Effect of Organizational Culture on Performance

There are some multinational companies that were superior in their industry but are now struggling for market survival. General Motors, Ford and Chrysler were the three largest automobile companies in The United States over the last decade (Micheline, 2003). Surprisingly, in 2008 those three companies declared for bankruptcy. They admitted to have suffered substantial losses in the previous years and been unable to make debt payments (Rauh, 2009). This situation was recorded as the biggest industrial bankruptcy in The United States history. Economic experts argue that their insufficient flexibility and unwillingness to adapt to new markets are the main reasons for their bankruptcy (Rauh, 2009; Gilson, 2010). Soon after, their bankruptcy became the example of bad company culture and was viewed as one prominent case of denial and arrogance in organizations (Jagdish, 2008).

The amount of research studying organizational culture has increased significantly over the last decade (Denison 1990; Agbonna 2000; Hofstede 2001). However, researchers varied in how they classified culture and what perspective they used when they claim to be studying cultural phenomena. Moreover, each of them had different definitions on what organizational culture is. Results of their studies were thus diverse and varied. Organizational culture is difficult to measure. Cameron and Quinn (2006) cited more than three types of organizational culture. Kennedy and Deal (1982) described organizational culture as a complex set of beliefs, assumptions, symbols, and values that determine the way a firm conducts business. Hofstede (2001) asserted that although organizational culture is a complex concept that makes it hard to perform research, it holds a tantalizing promise that cultures may have a great influence in shaping organization’s behavior. Barney (1986) mentioned that culture has a pervasive effect on a firm: it defines not only the firm’s relevant competitors, customers and employees, but also defines how the firm cooperates with these key actors. This statement illustrates how organizational culture is incorporated in an organization’s daily activities. Furthermore, because organizational culture creates a framework of values, rules, and beliefs that individuals must work with, it may influence the output. Thus a link or correlation should exist between the two.

Generally, a higher output usually correlates with a higher performance.  Market survival process stresses the importance of firm performance. For many years performance has been a common topic among researchers. However, despite the high number of performance studies, there is no universal agreement in conceptualizing organizational performance (Walton, 2001; Papadimitriou, 2000). It is very difficult to construct a comprehensive measurement theory of performance. This is because researchers use different perspectives to develop the performance theory. Meanwhile, we cannot take this for granted. It is helpful to understand what this theory comprises in order to measure organizational performance.

All the arguments mentioned above appear to suggest that if companies want to search for a performance source, they can start by looking at their organizational culture. However, according to Ogbonna (2000) various researchers in the past have been unable to come up with a universal theory to connect the notions of organizational culture and performance, therefore the influence of organizational culture to performance is still somewhat ambiguous and blurred.

1.2 Research Questions

For that reason, the objective of this thesis is to investigate in what ways does performance and culture relates. This leads to the following problem statement:

How does organizational culture affect organization performance?

There are several research questions established in order to answer the problem statement

What are the perspectives on organizational culture and which approach can be used to analyze organizational culture?

What factors determine organizational performance and what are the different indicators used to measure organization performance?

How does organizational culture, both directly and indirectly, have an impact on organizational performance?

In investigating the relationship, different dimensions commonly used to frame organizational culture need to be explored. The definition and common indicators of performance also will be explained and identified. By doing so, the relationship can therefore be analyzed.

1.3 Methodology

This research aims to clarify the relationship and generate more understanding of organizational performance and culture. This will be done by extracting the literatures and empirical data relevant to this issue and frame it so that one can get the big picture. As mentioned in section above, in existing literature there are many supporting facts and information available but most of them are not in the same line. According to Sekaran (2003) under this circumstance, an exploratory study is suitable. This paper will used secondary data to conduct this research. Data will be gathered from online literature databases, papers, and books. In order to sustain the quality of data, the snowballing data collection method will be used. By using several journals as the basis and starting point for this research, the possibility of finding large numbers of data relevant to this research is bigger. Literatures that do not have a connection with this paper will be easily recognized and overlooked. Furthermore, most of the basic data are considerably aged, to tackle the bias this paper will use more recent data.

