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Organizational Culture

MIT Sloan research on organizational culture

Kara Baskin

Jul 25, 2022

COVID-19 has upended traditional working arrangements: Remote and hybrid work have expanded geographic possibilities, while abbreviated work weeks and flex time have changed the parameters of the traditional workday and workers’ expectations.

In this new era, leaders at every level of the enterprise are struggling to articulate an organizational culture that’s right for this new moment.

Here’s what MIT Sloan experts and researchers think are the key steps to building an organizational culture that works now and into the future.

Embrace distributed leadership

Smart organizations are shifting from command-and-control leadership to distributed leadership, which MIT Sloan professor Deborah Ancona defines as collaborative, autonomous practices managed by a network of formal and informal leaders across an organization.

The practice gives people autonomy to innovate and uses noncoercive means to align them around a common goal, a structure that’s highly appealing to employees who are used to being autonomous and empowered.

“Top leaders are flipping the hierarchy upside down,” said MIT Sloan lecturer Kate Isaacs,  who collaborates with Ancona on research about teams and nimble leadership.

“Their job isn't to be the smartest people in the room who have all the answers,” Isaacs said, “but rather to architect the gameboard where as many people as possible have permission to contribute the best of their expertise, their knowledge, their skills, and their ideas.”

Nurture a digital workforce …

To transform a traditional workforce into one that is future-ready, leaders should equip workers with the technologies they need and give them the accountability and capabilities to fully exploit those tools, according to Kristine Dery, an academic research fellow with the MIT Center for Information Systems Research .

Companies should aim to make their employees empowered problem solvers, Dery said, by creating a supportive environment of continual and rapid learning where they can leverage technologies to solve unpredictable problems. These employees need to have confidence to solve problems, and the skills to work effectively in a digital world. 

This isn’t just a nice idea in theory: Companies that invest in the right experience for their people, and make sure they are ready for the future, tend to outperform their competitors. On average they deliver 19% more growth in revenue than their competitors and have 15% more profit. These companies are also more innovative, better at cross-selling, and deliver a significantly better customer experience, Dery said.

… but don’t ignore employee hierarchies

The ascension of junior employees needs to be handled with care. In a tech-first world, younger workers often possess more savvy than older colleagues — but quickly promoting them could create friction with senior co-workers, noted MIT Sloan work and organization studies professor Kate Kellogg.  She recommends creating peer-training programs that rotate both senior and junior employees through the role of trainer.

Strive for managers who understand nimble leadership

Nimble organizations are filled with people who feel free to step forward, propose new ideas, and translate them into action. Isaacs, Ancona, and co-researcher Elaine Backman have identified three types of leaders in a nimble organization:

• Entrepreneurial — lower- to mid-level idea generators who inspire trust through technical expertise and reputational credibility.
• Enabling — often middle managers who are good connectors and communicators and who remove obstacles for entrepreneurial leaders.
• Architecting — often high-level leaders who shape culture, structure, and values.

“In a lot of companies ‘purpose’ becomes a motto on the wall, it's not really lived, it’s just lip service,” Isaacs said during an MIT Sloan Executive Education webinar on nimble leadership . “In nimble organizations, [managers] are good at bringing the purpose down off the wall and into daily decision making.”

Turn to middle managers to help promote DEI

Nearly all companies have increased their efforts around diversity, equity, and inclusion. Research from Stephanie Creary , an assistant professor at The Wharton School, shows middle managers will be especially important when promoting diversity and inclusion within a workforce.

Speaking last year at the MIT Sloan Management Review Work/22  event, Creary explained that executives and senior managers are often motivated by market position and competition, but middle managers are typically focused on their team and its performance, making them ideal champions of DEI efforts.

Build a culture that supports remote teams

In their book “ Remote, Inc. ,” MIT Sloan senior lecturer Robert Pozen and  co-author Alexandra Samuel, offer ways for managers to effectively communicate with and encourage productivity in their remote employees.

The authors recommend four tools: ground rules, team meetings, one-on-ones, and performance reviews.

“Even experienced managers face new challenges when they first start managing an all or partially remote team,” the authors write. “You need to ensure your team gets its work done, but you also need to put some extra thought and TLC into managing the issues that crop up for remote workers, like personal isolation and trouble communicating with colleagues.”

Strengthen the link between worker well-being and company goals

Research by MIT Sloan professor Erin Kelly, co-author of  “ Overload: How Good Jobs Went Bad and What We Can Do about It ,” finds that happier employees are more likely to be engaged, enthusiastic about work, and likely to stay at their jobs.

To promote employee satisfaction, companies should consider pursuing a dual-agenda work redesign — that is, an action plan that links employees’ well-being and experience with a company’s priorities and goals.

A dual-agenda design prompts employees and managers to look at how work can be changed in ways that benefit employees and their families, and also the organization.

“Work redesign is not a change in company policy, it is an effort to construct a new normal, to reconsider and revamp how a team does its work,” Kelly said. “Dual agenda refers to the fact that these changes address both organizational concerns (working effectively) and employee concerns (working in ways that are more sustainable and reflect their personal and family priorities and protect their health).”

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Corporate Culture

Gary B. Gorton is the Frederick Frank Class of 1954 Professor of Finance; Jillian Grennan is Assistant Professor of Finance at the Duke University Fuqua School of Business; and Alexander Zentefis is Assistant Professor of Finance at the Yale School of Management. This post is based on their recent paper .

Research in finance and economics on corporate culture is at an exciting stage. As we describe in our survey on Corporate Culture , we are on the precipice of a new paradigm in the study of corporations. While futuristic visions of a workplace once seemed far-fetched, leaders foresee an immersive, hybrid world where social interaction, commerce and the internet all meet. Analogous to leaders’ visions of an internet where one is inside of it, rather than on the outside looking at it, economics and finance scholars are moving from an external, contract-based view of corporations to an internal approach that seeks to understand firms’ inner workings. Researchers have long been interested in firms, management, workers’ incentives and output, but for convenience reasons, many scholars simplified away from the internal, social elements. Yet new advances in theory and data are enabling researchers to bring these elements—that in sum make up what leaders often refer to as corporate culture—into the set of forces that can be modeled and measured.

Focusing on the inner workings of corporations is critical: Most people spend the majority of their lives working. In the United States, the volume of transactions that occur inside corporations is roughly equal to that which occur in open markets. Many corporations have thousands of employees who somehow cooperate to produce goods and services.  While some corporations generate expansive wealth for their investors, offer innovative solutions to problems, and are persistently more productive, otherwise similar corporations are much less successful. Executives believe these differences are linked to culture. In a large-scale survey of corporate executives, culture ranked as the number one long-term value driver ( Graham et al., 2021 ). Importantly, major shifts in research are taking place theoretically and empirically that will allow for corporate culture research to thrive.

From a theoretical perspective, it is the transition from a property rights-agency costs paradigm for corporate finance to newer models. Since Ronald Coase famously asked why firms emerge at all in a decentralized economy that is orchestrated by the price mechanism, the dominant answer has always been property rights and agency costs. In sum, property rights that are specified in contracts prescribe how costs and rewards are distributed among participants in a corporation. In modern firms, the separation of ownership and control creates an agency relation between principals (the firm’s outside stockholders) and the agent they hire (an inside manager) to perform a service on their behalf. This relationship automatically produces problems, as the principals cannot possibly ensure that the agent always acts in their best interests. Restricting the deviant behaviors of the agent would come at a cost, either through monitoring the agent like a prisoner, or paying him off like a mercenary.

