Innovative and creative organizational culture. What are the critical factors in building one?

by Maciej Wilczyński in Organizational Culture
March 26, 2019

Attracting best people. Talent management. Entrepreneurship. Learning. Flexibility. Great communication. These are some of the usual buzzwords that describe best companies in the world. In every business book, company culture is mentioned quite specifically. However, cases differ from each other, so we can’t really tell which factors are the most important. Luckily, researchers already helped with that.

The following post will tell you:

  1. What is organizational culture?
  2. Can organizational culture be changed? Few cases from known companies.
  3. What are the core factors influencing innovative organizational culture according to study?

people thinking of ideas

What is the organizational culture and how to think of it?

Every company has a culture. It can be better or worse, but you can never tell that you don’t have one as it’s a natural part of every single business subject.

Even the most pathological companies have their own. It’s vicious, toxic and mentally challenging, but it’s a culture. Same with top firms in the world: it’s inclusive, less stressful and joyful and again, it’s a culture. These are two sides of the same coin. The only thing we need to figure out is which side is yours.

According to most popular definitions, organizational culture can be described as:

_ „The way we do things around here” _

(Link to research paper). It pretty much describes it, but it’s not precise enough.

In a broader sense, it’s a set of factors, usually defined as values and behaviors, that contribute to unique social and psychological environment of whole organization. In a nutshell, these are the patterns that describes the way organization works.

I also like to describe it to my students as a personality. Imagine a person who is good in pitching ideas to others and making them share the same vision, but it’s not necessarily that good in actually delivering it. Company can be the same. They may organize great internal conferences and idea-sharing meetups, while in the end, they don’t allocate proper resources to make something happen of it.

In fact, culture is pretty instinctive, deep-rooted and made of repetitive habits, traditions, behaviors and addictions. It is the nervous and endocrine systems of every organization. Also, it is what drives people happy and excited about the company, but also what makes them mad or even depressed.

I remember seeing a term: „organizational vibe” to my students as it better reflects nuances of the problem. We tend to associate culture with more exclusive stuff like opera and theatre, while in organizational context it’s exactly the way the wheel is spinning and how the gears are moving if we consider most important part of company - people.

Can organizational culture be changed?

Of course it can. In both ways: positive and negative. We clearly see these examples: company that has created great products suddenly stops to innovate, revenue plummets, people leave and general company well-being erodes. Let’s take BlackBerry or Nokia. Excellent phone producers at their times, yet lost the battle for customers with Apple and Samsung (Nokia case is very well described here).

Different example, investment banking. You probably associate it with aggressive, highly competitive and individualistic culture. \
For instance, Goldman Sachs was a shining star of investment banking through many years: led with general principle of putting client interests ahead of firm’s, more conservative approach towards investments and partnership. Basically, they were the “good guys of Wall Street”.

It was like that until US government removed the barriers between commercial and investment banks. In such case, traditional banks moved to investments business and endangered Goldman. Company had to do something or get crushed. Goldman abandoned their partnership structure and went public. After the IPO nothing was the same: quarterly pressure, high stakes and gigantic capital of over $3.6 billion dollars changed the way people got incentivized; bonuses influenced company’s culture. Instead of going for long-term, value-based investment strategy, which was best for customers, traders were incentivized to get quick profits for short horizon speculations and financial engineering. You know the rest of the story. Goldman Sachs case is widely described here.

It’s a valuable lessons that strategic decisions and incentives change may drastically influence the way we behave.

Similarly, leadership can impose organizational change in negative way. Stanley O’Neal changed Merril Lynch culture from “Mother Merril” into vicious, pathological and highly distrustful organization. Not only he climbed the corporate ladder through palace intrigue, but changed the entire job security culture. Massive lay-offs, hierarchical structure, micromanagement, strong power distance (going with it’s own elevator) and aggressive push for short selling on CDO market pretty much sealed the fate of Merril Lynch as company collapsed during sub-prime bubble and was acquired by Bank of America. In the meantime, Stan O’Neal enjoyed his golden parachute severance package of $161 million of Merril’s stock and options on top of the previously earned $90 million compensation of 2006. The case is nicely described in this book.

However, there are positive examples as well. In 1987 Paul O’Neill gave his first speech as a CEO of Alcoa, aluminum manufacturing giant. Instead of mentioning financial metrics, he said he has only one goal:

“I intend to go for zero injuries in workplace”.

