Organizational culture is not just a trendy term in the business world, but the foundation determining the success or failure of a company. As former IBM CEO Lou Gerstner aptly put it: “Culture is not one of the aspects of the game, it is the game.” In today’s world, characterized by mass layoffs and remote work, a strong organizational culture is more important than ever in ensuring a company’s long-term success. Research shows that organizational culture accounts for about 40% of variance in organizational performance, while business strategy accounts for about 45%. The remaining 15% is attributed to luck – both good and bad. This post focuses on analyzing how toxic organizational culture can lead to corporate failure and provides practical examples illustrating this issue.
What is Organizational Culture and Why Is It So Important?
Organizational culture is a shared set of values, goals, attitudes, and practices that characterize a given organization. It not only defines the “personality” and values of a business, but is also the glue that binds the team together and informs how work is done within the organization. Michael McCarthy, an instructor at Harvard University’s Continuing Education Department, simply defines organizational culture as “the way things are done here.”
A healthy organizational culture helps companies overcome obstacles such as employee disengagement, high turnover, and high recruitment costs, and also makes the company a place where people want to work. This can lead to:
- Improved profitability
- Higher levels of innovation
- Greater competitive advantage
- Increased flexibility and adaptability
What Makes Organizational Culture Toxic?
Toxic organizational culture spreads like a virus, leading employees to adopt bad habits and negative attitudes, ultimately poisoning the atmosphere in the workplace. It can result from various problems, including leadership changes, layoffs, irrational workloads, or lack of clarity.
According to a study conducted by MIT Sloan Management Review and Glassdoor Culture 500, which analyzed over 1.4 million employee reviews, the five main attributes of culture that make it toxic in the eyes of employees are:
- Lack of respect
- Lack of inclusivity
- Unethical behavior
- Relentless competition
- Toxic leadership
“I think the worst thing is lack of transparency,” said McCarthy. “When something is happening, and the company is not straightforward about what’s happening or tries to present it in a more favorable light, it’s literally the worst thing you can do. It opens the door to suspicion and uncertainty, which can lead to rumors and fear.”
How Bad Organizational Culture Leads to Corporate Failures
Analyzing the causes of corporate failure reveals that cultural issues are often at the heart of business failures. Research highlights several key mechanisms through which bad organizational culture can lead to collapse:
1. The Pillars of Entering the Decline Phase
Studies on corporate collapses, particularly in the context of external takeovers of small and medium-sized enterprises, have identified three main pillars of entering the decline phase: market, debt, and management. However, the fourth pillar – “organizational culture” – turns out to be equally important. This dimension provides a less mechanical, richer understanding of the process of entering the decline phase. Of particular importance is the misalignment between the person and the organization, which is often an overlooked or ignored source of difficulties.
2. Burnout and Team Disintegration
Research shows that organizational culture and burnout are closely linked. Depending on the nature of the existing culture, levels of emotional exhaustion, disengagement, and professional effectiveness can vary greatly. Toxic cultures cause serious and lasting damage to affected employees, making them more susceptible to burnout.
3. Lack of Transparency and Communication
An organizational culture characterized by a lack of transparency opens the door to suspicion and uncertainty, which can lead to rumors and fear. This lack of clear communication undermines trust and cooperation, which is essential for the effective functioning of an organization.
4. Emotional Competitiveness Deficit
Studies on the causes and consequences of corporate failures from the perspective of emotional competitiveness emphasize the importance of emotional competencies in a company’s survival. A deficit in this area leads to organizational problems that can ultimately result in failure. Corporate teams that are motivated and work in an environment that ensures the security of their work and corporate results, promoting creativity and innovation, have a better chance of local and international growth.
Practical Examples of Companies That Failed Due to Bad Organizational Culture
Enron – Culture of Ruthless Competition and Lack of Ethics
One of the most well-known examples is the collapse of the Enron corporation, which declared bankruptcy in 2001. The company created an organizational culture that rewarded aggressive financial results at any cost, while ignoring the ethical consequences. The employee evaluation system, known as “rank and yank,” forced managers to give negative evaluations to a certain percentage of employees, regardless of their actual performance, creating an internal atmosphere of fear and ruthless competition.