While this principal-agent relationship sits comfortably at the definition of the firm as a “nexus of contracts,” it is not a suitable explanation of an entire firm—that interdependent collection of individual energies and choices that somehow cooperate, at times clumsily, to perform a vital function. As we highlight in our review chapter, markets and firms offer contrasting methods to arrange production. In markets, contracts govern the purchase of parts and services that compose production. While markets have social aspects, and firms have contracts and incentives inside them. Typically, in firms, the shared values, customs, and norms coming from a corporate culture govern employees’ joint development of those parts and services. This means a new explanation for the theory of the firm is possible. An explanation that relies on corporate culture, because culture at times is more efficient at carrying out production than detailed contracts. In such a model, the firm’s boundary encircles the parts of production for which a manager optimally chooses corporate culture as the organizing device ( Gorton and Zentefis, 2021 ).

From an empirical perspective, novel computational techniques and big data have encouraged many creative measures of corporate culture. We document the variety of empirical approaches for measuring corporate culture that have emerged by broadly categorize the various measures of culture into: (i) field-based surveys and interviews, (ii) experimental approaches, (iii) time-invariant approaches, (iv) time-varying approaches, (v) societal and biological approaches, and (vi) network-based approaches. We carefully evaluate the pros and cons of each of the measure while highlighting what will likely be fruitful paths forward for measurement. We also highlight some important open research questions in measurement: do different ways of measuring corporate culture lead to consistent implications for firm decision-making and outcomes? What is the correlation between cultural elements and the potential for specific cultural styles to emerge? Is there an optimal culture that is firm-specific?

Next, we summarize how the new empirical measures are able to explain several observed behaviors in corporations. While corporate culture involves many elements, it can broadly be defined as a pattern of behavior that is reinforced by systems and people, and is manifest in the norms or expectations that people have for how they need to behave to fit in and succeed in the corporation. From such a definition, it becomes apparent that examining systems like corporate governance, which may reinforce or work against culture, is critical for understanding the inner workings of firms. What may be surprising to scholars of corporate governance is that these systems can crowd out positive elements of culture like integrity or collaboration ( Guiso et al., 2015 , Grennan, 2019 ). In reviewing the empirical literature, we highlight many studies showcasing the links between culture and risk-taking, ethics, and merger success.

In conclusion, we believe corporate culture deserves substantial attention going forward, and we hope our review chapter helps to build a bridge to enable this future by selectively canvasing the economics and finance literature for the most promising areas to contribute to this exciting area of scholarship. Our survey contains a review of the theories of corporate culture, the measurement of corporate culture, and relevant empirical findings. We also pose a series of ideas and questions that we believe young and old scholars alike should look investigate. We highlight questions linking culture to traditional aspects of corporate finance and collective decision-making, and we encourage researchers to examine the many catalysts for cultural change such as leadership, governance, investors, technology, advocates within the firm, and society as we believe understanding the influence of catalysts will help simultaneously advance managerial best practices and academic knowledge.

The complete survey is available for download here .

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How do you inspire visionary culture in your company four strategies from a tech ceo.

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Riley McCormack, CEO of Digimarc

Building a strong company culture is crucial for attracting and retaining skilled, creative professionals and offering efficient, ground-breaking change. An essential tool for shaping culture is encouraging employees to ask “Why?” every day. Having core company values helps a team answer this question repeatedly, setting a company’s culture on a course for creative, relational, and economic growth.

According to a Gallup poll , “Just 23% of U.S. employees strongly agree that they can apply their organization’s values to their work, and only 27% strongly agree that they ‘believe in’ these values.” Without clarity about shared values and vision, a company will lose focus.

I recently had the opportunity to speak with Riley McCormack , the President and CEO of Digimarc , a global digital watermarking company that seeks to safeguard artists, digital creators, and businesses by ensuring their digital work is correctly identified. One project the company has developed, called Digimarc Recycle, is the creation of technology that allows brand owners to digitize their products using sustainable materials. With these kinds of projects underway, when McCormack began his role at Digimarc three years ago, he knew he needed to help encourage a culture that would excel at detailed and groundbreaking work. He began considering Digimarc’s core values and how they influenced its culture.

Digimarc employees learning about and discussing recycling technology.

Compassionate Leaders Circle created a list of seven core leadership values that foster a healthy culture, three of which Digimarc holds. A team of experts developed the seven C’s based on evidence-based research on successful leadership qualities. The seven C's include Contemplative, Confident, Compassionate, Civil, Courageous, Collaborative, and Curious.

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Riley McCormack offers a helpful example to other leaders who want to implement core values to change their company’s culture. At the start of McCormack’s role at Digimarc, the company had over fifty different core corporate values. McCormack found that holding so many values left the company without focus, so he sought the perspectives of his employees. Wanting to ensure that all of his employees clearly understood and supported the vision, he asked them the question: Who are we? His employees helped him narrow it down to three values: courage, collaboration, and curiosity.

• Courage: Employees hold each other accountable and dare to take risks to do the right thing for their stakeholders and shareholders.
• Collaboration: Employees function as a team, putting intentional effort into interpersonal communication, brainstorming, and problem-solving.
• Curiosity: Employees seek to understand their mission and one another fully and learn new methods and strategies.

Once core values are established, the culture-building process can begin. In The Secret of Culture Change, Jay B. Barney writes, “Unless your organizational culture aligns with your strategies, its full potential will not be realized.” Furthermore, Barney offers an example that could be applied to a company like Digimarc: “If your business strategy focuses on selling highly innovative products or services to your customers, then you must have a culture that supports teamwork, creativity, and risk-taking among your employees.” Centering on their company core values set the Digimarc team on a trajectory of efficiency and forward-thinking.

A company's leaders can introduce new practices that focus on its work culture based on its values. McCormack offers four practices for uniting his team around courage, collaboration, and curiosity.

• Offer your employees unique opportunities to grow and inspire their imagination. For example, in a tech company, having access to new and innovative technology will support one’s employees to think outside the box. Other examples might include traveling opportunities and conferences that engage their interests.
• Make your employees aware of the change they’re making in the world. Continually inform your employees how the products and services they offer are gaining traction.
• Surround your employees with equally passionate and intelligent people. Leaders can be intentional in the hiring process, bringing on team members who will complement other members in skill, interests, and communication.
• Recognize that employees are human beings. Everything a company will accomplish stems from its team, but too often, companies don’t treat their people like human beings. When leaders acknowledge their employees’ good days and bad days, personal aspirations, life changes, accomplishments, and growth areas, they will see a better result in culture.

In February of 2024, Digimarc reported a 71% increase in Annual Recurring Revenue and an 87% increase in Subscription Gross Profit Margin. Regarding this growth, McCormack writes, “These results were made possible by the team’s… ethos of never settling for the status quo and always planting the seeds for future growth.”

Culture-building begins with creating a clear vision for one’s team. According to a LinkedIn study in a recent Forbes article , “68% of workers in the UK, France, Germany, and Ireland [prioritize] organizations that share their values. The figure rises to 87% for workers in the US and 85% for those in Brazil.” Younger generations entering the workforce highly value work that offers a unique company culture and vision. In order to maintain a positive, passionate, and loyal company culture, companies should invest time in discerning and enacting their core values.

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When It Comes to Culture, Does Your Company Walk the Talk?

Company practices often conflict with corporate values. Closing the gap starts with communication.