His “safety first” approach changed the entire company. O’Neill imposed one critical habit, so well described here. It’s important to mention that aluminum manufacturing process is highly dangerous as workers need to cope with ~1500 Celsius degrees temperatures of liquid materials. Every year, substantial part of workforce experienced some type of accidents, fatal injuries were also present. Therefore, changing this would significantly improve employees well-being.

aluminum rod

Safety first policy incentivized for more frequent maintenance checks of equipment and machines. It also helped to boost investments as old, unsafe machines were replaced with new ones. Evaluating the production process led to removing unnecessary wastes. People felt someone cares for them, but they also started to feel they need to care about others in their workplace.

Everything that led to danger was reported and escalated. There is a common story of high-performing manager who wanted to cover up one accident to keep his score clean. When leadership found out, they kicked him out without second thought. Not because there was an accident, but because it highly affected the trust and culture that has been already created. Result of all these actions? After 13 years since hiring of O’ Neal, entire organization of Alcoa was transformed, become a better working place and net income was five times higher when he started.

Organizational culture can be influenced and eventually changed in both ways. Usually, it’s more of evolution than revolution process. Very often, it’s influenced by certain factors, e.g. IPO (Goldman Sachs), terrible leadership (Merril Lynch) or clear habit-changing guidelines in strategy (Alcoa). Sometimes, companies stop having the same vibe they used to have and they lose their position (Nokia). Especially, last company is important as Finnish giant used to be one of the most innovative company in the world; however, they have lost it as organization started to silos and leadership didn’t want to make any bold decisions.

Org culture topic is highly researched as well. Only in Google Scholar, we can find over 3.1 million search results, but let’s focus on how to stimulate innovation and creativity within organization.

Building organizational culture that stimulates creativity and innovation

I’m a huge fan of using well-researched academic papers to increase knowledge about business and management. Of course, the form is not easy enough to digest, but the value is tremendous. While I was researching this topic I have found out super interesting paper from E.C. Martins and F. Terblanche published in European Journal of Innovation Management titled as the headline above. If you want to read the full article, it’s here.

I loved the way the authors gathered knowledge from hundreds of articles (eventually referenced 58 of them) and researched the topic of innovative culture.
Their paper has been cited over 2,000 times, which in management sciences is a very good score.

As a disclaimer, I don’t own rights to this intellectual property. I’m simply sharing it as I think great stuff needs to get wider audience.

What is innovation? It’s an implementation of new idea/product/service/procedure. And as Valueships focuses on technological and new economy companies, it’s clear that innovative firms are the ones we have in scope. It’s important to mention that innovation doesn’t necessarily mean entering market the with new product. Constant development and improvement of processes (e.g. in kaizen or lean manufacturing) are also examples of it.

Basically, the more good ideas the organization implements, the more innovative it is.

Five determinants of innovative and creative organizational culture

Authors identified five critical factors that shape organizational culture that enables innovative and creative vibe. Those elements are: strategy, structure, support mechanisms, behavior that encourages innovation and communication. Each of these elements is divided into subcategories, which describe them in more details.

determinants of innovative and creative organizational culture

Strategy

Innovative companies, according to research, share the same vision, mission and values. They also are focused on the future, alongside with customer centricity. An example of great vision was initial Steve Jobs ethos of:

“to make a contribution to the world by making tools for the mind that advance humankind.”

However, leadership vision is one thing. It’ also critical that employees fully understand core strategic principles and purposefulness of company. According to Gallup Survey, only 4 on 10 employees don’t know their company’s mission, what substantially influences their level of engagement.

Organizations must align strategic priorities with full understanding of its employees as those are the factors that highly influence innovative culture.

Authors conclude that reflecting value of purposefulness in goals and objectives of company has strong impact on overall creativity and innovation.

Next time, ask your co-workers on your mission statement and see how much they know and check if you’re aligned. Have a look at Jeff Bezzos’ strategy of Amazon: “cheaper, faster, more” – three core principles that are unchanged since the first day of the platform. Everyone knows it and that’s why it’s so powerful.

Structure

Not surprising – the way org chart is structured is crucial for company’s well-being. Remember Merril Lynch? It was highly hierarchical, distrustful, centralized and formalized.

On the other hand, Authors mention that flat structure with autonomous work teams promote innovative behavior. Especially, flexibility in workplace understood as things like job rotation programs or moving away from rigid and formal job descriptions is important. You want your colleagues to switch their roles, so they’re more need-based, rather than tied to current positions. Once their role grows, their responsibilities increase alongside.

Another value, highly emphasized, was freedom understood as an ability for autonomy, empowerment and decision making. All structures, which encourage such behavior are preferred to create innovative culture.

In other words, employees need to have necessary space to use their entrepreneurial skills to make the right calls.

Also, trust was mentioned as a critical factor. The more team mates trust and respect each other, the higher the collaboration is. It was widely mentioned in books like “Radical Candor” or newest “The Fearless Organization”>).