1.4 Structure

The aim of this literature is to explore the relationship between firm performance and organizational culture. Each chapter contains a research question that will be discussed by using academic literature. Thiswill be donesequentially by first discussing general organizationalcultureissues andexplainingthe four types of organizational culture.  In chapter three, several indicators of performance will be identified and explained in detail. In order to clarify the causal relationship between the two concepts, the objective of chapter four is to provide exploration of the relationship between different types of culture and performance. It is postulated that the performance indicator differs across diverse cultural types and that certain type has a tendency to be linked with certain performance indicator. The conclusions, limitations and recommendations for future research are the main focus in the last chapter.

Chapter 2 Organizational culture

Organizational culture is the topic for this part. This material will be discussed in three steps. The first step is to discuss the definition of organizational culture. It is important to understand the meaning of organizational culture. The next step is to discuss two organizational culture’s school of thoughts. Several dimensions of organizational culture that commonly used for culture measurement are presented next.

2.1 Organizational culture definitions

The literature addressing organizational culture issue is scattered. Because different disciplines define organizational culture in different ways, there is no consensus on the definition of organizational culture (Sackmann, 1992; Eagleton, 2000). However, an investigation of different culture definitions shows that researchers viewed organizational culture in three ways. The first group views culture as the shared values, the second group view it as the way of working, and the third group view culture as a combination of both (Gallear, 2004).

Trompenaars (1998) positioned organizational culture as shared values that dictate how we act, what we pay attention to and what we value in an organization. Adopting a similar point of view, O’Reilly and Chatman (1996) argued that culture is a system of shared values defining what is important, while norms define appropriate attitudes and behaviors that guide member attitudes and behaviors.

According to Hofstede (1984) culture can be described as ‘the way things are done in the business’. He distinguished one organization from another and illustrated the characteristic of organization. In his later work, Hofstede (1990) argued that symbols, heroes and rituals are subsumed under the term practices. As such, they are visible to the outsider. Similarly, Francesco (1998) saw organization culture as a notion that can be understood by asking insiders how they get work done in their place. In addition, Hofstede (1990) also claimed that the core of culture is formed by values. Williams, Dobson, and Walters, (1994) echoed Hofstede’s argument in this consolidative perspective by defining culture as “the way we do things around here” and “the way we think about things around here”.

2.2 Different perspectives on organizational culture

The body of literature that focuses on organizational culture is large and diverse (Martin, 2002). Prior researchers studying organizational culture show only little convergences toward a commonly accepted conceptualization of the construct (Koen, 2005). Smircich (1983) argued that the conceptualization of organizational culture range from viewing it as a subpart of the organization itself (or something the organization has) to being a representation of the organization as a whole (or something the organization is). The first view is called functionalist perspective and the second view is called interpretive perspective

Organizational culture under the functionalist school of thought is taken as an instrument that can be used to map the relationships among cultural phenomena inside the organization (Smircich, 1983). Researchers in this perspective are more likely to focus in observing the functional meaning of organizational culture. Researchers view culture as something that meshed with the social system of the organization, which means that the organization visualizes culture in their daily operations. Therefore, researchers believe that culture is touchable and manageable. For example, managers can share the values and beliefs to their employees for a particular reason or purpose.

A notable research in the functionalist school of thought is Deal and Kennedy (1998). They contended that strong organizational culture is a key component to success. A strong organizational culture can be described as a situation where there is a clear informal rule that dictates how employees are to act.

On the other hand, researchers under the interpretive school of thought see culture as something an organization is, and therefore organizational culture cannot be managed.  Instead of thinking how to manage culture, they attempt to describe culture. This is because organizational culture is a knowledge deeply embedded in the minds of organizational members that is not consciously accessible (Ellis and Dick, 2003). This view has led researchers in this perspective to observe organizational culture in terms of symbolic, language and expressive aspects of the organization.

