What is Organizational Culture
and Why Does It Matter?

Like the scuba divers shown above in the Blue Hole in Belize, this Blog “dives in” to issues associated with organizational culture and cultural change. Staff members of the Breckenridge Institute® post recent research, case studies, experiences, insights, books we're reading and performance results they’ve gotten working with organizations in the area of using organizational culture to improve organizational performance and sustainability.


Thursday, November 08, 2007

The Culture Equation

Ground-breaking studies like Jim Collins’ books (Built to Last and Good to Great) and John Kotter’s book (Corporate Culture and Performance) have shown that while an organization’s culture powerfully molds its operating style and can positively (or negatively) affect the performance of work-groups and entire organizations, “culture” has remained an overly-complex and somewhat mysterious topic for most organizations – until now. Research conducted at the Breckenridge Institute® has identified the constituents of organizational culture and formulated them into a Culture Equation™ that describes what organizational culture is in simple, concrete terms (see below).

POI ↔ COI ↔ ROI = Current Results™

Our work has shown that managers can use this simple equation to improve performance at the organizational, work-group, and individual employee levels simultaneously. The terms of the Culture Equation™ are defined as follows:

  • POI = Pattern of Interaction (Informal Rules, Actions, Group Learning)

  • COI = Context of Interaction (Formal Rules, Structures, Systems, Location)

  • ROI = Repository of Interaction (Tacit Assumptions, Belief Structure, Meaning, History)

  • Current Results = The Actual Results an Organization Gets, Not its Goals

The key insight is that organizational culture is composed of all four terms in the equation, with each term being a distinct (but interdependent) category of business elements that interact with the others to produce an organization’s financial and non-financial results. It is the interaction of the four terms that creates organizational culture.

Here’s how the four elements work together to create organizational culture. Day-to-day operations occur as patterns of interactions (POI) within the context of interaction of an organization’s structures and systems (COI). Over time, the interaction of POI and COI functions like a group learning process that creates a repository of interaction (ROI) that becomes an organization’s knowledge-base and the tacit beliefs that managers and staff members have about the organization and the people in it. Over time, these first three elements settle down on an organization-wide pattern of interaction (POI) within the larger context of interaction of the business environment (COI) and the combination of these elements produces the financial and non-financial results that an organization actually gets. This is the underlying process that Dave Hanna is describing when he says that, “All organizations are perfectly designed to get the results they get.”

Most culture theorists have a primary focus on one or two of the terms in the Culture Equation™ as the key elements that define organizational culture, but few systematically consider all four terms and their interrelationship to one another. For example, Edgar Schein focuses primarily on tacit beliefs and assumptions (ROI) that exist within the organization's context (COI); David Hanna focuses primarily on observable work habits and practices to explain how the organization’s culture really works, e.g. the interaction between POI and COI as producing an organization’s Current Results; and John Kotter and James Heskett focus on linking Current Results to the level of flexibility in the POI as found in Theory I: Strong Cultures, Theory II: Strategically Appropriate Cultures, and Theory III: Adaptive Cultures.

Bottom Line: Whether a leader is the founder of a new company or a top line or middle manager in a well-established company, one of their most important tasks is to create, manage, and (if necessary) to destroy organizational culture in order to get the desired results. Our work at the Breckenridge Institute® has shown that the primary way this can be accomplished is by using the precise definition of culture provided by the Culture Equation™.