Organizational culture as a management concept was for the first time systematically researched and defined in the works of the late 1970s and early 1980s. From then on, an enormous amount of research as well as papers on the nature, content, dynamics, and impact of organizational culture have been published.
Since organizational culture is a very complex and multidimensional phenomenon, it is no surprise that different perspectives, approaches, and even paradigms of organizational culture appear in the literature (Martin 2002; Alvesson 2002). However, mainstream thinking concerning organizational culture has adopted certain views regarding its nature, content, and effects.
First, organizational culture is thought to involve a set of values and norms that are expressed through symbols shared by the organization members (Hofstede et al. 1990).
Second, because organizational culture is a collective rather than an individual construct, its content is created through social interactions among members of particular groups (Schein 2004).
Third, the values and norms shared by organization members significantly shape their thoughts and behavior (Schein 2004). Cultural values such as inspirational ideals (Rokeach 1973) and cultural norms as specific social expectations governing behavior (Balthazard, Cooke, & Potter 2006) guide organization members in understanding and interacting with people, phenomena, and events.
The everyday decisions managers and employees make, the actions they take, and the interactions they engage in are in large part determined by the values and norms of the organizational culture. Even if they do not share the predominant values and norms, the organization members cannot ignore them because the organization sanctions behavior that deviates from its values and norms.
In order to understand the impact of organizational culture on an organization’s functioning as well as on organizational performance, it is necessary to explore the relations between culture and meanings as one of the determinants of thinking and behavior of organization members.
Organizational culture is, in fact, a kind of reservoir for collective meanings in an organization, which determine every collective and individual action and decision (Peterson & Smith, 2000; Smircich, 1983). Organizational culture emerges in the process of social interactions of the organization members in which they construct the reality together (Geertz, 1973).
According to Schein (2004), this process occurs during solving the key issues of external adaptation and internal integration which members of every organization face. In the process of the social construction of reality, the organization members together ascribe meanings to occurrences, people, and events within and outside of the organization in order to interpret and understand them.
Depending on the meanings that the organization members collectively ascribe to the realities they face, they will also act in a certain way in that reality. (Smirchich, 1983). The comprehensiveness of organizational culture’s impact on people’s behavior in organizations emerges from every single action, reaction, or decision of each member of the organization being, to some extent, conditioned by the meanings imposed on people in the organization by the organizational culture (Alvesson, 2002).
Due to all of this, organizational culture is a very powerful means for the shaping of organization members’ behavior, and thereby also for all the processes within the organization that generate its performance. The aim of this article is to explain how organizational culture impacts company performance.
The mechanism of impact of organizational culture on a company’s performance
From the very beginnings of research into this concept, researchers were aware that culture can be a management’s tool for achieving high performance. This awareness is based on three implicit assumptions that stand as the foundation of most research dealing with the problem of relations between organizational culture and performance (Wilderom, Glunk, Maslowski 2000).
Organizational culture is a very powerful means for the shaping of organization members’ behavior, and thereby also for all the processes within the organization that generate its performance
First, there is the assumption that some organizational cultures imply better performance than other organizational cultures. This means that culture is the factor that could explain, at least in some part, the differences in performance of different companies and that, hence, there is indeed a causal relationship between these two concepts.
Second, it is possible to identify a particular attribute of organizational culture that leads to better performance. Therefore, through either experience or research, we may come to know what kind of culture leads to better performance.
The third assumption is that organizational culture is prone to changes and management, that is, it can be changed and shaped in the direction that leads to better performance. The literature overview shows, however, that despite the “obviousness” of the impact of culture on organizational performance, the results of research into this impact are not so clear and unambiguous.
In contemporary market conditions, the only permanent source of competitive advantage for a company in the market is its ability to conduct the business processes from the value chain in a way that is superior compared to its competitors (Porter, 1985).
Superiority in conducting business processes leads to creating added value for the consumer, which is difficult or impossible to imitate, and thus the company gains a competitive advantage in the market (Hamel, Prahald, 1994).
In turbulent conditions of rapid changes, the company gains a competitive advantage in the market not because it has something that other companies do not have, but because it can and knows how to do something better than others. The thing that the company can and knows how to do better than its competitors is its core competence, which represents the source of its competitive advantage in the market (Freiling, Fichtner, 2010).
How will the company perform business processes, such as purchase, production, sales, but also logistics, information processing, organizational learning, organizational changes, etc., largely depends on organizational culture. Since organizational culture determines the meanings that the members of the organization ascribe to the reality within and outside of the organization, and since they make their decisions, take action, and enter mutual interactions based on these meanings, this means that organizational culture shapes all the processes within the organization.
Besides the direct impact on performance through the shaping of business processes, organizational culture also indirectly impacts the success of the company.
Through its assumptions, values, norms, and attitudes shared by the employees and managers, the culture shapes their everyday behavior, practices, and routines in performing work tasks, and it thus also shapes business processes. Thereby, the culture determines if the business processes in the company would be performed in a way that leads to a competitive advantage.
We may, therefore, say that organizational culture is one of the key factors in a company’s core competence. What is especially important is that the organizational culture of every company is idiosyncratic because it originated from its own unique experience.
From the very beginnings of research, culture has been defined as “the way we do it here”, suggesting that the culture implies a unique way of working and living within the organization. This, in turn, makes culture the source of core competence which is very difficult to imitate by the competition (Heskett, 2022).
Thereby, organizational culture becomes “that one thing”, that is, “the secret ingredient” in the formula of a company’s success. This was, indeed, clear from the very beginning of researching organizational culture, so many authors have emphasized organizational culture as the “magic wand” of a company’s success, and it was regularly classified among the sources of business success (Peters, Waterman, 1982).
Besides the direct impact on performance through the shaping of business processes, organizational culture also indirectly impacts the success of the company. Namely, by determining decisions, actions, and interactions between management and employees, organizational culture not only directly shapes business processes, but also influences many aspects of organization and management that are also determinants of business processes.
As previously noted, organizational culture determines company strategy, the way in which its organizational structure is shaped, the system of control and coordination, leadership style, motivation profile, job satisfaction, reward system, employees’ performance appraisal, organizational learning, and knowledge management model, power distribution in the organization, and organizational change management.
By impacting all of these hard and soft organizational elements of a company, organizational culture also impacts the business processes, and thereby company performance as well. The elements of management and organization, such as strategy, structure, leadership, and human resources management (HRM) systems, are the framework in which business processes that should lead to competitive advantage and company performance unfold (Martinez et al., 2015).
The culture determines if the business processes in the company would be performed in a way that leads to a competitive advantage.
As a framework, they certainly, to some extent, determine the way in which business processes will take place, as well as their performance. Since organizational culture determines the stated elements of company organization and management, it thereby also indirectly impacts business processes, and thus also the company performance as well.
Figure 1. Theoretical framework of organizational culture’s impact on company’s performances
The purpose of researching culture in management is its supposed impact on company performance. Organizational culture, as a system of collective meanings which emerged in the process of social construction of reality, significantly determines the perceptions and interpretations of the organization members, and thereby also their decisions, actions, and interactions.
Therefore, organizational culture shapes the behavior of employees and managers in a company, and thereby it also shapes how they perform activities and tasks in the company’s business processes. This is why organizational culture is an important determinant of core competence, whereby it influences the ability of the company to gain competitive advantage on the market, which is the key precondition for good performance. Organizational culture, therefore, represents one of the factors of business performances of companies and other types of organization.
Author: Prof. dr. Nebojša Janićijević, full professor Faculty of Economics, Belgrade University
Publication: HR World Magazine No. 8 (2022)