capital costs.  There are some absolutes in airlines. As an asset class since the industry got off the ground in the late 1920s, it has never ever made money.  Southwest is an outlier.  It has made money and turned profits.

Why?

It turns out it has to do with the way they structure their air traffic.  Instead of a hub and spoke model where you take many routes to a hub to fill one big profitable one, Southwest finds a point to point route and makes money on it.  They can add and subtract routes according to supply and demand.  If a route is failing, they kill it quickly.

One case that was particularly interesting to me was in the discount retail space.  Schrager looked at Walmart, Kmart, Sears, Target and Kohl’s.  The variables he held constant were general economic cycles, effective management, and positive culture.  Each company grew significantly, was highly profitable, and were excellent merchants.  All of these companies were impacted by Amazon entering the discount retail space.

Kmart had everyday household items.  It was mostly in the suburbs and in Tier 2&3 cities in the North and East.  Headquartered in Detroit it had big stand-alone stores with the lowest prices and frequent sales.  It went to market through a big color circular in the Sunday paper.

Target was upscale and stylish when it came to everyday household items.  Its prices were a level above K-Mart.  They promoted their brand in newspaper circulars.  Headquartered in Minneapolis, it had a really strong well-chosen product line in things like picture frames, vacuums, and gadgets.

Kohl’s specialized in ready to wear fashion.  It was in the North Central US and targeted strip malls and smaller stores.  They had frequent sales to drive traffic.  They also promoted in newspaper circulars.  They were headquartered in Milwaukie, Wisconsin.

Walmart was headquartered in Bettendorf, Arkansas.  They concentrated on building stores in rural towns throughout the South and Southeast.  They were big standalone stores.  They competed heavily on price, and rarely had sales.  They didn’t promote the brand or store very much on television, radio or the newspaper.

Sears, of course, was the first dominant retailer in US history.  They started with a catalog but became anchor stores in the best shopping malls all over America.  They were headquartered in Chicago.

All of these companies had a great culture.  Employees at all of them indicated positively on culture.  In the case of Sears, everyone said it was a fantastic place to work.  They had great people.  For over a century they had strong growth and strong profits.

What happened?

In the history of Sears, they were small stores in small towns. They rolled out their catalog. Then, big stores in big towns.  At the end, anchor stores in shopping malls.  What was their next iteration?  Nothing.  They never adapted.  They didn’t focus on growth.  They died.

Walmart started in the rural South.  They moved North when they ran out of room to expand in the South.  They went international when they ran out of room in the US.  Sometimes they failed miserably in their international expansion.  It’s worth noting Target tried to expand to Canada but totally failed.  Walmart moved into groceries which is a low margin business but became the largest retailer of organic produce in the world.  What was Walmart’s next iteration?

Walmart bought Jet.com to create a powerful eCommerce site.

What’s the conclusion?

• 100% of firms with good cultures had at least one business disaster.  Sometimes it really damaged the firm. Success will always invite competitors to join in so you can’t ever have a true monopoly.
• The strategy must adapt and change.
• The strategy must be focused on growth and profit.
• There is no “end of time” or “We got this licked”.

Here are some other tidbits from the session.

• Great management looks inward.  Great strategy looks outward.
• Great management finds answers.  Great strategy asks questions.
• Great management is about people.  Great strategy is about ideas.
• Great management centers on doing.  Great strategy centers on thinking.

If we think about the roles of different C level executives, the Chief Operating Officer runs the business.  They answer the question “Management does what?” They execute.  They think, see and hear.

The Chief Executive Officer thinks about tomorrow.  They worry about tomorrow.  They think about how to grow and how to create more profit for the company in areas that they aren’t executing in today.  A great CEO answers the question “Strategy does what?”

The conclusion is that culture follows strategy.  You must put in place a strategy for growth.  If a company is growing and profitable, it will have a good culture.  Once the strategy for growth is in place, it’s up to the management team to develop the people who will execute on that strategy.

If you have a bad strategy, no amount of culture can overcome it.  Get the strategy for growth right first.