A notable researcher in the interpretative school of thought is Hofstede (2001). In his literature, he conducted a comparative cross cultural research in a multinational company and tried to search for the cultural differences within this company. He defined five dimensions that can be used to explain the different aspects of culture. Those five dimensions are: Masculinity, Power Distance, Individualism, Long Term Orientation and Uncertainty Avoidance Index.

Berry (1990) asserted that the major implications of functionalist and interpretive differentiation are that functionalist research attempts to work within a single culture to analyze local culture phenomena, while research in interpretive perspective attempts to work across cultures to construct a universal generalization.

2.3 Organizational culture assessment approach

According to Gagliardi (1986) culture is a coherent system of assumptions, beliefs and basic values which distinguish one group from another and orient its choices. Hofstede (2001) asserted that value is one of the building blocks and core element of culture. Taking these definitions into consideration, it appears that culture contains values and that value constitutes an important part of the culture. Hence, it is possible to observe an organization cultural pattern through the analysis of their value orientation (Kluckhohn & Strodtbeck, 1961).

Since the basic concept of organizational culture mainly comes from the concept of belief, values and underlying assumptions. Not surprisingly,there are as many different organizational cultures as there are organizations (Hofstede, 1990). Furthermore, some researchers have successfully identified various assessment approaches of organizational culture to explain the variance between organizations. According to Delobbe, Haccoun and Vandenberghe (2002) the development of this research falls in two categories, practically and theoretically. In the next section two well known organizational assessment approaches from each category will be discussed briefly.

Three Levels of Culture Model

Schein (1999, 2004) developed an empirical assessment approach consists of three levels of organizational culture, whereas the “level” term refers the extent to which the cultural phenomenon is visible to the observer. These levels move from the very visible to the very implicit and invisible.

* Level one: Artefacts. Consists of artifact, all phenomena that one hears, feels and sees when one encounters a new group and visible behavior pattern.

* Level two: Espoused values. Culture in this level can be depicted by collecting or asking information about the ‘’true meaning” of artifacts from the insider’s informants. This kind of investigation takes us to the next level of cultural analysis.

* Level three: Basic underlying assumptions. Address on interactions between the artifacts perceived in the first level and information gathered from the insider informant in the second level of this hierarchy.

According to Ott (1989) the preferred research methodologies are different for each level. The first and second level has several cultural manifestations that can be examined by the used of quantitative method, while the third level consists of subconscious assumptions that can only be investigated through qualitative method. Schein (2004) proposed that this model is useful in measuring the cultural strength of an organization. This model offers opportunities for researchers to measure and compare the relations between these three levels. If the relations are strong it indicates a strong organization culture and vice versa.

The Competing Values Framework

A study conducted by Quinn and his associates (Quinn & Rohrbaugh, 1981; Quinn & Cameron, 1983; Cameron & Quinn, 2006) consolidated much of the prior researches in this field (Yu and Wu, 2009). They proposed a fourfold typology named The Competing Values Framework. This assessment approach has been validated in many prior researches (Denison, 1990; Howard, 1998; Deshpande & Farley, 2004), and claimed to be aligned with other widely accepted categorical dimensions that outline how people behave in organization (Linnenluecke, 2010; Ralston, Tong, Terpstra, Wang & Egri, 2006; Cameron & Quinn, 2006).

