Building a start-up culture

The average lifespan of companies in Standard & Poor’s 500 Index has been shortening over the years – from 33 years in the 1965 to 20 years in the 1990, and forecast to shrink to 14 years by 2026. This is according to a 2016 study of turnover in the S&P 500, conducted by consulting firm Innosight.

If we follow its forecast, about 50 percent of the S&P 500 will be replaced over the next 10 years. This is exactly what happened to the past seven years alone wherein many renowned companies have been cast out from the S&P list: Eastman Kodak, National Semiconductor, Sprint, US Steel, Dell, and the New York Times, replaced by newer companies like Facebook, PayPal, Under Armour, Seagate Technology, and Netflix.

There are several reasons cited why companies drop off the list. Some filed for bankruptcy, lose market share to competition, or were acquired. But what’s striking is that entrepreneurship is also playing a major factor in the S&P 500 turbulence. Apart from the likes of Facebook and Amazon which went public post dotcom era, the Innosight report notes that start-ups with multibilliondollar valuations are likely candidates to replace the old guards of S&P 500 such as Uber, Airbnb, Dropbox, Tesla, and Spotify once they go public.

What does all of this mean for CEOs? It’s a stark reminder that a company needs to break free from existing mindsets and processes by continually innovating and reinventing. In other words, act and operate like a start-up, that is, companies should foster a start-up culture.

What is a start-up culture? According to Techtarget, start-up culture is a “workplace environment that values creative problem solving, open communication and a flat hierarchy.” But as business leaders, how do we transform our companies to behave like start-ups that promote business agility and adaptability as being key virtues, and one that can compete successfully in the global market?

Organizational culture is a collection of core values and beliefs of the members of the organization, and the policies and practices that go along with them, such as treatment of customers and employees and rules on employee behavior. Thus, the effectiveness of an organization’s culture depends on the success of the business leader in translating core values and beliefs into policies and practices that help the organization capitalize on the opportunities and ward off threats in the competitive environment.

It has been well-established in management literature that organizational culture drives performance. But what kind of organizational culture drives performance? The seminal work of Deshpande, Farley, and Webster identifies four types of organizational culture — clan, adhocracy, hierarchy, and market. Each is defined by its dominant attributes, leadership style, the kind of bonding among employees, and the strategic emphasis of the organization.

The framework is divided into the internal maintenance cultures (clan and hierarchy cultures) and external positioning cultures (adhocracy and market cultures). Market culture emphasizes competitive advantage and market superiority; adhocracy culture, on the other hand, emphasizes entrepreneurial behavior, innovation, and risk-taking. Hierarchy culture characterizes bureaucratic regulations and formal structures; clan culture emphasizes loyalty, tradition, and smoothing activities.

Operationally, organizations have a mix of these four organizational culture types. However, those that exhibit dominant externally oriented cultures of adhocracy and market, which is more of start-up cultures, generally outperform those that exhibit the internally oriented clan and hierarchy cultures.

In practical terms, it makes sense for a predominantly entrepreneurial and competitive organization, i.e. start-up culture, to outperform a bureaucratic and consensual one. Compare an aggressive, competitive, and opportunity-seeking salesperson who would over-achieve his or her sales quota with one who is burdened by the company’s bureaucracy and spends more time making friends with colleagues.

Therefore, as business leaders, we need to develop and nurture start-up cultures that promote an agile and effective response to environmental changes and to the opportunities that emerge from these changes. We can start by fighting complacency within our companies and building a sense of urgency in how we run our business. The sense of urgency should be translated into a vision and organization goals and should be communicated to all employees. The vision and organization goals are further translated into the discrete goals of each employee and monitored and reviewed through a performance management system.

There are several examples of companies which are able to nurture and sustain a start-up culture. One is DBS Group Holdings, a Singapore-based bank, which is one of the most proactive in efforts to stay on the front edge of the wave of fintech innovation. In January, 2010, the new DBS chief executive officer, Piyush Gupta, was tasked to realize the bank’s vision to be the ‘Asian bank of choice for the new Asia’. He had to change the passive local culture at DBS with the more competitive yet proactive culture without causing much outcry from the other stakeholders. He adopted an innovation program, with an innovation culture at the heart of driving change. At the beginning of 2016, the bank set up a new innovation center to further evolve their digital strategy, as well as placing some ‘hard revenue’ targets against innovative projects. It was then awarded by Euromoney magazine the title of "world's best digital bank."

While a highly competitive start-up culture will most likely make a company successful, too much of it will also be detrimental in the long run as it will engender organizational stress, uncooperativeness, and in-fighting. Thus, a start-up culture should be supported by a good amount of clan and hierarchy cultures to achieve teamwork, better control, and coordination.

In the end, striking a balance among the different culture types makes a start-up culture more effective in this ever-changing marketplace.

**** The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of FINEX. The author may be emailed at reylugtu@ reylugtu.com.

The author is a senior executive in an information and communications technology firm. He is the Chairman of the ICT Committee of the Financial Executives Institute of the Philippines (FINEX). He teaches strategic management in the MBA Program of De La Salle University. He is also an Adjunct Faculty of the Asian Institute of Management