Why is culture so important?

Why is culture so important?

Ed Lascelles, Partner, Head of Technology Investment – Albion Capital

What did Marc Benioff, CEO of Salesforce, mean when he said at Davos in 2016, “Speed is the new currency of business”? And why did he say it?

We continue to see industries all around us evolve at unprecedented rates, disrupted by new business models enabled by innovative technologies. This industry upheaval goes hand in hand with the “devastating impact” of a seismic change in consumer behaviour (Kevin Johnson, CEO of Starbucks, 2017).

Adopting the right business culture is critical to survival as well as the foundation for grasping the opportunities that come in these volatile markets. As Jack Welch noted, "If the rate of change on the outside exceeds the rate of change on the inside, the end is near.”

Most start ups now follow the principle of the lean start up, which (very crudely) suggests that a start up should keep iterating its product or service until it finds product/market fit – that point when a company is selling something that a (meaningful) market wants to buy. Once this is achieved, identify a repeatable sales model and move into scale up mode.

However the focus on product iteration shouldn’t ever stop. As customer requirements and competitive dynamics change, so businesses have to innovate and evolve. We see this in our tech portfolio, where some of our investments have grown revenue 10-fold in the last 3 years. In every case the value proposition today has evolved substantially from the business we initially backed. So has the competitive environment and so have the customer demands.

And if a business can maintain this focus on innovation and iteration at scale then it will win, as shown by the most impressive business today (in my view): Amazon. Amazon started life 22 years ago as an online bookstore. Today it is estimated to account for 44% of all eCommerce in the US. Amazon’s cloud services division, AWS, is larger than Microsoft, Google and IBM’s combined (the next three largest). Amazon Alexa was the first AI-powered chatbot to enter the mainstream. Within four years of launch, Amazon Payments has grown to almost a fifth the size of Paypal (founded in 1998). Amazon lodged 78 supply & logistics patent applications in 2016, including one for an autonomous drone beehive. Perhaps most impressively, Amazon uses data-driven intelligence to offer an invitation-only loan facility for vendors on Amazon Marketplace, which is now lending over $1bn per annum.

In Q3 17 Amazon generated $44bn revenue (34% up on the prior year) and $17bn in operating cashflow. This astounding performance wouldn’t be possible without a business culture that fostered absolute focus on innovation and iteration. It’s no surprise to learn that before deciding on ‘Amazon’, Jeff Bezos had initially registered www.relentless.com to launch his new business.

Virtually everyone today recognizes the importance of innovation within their business, but few companies successfully innovate as part of their day to day operation. This is because it is not a matter of strategy, or even leadership (on its own), but a function of a business’s culture.

Business culture is an entire field of study on its own. Even defining ‘culture’ is a matter for debate. But in the context of embracing change and innovation in a dynamic market, the critical ingredients for an organisation are an open culture with strong values.

An open culture is one where staff feel trusted, so they can be open with their problems and are open to having their views challenged. This means concerns within the business are surfaced and dealt with in good time. Opportunities can be grasped quickly. There is greater interaction between the employees on the front line who engage with customers and competitors, and the executive leadership who set and hold the strategic vision for the business. Better decisions are reached as greater perspective and experience is brought to bear on decisions. Within a supportive rather than fearful environment, ideas are tried even though they often fail.

The values held by an organisation set the parameters by which a business can achieve the mission, some of which may make it into corporate slogans such as ‘move fast and break things’. Holding strong values gives an organisation greater ability to operate in the ‘grey zone’, where staff on the ground can figure out for themselves how to react to a changing situation, without having to be directed by management on each new category of decision.

Businesses that embrace an open culture and are founded on strong values are more scalable and more agile than others. However, it is a non-trivial problem for a business to maintain and nurture its culture as it grows from 20 people to 200, as it grows from a business where the CEO knows the name of all the staff and probably all the customers too, to an international organisation with layers of middle management and customers who are statistics in a management report. Solving this problem is as critical to sustained success as product, leadership and market dynamics, and if you get it right, well look at Amazon