September 2, 2014

My Research: Organizational Culture Matters on the Bottom Line: Evidence from the High-Tech Industry

Prof. Jennifer Chatman
Prof. Jennifer Chatman

By Jennifer Chatman

Organizational culture has been the latest and greatest fad since the 1990s with many different views getting valuable airtime.  Conventionally, researchers have argued that strong cultures that align employee behavior with organizational objectives should boost performance.  More recently, research has shown that a strong culture can actually stifle creativity and innovation in dynamic environments because people are adhering too closely to routines creating behavioral uniformity, inertia, and an inward focus. 

Despite all the differing views, existing research and debates have tended to oversimplify culture and have failed to definitively resolve one key question: How does organizational culture influence an organization’s financial performance over time? 

My research with colleagues Charles O’Reilly at Stanford, Dave Caldwell at Santa Clara University, and Bernadette Doerr at the University of California, Berkeley, suggests that neither the conventional view of culture nor the recent view paints a full picture of the culture-performance relationship, and  instead, a third, more nuanced relationship exists. 

Our research shows that strong cultures are not necessarily a disadvantage in dynamic environments.  In fact, we learned that firms with strong cultures actually perform better financially, growing more over time, in economically turbulent periods but only if they intensely hold a cultural norm of adaptability.

More specifically, our data shows that strong-culture firms with a high level of consensus across many norms and an intensive emphasis on adaptability have higher revenue, net income growth, and return on investment over the economically volatile three-year period from 2009 through 2011. 

By “adaptability,” we mean a firm’s support of risk-taking, willingness to experiment, initiative-taking, along with the ability to be fast-moving and quick to take advantage of opportunities.  Firms that successfully cultivate adaptability tend to permit their people to express themselves in wide-ranging behaviors, and this freedom of expression helps employees to fully explore divergent solutions to a problem.

A secondary result that also came from our research is that firms with strong cultures that are adaptive also have better reputations. Our data shows a strong correlation between cultural adaptiveness and a firm’s ranking on Fortune Magazine surveys in 2010 in several categories such as “Most Innovative,” “Most Admired,” and “Best Places to Work.”

However, we also found that focusing intensely on adaptability is only advantageous if high consensus exists across the firm about its culture more generally. Our most surprising finding was that firms that emphasized adaptability intensely but had low consensus about their overall culture performed worse over the three-year period—even worse than firms with weak cultures and no emphasis on adaptability. Firms that intensely value adaptability but have low agreement on their overall culture are typically more siloed in their orientation. As a result, their efforts to adapt to changing environmental circumstances were thwarted by a lack of coordination and strategic alignment.

 

How We Arrived at our Findings

One of the strengths of our research was the number of firms we studied, allowing us to draw conclusions with more confidence than looking at one or a few firms.  We focused our research on high-technology companies since they operate in one of the most dynamic industries in terms of competitive challenges and the pace of technological advancements.  We analyzed the cultures of 54 of the largest and most prominent publically traded U.S.-based technology firms over a three-year period beginning in 2009.  We used a culture assessment approach that we have developed over the last 25 years, the Organizational Culture Profile, to assess participating firms’ cultures.  More than 800 informants provided culture profiles on their organization.

Our research delves more deeply into culture than previous research to avoid oversimplification.  We deconstruct culture into three dimensions to better understand the link between culture and a firm’s financial growth: 1) culture content (e.g. norms like adaptiveness, teamwork, integrity); 2) culture intensity (how forcefully the culture is held by employees); and 3) culture consensus (how widely employees share and agree about cultural norms).    

Nailing down the advantages and disadvantages of organizational culture has been elusive because researchers haven’t been specific enough about various aspects of culture.  We label an organization where members understand what top management values but attach no strong approval or disapproval to these beliefs as a high consensus but low intensity culture or a “vacuous culture.”  Low consensus, high intensity cultures can be characterized as “warring factions,” and low consensus and low intensity cultures as a “weak culture.”  A “strong culture” exists when there is both intensity around one or two key norms, and broader consensus about culture content (both high consensus and high intensity).

Distinguishing between the variations within culture content among strong culture organizations as well as distinguishing between culture content and culture consensus resolves conflicting perspectives about the culture-performance relationship.      

For example, we believe that recent research arguing that strong cultures, because of their uniformity and routines, lead to less reliable performance in turbulent environments is insufficient because the researchers failed to analyze the actual content of cultural norms.  When we deconstruct culture into our three dimensions (content, consensus, and intensity), we see that a firm with higher levels of consensus across many cultural norms, as well as an intensive emphasis on adaptability in particular, is actually more likely to recognize environmental volatility and discover alternative routines than are strong culture firms that focus on norms emphasizing behavioral uniformity.

Similarly, the conventional view that strong cultures boost performance might not always be true.  For example, a strong culture that emphasizes uniformity, even around performance-related norms like being results oriented, likely will not boost performance in dynamic environments that require greater nimbleness, adaptiveness, and innovation.

Importantly, in our research, we controlled for other factors such as firm size and technology sector such as software or hardware, and we controlled for six other culture dimensions such as customer-oriented and results-oriented in order to rule out the possibility that our results could be due to other cultural norms besides adaptability.

Thus, based on our research, organizational culture is not just another business fad that firms should take lightly or ignore altogether.  Firms should reconsider the latest research that contends that those with strong cultures are at a disadvantage in turbulent environments, much like the environment we operate in today.  At the same time, a strong culture doesn’t always boost performance.  Rather, our research suggests that those firms that focus on and cultivate a culture that members agree about and that specifically focuses on adaptability will grow faster financially than their competitors. They will enjoy better external reputations, helping them to weather whatever current and future storms come their way.

See full paper.

Topics:    Research News