Corporate Culture-Financial Performance Relationship in Multinational Corporations - Article Example

An empirical investigation of the corporate culture-financial performance relationship in multinational corporations. 2 Introduction This paper investigates literature available on the correlation between corporate culture and financial performance. While the latter is relatively easy to measure and therefore to compare, the former is often subjective even though efforts have been made to put in place systems, if not of measurement, then at least of comparison. We begin with a discussion of the nature of corporate culture, before turning to the interrelationship with competitive advantage, and thence with performance, to finish with a review of existing indications of how corporate culture may relate to both trust and financial performance. 2.2 The Definition of Corporate Culture Webster's Dictionary defines corporate culture as "the shared values, traditions, customers, philosophy, and policies of a corporation; also, the professional atmosphere that grows from this and affects behaviour and performance." In essence, "corporate culture is the personality of your organization. It's the way your company does business and how it conducts itself. It's employees' beliefs and expectations of work." (Ceridian, 2005). Corporate culture and the cultural statements that it engenders then become the modus operandi for corporate members when the executives voice and document the values of the corporation to provide models for how corporate members should behave (1000ventures). There are various numbers of definitions available regarding to corporate culture. Various academic scholars and authors have defined it in different ways. Despite having differences in definitions many would agree on one thing that corporate culture can be referred to as a set of values, beliefs, and behaviour patterns that form the core identity of the organisation, and help shape the employees' behaviour ( Rashid et al, 2003). According to Tichy et al ( 1982), corporate culture is a directive glue where the appropriate questions to ask concern the values and beliefs that are needed to support the corporate strategy, the subcultures that might also contribute to this goal and whether or not there should be an umbrella corporate culture as well. As an extension of the foregoing, another question is also on the role of the human resources department in shaping and moulding the corporate culture. Corporate culture can also be interpreted as a collective mental programming that binds the organisation together through shared values, which ensure that employees are committed to their nominated responsibilities which can lead to achieving organisational goals together ( Hofstede, 1980). Much of what has been written on the definition of corporate culture proceeds by comparison of one type with another. Culture is by definition a varied and variable subject. There is no overall cultural norm in the world, nor any cultural "mean" or average that can be usefully applied. By comparison with the financial sections of corporate annual reports that allow average revenue, profitability, investment and so on to be calculated precisely (which is not necessarily the same as meaningfully), corporate culture requires a different tack (Hofstede, 1980). Having said that culture is defined by comparison, rather than any intrinsic and absolute qualities, corporate culture does display a difference in how it acquires shape and form. Within the corporate environment, culture is strongly influenced by the corporate leaders who are natural role models for other employees. The qualities of a leader in his opinion are forged by experience, trial and error and practical application. The more a leader has been exposed to these aspects, the stronger the leadership becomes and the more influence the leader exerts on the corporate culture of the company concerned (Mintzberg, 1989). A corporation also needs to be able to analyse its own culture to see what is it made of and therefore to be able to adapt it to varying requirements. Explicit instructions on how to analyse one's own corporate culture and how to use culture as a determining factor of business success have been developed (Deal & Kennedy, 1982). A duality appears in corporate culture that is not present in culture in its general sense. Not only is corporate culture based on beliefs and values like culture in general, but it also admits more in the way of absolute measurements, because it is linked to the way that a corporation performs, which in turn is ultimately measurable in financial terms. When we compare this to culture in general, the culture of nations, regions or peoples, we do not find such absolute indicators. Like it or not, a culture in the general sense is not better or worse than another culture. It simply is. In the business sense, culture starts to take on a different life in the sense that one corporate culture can be shown to lead to better performance in a specified domain than another corporate culture (Wilkins & Ouchi, 1983). It becomes possible to prescribe different models of corporate culture and their correspondence with particular types of business. These models often rely on characterising the dimensions of corporate culture in a certain way. When the characterisation chosen is that of the two factors of feedback (rapidity of response) and risk (uncertainty), each one taking possible higher or lower values. Corporate culture and industry type sample pairings are then as follows: high risk, high feedback and financial