As previously mentioned, Competing Values Framework can integrate most organizational culture instruments presented in the literature. Primary among these discipline researches are: The Organizational Culture Inventory, including twelve cultural styles in three categories such as passive/defensive styles, aggressive/defensive styles and constructive styles (Cooke & Rousseau, 1988); Ouchi Organizational Culture Typology, including three governing mechanism; Denison Theoretical Model of Culture Traits, including four culture types which is conceptually similar to the Competing Value Framework. Moreover, according to Ralston et al., (2006) Competing Value Framework consists of two dimensions that incorporate the core of the three commonly accepted dimensions mentioned above into its structure (as cited in Yu and Wu, 2009, p 40). Based on this argument, one could argue that the similarity of the conceptual between Competing Value Framework with other dimensions mentioned above tend to confirm that Competing Value Framework is a “multidimensional” framework with broad implications.

The richness provided by Competing Value Framework leads this paper to use it as a basic instrument for assessing the relationship between culture and performance. This concept will be discussed in greater details in the next section

2.3.1 CVF Basic model

The Competing Values Framework (CVF) was developed initially based on research to identify the organizational effectiveness criteria (Quinn & Rohrbaugh, 1981). The effectiveness criteria are classified into three values: dimensions internal-external, control-flexibility and means-ends.

Figure 2.1 illustrates a picture of effective criteria. The horizontal line is the first value dimension related to organizational focus. This dimension emphasized on the organization’s external and internal orientation. It deals with the organization preference between focusing on activities happening outside the organization’s environment (external) and activities happening within the organization’s environment (Cameron & Quinn, 2006). According to Gregory, McFadden and Gowen (2007) an external orientation emphasizes connection and communication with the external actors, while an internal orientation emphasizes development and continuation of the organization itself.

The vertical line interprets the second value dimension related to organizational structure, with strong emphasis on control and flexibility. It reflects the degree to which the organization emphasizes solidity or change. Gregory et al., (2007) asserted that a control orientation illustrates consistency, regulations, and rules; while, a flexibility orientation illustrates elasticity, flexibility and spontaneity,

Last but not least, a depth or distality axis is the means and ends, reflecting the degree of closeness to desired organizational outcomes (Quinn & Rohrbaugh, 1983).  The integration of these three dimensions makes possible the identification of four basic models of organizational effectiveness (Quinn & Rohrbaugh, 1983). These four basic models are clan (collaborate), adhocracy (create), hierarchy (control) and market.  Each model is explained later.

Before discussing various cultures model, it is important to understand two key assumptions of the framework. First, each quadrant in this framework is a specific orientation (Denison & Spreitzer, 1991). In practices, an organization shows a combination of different culture orientations. One or two type of orientation could be more dominant that the others and those dominant orientation types will characterize the culture of an organization (Quinn & Rohrbaugh, 1981). Another assumption underlying this framework is that an effective organization needs a balance between the different orientations. This is because an overemphasis on one orientation might limit the ability of organization to acts on different environmental situations (Gregory et al., 2007).

Adapted from Quinn and Rohrbaugh (1983)

2.3.2 Clan culture

The clan culture is similar to family type organization, where the organization focuses on their employee’s development with concern for high cohesion and morale. In return, employees are dedicated to their job and concerned with the organization development. The glue that holds the organization together is loyalty and high commitment (Cameron & Quinn, 2006). Since the organization in this culture has empowering environment for the employees, the employees have greater motivation to do what is best for the organization. In addition, this type of culture is similar in tone to the Ouchi’s typology and “involvement” dimension in Denison’s Theoretical Model of Culture (Delobbe, Haccoun, & Vandenberghe, 2002)

2.3.3 Adhocracy culture

In adhocracy culture, the organization can be characterized as a dynamic, entrepreneurial and creative place to work. This organization is mostly driven by their stakeholders and has capability to adjust in extreme change. The glue that holds the organization together is commitment to experimentation and innovation (Cameron & Quinn, 2006). The organization in this culture is like a temporary tent which is discharged whenever the tasks are completed, and reconfigure quickly whenever new tasks come out (Yu & Wu, 2009). Because of the frequent change in the structure, not surprisingly it is almost impossible to map the organization chart. The adhocracy organization is often found in industries such as software development, filmmaking, etc. In addition, this type of culture is conceptually similar to the “adaptability” dimension in Denison’s Theoretical Model of Culture and “constructive” culture in Cooke and Rousseau’s Culture Inventory (Delobbe et al., 2002).