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When Johnson & Johnson’s CEO codified the company’s principles into a credo in 1943, corporate value statements were a novelty. Today they are ubiquitous among large corporations. In our study of nearly 700 large companies, we found that more than 80% published an official set of corporate values on their website. 1 Senior leaders, in particular, love to talk about their company culture. Over the past three decades, more than three-quarters of CEOs interviewed in a major business magazine discussed their company’s culture or core values — even when not specifically asked about it. 2

Corporate values statements are nearly universal, but do they matter? Critics dismiss them as cheap talk with no impact on employees’ day-to-day behavior. Recent corporate scandals support the skeptics’ view. Volkswagen, Wells Fargo, and Barclays each included ethics or integrity among their core values in the years before their wrongdoings were discovered, while Boeing hit the trifecta by listing integrity, quality, and safety among its “enduring values.”

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It is tempting to dismiss corporate value statements as irrelevant, but ignoring them is a mistake. Even when companies fall short of their aspirations, official statements still cast light on the values leaders consider critical for success. They also spell out the cultural elements that leaders believe distinguish their company in the eyes of employees, customers, and other stakeholders.

Official corporate values only matter to the extent they shape employees’ activities and decisions on a day-to-day basis. This raises a fundamental question: How well does behavior inside a company align with cultural aspirations? In other words, when it comes to their core values, do companies walk the talk?

To measure the gap between aspiration and action, we collected the official corporate values statements for more than 500 large organizations and compared these official values with how employees view their companies on common corporate values based on an analysis of more than 1.2 million Glassdoor reviews.

What Companies Aspire To

Corporate culture means different things to different people. There are more than 50 distinct definitions in the academic literature, including the stories employees tell to interpret events, organizational rituals, and corporate symbols. 3 The official culture statements we studied, in contrast, display a striking consistency in how they define corporate culture.

Three-quarters of the culture statements include an introduction explaining the role of corporate culture. The primary function of corporate culture, according to these descriptions, is to guide the actions and decisions of employees throughout the organization. 4 Aligning behavior with official culture allows companies to differentiate themselves from competitors, build trust with stakeholders, increase brand equity, and attract great talent.

Nearly all the organizations we studied rely on a set of core values as the guideposts for helping employees align their behavior with corporate culture. Of the companies in our sample, 72% referred to their company’s culture as values or core values, and even employees at companies that use other labels — principles, philosophy, or ideals, for example — cited values as the foundation of their culture. The realities of how companies talk about their culture is consistent with a prominent theory that defines organizational culture as “a set of norms and values that are widely shared and strongly held throughout the organization.” 5 We’ll use this definition of corporate culture throughout this paper.

The typical company lists a handful of values — the most common number of reported values is five, and nearly three-quarters of companies in our sample listed between three and seven values. (See “How Many Corporate Values Do Companies Have?”) Companies are not, however, always disciplined in spelling out their core values. Ten percent of organizations listed two or more sets of values under different names (core values and corporate culture, for example) on different parts of their website. Others packed multiple values into a single item. JP Morgan Chase’s business principles, for example, included “a commitment to integrity, fairness, and responsibility,” which we count as three distinct values. When we accounted for nested values, the average company in our sample listed seven distinct values.

One of the most striking findings of our analysis is the sheer number and diversity of values cited. We identified 62 distinct values mentioned by at least 1% of the companies with official values statements. Integrity was the most common, listed by 65% of all companies, followed by collaboration (53%), customer focus (48%), and respect (35%). No other value was cited by more than one-third of companies, and the list contains a long tail of values mentioned by less than 10% of companies. (See “What Companies Say They Value.”)

While some values are more common than others, none are universal. Even integrity, the most frequently cited, is listed by less than two-thirds of all organizations in our sample. The lack of universal values is explained, in part, by variance across industries. All of the companies in the construction and engineering and health care services industries, for example, included integrity among their core values, while less than 20% of internet companies did so. (See “Stated Corporate Values Vary Across Industries.”) Even within the same industry, however, we observed significant variation in the choice of core values.

The diversity of values calls into question the usefulness of frameworks that attempt to reduce all corporate cultures to a handful of universal types. One popular model, for example, argues that all corporate cultures can be plotted along two dimensions — internal versus external orientation on one dimension and flexibility versus control on the other. 6 The cultures that correspond to the resulting quadrants — clan, ad-hocracy, market, and hierarchy — are presented as archetypes that describe all corporate cultures.

While these dimensions are important elements of corporate culture, the resulting two-by-two matrix cannot easily accommodate crucial values like integrity, diversity, or psychological safety. Other models choose different dimensions and produce other cultural archetypes, but they face the same fundamental challenge. 7 No two dimensions can or should be able to capture the richness and diversity of corporate cultures that companies attempt to achieve. Trying to force diverse corporate values onto a cultural Procrustean bed, moreover, strips them of the very elements that make them distinctive.

Do Companies Walk the Talk?

More than 80% of large American corporations publish their official corporate values. But do these professed values make a difference? If a company singles out teamwork as a core value, for example, are employees more likely to collaborate with one another compared with a company in the same industry that does not include collaboration among its core values?

To address whether stated values shape employee behavior, we first measured what companies say they value. The simplest way to quantify corporate culture would be to treat each value as binary — a company either listed it as a core value or did not. When Charles Schwab lists innovation as one of four core values, it is presumably more focused on it than Quicken Loans, which includes innovation among a laundry list of 19 elements of its culture.

To quantify each company’s relative focus on a value, we weighted it by the inverse of the total number of values listed. 8 So innovation was weighted at 25% for Charles Schwab and 5% for Quicken Loans. (A company that didn’t list a specific value received a weighting of zero for that value.) To control for differences across sectors, we assigned each company to one of 33 industries. 9 We then ranked each company in its industry based on the weighting for each value we measured.

To assess how well companies live up to their stated values, we used data from the 2019 Culture 500 , which ranks companies on nine of the most commonly cited values. Every Culture 500 company received a sentiment score that measured how positively employees talked about a specific value in the free text of their Glassdoor reviews. 10 If half the employees who discussed integrity in a company spoke about it in positive terms, for example, that company’s sentiment score for integrity would be 50%.

Comparing the rankings from the Culture 500 with official corporate values allowed us to measure the correlation between them. 11 The figure below shows the correlation coefficients (with 95% confidence intervals) between official and actual values. 12 The analysis reveals that there is no correlation between the cultural values a company emphasizes in its published statements and how well the company lives up to those values in the eyes of employees. All of the correlations between official and actual values were very weak, and four of the nine — collaboration, customer orientation, execution, and diversity — were negatively correlated.

Values Should Be Actionable, Distinctive, and Linked to Results

Our research reveals a gap between official values and the cultural reality on the ground in most organizations, which raises the question of how leaders can close that gap. As a first step, leaders can communicate corporate values more effectively by providing concrete guidance on desired behavior, ensuring their organizational values are distinctive, and linking them to outcomes that matter to employees. Effective communication cannot, of course, guarantee a healthy culture on its own. But it’s a good place to start.

Provide behavioral guidelines. Most employees would agree in principle that integrity, respect, and innovation are worthwhile values. They might have very different notions, however, about what these abstract terms mean in practice. Leaders can provide additional guidance by spelling out a handful of expected behaviors consistent with each value. To the extent these guidelines shape behavior across all parts of the organization, they provide a consistent framework for different functions, business units, and teams to coordinate their activities.