brokerage; low risk, high feedback and established multinationals in food or information technology; high risk, low feedback and oil exploration; low risk, low feedback for corporations in the public sector or in administration (Deal & Kennedy, 1982). From the analysis and pairing of corporate culture type and industry sector, a natural progression is to management tools to allow corporations to define and form the corporate culture that they require. Culture finds itself intertwined with aspects to motivation, leadership, power, role-playing and group working, alternately defining and being defined by the aspects according to the situation (Handy, 1985). Earlier studies and analyses of these aspects were content to formulate models by type of culture, such as: the Power culture, autocratic and centrally controlled; the Role culture, tending to hierarchical bureaucracy; the Task culture, typified by corporate matrix management; and the Person culture where individuals consider themselves superior to the organisation in which they work (Handy, 1985). Later developments on this characterisation of corporate culture were on the lines of characterisation by dimensions whereby a model of a corporate culture can be assembled in kit form, allowing corporate members to experiment by varying values of different parameters (Hofstede, 1980: Deal & Kennedy, 1982). Johnson's model (1988) is that of a web of corporate culture that lists a number of parameters that are used to classify corporate culture. The list includes the paradigm (a "snapshot" of the company, activities and mission), control systems, organisational and power structures, symbols, rituals and myths. The model can be connected with Handy's discussion of corporate culture in that Role cultures will have elaborate control systems and Power cultures will have more individualism. The awareness of the need to offer a concrete framework that corporations can use then prompts the question of who will use it. The choice typically falls on the leader of the organisation. The examination of the link between leadership and culture is all the more relevant in situations where a change in corporate culture is deemed necessary, because of failure to meet certain performance goals. As the leadership of a corporation defines the culture and also is defined in some respects by it, expecting cultural change in a corporation while retaining current leaders may be overly optimistic (Schein, 1985). Corporate culture assumes further importance as the corporation itself grows bigger. When the corporation expands internationally, its corporate culture may handicap it in its efforts to either do business in foreign countries or to successfully establish foreign subsidiaries. The corporation finds itself needing to develop its perception of culture both inside and out and to apply a rigorous if simple process to move outside of self-imposed cultural barriers (Lee, 1990). Although local subcultures may be less prevalent than otherwise believed (Wilkins & Ouchi, 1983), corporations active internationally still need to analyse and understand the varieties of corporate culture that can exist in their own organisation. The evaluation by dimensions and values of parameters forming a common base for comparison allows business corporations to easily compare and identify differences within their own corporate culture and also use the insights to fix cultural problems that might be impacting corporate performance (Hofstede, 1980: Hall, 1976). When reflecting on these different contributions to the body of literature on corporate culture, what it is and how it evolves, a particular conclusion is reached. Corporate culture on the one hand obeys the same rules as culture in general, as witnessed by the wider studies and analyses of culture in general being applicable to the narrower context of corporate culture. However, corporate culture, unlike culture in general, has the possibility to be acted on with the aim of attaining specific objectives. Even though it will continue to obey the rules of culture in general, it can obey them in the form given to it by executives or members of the corporation (Deal & Kennedy, 1982). 2.3 corporate culture and competitive advantage Every company has their own style of culture: many of these companies end up with a culture by default as they lack the knowledge for designing the culture to their requirements (Schulz, 2001). Furthermore Schulz (2001) argues that that company which has been able to develop its own effective culture can take significant advantages of increase organisation productivity and the better quality of work life (QWL) of its employees. "QWL is a process by which an organisation responds to employee needs by developing mechanisms to allow them to share fully in making the decisions that design their lives at work "Robbins (1989). Brown (1996) has indicated that the companies with an excellent record have a close interest in having and maintaining a good relationship with its employees. As corporate culture is unique to every organisation, the positive relationship between employees and the companies is stable and difficult to copy by competing organisations. This can provide the company with considerable and sustainable competitive advantages compared to others (Romero, 2004). The intuitively true nature of this concept has been shown to be at the heart of the success of companies in different domains where the leader publicly recognises the corporate culture to be a key competitive advantage. In these cases, the corporation is also safe in the knowledge that their