The Surprising Effect of Company Culture on Innovation

Last Updated Jan 3, 2011 10:47 AM EST

It's become an axiom that company culture is key to retaining employees, increasing profits, and enabling innovation. But what kind of culture, exactly, is the best at fostering these three things? A star system, like the one used by Wall Street firms? The traditional top-down management?

Or something else?

A team of researchers from the Cox School of Business and the Kenan-Flagler Business School studied this question and came to the conclusion that the answer was a more "communal" culture-essentially, letting everyone pitch in without assigning individual responsibilities.

Professors Zannie Voss and Glenn Voss, both from Cox, and professor Daniel Cable, of Kenan-Flagler, queried the managing directors of 146 nonprofit professional theatre companies to understand how much each company embraced one of three different organizational cultures: a communal culture, a hierarchical one, or a so-called "market pricing" or "star" culture, where staff are compensated according to the economic value of their contributions. The researchers then examined three years of data about each theatre company's revenues and royalty streams (used to gauge success at innovation, since theatre companies earn royalties by licensing their own original works to other theatres). The result, according to Glenn Voss: "When it comes to encouraging a communal culture, it seems there's no such thing as too much. You should be off the scale," he says.

Voss is talking literally. The researchers used a seven-point scale to measure the influence of the three different types of firm culture on each theatre company. They say that increasing a company's "community norms" rating by just one point could change a firm's employee retention, revenues, or revenues coming from innovation, by as much as 10 to 15 percent.

Do you have a communal culture?
To determine the strength of a communal culture at your company or business group, Zannie Voss recommends asking yourself how well these statements describe your firm or business unit:

  • Our organizational culture stresses group unity and solidarity
  • In making complex decisions that impact multiple departments, we use a communal process designed to achieve full agreement and buy-in
  • Internal dynamics would best be described as a tradition of cooperation and sharing among everyone
  • I would describe each person's role in the organization by saying that everyone is part of the family.
For executives at firms that are not very community-oriented, Zannie Voss suggests that managers ask further set of questions to help spur thinking about how to create a more communal environment:
  • How much voice do I give employees?
  • How much encouragement do I give employees to bring about change?
  • How much ability do front-line employees have to make an impact?
  • Am I allowing front-line employees to do their best work?
Glenn Voss points out that all three styles of management are ideally used together. "The individual manager has to first provide the leadership and vision. That's part of the hierarchical or authoritarian norm," he says. Even so, it's the communal dimension on which U.S. enterprises are most likely to fall short.

Have you worked at less star- and boss-driven companies, and what impact has that had on innovation?

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    Kimberly Weisul is the co-founder of One Thing New, the free email newsletter for smart, busy women. She was previously Senior Editor at BusinessWeek, responsible for all coverage of entrepreneurship and for launching BusinessWeek SmallBiz, a bimonthly magazine. She is also a freelance writer, editor and editorial consultant.