2.3.4 Hierarchy culture

Hierarchical organization is a formalized and structured place to work. In this culture the organization has a clear structure for authority, well defined responsibilities and high standardization values. The glue that holds the organization together is formal rules and policies. Maintaining a smooth running organization is important; hence, the primary concerns are stability and efficiency. In his works on organization culture Zammuto (2000) asserted that this culture model shares similarities with the bureaucratic dimension prevalent in other typologies, whereas organization is designed to achieve certain ends.

2.3.5 Market culture

This culture model originates from prior study held by Ouchi (1983). In this culture, the organization focuses on the transactions with external environment to create competitive advantage and to make as much of as profits through market competition. Revenue, strength in market niches, and enlarging market share are the primary objectives. In order to achieve these objectives, organization has to emphasize their external control. Therefore, the glue that holds the organization together is “emphasis on winning” (Cameron & Quinn, 2006). In addition, this type of culture is conceptually close with the Ouchi’s typology and “mission” dimension in Denison’s Theoretical Model of Culture (Delobbe et al., 2002).

2.4 Summary

This chapter focused on organizational culture. The main question is“What are the perspectives on organizational culture and which approach can be used to analyze organizational culture?” In the first section of this chapter, several definitions of organizational culture were presented. In the next section, two perspectives of organizational culture were discussed.  Organizational culture can be seen from two perspective “interpretative” and “functionalist”, each perspective has different main focus. In the last section, four basic ideal types of organizational culture were given and the reason for choosing this typology was outlined.

Chapter 3 Organizational Performance

There is one difficult question in business, why do some organizations succeed while others fail. Organization performance is one of the most important issues for every organization. For managers it is important to recognize which factors influence their organization performance and which factors do not. However, despite decades of research, the definition and measurement of performance remains a contentious issue. Scholars often have different perceptions and definitions of performance among themselves (Hefferman & Flood, 2000). In this chapter several issues regarding definition and measurement of performance will be discussed.

3.1 Definitions and Perspectives

According to Abowd (1990) organizational performance is the process of comparison between the actual output of the organization and its objectives. An organization is performs well when its actual output is higher than or equal with its objectives. Organizational performance is the organization’s ability to achieve its goals by processing their resources in an efficient way (Daft 2003).

In general, there are two major perspectives on the determinants of organizational performance (Hansen & Wernerfelt, 1989). First is economic tradition, researchers in this perspective claim that the external market aspects such as external resources and industry characteristics are the most important variables in determining organizational performance.

Researches in the other perspective argued that the internal environment of organization is important predictors of organizational performance.  In her study, Kim (2005) demonstrated the positive relationship between organizational internal factors such as job satisfaction, organizational commitment, organizational citizenship behaviour and performance. Similar to Kim (2005), a comparative study held by Trovik and McGivern (1997) noted that organizational internal factors have a higher contribution to performance compared to the external factors.

3.2 Performance measurements

In the early of 1990s prior researches used traditional performance measures to evaluate organizational performance (Bhimani, 2008). These measures saw performance from the financial perspective and emphasis on tangible asset and financial data information (Mohammad, 2009).

Nevertheless, despite financial indicators representing an ideal information source related to organizational performance, the organization requires more than just financial performance to survive in the long run (Bradley, 2005). Griffin (2003) criticized the traditional performance measures by claiming that single variable is insufficient to measure organizational performance; there are diverse factors that influence organizational performance.

