The Strength of Corporate Culture and the Reliability of Firm Performance

The Strength of Corporate Culture and the Reliability of Firm Performance

Transcript of The Strength of Corporate Culture and the Reliability of Firm Performance

Abstract

Paper is consider the relation between the exploration of new possibilities and the exploitation of old certainties in organizational learning. It examines the complication in allocating resources between two, particulary those introduced by the distribution of cost and benefits across time and space, and the effects of ecological interaction. Two general situation involving the development and use of knowledge in organization are modeled. 1st, case of mutual learning between members of an organization and an organizational code.  2nd, case of learning and competitive advantage in competition for primacy. The paper develops an argument that adaptive process, by refining exploitation more rapidly than exploration are likely to become effective in the short run but self-destructive in the long run.

The possibility that certain common organizational practices ameliorate that tendency is assessed.

Exploration: purpose of discovery the resouces or information

--> Search, Variation, Risk Taking, Experimentation, Play, Flexibility, Discovery, Innovation.

Exploitation: Using something in an unjust

-->Refinement, Choice, Production, Efficiency, Selection, Implementation, Execution.

Adaptive system: Engage in exploration to the exclusion of exploitation are likely to find that they suffer the costs of experimentation without gaining many of its benefits. Therefore, as a result maintaining an appropriate balance between exploration and exploitation is a primary factor in system survival and prosperity. Organization make explicit and implicit choice between two: Explicit choices in calculated decision about alternative investments and competitive strategies. Implicit choices are buried in many features of organizational forms and customs ( organizational procedures--accumulating and reducing slack, in search rule and practive in the way in which targets are set and changed and in incentive system.

Theories of Organizational Action:

In rational model of choice-->balance btw E&E is discussed classically in terms of a theory of rational serach (alternatively, probability).

In theories of limited rationality--> Discussion of the choice btw E&E emphasize the role of targets or aspiration levels in regulating allocations to search.

In studies of Organizational Learning-->Problems of balancing E&E is exhibited in distinctions made between refinement of an existing technology and invention of a new one.

In evolutionary model of organizational forms and technologies-->Discussion of the choice btw E&E are framed in terms of balancing the twin process of variation and selection.

The Vulnerability of Exploration

Compared to returns from exploitation, and exploration are systematically less certain, more remote in time and organizationally more distant from the locus of action and adaption. 

The Social Context of Organizational Learning

Contain 2 distinctive features of the social context:

1. Mutual learning of an organization and individual. Organizationas store knowledge in their procedures, norm, rules and forms. They accumulate such knowledge over time, learning from their members. At the sametime, individual in an organization are socialized to organizational beliefs
2. The context of competition for primacy.Organizational often compete with each other under conditions in which relative position matters.

Mutual Learning in the Development of Knowledge

A model of Mutual Learning - process begins with an organizational code characterized by neutral beliefs on all dimensions and set of individuals with varying beliefs that exhibit on average, no knowledge. 

Basic Properties of the Model in a Closed System

Effect of learning rate: higher rates of learning lead, on average, to acheiving equilibrium (As individual in the organization become more knowledgeable, they also become more homogeneous with respect to knowledge). Effect of learning rate heterogeneity: effect on improving in organizational knowledge and on long-term individual improvement suggest that the advantage to having mix of fast and slow learners in an organization. 

Basic Properties of the Model in a More Open System

Effect of personel turnover: Alternative way to producing variability in an organization. The greater the turnover, the shorter the average length of service and the lower the average individual knowledge at any point. Effects of environmental turbulence: useful on turnover, but it produces a disparity btw code knowledge and average knowledge of individuals in the organization. 

Knowledge and Ecologies of Competition

• Competition and the Importance of Relative Performance
• Learning, Knowledge and Competitive Advantage
• Competition for Relative Position and Strategic Action

Litter Model and Old Wisdom

Learning, analysis, imitation, regeneration and technological change are major components of any effort to improve organizational performance and strengthen competitive advantage. Each involves adaptation and a delicate trade-off btw E&E. The present argument has been that these trade-offs are affected by their context of distributed costs and benefits and ecological interaction. The essence of exploitation is the refinement and extension of existing competences, technologies and paradigms. Its returns are positive, proximate and predictable. The uncertain, distant and often negative. Thus, the distance in time and space btw the locus of learning and the locus for the realization of returns is generally greater in the case of exploration than in the case of exploitation, as is the uncertainty. Model suggest on consideration involved in thinking about choice between E&E and in sustaining exploration in the face of adaptive processes that tend to inhibit it.