corporate culture not only favourably distinguishes them in the eyes of their customers, but that it is an advantage that cannot be taken away from them, unlike a technological advance or a financial advantage (Turknett, 1990). Corporate culture can confer competitive advantage in different ways, often directly linked to the nature of the corporation's activities and the performance goals that it sets itself. It may be that corporate culture starts by defining the possibilities of competitive advantage, or that a desired competitive advantage in turn forces a change in corporate culture (for example in the case of a corporation obliged to enter new, different markets because of a downturn in its traditional business. This interplay between corporate culture and competitive advantage finds expression in open business models which "create value by leveraging many more ideas, due to their inclusion of a variety of external concepts" (Chesborough, 2003). The open business model poses the condition that a corporate culture is at least sufficiently open to allow the contemplation of new ideas. It also states that a corporation whose culture which is entirely closed is less likely to develop any further competitive advantage. To fully realise competitive advantage from positioning or developing corporate culture, different models are proposed for the ranges of tools that corporate leaders have at their disposition. These tools allow corporate leaders and corporations to orient the development of their corporate culture in the ways that they want (Schein, 1985). It is a process of evolution and change that is distinguished from purely organisational changes that may or may not involve cultural aspects. Because corporate culture will evolve in different ways according to the age or life cycle of a corporation, the leadership requirements for effecting cultural change will evolve in parallel (Handy, 1985). Changing corporate culture is also one of the most challenging tasks of corporate leader and must therefore be weighed against the importance of corporate culture in defining competitive advantage. Corporate change for competitive advantage may also be facilitated by considering different depths of the corporate culture. In a three-level model requiring the corporation leaders to step outside of the corporation, the first level deals with what an external observer might experience at a basic sensory level (what they see and hear within the corporation), the second level at a conceptual level as a function of what employees describe as their culture and the third level at an "embedded" level which is not obvious or easy to apprehend and yet is a fundamental component often missed by organisational behaviourists (Schein, 1985). It is a model that also allows a better understanding of cultural conflicts in the organisation and why the cultural competitive advantage that should come about can sometimes be derailed. If for example, the superficial environment gives an impression of being run down, the employees talk of quality and customer satisfaction, but at the deepest level the organisation seems only oriented towards invoicing for short term gain, it becomes obvious that competitive advantage will be hard to derive from any corporate culture in such an organisation. To resume the foregoing, if corporate culture is already adapted to give competitive advantage, so much the better. If on the other hand, it must be adapted, then observers typically agree that the change process is likely to be arduous as corporate culture can be so ingrained. Different models are proposed as guidelines for change and as might be expected there is overlap between the different solutions offered. Guidelines for change are offered by Cummings and Worley who formulate six rules: a clear strategic vision; top management commitment; cultural change at the highest level; change the organisation to be compatible with the cultural change; choose newcomers according to cultural fit; be aware of legal and ethical issues that may arise. Other reference structures for changing corporate culture are also provided in other literature on the subject (De Caluw & Vermaak, 2004: Kotter, 1992). In defining corporate culture, certain writers have expressed doubt about the notion of one corporate culture per company, in particular, advancing the notion that there may be several sub-cultures within a corporation, including one that is enforced by top management and others that exist in conflict with it. Theoretical models may not take this into account. Neither would they reckon with the financial constraints sometimes imposed on a company and that prevent the full enactment or manifestation of a culture. Linda Smircich (Smircich, 1983) criticises such "unrealistic" analyses, stating that culture drives corporations and not the reverse, that much is left un-revealed and that attempts to classify corporate culture should accept this basic notion of uncertainty. Realism is the underlying theme of studies of real life corporations, for example in the perceptions and conclusions of corporate culture in the case of three British organisations (Parker, 2000). The main question that to which the answer is sought is on whether in the real world corporations shape the identities of their employees and if so, whether management should make efforts to direct this formative process to gain corporate advantage. The answer in this case is that corporations have a formative influence on their employees, although the deliberate direction of the process is bounded by other conditions. The choice of