The way you shape your organizational structure, very often since day 1, impact your day-to-day business operations. It’s never too late to make some changes, but it’s good to know, which ones are more beneficial than others.

Support mechanisms

Those are the types of incentives that change the way organization behaves. Study revealed that most important mechanisms are proper rewards and recognition, alongside with availability of resources: time, information, technology and right people.

Starting from rewards and recognition, organizations need to decide which behavior is promoted and which is not expected. Rewarding employees for risk-taking, experimenting, ideas generation, lateral approach stimulates innovation, while being praised for intriguing and politicking does opposite. Safi Bahcall nailed it pretty well in his article: “The Innovation Equation”. He introduced the concept of “Return on Politics”, the higher it is, the least innovative organization is. In general, if you create a special review for new venture ideas or initiatives, you may quickly see the difference in behavior.

Also, judging people by their merits is critical. That’s why Google doesn’t allow managers to review their own people, but rather relies on someone else. Similarly, in top consulting firms, you will be evaluated by someone from difference office, ideally from different practice, so the whole process is as fact-based as possible.

Resources availability is slightly different. Here the organization needs to be sure that optimal access to them is provided. If you want to innovate, you need to have time for that. That’s why companies follow Google’s approach of dedicating 15% of time to work on their own projects. Also, internal hackathons or competitions are a good way of doing it. Polish SaaS tool Brand24, from time to time, spends an entire day to work only on creative stuff. Such institutional enablers may be necessary, as everyday we’re too busy with “whirlwind”, so it’s hard to cut some time for actual innovation.

Information and technology are additional resources that need to be allowed. People need to know what is happening within the organization, information flow needs to be clear. Technological advantage as new cloud-based based tools are also right choice. So next time, think twice before you reject your employee request to purchase new analytics tool.

Last but not least, hiring right people. Proper recruitment, selection and retention of right employees plays a vital role in sustaining right innovation culture. Except usual traits like problem-solving, general intelligence on both IQ and EQ level, which are no-brainer here, companies need to also focus to hire people with diversified backgrounds as it ultimately leads to better ideas and positive melting pot. Scott Galloway nailed it perfectly, when he summarized the key success factors of Four Horsemen: Google, Apple, Amazon and Facebook in his book. Mentioned that these companies have the ability to attract top talent and maintain best people in the industry.

Behavior that encourages innovation

I’ve already mentioned the type of behavior that needs to be rewarded and recognized, but in this case we go even further. If we sum up the study, we find out that two factors are critical: tolerance of mistakes and safety zones.

By tolerating mistakes, we don’t accept mediocrity, bur rather understand they’re natural part of learning process and while sometimes curve can be pretty steep, very often it takes time and money to get things done. Successful organizations don’t embrace failures, but rather try to understand them and learn. Let’s take NASA or SpaceX – these guys cheer every time they blow something up as they run their tests. Baby steps are essential. Continuous learning, improvement, experimenting, keeping skills up-to-date are behaviors that are not only recommended, but simply needed at the highest priority.

Another thing is a safety zone within company. People need to feel they can express their concerns, feelings freely. Organizations based on candid constructive feedback survive and push for innovation. Mistakes and attitude towards them is mentioned as another part of the scheme. Punishing employees for mistakes is a clear path towards stressful and unsafe environment, which encourages them to not try anything new. It’s simple as that. If you don’t do anything risky, you won’t have problems, but at the same time your whole culture stops doing new stuff.

Communication

Study proves, that open and transparent communication has positive influence on creativity and innovation.

When people know that disagreement is fine and someone may have different opinion, whole organization supports discussion and ideas sharing. Good communication means it’s structured, precise, without unnecessary noise.

It’s also connected to safe zones: people must feel emotionally fine to express their feelings. That’s why retrospective sessions were invented. You want to have clear atmosphere and setup the right tone for smooth communication. However, keep in mind not to waste too much of the time on meetings that doesn’t bring any value as it does exactly opposite - frustrates people and makes their comments irrelevant as in the end no one listens to them.

Conclusions and questions to think

If you want to create organizational culture that promotes innovation and creativity, ideally you want to have:

  1. Strategic mission, vision and goals shared by employees. Do my co-workers share it?
  2. Clear org chart structure that enables freedom and flexibility. Is it created this way?
  3. Promote and reward people who take ownership and are judged by their merits. What are the incentives in my company?
  4. Encourage risk-taking, experimenting and ideas sharing. What type of behavior is usual?
  5. Care about clear and precise communication, which limits the chaos. Do we fully understand each other?

In few weeks, we’re going to launch self-assessment, where you can test your organization to see how aligned you are. Subscribe for newsletter, so you can get the news when it’s out.

Take care and good luck in making awesome things!