Biotechnology company Biogen, for example, includes pioneering among the elements of its corporate culture. Pioneering is an inspirational value to be sure, but one that employees might struggle to operationalize without further guidance. To clarify what pioneering means in practice, Biogen offers examples, including “We encourage candor to test assumptions and uncover the best ideas” and “We are open about what we do not know and ask questions to understand.” (See “Behavioral Guidelines for Innovation.”) Amazon and Nvidia, two of the highest-ranking companies on innovation in the Culture 500, likewise provide employees with concrete guidelines on how employees can incorporate innovation into their daily activities.

Articulate what makes your organization distinctive. A company’s core values should capture its unique identity — the enduring essence of the company that distinguishes it from competitors. 13 When employees identify with a distinctive culture, they are more likely to incorporate core values in their daily activities and pursue their organization’s goals. 14 A distinctive corporate culture can also differentiate an organization from competitors and provide a source of sustainable competitive advantage. 15

Unfortunately, many organizations’ core values are so generic that they could easily serve as fodder for a Dilbert cartoon (there are more than 50 lampooning official culture statements). 16 The core values of pharmaceutical supplier McKesson (integrity, customer-first, excellence, respect, and accountability) could apply equally well to an airline, grocery store, or bank.

How can leaders translate common values, like customer-centricity or integrity, into something distinctive? One approach is to translate abstract values into organization-specific behavioral guidelines. Alaska Airlines and McKinsey & Co. both emphasize customer service. The specific behaviors associated with their values, however, are tailored to their respective industries and strategies. Alaska Airlines offers tactics for front-line employees dealing with passengers, such as “engage with kindness” and “offer assistance.” McKinsey’s guidelines, including “use our global network to deliver the best of the firm to all clients” and “build client capabilities to sustain improvement” are appropriate for a professional services company serving global clients.

The McKinsey example illustrates another way to make values distinctive — by elaborating on desired behaviors in language unique to an organization. Within McKinsey, “follow the top management approach” means thinking through an issue for the client organization as a whole, rather than its impact on a single division or function. That phrase, and others like “obligation to dissent,” have been used for decades, have a well-defined meaning within the company, and constitute part of the company’s distinctive legacy.

Another approach is to take common values as a given, but then highlight those elements of corporate culture that differentiate an organization. Netflix, for example, acknowledges that integrity, respect, and collaboration are important, but emphasizes five values that distinguish the company including “encourage independent decision-making by employees” and “share information openly, broadly, and deliberately.”

Clarifying what your values mean in practice and providing insight into what truly differentiates your corporate culture requires hard work. Linguistic gimmicks are no substitute for effort and insight. Appending adjectives like “ferocious,” “unflinching,” or “relentless” will not make values more distinctive or actionable. Leaders also do well to avoid acronyms that force fit values. Would Discover Financial Services, for example, have included “volunteerism” (the “V” in its DISCOVER values) or Hilton Hotels “now” (the “N” in HILTON) if these companies went by different names?

Explain why your values matter. Official statements of culture signal what matters most to an organization, and behavioral cues provide concrete guidance on how to translate values into actions. Leaders can further clarify their organization’s values and what makes them distinctive by spelling out why they matter. Of the companies that publish corporate culture statements, less than one-quarter include any discussion of how those values help the organization succeed. And most of those companies simply assert culture is a competitive advantage without explaining the link between core values and organizational performance.

A handful of companies, in contrast, explicitly spell out the connection between their culture and desired results. A common rationale links corporate culture with a company’s ability to attract, retain, and energize the best employees. HubSpot — the No. 1 company on Glassdoor’s list of best places to work in 2020 — explains its “culture doesn’t just help attract amazing people, it amplifies their abilities and helps them do their best work.” Where companies choose to publish their core values provides a clue as to why they matter. One in five companies publish values on the section of their website targeted at potential employees. Their culture statements often include values, such as respect, diversity, learning, and caring, that are attractive to many job seekers.

Nearly the same percentage of companies (18%) include core values in their code of business conduct, which, unsurprisingly, emphasizes integrity, honesty, fairness, and strict compliance with applicable laws. Deutsche Bank, for example, underscores the importance of integrity in rebuilding trust with key stakeholders: “By living these values and beliefs in daily interactions with our stakeholders, employees have a critical role to play in helping us to restore the trust lost during the financial crisis.”

Companies can also spell out the link between values, behaviors, and performance. Netflix explains that employees are expected to be “extraordinarily candid with one another” because “we will learn faster and be better if we can make giving and receiving feedback less stressful and a more normal part of work life.” 17 The company’s value of “avoid rules” is, according to Netflix, critical to maintaining agility in the face of changing market circumstances.

Explaining the rationale behind specific values helps employees (and other stakeholders) understand why the organization prizes certain values above others. Illinois Tool Works’ emphasis on decentralization and entrepreneurship is appropriate for a diversified conglomerate, for example, but would not suit a global professional services company that needs to collaborate across offices and practice groups to serve multinational clients. Clarifying the purpose of values also makes it easier to measure whether they are working. HubSpot, for example, could track attrition among employees they want to keep to assess whether their culture is doing its job.

Leaders love to talk about corporate culture. Many companies, however, display a disconnect between what leaders preach and what is practiced throughout the organization. Improving corporate culture is a long journey that demands a holistic approach and sustained effort over time. During the next year, the Culture 500 project will publish a steady stream of content exploring how leaders can build and sustain a healthy corporate culture.

Related Articles

As first steps in improving their culture, leaders can take a hard, evidence-based look at how well their organization is living up to its espoused values. Which elements of your culture are working well? Which are falling short? Where are the pockets of cultural excellence within your organization? Which teams are undermining your culture?

A cultural diagnostic may reveal that your values are too abstract, generic, or divorced from results to shape how employees act on a day-to-day basis. In this case, you may want to refresh your core values to make sure they capture the distinctive essence of your organization, provide concrete behavioral guidelines, and clearly link to outcomes that matter to employees.

About the Authors

Donald Sull ( @culturexinsight ) is a senior lecturer at the MIT Sloan School of Management and cofounder of CultureX. Stefano Turconi is a teaching fellow at the London Business School. Charles Sull is a cofounder of CultureX.

1. An earlier study of companies included in the S&P 500 index in 2011 found that 85% published corporate values on their website. See L. Guiso, P. Sapienza, and L. Zingales, “The Value of Corporate Culture,” Journal of Financial Economics 117, no. 1 (2015): 60-76.

2. We identified all interviews in Harvard Business Review published between January 1990 and December 2019, and excluded anyone who was not the CEO of a for-profit organization with more than 250 employees at the time of the interview. We searched the text of the remaining interviews for mentions of culture, core values, or other phrases indicating the interviewee was discussing corporate culture.

3. W. Verbeke, M. Volgering, and M. Hessels, “Exploring the Conceptual Expansion Within the Field of Organizational Behavior: Organizational Climate and Organizational Culture,” Journal of Management Studies 35, no. 3 (May 1998): 303-329 identified 54 definitions of organizational culture. For a terrific overview of the current state of corporate culture literature, see J.A. Chatman and C.A. O’Reilly, “Paradigm Lost: Reinvigorating the Study of Organizational Culture,” Research in Organizational Behavior 36 (November 2016): 199-224.

4. More than 80% of the explanations of corporate culture in our sample explicitly discussed the role of corporate values as guides to behavior.