the corporations examined allows an in-depth analysis of the situation to be performed. However, by its nature, the study does not extend to corporations of other nationalities, where other studies would be required. Other studies proceeding in a similar empirical fashion have also been done to try to answer the question of how corporate culture can be transformed to provide competitive advantage (Peters & Waterman, 1982: Ouchi, 1981). These studies gain with respect to more theoretical approaches by their analysis and evaluation of what really happens in named corporate environments, but also run the risk of being specific to certain companies and not being able necessarily to be generalised to all corporations. Competitive disadvantage also figures in works by authors such as O'Donovan. The notion is simple: in the same way that corporation culture may claim a role in conferring competitive advantage on a company, in other cases corporation culture may be directly responsible for damaging competitive advantage generated by other factors. A corporation culture may therefore have characteristics of toxicity and hinder positive corporate development. In this case an extended blueprint is required which may be supported by empirical observations on the equivalence in importance of corporate culture to corporate success, as any notion of sales revenue and profitability. The notion of toxicity is applied to the potential damage to a company's productivity and credibility, which may lead to its ultimate failure in its market. In a healthy corporate environment, tradition and innovation are balanced. Imbalance leads to a toxic situation (O'Donovan, 2006). As corporations are seldom new or "greenfield", any attempt to harness the power of corporate culture will need to be made from an existing situation. This means resolving any possible problems or blockages. Case studies on this theme include the particular situation of British Petroleum where two different functional teams had difficulties in sharing a common viewpoint of value to be created (Black, 2003). The hypothesis in this instance was that differences in corporate culture within the corporation contributed to this undesirable situation. Using different primary data, and modelling the culture of each division, the hypothesis is indeed verified. This allows the proposal of corrections to be made including communications, selection of new entrants and training in cultural awareness. In this sense his recommendations are coherent with other more theoretical models (Cummings & Worley, 2005: Kotter, 1992). However, with respect to other recommendations from such theoretical models, concomitant changes in management attitude and behaviour are not explicitly referenced. 2.4 Perspectives of Culture - Performance Relationship Having reviewed not only the definitions and re-definitions possible for corporate culture, as well as the ways in which corporate culture may add to, or detract from, competitive advantage, we now turn our attention to writing on the relationship between corporate culture and performance. Specifically we will discuss writers who have linked the two items with data or proof that the two are indeed positively correlated. Authors interested in this aspect also evoke questions such as whether it is the corporate culture that leads to performance, or the performance that shapes the corporate culture (Peters & Waterman, 1982). Others invoke models or measurements of performance in order to demonstrate a link between corporate culture and financial performance, such as a model of corporate culture predicting revenue from new sources, validated as a system of shared values and norms (McGuire, 2003). In 1982, Peters and Waterman (1982) studied the relationship between corporate culture and performance by collecting the sample of 62 American companies with outstanding performance during a period of time of 5 years. They have suggested that the firm's productivity is determined by the systems within which employees work. They also drew the attention that organisation excellence can only be delivered of employees are aware of the values that is set by the firms. Barney ( 1986) published another research to support the previous study of positive relationship between corporate culture and performance, where he drew attention to the observation that the American firms that have a developed corporate culture benefit from better financial performance. Following the study it has been discovered that the firms with corporate culture have strong set of core managerial values which defines the way in which firms will conduct the business, how it will treat its employees, customers, suppliers, and other stake holders. However, this studies by Barney (1986) and Peters and Waterman (1982) has been criticised for lack of accuracy in research methodology (in the case of Peters and Waterman's work) and lack of statistical evidence (in the case for Barney's Work). Lewis conducted more systematic study in 1994. Surprisingly the finding form this study does not clearly proved the positive relationship between culture and organisational performance. Research methodology was one of the problems of this study which was encountered, influence of other variables was also the others problems that influence in findings of the study. Lim ( 1995) criticised this study by arguing that the findings of Lewis (1994) lacks the generalisability, and furthermore he mentioned that it need to be replicated before this findings can be used and accepted by others. With the vast body of anecdotal evidence that exists