The object of this paper is to examine organizational culture and organizational performance through an analysis of the existent culture models and the empirical studies conducted to examine the corporate culture and organizational performance link. Even though a wide literature has focused on this relationship, the link between these two variables remains unclear because of the mixing results of the empirical studies

Corina Gavrea

Liviu Ilies

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322 THE LINK BETWEEN ORGANIZATIONAL CULTURE AND CORPORATE PERFORMANCE – AN OVERVIEW  Liviu Ilie￿ Babe￿  Bolyai  University,  Faculty  of  Economics  and  Business  Administration,  58-60  Teodor  Mihali Street, Cluj-Napoca, Romania, liviu.ilies@econ.ubbcluj.ro, 0264-41.86.52/3/4/5 Corina Gavrea Babe￿  Bolyai  University,  Faculty  of  Economics  and  Business  Administration,  58-60  Teodor  Mihali Street, Cluj-Napoca, Romania, corina.gavrea@econ.ubbcluj.ro, 0264-41.86.52/3/4/5  The object of this paper is to examine organizational culture and organizational performance through an analysis  of  the  existent  culture  models  and  the  empirical  studies  conducted  to  examine  the  corporate culture  and  organizational  performance  link.  Even  though  a  wide  literature  has  focused  on  this relationship, the link between these two variables remains unclear because of the mixing results of the empirical studies.  Key words: organizational culture, organizational performance, competitive advantage. Introduction The term culture refers to a relatively stable set of beliefs, values and behaviors commonly held by a society, being derived from social anthropology as a framework for understanding “primitive” societies (Kotter and Heskett, 1992). The term organizational culture was used for the first time in the academic literature by Pettigrew in 1979 in the journal “Administrative Science Quarterly”. Organizational culture was used to explain the economic successes of Japanese firms over American firms by motivating workers who were committed to a common set of core values, beliefs and assumptions (Denison, 1984). One of the most important reasons that explain the interest in organizational culture is the assumption that certain organizational cultures lead to an increase in organizational financial performance. According to Peters and Waterman  (1982)  successful  organizations  possess  certain  cultural  traits  of  excellence.  Ouchi  (1981) showed a positive relationship between organizational culture and productivity. Even though the literature on organizational culture and its relationship with corporate performance is rich and diverse, there are only a few empirical studies that actually examined the nature of this relationship. For this reason, this article will examine, based on existent empirical research, the link between culture and performance.    Conceptualizations of organizational culture Lim (1995) suggested that the conceptualizations of organizational culture exist along a continuum which has two extremes: the process oriented and the classification approaches. The process/qualitative approaches to organizational culture This approach is usually represented by Schein’s model (1990) who describes organizational culture as a pattern of basic assumptions invented, discovered, or developed by a given group as it learns to cope with its  problems  of  external  adaptation  and  internal  integration,  and  that  has  worked  well  enough  to  be considered valid, and therefore, is to be taught to new members as the correct way to perceive, think and feel in relation to those problems. In Schein’s opinion, culture has three levels: •  behaviors and artifacts, which is the most clear level of culture consisting of the physical and social environment of an organization; •  values,  which  is less  visible than  the previous level of culture, being composed of those elements that provide the underlying meanings by which the patterns of behaviors may be deciphered; •  basic assumptions, which represent an unconscious level of culture being the most difficult to relearn and change. 323  According to Sackman (1991), the qualitative approaches may have limitations in testing hypotheses and building theory because of the large number of case studies that have to be completed in order to draw some  general  principles  from  such  approaches.  Because  qualitative  approaches  are  time  and  money consuming, the classification approaches were proved to be more useful in the study of organizational culture. The classification/quantitative approaches to organizational culture According to the classification approach, organizational cultures correspond to a range of ideal types that can be reflected by two or more variables. One of the best known studies based on this approach belongs to Hofstede  (1980)  who  used  data  gathered  from  IBM  employees  from  over  40  countries.  The  author identified  four  dimensions  of  organizational  culture:  power  distance,  uncertainty  avoidance, individualism/collectivism and masculinity/femininity. Later, Hofstede (1998:238) defined organizational culture as a concept that has the following features: •  “holistic (describing a whole which is more than the sum of its parts); •  historically determined (reflecting the history of the organization); •  related to the things anthropologists study (like rituals and symbols); •  socially constructed (created and preserved by the group of people who togheter form the organization); •  soft, and; •  difficult to change”. Compared  to  the  qualitative  approach,  the  quantitative  approach  generates  a  number  of  quantitative methods that can be used to measure the corporate culture. There were many questionnaires developed based  on  the  classification  approach  that  have  the  advantage  compared  to  the  qualitative  approach  of covering large samples at lower cost. (Sackman, 1991)   Organizational culture: assumptions From the literature on organizational culture we can identify a number of assumptions about organizational culture. We will present and discuss four of the most important assumptions found in literature: 1.  