5. C.A. O’Reilly and J.A. Chatman, “Culture as Social Control: Corporations, Cults, and Commitment,” Research in Organizational Behavior 18, eds. B.M. Staw and L.L. Cummings (Greenwich, Connecticut: JAI Press, 1996): 166.

6. K.S. Cameron, R.E. Quinn, J. DeGraff, et al., “Competing Values Leadership: Creating Value in Organizations” (Northampton, Mass: Edward Elgar Publishing, 2006).

7. T.E. Deal and A.A. Kennedy, “Corporate Cultures: The Rites and Rituals of Corporate Life,” (New York: Penguin, 1992); R. Goffee and G. Jones, “What Holds the Modern Company Together?” Harvard Business Review 74, no. 6 (November-December 1996); and B. Groysberg, J. Lee, J. Price, and J. Yo-Jud Cheng, “The Culture Factor,” Harvard Business Review 96, no. 1 (January-February 2018).

8. When weighting each value, we used the number of values we coded for each company (average of seven per company) rather than the number of values reported by the company (five per company on average). This adjustment allowed us to account for companies that incorporated multiple values into a single item in their official values statements and more accurately reflects their level of focus on any value.

9. The list of industries can be found at the Culture 500 website. Companies like Johnson & Johnson, which competes in pharmaceuticals, medical devices, and consumer goods, were assigned to multiple industries.

10. A company’s sentiment score for a value was calculated as the number of reviews that discussed a value in positive terms divided by the total number of reviews that mentioned that value.

11. This analysis applied to companies that were both included in the Culture 500 and that had published official values statements. Of the 531 organizations in the 2019 Culture 500 sample, 444 (84%) had official culture statements. Some of the Culture 500 values included cultural items that we classified as distinct cultural items when coding official value statements. The Culture 500 value of agility, for example, included topics of agility, speed, entrepreneurial, change, and simplicity. In calculating the weighting of official corporate values, we consolidated those values to ensure consistency with the Culture 500 data.

12. We tested the association between officially stated values and employees’ assessment of those values in practice using Pearson’s rho. The correlations had a p-value less than 0.01 for agility and innovation, below 0.05 for respect, and was above 0.05 for all other values. Many companies did not list a specific value, which resulted in many tied value rankings within an industry. We used the Kendall rank correlation to calculate correlations in the presence of ties. The correlations coefficients using the two methods were virtually identical.

13. David Whetten defines organizational identity as “the central and enduring attributes of an organization that distinguish it from other organizations, ” D.A. Whetten, “Albert and Whetten Revisited: Strengthening the Concept of Organizational Identity,” Journal of Management Inquiry 15, no. 3 (September 2006): 219-234.

14. J.E. Dutton, J.M. Dukerich, and C.V. Harquail, “Organizational Images and Member Identification,” Administrative Science Quarterly 39, no. 2 (June 1994): 239-263; and M. Riketta, and R. van Dick, “Foci of Attachment in Organizations: A Meta-analytic Comparison of the Strength and Correlates of Workgroup Versus Organizational Identification and Commitment,” Journal of Vocational Behavior 67, no. 3 (December 2005): 490–510.

15. J.B. Barney, “Organizational Culture: Can It Be a Source of Sustained Competitive Advantage?” The Academy of Management Review 11, no. 3 (July 1986): 656-665.

16. A search of Dilbert cartoons produced 44 comic strips for culture and seven for core values, https://dilbert.com , accessed March 15, 2019.

17. “Netflix Culture,” Netflix, accessed March 17, 2020, https://jobs.netflix.com .

i. We searched websites and annual reports between March and July 2018. We classified as corporate value statements any list of two or more items that were labeled as culture, values, principles, philosophy, norms, beliefs, creed, credo, ethos, attitudes, way, tenets, or commandments. We only included lists of items that were clearly separated from the main text of the website or document through, for example, bullet points, separate lines, item titles, etc. This allowed us to avoid subjective assessments of whether text embedded in a paragraph was discussing corporate culture. We excluded mission and vision statements that laid out an organization’s desired future without specifying the values that would guide behavior.

ii. In some cases, we could not code a value based on the value title alone. Aon Hewitt, for example, listed head as one of its core values. In these cases, we read the value description (if available) to identify what the company meant. If the explanation included more than one value, we coded for all of these. In the Aon Hewitt example, head was described as “Integrity and professionalism are the pillars of our business. Our commitment to rigorous standards and innovation assures clients of bespoke valued solutions,” which we coded to four values (integrity, professionalism, innovation, and customer orientation).

iii. Our list is broadly consistent with the Organizational Culture Profile, a compendium of corporate values widely used by management scholars that lists more than 60 distinct values. In the late 1980s, the development of the Organizational Culture Profile (OCP) summarized the most common values found in academic and managerial writing at that time. C.A. O’Reilly, J. Chatman, and D.F. Caldwell, “People and Organizational Culture: A Profile Comparison Approach to Assessing Person-Organization Fit,” Academy of Management Journal 34, no. 3 (September 1991): 487-516. In a later study, they added 10 new value statements that did not appear in the original OCP, mostly dealing with customer orientation (three) and integrity (three). C.A. O’Reilly, D.F. Caldwell, J.A. Chatman, et al., “The Promise and Problems of Organizational Culture: CEO Personality, Culture, and Firm Performance,” Group and Organization Management 39, no. 6 (December 2014): 595-625. Seventy-five percent of the values listed by companies we studied were also included among the superset of OCP values enumerated by O’Reilly and Chatman across their two studies.

iv. According to the Bureau of Labor Statistics, the retail trade sector and accommodation and food services sector together employed over 30 million employees in 2018 versus a total employed population of 161 million.

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Lessons from Amazon’s Early Growth Strategy

If you’re interested in strategies for scaling start-ups, this episode is for you.

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So much has been written about Amazon’s outsized growth. But Harvard Business School professor Sunil Gupta says it’s the company’s unusual approach to strategy that has captured his scholarly attention. Gupta has spent years studying Amazon’s strategy and its founder and former CEO Jeff Bezos.

In this episode, Gupta shares how Amazon upended traditional corporate strategy by diversifying into multiple products serving many end users, instead of having a narrow focus.

He argues that some of Amazon’s simplest business strategies — like their obsession with customers and insistence on long-term thinking — are approaches that companies, big and small, can emulate.

Key episode topics include: strategy, innovation, leadership, scaling, Jeff Bezos, long-term thinking, customer focus.

HBR On Strategy curates the best case studies and conversations with the world’s top business and management experts, to help you unlock new ways of doing business. New episodes every week.

• Listen to the full HBR IdeaCast episode: How Jeff Bezos Built One of the World’s Most Valuable Companies (2020)
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• Discover 100 years of Harvard Business Review articles, case studies, podcasts, and more at HBR.org .

HANNAH BATES: Welcome to HBR On Strategy , case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock new ways of doing business.

So much has been written about Amazon’s outsized growth. But Harvard Business School professor Sunil Gupta says it’s the company’s unusual approach to strategy that has captured his scholarly attention.

Gupta has spent years studying Amazon’s strategy and its founder and former CEO, Jeff Bezos.

In this episode, Gupta shares how Amazon upended traditional corporate strategy by diversifying into multiple products serving many end users instead of focusing more narrowly.

And he argues that some of their simplest business strategies – like their obsession with the customer and insistence on long-term thinking – are approaches that companies, big and small, should emulate.