The Strength of Corporate Culture and the Reliability of Firm Performance

Abstract

Prevailing research claims that strong corporate cultures improve firm performance by facilitating internal behavioral consistency. Addresses an unexamined implication of this argument by analyzing the effect of strong corporate cultures on the variability of firm performance. The relationship depends on how strong cultures affect organizational learning in response to internal and external change.

Paper hypothesize that strong culture firms excel at incremental change but encounter difficulties in more volatile environment. Results of analyses of a sample of firms from a broad variety of industries show that in relatively stable environments, strong culture firms have more reliable performance. In volatile environments, however, the reliability benefits of strong cultures disappear.

Corporate Culture

Strong-culture firms have encountered great difficulties in responding to changes in their environment. Performance variability, an important outcome in its own right because it plays a central role in a variety of theoretical approach to organizations. (high viarable performance may increase the frequency of risk taking behavior. Organizational ecologists have attributed causal importance to performance variability by arguing that external stakeholders typically attach value to predictable performance, giving reliable firms a survival advantage. Behavioral theories, risk taking by managers depend on firm performance relative to aspiration level.

The strength of corporate cultures and firm performance

Culture is a measurable characteristic of organizations. A system of shared values and norms that define appropriate attitudes and behavior for organizational members. A culture can be considered strong if those norms and values are widely shared and intensely held throughout the organization.

Organization culture define as: 

• A social control mechanism
• It framed people interpretations of organizational events and basic assumptions about organizational processes
• It provide group members with a way of giving meaning to their daily lives, setting guidelines and rules for how to behave, and most important, reducing and containing the anxiety of dealing with an unpredictable and uncertain environment.

Performance benefits of strong cultures

Widespread consensus and endorsement of organizational values and norms facilitates social control within the firm. when there is broad agreement that certain behavior are more appropriate than others, violations of behavior norms may be detected and corrected faster. 

Enhance goal alignment. With clarity about corporate goals and practices, employees face less uncertainty about the proper course of action when faced with unexpected situations and can react appropriately. Enhance employees motivation and performance because they preceive that their action are freely chosen. Performance reliability depends on 2 factors: the consistency with which a firm perform its organizational routines and the degree to which those routines are well adapted to changing environmental conditions.

Culture, Learning, and Performance Variability

--culture ultimately reflects the groups effort to cope and lean and is the residue of learning process.

Hypothesis 1: Firms with strong corporate cultures will exhibit more reliable (less reliable) performance. Knowledge makes performance more reliable.As work is standardized as techniques are learned, variability,both in the time required to accomplish tasks and in the quality of task performance is reduced.

Culture, Environmental Volatility, and Performance

--Organizational performance in changing environments depends on the ability of the firm to modify its routines in response to changes in conditions.

Hypothesis 2: As industry volatility increases, the positive effect of culture strength on mean performance declines.

Hypothesis 3: As industry volatility increase, the positive effect of culture strength on performance reliability declines.

Strong culture organizational should have greater difficulty responding to environmental volatility than weak-culture organizational. If environmental change sharply reduces the value of the organization existing routines, strong culture firms should have greater difficulty regaining their footing

Hypothesis 2: that the positive effect of culture strength on mean performance should decrease in volatile environments was not supported. Because strong culture firms are in a relatively good position to weather short-term volatility, it may only be when there are truly radical shifts in the underlying technologies and competitive conditions in an industry that the mean performance benefits of a strong culture disappear.

Conclusion

Firms with strong cultures incur a tradeoff with respect to their adaptive ability in the face of environmental change.

Strong corporate cultures facilitate reliable performance in relatively stable environmentsm but as volability increases, these benefits are dramatically attenuated. This pattern is consistent with the fundamental tradeoff between exploration and exploitation noted by March (1991) and suggests that strong culture firm excel at exploring and discovering new competencies that better suit changing environmental conditions.

It still depends on the existence of environmental conditions that reward exploration. If the environment changes to reward efficiency exploration and exploitation of organizational routines, firms that are strongly committed to exploration should have greater difficulty adapting than firms with weak cultures of exploration, because such an environment demands relative stability in organizational routines and the ability to make incremental improvement in efficiency. 

It create competitive advantage not only by increasing motivation and facilitating coordination and control, but also by leaving the strong culture firm in a stronger position to respond to invesment opportunities that might solidify its competitive advantage.