Enron’s culture promoted short-term profits at the expense of long-term stability, encouraged hiding problems, and prevented employees from reporting irregularities. When the problems began to surface, the company was unable to maintain the façade of success, leading to one of the largest bankruptcies in U.S. history.
Nokia – Culture of Fear and Risk Aversion
Nokia, once the dominant producer of mobile phones, fell primarily due to its organizational culture. The company created an environment in which middle management was afraid to communicate bad news to upper management. This culture of fear meant that when Apple launched the iPhone in 2007, Nokia was unable to respond quickly enough because its management did not have a complete picture of the competitive threat.
Moreover, Nokia developed a culture of risk aversion and bureaucracy that stifled innovation, which was urgently needed in the rapidly changing tech sector. The company failed to adapt to the new reality of smartphones, ultimately leading to its acquisition by Microsoft and the disappearance of the brand from the mobile phone market.
Lehman Brothers – Culture of Excessive Risk-Taking
The investment bank Lehman Brothers, whose collapse in 2008 became a symbol of the financial crisis, suffered due to an organizational culture that excessively rewarded risk-taking. The company created a system where traders and managers were rewarded for generating short-term profits without adequately considering the long-term consequences and risks.
This culture led to excessive engagement in risky financial instruments, especially those related to the real estate market, without proper safeguards. When the real estate market collapsed, Lehman Brothers did not have sufficient reserves to survive the crisis, leading to the largest bankruptcy in U.S. history.
WeWork – Cult of Personality Culture
WeWork, a company specializing in co-working spaces, experienced a dramatic drop in value and canceled its IPO in 2019, which was directly related to its organizational culture. Under the leadership of co-founder Adam Neumann, the company created a nearly cult-like culture centered around the charismatic but unpredictable personality of its leader.
This culture led to unusual business practices, lack of accountability, and conflicts of interest. Neumann made unilateral decisions, often without proper oversight from the board of directors. When investors and analysts began to take a closer look at the company before its planned public offering, the problems stemming from this dysfunctional culture became apparent, leading to a dramatic drop in the company’s valuation and Neumann’s departure.
How to Build a Healthy Organizational Culture
To avoid failure due to bad organizational culture, companies should focus on several key aspects:
1. Define Core Values
Corporate culture must be deeply rooted in the company’s core purpose and values. People – both customers and employees – will not want to be part of a company just because of its products and services. The culture should offer an experience they want to be a part of.
2. Ensure Alignment of Mission, Purpose, and Vision
One way leaders can influence organizational culture is by ensuring that everyone is aligned with the company’s mission, purpose, and vision. This communication serves as the foundation of culture.
3. Create a Supportive Employee Culture
Research shows that an employee-oriented culture, focusing on engagement, collaboration, teamwork, mutual trust, decentralized decision-making, and power-sharing, influences the perceived success of an organization.
4. Recognize the Impact of Leadership on Culture
Leaders must understand that their behavior directly impacts organizational culture. They must model the values they want to see in their organization.
5. Regularly Evaluate and Adjust the Culture
Culture is not static – it requires regular evaluation and adjustment. Leaders should actively monitor their organization’s culture and implement changes when necessary.
Conclusion
Corporate failures caused by bad organizational culture are not uncommon in today’s business world. Toxic organizational cultures characterized by a lack of respect, non-inclusive environments, unethical practices, relentless competition, and abuses can lead to serious organizational problems that ultimately result in failure.
However, by consciously shaping organizational culture, clearly defining values, ensuring alignment between mission and actions, supporting employees, and recognizing the impact of leadership on culture, companies can build a healthy work environment that fosters success.
As Edgar Schein, one of the leading researchers in organizational culture, said, culture is “a set of basic assumptions that a group has invented, discovered, or developed in learning to cope with the problems of external adaptation and internal integration.” This reminds us that organizational culture is not just an abstract concept but a practical tool that companies can shape to ensure long-term success.
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