The first assumption refers to the process of organizational culture change, more specifically even though culture may be resistant to change, they are to some extent flexible and manageable (Scott et al., 2003). According to Ogbonna and Harris (2002) who analyzed the existent literature on culture change, the process of organizational culture change can be influenced and a number of contemporary organizational culture researchers are adopting this perspective. 2.  The second assumption relates business performance with distinct cultures of organizations. 3.  The  third  assumption  refers  to  the  possibility  of  identifying  particular  cultural  attributes  that facilitate or inhibit good performance, thus helping managers in designing appropriate strategies for cultural change. 4.  The fourth assumption states that the benefits resulted from change will outweigh any negative or undesirable consequences. (Scott et al., 2003).   Organizational culture and sustained competitive advantage As mentioned previously, the interest in organizational culture can be explained by the assumption that certain organizational cultures lead to an increase in corporate financial performance. This assumption is founded on the perceived role of culture in generating competitive advantage (Scholz, 1987). According to Krefting and Frost (1985) organizational culture may create competitive advantage if the boundaries of the organization  are  designed  in  a  manner  which  facilitates  individual  interactions  and  if  the  scope  of information processes is limited to appropriate levels. Theorists also argue that the values that are widely shared and strongly held enable managers to predict employee reactions to certain strategic options and in this way minimizing the scope for undesired consequences (Ogbonna and Harris, 20000  324 In 1986, Barney specified three conditions that have to be met in order for a company’s culture to achieve sustained competitive advantage. First, the culture has to be valuable, which means that it must allow the company to behave in a manner that will lead to higher profits, lower costs and other results that improve the financial performance of the firm. Second, the culture has to be rare, which means that it must have distinctive characteristics that differentiate the firm from the cultures of a large number of other firms from the  same  industry.  Third,  a  culture  must  be  imperfectly  imitable,  which  means  that  even  if  potential imitators can understand valuable and rare organizational cultures, it still may not be possible to imitate those cultures.  The impact of organizational culture on corporate performance The literature on organizational culture is rich and diverse. Much of its richness is founded on the claim that culture is linked to organizational performance. Even though there are some theorists that questioned the culture-performance link, sufficient evidence exists to suggest that organizational culture is associated with organizational performance. (Ogbonna and Harris, 2000) One of the earliest quantitative studies on the culture-performance link was conducted by Denison (1984) who used data from 34 American firms over a five year period. The author examined characteristics of organizational culture in these firms and tracked their performance over time. To measure performance the author used data on returns on investment and sales. For organizational performance responses on a one time survey regarding the perceptions of work organization and participation in decision making were gathered.  Although, the author found that organizational culture is correlated with financial performance, some  of  his  measurement  indicators  differ  in  the  strength  of  the  relationship  between  culture  and performance. Decision making and work design were associated with long term financial performance while supervisory leadership was associated with short term financial performance. Even though it has encouraging results, this study is not without limitations. The most important criticisms refer to the use of employee perceptions which suggest that the study had obtained a measure of organizational climate rather than a measure of organizational culture (Lim, 1995). Rousseau (1990) tried in his study to overcome some of the limitations in measuring organizational culture. He gathered data from 32 voluntary service organizations using as a performance measure the amount of money raised from a recently completed found-raising campaign and the Organizational Culture Inventory promoted  by  Cooke  and  Lafferty  (1983)  to  measure  organizational  culture.  