on the subject of the relation between corporate culture and performance, there is a need to found conclusions on solid empirical data collected in a rigorous way and over a sufficiently long period of time to avoid the data being skewed by specific events. Kotter and Haskett researched 205 American corporations over a period of 11 years, which allowed them to bring proof of a positive relation between performance and corporate cultures that foster and adhere to what they call quality agreements and relationships between stakeholder groups. The measurements were made using comparisons such as annual growth in net income, average returns on capital investment and increases in stock prices. Kotter and Haskett's conclusions drawn from their primary research of these corporations have commonality with those of other authors. Their comment that there is no universally applicable theory is a reminder of a similar observation concerning corporate culture and management of different divisions where there is no single applicable management theory either (Edstrm & Galbraith, 1977). Similarly, while stating that corporate culture can significantly affect a corporation's financial results in the long term, the conclusions state that cultures appropriate for one corporate context may be catastrophic for others, and not just those that are characterised as being arrogant, bureaucratic or xenophobic. This is the same conclusion reached in other studies of the subject of corporate culture coming from different starting points (Deal & Kennedy, 1982: Handy, 1985). The extension of this conclusion from the authors is that the requirement is for an adaptive culture that provides for alignment of the corporations interests with those of employees, investors, and patrons as the key "stakeholders". In addition, this alignment should be automatic. Using case studies, the authors then give summary details on how leaders in corporations can set the pace and inspire corporate members to aim at this objective. While the US has certainly much to offer in terms of scope of research, primary data to be acquired and case studies to be written, it is clear that other countries also have their stories to tell. We mentioned above the studies made concerning British companies. Japan's Toyota Corporation is another example, this time from outside the Anglo-Saxon context of a corporation that has defined a winning culture that positively impacts on company performance (1000advices). The roots of research into corporate culture linking to company performance go back somewhat further. Over the years, many scholars and academic researchers have acknowledged in various articles or books that corporate culture has a significant effect on the performance of an organisation. The Hawthorne studies are one of the earliest attempts that were carried out in 1920's in order to understand the relationship between corporate culture and the organisational performance ( Van der Post, 1998). The importance of the culture of the work group within the organisation, the attitude of employees towards the management, and productivity were the few norms that existed at the time, which is stressed in the Hawthorne research studies (Van der Post, 1998). One the earliest books related to corporate culture was 'Human Side of Enterprise', where McGregor (1960) the author of the book mentions that most managers tend to make incorrect assumptions about the workers who work for them. Furthermore employees will always react in the way their management managed its staffs (Torrington, et al 2002; Mullins, 2005). Likert (1961), in 'New Pattern of Management', has stressed on the importance of corporate culture of an organisation, and he had found that there is a correlation between employees' attitudes and the performance. If management can able to reduce the amount of organisational control on its employees than it can achieve the organisational goal with effectiveness and efficiency (Argyris, 1964). Denison (1984) was one of the earliest researchers who conducted quantitative studies by examining the relationship between corporate culture and the performance of the organisation. To get the result he studied the financial performance of the 34 American companies over the five-year period. The results of that studies showed that the firm with more positive organisational quality of life can do constantly better in the organisation performance than firm with less positive views. In addition, Denison ( 1990) carried out the study for 12 year period where it shows that organisation with its corporate culture, mission for future, values and goals, can have positive effect on sales, growth and business performance. This compares to Kotter and Haskett's conclusions which can be summarised as follows: corporate culture has positive impact on an organisation's long-term financial performance; to determine the success or failure of any firms in the long-term future can be found in corporate culture; corporate culture are difficult to change but they are there to enhance the performance of firms; and corporate cultures that have financial performance as long-term vision are common and they can be developed easily. The corporate culture as it extends beyond national boundaries has also been analysed to see how it can be tuned for performance. Following the open business model of Chesborough, there is advantage for the corporation to gain in integrating cultural differences into multinational corporate culture and vice versa distinct disadvantages to corporate performance if this is not done (Yip, 1995). This back-flow of cultural difference to strengthen overall performance has also been explored in other works where efforts are made to categorise the type of relationship engendered by the fundamental corporate culture (arms- length or cooperative), in order to define guidelines as to how to maximise overall corporate performance (Edstrm & Galbraith, 1977: Boyacigilla, 1990). 