Furthermore, Kaplan and Norton (2001) asserted that traditional performance measures are insufficient in today’s business environment. This is because organizations nowadays are focusing more on intangible performance rather than tangible performance. Less tangible performance such as employee turnover and job satisfaction cannot be evaluated by traditional performance measures. On the other hand, Maskell (1991) argued that in spite of the shortcomings and limitations of traditional performance measures, financial indicator still serves as a critical measure of success. Therefore, a balance between financial and non-financial performance is needed to capture the complete picture of organizational performance (Andersen, 2002).

According to Anderson (2007) performance indicator can be classified into two types: soft and hard performance measures. The first type, known as soft performance measures, is defined as less tangible assets that have to be measured indirectly (Anderson & Fagerhaug, 1999). Thomas (1998) asserted that less tangible assets such as job satisfaction and customer’s loyalty are important in assessing organizations long term feasibility. The second type is defined as “the pure facts that can be calculated and measured directly” (Anderson & Fagerhaug, 1999). This measure provides “hard” values measures and is characteristically based on financial reports (Bradley, 2005). The following section will expose the different types of soft and hard performances indicators.

3.2.1 Soft performance indicators

Many organizations have a value that says “people are our important asset”. Employees directly perform the business and produce the products or services. There is thus a possibility of a link between employee performance and organizational performance (Ostroff, 1992). In general soft performance indicators are based on human resources and other non monetary terms. Some soft performance indicators that are commonly used by researchers will be discussed here.

Job satisfaction

Downs, Clampitt and Pfeiffer (1988) argued that job satisfaction is a complex concept in nature. However, understanding the complexity of the concept can help in understanding how crucial this facet is to an organization’s productivity. According to Al Jenaibi (2010), job satisfaction is a measure of how happy individuals are with their workplace and career. Pearman (1998) argued that job satisfaction influences many aspects of the organization such as personal development and teamwork; hence, it is critical for an organizational success.

It is important for employees to feel satisfied. There is a possibility for the employees to not give 100% of their effort if they are unhappy with their working environments and conditions (Akerlof, Rose & Yellen, 1988). According to Engleza (2007) satisfied employees appear to show more durability and productivity in their job. Another research held by Akerlof et al. (1988) claimed that satisfied employees tend to have more commitment and loyalty toward their organization compared to their unhappy counterparts. It is important to note that this argument does not claim that unhappy employees will have no tendency to work and dedication at all. Unhappy employees will give 100% of their effort only in the short term period.

Errors rate

Errors can be simply defined as failure in activities and operations (Tucker, 2004). In practices, almost every organization is confronted with errors (Gregory et al., 2007). According to Reason (1990) errors in the organization are caused by two factors, human and non human. Where human factor is the biggest contributor in errors (Perrow , 1984).

Many organizations have a value that states “There is no room for error”. Prior researches (Tucker, 2004; Gregory et al., 2007; Sitkin, 1996) indicated that errors can have direct negative consequences to performance such as high lead time and faulty products. Given these recognition of errors consequences, it becomes reasonable for an organization to prevent and avoid errors at any cost. However, preventing errors have never been an easy task. Johnston (2001) argued that human error is unavoidable and difficult to tackle.

Product and services quality

Various researches define quality as conforming to specifications and meeting customer expectations (Beverly, Diane & Wang, 2002). The higher the quality of product or services produced by an organization, the higher its performance is in business. Excellence in quality is important if the organization wishes for long term performances (Bradley, 2005). In many existing literature, quality is often linked to customer satisfaction (Kotler et al., 2009). This indicator will be discussed in the next paragraph.

Customer satisfaction

Customer satisfaction is very important in today’s competitive industry. It can be defined as “the emotional response of an individual towards a product or service after it has been used” (Wells & Prensky, 1996). Customer satisfaction is measured by examining how far the services or quality that an organization produced meet the customer’s expectations (Kotler et al., 2002). According to Hüseyin (2007), customer expectations are determined by customer experience and third party promises toward the product or service. When the expectation is higher than the actual outcome, the customer may be dissatisfied. When the actual output is higher than the expectation, the customer may be satisfied. Moreove