The  results  of  this  study showed no significant positive correlations between performance and culture. One of the most extensive studies on the culture-performance link was conducted by Kotter and Heskett (1992). They used data gathered from 207 firms over a five year period. In this study they used various measures of culture and long term economic performance data. Their initial objective was to examine the relationship between strong cultures and long term performance. Even though they found only a minor correlation between strong culture and long term performance, subsequent investigations showed that firms with cultures suited to their market environment have better performance than those that are less fitted to their environment. Marcoulides and Heck (1993) analyzed the relationship between organizational culture and performance using data collected from 26 organizations. The authors proposed a model in which organizational culture was  measured  using  several  latent  variables  (organizational  structure,  organizational  values,  task organization, climate, and individual values and beliefs) and organizational performance was measured using  capital,  market  and  financial  indicators.  The  results  of  this  study  showed  that  all  of  the  latent variables used to measure organizational culture had some effect on performance with workers attitudes and task organization activities being the most significant variables. More  recently,  Ogbonna  and  Harris  analyzed  the  relationship  between  organizational  culture  and performance by including the leadership style as a third variable in the model. They used a sample of 1000 units  from  the  Financial  Analysis  Made  easy  database  of  registered  British  companies.  To  measure performance they used variables such as: customer satisfaction, sales growth, market share, competitive advantage and sales volume. For organizational culture they used measures such as: competitive culture, innovative culture, bureaucratic culture and community culture. The results showed that all four measures of organizational culture  were associated in some  way  with corporate performance. More specifically, innovative and competitive cultures had a direct effect on performance and accounted for approximately 25 percent  of  the  variance  in  organizational  performance.  Both  competitive  and  innovative  cultures  were 325 externally oriented in line with the assumption that organizational culture must be adaptable to external environment for a sustained competitive advantage. The bureaucratic and community cultures, which were internally oriented, were not directly related to performance.  This  study  was  extended  in  2002  when  the  authors  analyzed  the  link  between  market  orientation, organizational culture, strategic human resource management and organizational performance. The authors used the same measures as in the previous study for organizational culture and performance. As in the previous study, competitive and innovative cultures were found to have a significant effect on performance while community and bureaucratic cultures were not related to performance.  Concluding remarks In  this  paper  we  examined  and  reviewed  some  of  the  research  concentrated  on  the  link  between organizational culture and corporate performance. Even though we presented a wide variety of studies, the results are mixed or inconclusive.  First  of  all  it  is  assumed  that  organizational  culture  is  directly  related  to  performance  but  the  study conducted by Ogbinna and Harris (2000, 2002) shows the opposite: the only variable that had a purely direct effect on performance was innovative culture while the competitive culture had both a direct and indirect effect. Moreover measures of bureaucratic and community culture had a purely indirect effect on performance. Also, except for a few studies (Marcoulides and Heck, 1993; Ogbinna and Harris 2000, 2002), all the other studies that examined the culture-performance link failed to discuss the influence of other variables such as organizational structure or leadership. For this reason the future investigations of this relationship have to take into consideration and remove the effect of other factors (Scott et al., 2003). Bibliography 1.  Denison,  D.  (1984).  Bringing  corporate  culture  to  the  bottom  line.  Organizational  Dynamics, 13(2), 5-22. 2.  Hofstede, G. (1980). Culture’s Consequences. Sage, Beverly Hills, CA. 3.  Kotter, P. and Heskett, L. (1992). Corporate Culture and Performance, Macmillan, New York, NY. 4.  Lim,  B.  (1995).  Examining  the  organizational  culture  and  organizational  performance  link.   Leadership and Organizational Development Journal, 16(5), 16-21. 5.  Marcoulides, G. and Heck, R. (1993). Organizational culture and  performance: Proposing and testing a model. Organization Science, 4(2), 209-225. 6.  Ogbonna,  E  and  Harris,  L.  (2000).  Leadership  style,  organizational  culture  and  performance: Empirical evidence from UK companies. International Journal of Human Resources Management, 11(4), 766-788. 7.  Ogbonna, E and Harris, L. (2002). Managing organizational culture: Insights from the hospitality industry. Human Resource Management Journal, 12(1), 22-53. 8.  Pettigrew, A. (1979). On studying organizational culture. Administrative Science Quarterly, 24, 570-581. 9.  Rousseau, D. (1991). Quantitative assessment of organizational culture. Group and Organizations Studies, 15(4), 448-460. 10.  Sackman,  S.  (1991).  Uncovering  culture  in  organizations.  Journal  of  Applied  Behavioral Science,27(3), 295-317.  11.  Schein, E (1990). Organizational culture. American Psychologist, 45(2), 109-119. 12.  Scott, T., Mannion, R., Davis, H., and Marshall, M. (2003). The quantitative measurement of organizational  culture  in  health  care:  A  review  of  the  available  instruments.  Health  Services Research, 38(3), 923-945.    

THE LINK BETWEEN ORGANIZATIONAL CULTURE AND CORPORATE PERFORMANCE – AN OVERVIEW

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