Knowing your corporate DNA

What is Corporate DNA?  In general parlance, your corporate DNA is a mixture of culture and strategy but we want to be a bit more specific.  Like biological DNA, corporate DNA is the underlying coding that dictates your organization's response to issues, questions and challenges as well as guides your internal decision making.  Like biological DNA, corporate DNA is unconscious; sometimes, it will manifest itself in unusual and surprising ways.

Sometimes the easiest place to see corporate DNA at work is in conglomerates or companies that have multiple (but dissimilar) operating units.  Take, for example, the distribution company that owned a large information technology business in the same industry.  The combination of these assets made sense on paper; much of the information technology fed efficiency in distribution and streamlined the ordering process, increasing opportunity for the distribution business.

When the parent business reported quarterly results, one of the key measures they reported to the street was margin percentage.  In high volume distribution businesses, squeezing margin out the business is key; margin improvements are measured in basis points (or hundredth of a percentage point).  The impact of this was stark on the non-distribution businesses.  When a business initiative was proposed in the technology business which might require investment, it was always measured on the basis of margin dilution.  If it would result in an overall reduction in margin percentage (even with a commensurate increase in profit), it wouldn't be approved. So, if a business was currently doing $10 million at 30% margin but had an opportunity to do $20 million at 20% margin (an increase in $1 million in profit), that initiative wouldn't be approved.

This is corporate DNA at work.  In this instance, there was an unwitting exchange between profit-maximization (which should have been the goal) and margin-percentage maximization (which was seen to drive the share price, an unlikely fact if the impact was an overall reduction in earnings).  Hence the need to know your DNA.

Another example.  A healthcare company had three divisions: pharmaceuticals, diagnostics (essentially an equipment business) and nutrition (mostly nutritional drinks sold in retail outlets).  The nutrition business was an international business and competed against global food companies in many international markets.  Those companies were used to selling products at 20% gross margin, leveraging marketing to drive high volumes and making money based on massive scale.  However they tried, the international nutrition businesses struggled to compete with these formidable competitors.  Why?  Because they were required to price at 60% gross margin (or better).  The presiding corporate DNA was that of the pharmaceutical business where 95% gross margins were common.  They treated the nutrition business similarly, grudgingly conceding 60% margin- but, in effect, ensuring that their nutrition business would be a niche, premium business with high margins but low share.  

There are many other examples:

• The CEO who believed that the marketing slogan "We're number 1!" meant that the company must have the largest share in all markets in which they competed, even if that meant selling below variable cost in some markets to achieve that share.
• The company CEO who said, "Lose a deal, you lose the customer", thereby instilling in his sales force a fear of ever losing a deal.  This led to discounting without restriction, even below cost, to make sure no customer ever established a relationship with a competitor.  This ignored the fact that most large customers maintained multiple relationships as a matter of course; however, rarely did they price shop once they had established a relationship with a reliable vendor with good quality.  Many of those discounts did nothing but give money away.

The point is, as leaders we need to be fully aware of our corporate DNA.  Much of it is good; much of it leads to positive action by default, to rapid decision processes in line with the corporate strategy and in alignment with the general direction of the company.  However, there are many situations where that same DNA can lead to bad business decisions, much in the same way that a mutation in our biological DNA can cause the wrong protein to be synthesized at the wrong time, leading to disastrous consequences.  The goal is to know when corporate DNA is an asset- and when it is a liability.