If you’re interested in innovation strategy, this episode is for you. It originally aired on HBR IdeaCast in November 2020. Here it is.

ALISON BEARD:  Welcome to the HBR IdeaCast from Harvard Business Review.  I’m Alison Beard.

If you had to name the most successful business leader alive today, who would you say?  I can’t hear you from my basement podcasting room, but I would bet that for many of you, the answer is Jeff Bezos, CEO of Amazon.  This is a man who over the past 25 years turned his online bookstore startup into a diversified company currently valued at $1.6 trillion.

Amazon is a digital retailing juggernaut, it’s also a web services provider, media producer, and manufacturer of personal technology devices like Kindle and Echo.  Oh, and Bezos also owns the Washington Post and Blue Origin, a space exploration company.  Forbes tells us he is the richest person in the world.

How did he accomplish so much?  How did he change the business landscape?  What mistakes has he made along the way?  A new collection of Bezos’s own writing, which full disclosure, my colleagues at Harvard Business Review Press have published, offer some insights.  Here’s a clip from one speech that’s included.  The book is called Invent and Wander.

And our guest today, who has spent years studying both Amazon and Bezos, is here to talk with me about some of the key themes in it, including the broad drivers of both the company and the CEO’s success.  Sunil Gupta is a professor of business administration at Harvard Business School and cochair of its executive program, and cochair of its executive program on driving digital strategy, which is also the title of his book.  Sunil, thanks so much for being on the show.

SUNIL GUPTA:  Thank you for having me, Alison.

ALISON BEARD:  So Invent and Wander.  I get that Bezos is inventive.  You know, he created a new way for us to buy things – everything.  How is he also a wonderer?

SUNIL GUPTA:  So he’s full of experiments.  His company and his whole style is known for experimentation, and he says that in so many words that if you want big winners, then you have to be willing to have many failures.  And the argument is, one big winner will take care of a thousand failed experiments.  So I think that’s the wandering part.  But also his experiments are not aimless.  There is a certain thought and process behind what experiments to do and why they will connect to the old, old picture of what Amazon is today.

ALISON BEARD:  And your expertise is in digital strategy.  How does he break the traditional rules of strategy?

SUNIL GUPTA:  So for the longest time the way, at least I was taught in my MBA program and the way we teach to our MBA students and executives, is strategy is about focus.  But if you look at Amazon, Amazon certainly doesn’t look like it’s focusing on anything, so obviously Jeff Bezos missed that class, otherwise it’s a very, very different thing.

And then you’d say, why is it that so called lack of focus strategy seems to be working for Amazon?  And I think the fundamental underlying principle that he’s guiding his whole discussion of strategy is, he’s changed the rules of strategy.  So the old rules of strategy were, the way you gained competitive advantage is by being better or cheaper.  So if I am selling you a car, my car is better of cheaper.  But the inherent assumption in that strategy statement is, I’m selling one product to one customer.  And what Amazon is basically arguing is, the digital economy is all about connection.  We have got to connect products and connect customers.  Let me explain why that is so powerful.

So connecting products, here the idea is, I can sell you, this is a classic razor and blade strategy.  I can sell you a razor cheap in order to make money on the blade.  So I can sell you Kindle cheap in order to make money on the ebooks.  Now, at some level you might say, hey, razor and blade have been around forever.  What’s so unique today?  I think unique today is razor could be in one industry and blades could be in completely different industrys.

So for example, if you look at Amazon’s portfolio of businesses, you sort of say, not only Amazon is an e-commerce player, but also is making movies and TV shows, its own studio.  Well, why does it make sense for an e-commerce player, an online retailer to compete with Hollywood.  Well, Walmart doesn’t make movies.  Macy’s doesn’t make movies?  So why does it make sense for Amazon to make movies?

And I think once you dig into it, the answer becomes clear that the purpose of the movies is to keep and gain the Prime customers. Two day free shipping is fine, but if  you ask me to pay $99 or $119 for two day free shipping, I might start doing the math in my head, and say, OK, how many packages do I expect to get next year?  And is the Prime membership worth it or not?

But once you throw in, in addition to the two-day free shipping, you throw in some TV shows and movies that are uniquely found only on Amazon, I can’t do this math.  And why is Prime customers important to Amazon?  Because Prime customers are more loyal.  They buy three or four times more than the non-Prime customers, and they’re also less price sensitive.

And in fact, Jeff Bezos has said publicly that every time we win a Golden Globe Award for one of our shows, we sell more shoes.  So this is, and he said it in your book, Invent and Wander, also, that we might be the only company in the world which has figured out how winning Golden Globe Awards can actually translate into selling more products on the online commerce.

So this is a great example of the razor being in a very different industry and blade being in another industry.  Take another example.  Amazon has a lending business where they give loans to small and medium enterprises. If Amazon decides to compete with banks tomorrow, Amazon can decide to offer loans to the small merchants at such a low price that banks would never be able to compete.  And why would Amazon be able to do that?  Because Amazon can say, hey, I’m not going to make money on loans, as much money on loans, but I’ll make more money when these businesses, small businesses grow and do more transactions on my marketplace platform.  And I get more commissions.  So again, loan can become my razor in order to help the merchants grow and make money on the transaction and the commission that I get from that.  The moment I make somebody else’s, in this case the banks, core business my razor, they will make a very hard time competing.  So I think that’s the key change, the fundamental rules of strategy and competition in that direction.

The second part of connection is connecting customers, and this is the classic network effect.  So marketplace is a great example of network effects.  The more buyers I have, the more sellers I have.  The more sellers I have, the sellers I have, the more buyers I get, because the buyers can find all the items.  And that becomes flywheel effect, and it becomes a situation where it’s very hard for a new player to complete with Amazon.

ALISON BEARD:  In this diversification that Amazon has done, how have they managed to be good at all of those things?  Because they’re not focused.  You know, they’re not concentrated on an area of specific expertise.  So how have they succeeded when other companies might have failed because they lacked that expertise, or they were spreading themselves too thin?

SUNIL GUPTA:  So I think it depends on how you define focus.  Most of us, when we define focus, we sort of define focus by traditional industry boundaries, that I’m an online retailer, therefore going into some other business is lack of focus.  The way Amazon thinks about is focus on capabilities.

So if you look at it from that point of view, I would argue that Amazon had three fundamental core capabilities.  Number one, it’s highly customer focused, not only in its culture, but also in its capability in terms of how it can actually handle data and leverage data to get customer insight.  The second core capability of Amazon is logistics.  So it’s now a world class logistics player.  It uses really frontier technology, whether it’s key word, robotics, computer vision, in its warehouse to make it much more efficient.

And the third part of Amazon’s skill or the capability is its technology.  And a good example of that is Amazon Web Services, or AWS.  And I think if you look at these three core capabilities, customer focus and the data insight that it gets from that, the logistics capability, and the technology, everything that Amazon is doing is some way or the other connected to it.  In that sense, Amazon, and there’s no lack of focus, in my judgment on Amazon.

Now, if he starts doing, starts making cream cheese tomorrow or starts making airplane engines, then I would say, yes, it’s got a lack of focus.  But one of the other things that Jeff Bezos has said again and again is this notion of work backwards and scale forward.  And what that means is, because you’re customer obsessed, you sort of find ways to satisfy customers, and if that means developing new skills that we don’t have because we are working backwards from what the customer needs are, then we’ll build those skills.