2.5 A Culture of Trust and Financial Performance If a management can establish or create the culture that has a high level of trust with the employee, this can provide an unmatched competitive advantage to the company. It can only happen to the organisation who has invested its times and money to develop a trusting relationship with employees. Correspondingly, those organisations are the ones that are then the most successful in this competitive business world. "Trust is the critical factor that supports effective communication, and ability to collaborate across the departments and hierarchies, the willingness to seek fair resolutions to difficult solutions, and the overall ability of employees to have confidence in management's vision for the future'' ( Layman , 2003, page 24). In her articles "Building Trust in the Workplace", Layman (2003) has explained that trust can be found in an organisation where they have three distinctive characteristics of workplace relationship, which are that they are credible, respectful and fair. We return again to the studies of Kotter and Haskett for further insight into the type of corporate culture that generates sustainable competitive advantage that can be measured by financial performance criteria. They define such performance enhancing corporate cultures to be the ones that encourage taking calculated risks and being innovative, being receptive to change, adopting a stance of "value entrepreneurship" and encouraging mutual support in problem identification and resolution. This in itself is sufficient to define a context of trust that operates within such corporations between corporate members. The figures speak for themselves. When the adaptive culture corporations were compared to the non-adaptive ones, over several decades, the adaptive culture group outperformed the other one on several significant criteria. Growth of revenue during this time was 680% for the adaptives, but only 175% for the non-adaptives. In terms of stock price, the variation was even more marked with a score of 900% increase for the adaptives compared to 75% for the non-adaptives (Kotter & Haskett, 1992). Work continues in the field with cultural assessment tools such as the one created by Hagberg and Heifitz (2002), which allows some perception of how corporations can build the behaviour required to become adaptive and to favour intelligent risk-taking. As a model presented to other companies, a corporation that is evaluated with a high risk-taking score also gets an evaluation at a similar level for characteristics such as autonomy, intellectuality, constructive conflict and affirmative behaviour. Interestingly, the correlation continues with other factors that might not have been immediately suspected, such as diversity, loyalty, openness, participation, supportiveness and teamwork. At the top of the scale in the evaluations correlating highly to the adaptive/risk-taking model are the factors of innovation, respect for the individual and trust. Conversely and as a reminder of O'Donovan's concept of toxicity of a corporate culture, the highest negative correlations were with politics, internal focus and hierarchy (Turknett). Intuitively, the trust factor comes to the fore in this discussion, in so much as corporate members are free to be part of the adaptive, risk-taking culture when they trust their colleagues, know that divergence in viewpoints can be accepted and consider themselves to be members of a strong team. Trust as a factor in corporate culture has also been modelled in business game theory where the game in question does not reward situations of mutual trust (Kreps, 1996). The game then assumes importance as a model of corporate culture and shows how a corporate learning process then goes on to overcome the inherent reward problem and create improvements in corporate performance. Other works build on research into corporate cultural types by Deshpande and Farley as well as organisational commitment by Allen and Meyer to demonstrate the influence of corporate culture together with organisational commitment on financial performance (Rashid et al, 2003). 2.6 Summary In this literature review, we have traced the path beginning with the definition of corporate culture to explore work done on the existence of subcultures and the possibility of modifying or enhancing corporate culture. One of the salient points is the involvement of corporate leadership in defining and changing culture. We then moved on to the competitive advantage that corporations can gain with their culture and the justification for wishing to change it, before examining what should be the logical extension of competitive advantage, which is performance improvement. Empirical studies continue to reinforce the notion that corporate culture is largely responsible for corporate performance, either positively or negatively, and that for positive results, trust is also an integral component of corporate culture. References 1000advices: http://www.1000advices.com/guru/org_culture_vk.html 1000ventures: http://www.1000ventures.com/business_guide/crosscuttings/culture_corporate.html Allen and Meyer Argyris (1964) Barney (1986) Black, Richard J. 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