Culture eats strategy for breakfast. Peter Drucker, supposedly (*)

I always found this frequently cited quote a bit misleading. It implies a dilemma that’s in my opinion fake: no strategy will be executed effectively without a great culture evolving it and the main measure we have of corporate culture success is strategy execution under competitive conditions. The issue is nuanced and that nuance matters. My view is that in the long run, culture actually is strategy. More on that below.

Why do firms exist in the first place?

Ronald Coase in his 1937 article The nature of the firm (the one that got him the Nobel prize) views the firms primarily as a cost arbitrage phenomenon: when costs of doing a task internally are lower than contracting the same task on the external market, entrepreneurs hire people. This implies that firms will grow until the arbitrage opportunity no longer exists: when firms become so inefficient that it’s cheaper to contract out the firm’s tasks, firm’s growth stops.

But the firm has to be more than a mere aggregation of all the tasks being done inside it. Emergence of the internet and remote work should have decreased the cost of outsourcing firm’s tasks which should in turn lead to modern companies getting smaller than historical juggernauts were. Yet, the tech giants show remarkable resilience — despite it being easier than ever to build a Facebook or Google clone, the big guys seem to remain pretty competitive.

Why do some firms stay competitive for longer?

Firms obviously compete with the aim of making money, working under continuous competitive threat of other market players — the ocean out there is red from the competitors’ blood. Operating in such a competitive environment, what keeps some businesses competitive over long periods?

Flamholtz & Hua in their 2003 work define the intangible company infrastructure as resource management, operational systems, planning systems, and corporate culture. They then further posit that since markets can be penetrated by competitors and products can be copied, it has to therefore be that infrastructure that creates a long term strategic advantage.

Flamholtz and Hua’s research implies that it’s the interaction of culture, management and planning systems, and resource management that makes companies successful in the long run (as measured by achieving higher return on equity over longer periods). Flamholtz illustrates this as the pyramid of the organizational development, thereby indicating that culture is only the last step in building a company’s internal infrastructure.

Tactics vs Strategy

Majority of strategic decision making at companies is actually tactics with time horizons of at most a year or two. Sustained competitive advantage is by definition concerned with longer time horizons: more likely to last decades than quarters.

Since many things change in the competitive landscape over a decade, only the company infrastructure can remain stable, allowing the company to adapt to the changing environment and remain competitive.

Culture (and associated management systems) IS strategy.

Everything else is just quarter-to-quarter, year-to-year tactics.

What does this mean for managers?

Your team culture is replicated by people in your team copying behaviors which get rewarded. View your culture as your key strategic pillar. This means you should ask yourself what types of behaviors or values will make the company resilient or even antifragile in the long term.

In my line of work (managing software engineers), this includes cultural artifacts like career ladders, postmortems, design docs, demos, architecture review sessions, etc. We show what good looks like (i.e. what behaviors we want or don’t want) but also make space for learning and debating technical nuances with each other. This is critical if you want to avoid structural weaknesses such as Key Person Risk or your company becoming a one trick pony.

Solid, decentralized decision making is key to making your organization nimble and proactive over the long term. And you need to empower those decentralized decision makers by making room for them to learn the context around them — and allow them to make mistakes! That’s the main way your culture becomes self-replicating and your strategy adapts to its environment as a result.

Doing these things takes a lot of time and it’s easy to deprioritise them in favour of doing real, Q4-relevant work. But in the long term that’s what matters. In my opinion at least :)

(*) There is no evidence Peter Drucker ever said that, even though it does sound like something he would say.