So a good example of that is, when Amazon started building Kindle, Amazon was never in the hardware business.  It didn’t know how to build hardware.  But Bezos realized that as the industry moved, people are beginning to read more and more online, rather, or at least on their devices, rather than the physical paper copy of a book.  So as a result, he says, how do we make it easier for consumers to read it on an electronic version?  And they’re spending three years learning about this capability of hardware manufacturing.  And by the way, Kindle came out long before iPad came out.  And of course, that capability now has helped them launch Echo and many other devices.

ALISON BEARD:  Right.  So it’s the focus on the customer, plus a willingness to go outside your comfort zone, the wander part.

SUNIL GUPTA:  Exactly.

ALISON BEARD:  Yeah.  How would you describe Bezos’s leadership style?

SUNIL GUPTA:  So I think there are at least three parts to it.  One is, he said right from day one that he wants to be a long-term focus.  The second thing is being customer obsessed.  And many times he has said that he can imagine, in the meetings he wants people to imagine an empty chair.  That is basically for the customer. And he says, we are not competitor focused.  We are not product focused.  We are not technology focused.  We are customer focused.  And the third is, willingness to experiment.  And fail, and build that culture in the company that it’s OK to fail.

ALISON BEARD:  What about personally, though?  Is he a hard charger?  Is he an active listener?  What’s it like to be in a room with him?

SUNIL GUPTA:  Oh, he’s certainly a hard charger.  I mean, he’s also the kind of guy, when he hires people, he says, you can work long, hard, or smart.  But at Amazon, you can choose two out of three.  And I think this is similar to many other leaders.  If you look at Steve Jobs, he was also a very hard charging guy.  And I think some people find it exhilarating to work with these kind of leaders.  Some find it very tough.

ALISON BEARD:  Do you think that he communicates differently from other successful CEOs?

SUNIL GUPTA:  So the communication style that he has built in the company is the very famous now, there’s no PowerPoints.  So it’s a very thoughtful discussion.  You write six-page memos, which everybody, when their meeting starts, everybody sits down and actually reads the memo.

In fact, this was a very interesting experience that I had.  One of my students, who was in the executive program, works at Amazon in Germany.  And he is, he was at that point in time thinking of moving to another company and becoming a CEO of that company.  So he said, can I talk to you about this change of career path that I’m thinking about?  I said, sure.  So we set up a time, and five minutes before our call, he sends me an email with a six-page memo.  And I said, well, shouldn’t he have sent this to me before, so I could at least look at it?  He says, no, that’s the Amazon style.  We’ll sit in silence and read it together.  And so I read it together, because then you’re completely focused on it.  And then we can have a conversation.  But this discipline of writing a six-page memo, it’s a very, very unique experience, because you actually have to think through all your arguments.

ALISON BEARD:  You also mentioned the long term focus, and that really stood out for me, too, this idea that he is not at all thinking of next year.  He’s thinking five years out, and sometimes even further.  But as a public company, how has Amazon been able to stick to that?  And is it replicable at other companies?

SUNIL GUPTA:  I think it is replicable.  It requires conviction, and it requires a way to articulate the vision to Wall Street that they can rally behind.  And it’s completely replicable.  There are other examples of companies who have followed a similar strategy.  I mean, Netflix is a good example.  Netflix hadn’t made money for a long period of time.  But they sold the vision of what the future will look like, and Wall Street bought that vision.

Mastercard is exactly the same thing.  Ajay Banga is giving three year guidance to Wall Street saying, this is my three-year plan, because things can change quarter to quarter.  I’m still responsible to tell you what we are doing this quarter, but my strategy will not be guided by what happens today.  It will be guided by the three-year plan that we have.

ALISON BEARD:  There are so many companies now that go public without turning any profit, whereas Amazon now is printing money, and thus able to reinvest and have this grand vision.  So at what point was Bezos able to say, right, we’re going to do it my way?

SUNIL GUPTA:  I think he said it right from day one, except that people probably didn’t believe it.  And in fact, one of the great examples of that was, when he was convinced about AWS, the Amazon Web Services, that was back in the early 2000s, when a majority of the Wall Street was not sure what Jeff Bezos was trying to do, because they say, hey, you are an online retailer.  You have no business being in web services.  That’s the business of IBM.  And that’s a B2B business.  You’re in a B2C business.  Why are you going in there?

And Bezos said, well, we have plenty of practice of being misunderstood.  And we will continue with our passion and vision, because we see the path.  And now he’s proven it again and again why his vision is correct, and I think that could give us more faith and conviction to the Wall Street investors.

SUNIL GUPTA:  Oh, absolutely.  And he’s one of the persons who has his opinion, and you always surround yourself with people better than you.

ALISON BEARD:  How has he managed to attract that talent when it is so fiercely competitive between Google, Facebook, all of these U.S. technology leaders?

SUNIL GUPTA:  So a couple of things I would say.  First of all, it’s always good fun to join a winning team.  And all of us want to join a winning team, so this certainly is on a trajectory which is phenomenal.  It’s like a rocket ship that is taking off and has been taking off for the last 25 years.  So I think that’s certainly attractive to many people, and certainly many hard charging people who want to be on a winning team.

And a second thing is, Amazon’s culture of experimentation and innovation.  That is energizing to a lot of people.  It’s not a bureaucracy where you get bogged down by the processes.  So the two type of decisions that we talked about, he gives you enough leeway to try different things, and is willing to invest hundreds of millions of dollars into things that may or may not succeed in the future.  And I think that’s very liberating to people who are willing to take on the ownership and build something.

ALISON BEARD:  But don’t all of the tech companies offer that?

SUNIL GUPTA:  They do, but if you think about many other tech companies, they’re much more narrow in focus.  So Facebook is primarily in social media.  Google is primarily in search advertising.  Yes, you have GoogleX, but that’s still a small part of what Google does.  Whereas if you ask yourself what business is Amazon in, there are much broader expansive areas that Amazon has gone into.  So I think the limits, I mean, Amazon does not have that many limits or boundaries as compared to many other businesses in Silicon Valley.

ALISON BEARD:  So let’s talk a little bit about Bezos’s acquisition strategy.  I think the most prominent is probably Whole Foods, but there are many others.  How does he think about the companies that he wants to bring in as opposed to grow organically?

SUNIL GUPTA:  So some acquisitions are areas where he thinks that he can actually benefit and accelerate the vision that he already has.  So for example, the acquisition of Kiva was to improve the efficiency and effectiveness of the systems that he already put in place in his warehouse.  And logistics and warehouse is a key component or key part of Amazon’s business, and he saw that Kiva already was ahead of the curve in technology that he probably wanted to have that in his own company.  So that was obvious acquisition, because that fits in the existing business.

Whole Foods is kind of a slightly different story, in my judgment, because I some ways, you can argue, why is Amazon, an online player, buying an offline retail store, Whole Foods?  And in fact, they bought it at 27% premium.  So that doesn’t make sense for an online retailer commerce to go to offline channels.  And I think, in fact, part of the reason in my judgment is, it’s not just Whole Foods, but it’s about the food business, per se.  And why is Amazon so interested in food?  In fact, Amazon has been trying this food business, online food delivery for a long period of time without much success.  And Whole Foods was one, another way to try and get access to that particular business.  And why is that so important to Amazon, even though you could argue, food is a low margin business?

And I would say, part of the reason is, food is something, grocery is something that you buy every week, perhaps twice a week.  And if I, as Amazon, can convince you to buy grocery online from Amazon, then I’m creating a habit for you to come onto Amazon every week, perhaps twice a week.  And once you are on Amazon, you will end up buying other products on Amazon.  Whereas if you are buying electronics, you may not come to Amazon every day.

So this is a habit creation activity, and again, it may not be a very high margin activity to sell you food.  But I’ve created a habit, just like Prime.  I’ve created a loyal customer where you think of nothing else but Amazon for your daily needs, and therefore you end up buying other things.

ALISON BEARD:  And Amazon isn’t without controversy.  You know, and we should talk about that, too.  First, there are questions about its treatment of warehouse employees, particularly during COVID.  And Bezos, as you said, has always been relentlessly focused on the customer.  But is Amazon employee centric, too?

SUNIL GUPTA:  So I think there is definitely some areas of concern, and you rightly said there is a significant concern about the, during the COVID, workers were complaining about safety, the right kind of equipment.  But even before COVID, there were a lot of concerns about whether the workers are being pushed too hard.  They barely have any breaks.  And they’re constantly on the go, because speed and efficiency become that much more important to make sure customers always get what they are promised.  And in fact, more than promised.

Clearly Amazon either hasn’t done a good job, or hasn’t at least done the public relations part of it that they have done a good job.  Now, if you ask Jeff Bezos, he will claim that, no, actually, they have done things.  For example, they offer something called carrier choice, where they give 95% tuition to the employees to learn new skills, whether they’re relevant to Amazon or not.  Pretty much like what Starbucks does for its baristas, for college education and other things.  But I think more than just giving money or tuition, it requires a bit of empathy and sense that you care for your employees, and perhaps that needs, that’s something that Amazon needs to work on.

ALISON BEARD:  And another challenge is the criticism that it has decimated mom and pop shops.  Even when someone sells through Amazon, the company will then see that it’s a popular category and create it itself and start selling it itself.  There’s environmental concerns about the fact that packages are being driven from warehouses to front doors all over America.  And boxes and packaging.  So how has Bezos, how has the company dealt with all of that criticism?

SUNIL GUPTA:  They haven’t.  And I think those are absolutely valid concerns on both counts, that the small sellers who grow to become reasonably big are always under the radar, and there are certainly anecdotal evidence there, small sellers have complained that Amazon had decided to sell exactly the same item that they were so successful in selling, and becoming too big is actually not good on Amazon, because Amazon can get into your business and wipe you away.  So that’s certainly a big concern, and I think that’s something that needs to be sorted out, and Amazon needs to clarify what its position on that area is, because it benefits from these small sellers on his platform.

And your second question about environmental issues is also absolutely on the money, because not only emission issues, but there’s so many boxes that pile in, certainly in my basement, from Amazon.  You sort of say, and it’s actually ironical that Millennials who are in love with Amazon are extremely environmentally friendly.  But at the same time, they would not hesitate to order something from Amazon and pile up all these boxes.  So I think Amazon needs to figure out a way to think about both those issues.

ALISON BEARD:  And at what point will it have to?  I mean, it seems to be rolling happily along.

SUNIL GUPTA:  Well, I think those issues are becoming bigger and bigger, and it’s certainly in the eye of the regulators, also, for some of these practices.  And not only because it’s too big, and there might be monopoly concerns, but these issues will become larger, and any time you become a large company, you become the center of attraction for broader issues than just providing shareholder value.

ALISON BEARD:  Yeah.  So those are weaknesses possibly for the company.  What are some of Bezos’s personal weaknesses that you’ve seen in studying him and the company?

SUNIL GUPTA:  So I think one thing that stands out to me, and at least in the public forums, I have not seen any empathy.  And it’s, I mean, we talk about that the leaders have, should have three qualities.  They should be competent.  They should have a good character.  And they should have compassion.  So he’s certainly very competent.  I mean, he’s brilliant in many aspects, right, from the computer vision and AI and machine learning, to the nuances of data analytics, to the Hollywood production, etc.  He also seems to have good character, at least I have not heard any personal scandals, apart from his other issues in his personal life, perhaps.

Those characteristics of competence and character make people respect you.  What makes people love you is when you show compassion, and at least I haven’t seen compassion or empathy that comes out of him.  I mean, he certainly comes across as a very hard charging, driven person, which probably is good for business.  But the question of empathy is perhaps something lacking right now.

ALISON BEARD:  Yeah.  The other issue is his just enormous wealth.  He did invent this colossally valuable company, but should anyone really be that rich?

SUNIL GUPTA:  Well, I guess that’s, you can say that’s the good or the bad thing about capitalism.  But I think, and again, my personal view is there’s nothing wrong in becoming rich, if you have been successful and done it with hard work and ingenuity.  But how you use your wealth is something that perhaps will define Jeff Bezos going forward.  I think Bill Gates is a great example how he actually has used his wealth and his influence and his expertise and his brilliance into some certain thing that actually is great for humanity.

Now, whether Jeff Bezos does that down the road, I don’t know, whether his space exploration provides that sort of outlet which is both his passion as well as good for humanity, I don’t know.  But at some point in time, I think it’s the responsibility of these leaders to sort of say, my goal is not simply to make money and make my shareholders rich, but also help humanity and help society.

ALISON BEARD:  If you’re talking to someone who’s running a startup, or even a manager of a team at a traditional company, what is the key lesson that you would say, this is what you can learn from Jeff Bezos?  This is what you can put to work in your own profession?

SUNIL GUPTA:  So I would say two things that at least I would take away if I were doing a startup.  One is customer obsession.  Now, every company says that, but honestly, not every company does it, because if you go to the management meetings, if you go to the quarterly meetings, you suddenly go focus on financials and competition and product.  But there’s rarely any conversation on customers.  And I think, as I mentioned earlier, that Jeff Bezos always tells his employee to think of the imaginary chair in which a customer is sitting, because that’s the person that we need to focus on.  Howard Shultz does the same thing at Starbucks, and that’s why Starbucks is so customer focused.

So I think that’s the first part.  And the argument that Bezos gives is, customers are never satisfied.  And that pushes us to innovate and move forward, so we need to innovate even before the rest of the world even sees that, because customers are the first ones to see what is missing in the offering that you have.

And the second I would say that I would take away from Jeff Bezos is the conviction and passion with what you do.  And many times that goes against the conventional wisdom.  And the Amazon Web Services is a great example of that.  The whole world, including the Wall Street Journal and the Wall Street analysts were saying, this is none of Amazon’s business to do web services.  But he was convinced that this is the right thing to do, and he went and did that.

And part of that conviction may come from experiments.  Part of that conviction comes from connecting the dots that he could see that many other people didn’t see.  I mean, that’s why he went, left his job, and went to Seattle to do the online bookstore, because he could see the macro trends as to what the Internet is likely to do.  So, I think that’s the vision that he had.  And once you have the conviction, then you follow your passion.

ALISON BEARD: Sunil, thanks so much for coming on the show.

SUNIL GUPTA:  Thank you for having me. Alison.

HANNAH BATES: That was Harvard Business School professor Sunil Gupta, in conversation with Alison Beard on the HBR IdeaCast .

We’ll be back next Wednesday with another hand-picked conversation about business strategy from Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review.

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This episode was produced by Mary Dooe, Anne Saini, and me, Hannah Bates. Ian Fox is our editor. And special thanks to Maureen Hoch, Nicole Smith, Erica Truxler, Ramsey Khabbaz, Anne Bartholomew, and you – our listener. See you next week.

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