We get frequently contacted regarding the connection between organizational culture and profitability. At itim International´s Hofstede Centre, we are naturally convinced that such a link exists, only that so far it was impossible to demonstrate on paper as there are so many other factors determining the performance of an organization, such as the general economic conditions and the political situation in the country where an organization is based or the degree of competitiveness in the organization’s industry.

In the 90s, researchers concluded that the link between organizational culture and firm performance “has not been – and may well never be – empirically demonstrated” (Siehl and Martin, 1990). Luckily, science has evolved. Charles O’Reilly of Stanford University et al. took up the challenge in their article “The Promise and Problems of Organizational Culture” (2014). They found altogether 31 studies that explicitly investigated the relationship between culture and performance.

One research challenge is that culture is multidimensional and some facets of culture may be relevant in some circumstances and irrelevant in others. For example, a strict culture will support success if competition is all about cost cutting or if realizing “first time right” is an overriding requirement in order to be successful. A strict culture, however, will not be helpful in situations in which people have to think out of the box or in situations which cannot be predicted and therefore cannot be planned at all. So there cannot be one optimal culture on this dimension (D3: easy going vs. strict in the Hofstede Multi-focus Model) that is the secret of success for all companies and industries.

Rather, it depends on the context in which an organization operates and it depends on its strategy chosen to realize its mission, vision and objectives most successfully.

by Michael Schachner, Egbert Schram & Bob Waisfisz

How Organizational Culture Affects Your Balance Sheet

However, research has shown that certain characteristic of an organizational culture are related to financial performance regardless of the strategy adopted:

• Adaptability (in terms of the Hofstede Multi-focus Model: D2 – customer orientation, the more externally oriented the higher the adaptability), and

• Goal orientation (D1 – effectiveness of the organization)

For example, O’Reilly’s results showed that firms whose cultures were higher on adaptability had significantly higher revenue growth over the period studied, higher market valuations, rank higher on Fortune’s Most Admired list, were more likely to be recommended by stock analysts and had higher ratings as reported by Glassdoor, a site where employees can anonymously rate their employer.

Hofstede’s Multi-focus model consists of 6 autonomous dimensions. On each dimension, companies can have a score from 0 to 100. In an analysis of 31 organizations whose cultures were measured last year (2014), it turned out that 22 out of 31 organizations scored less goal oriented than they wanted to be and 23 out of 31 organizations were less externally oriented than they wanted to be. On goal orientation the average difference for these companies was 17 points, whereas on customer orientation the average difference was 14 points. In terms of the model, there is scope for improvement as soon as the optimal culture (defined by the management team) differs from the actual culture more than 10 points.

Hence, measuring your culture using the Hofstede Multi-focus Model and, in case of a discrepancy on dimensions in question, involving us in a change process, will have a positive impacton your balance sheet. Yet, be aware that this is not an iron law. It is always the challenge to analyze the context in which you operate and then to align your culture with your strategy.

Our model also allows us to point out the danger of such sweeping findings. Thus, nuclear power plants should not try to score goal oriented as productivity is not influenced by e.g. a more entrepreneurial attitude but by ensuring that nothing goes wrong. This implies that their cultures should not score higher than around 50 on the first dimension; means versus goal oriented.

Also when it concerns the scores on D2, internally versus externally driven, companies and other organizations may not want to score higher than 75. Whether this is the case depends on whether clients can be kept in the dark about the consequences of the use of things for sale. Thus, the assumption is that the Mafia scores 100 on this dimension as they sell drugs although knowing that it is not good for you.

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ReferenceO’Reilly III, C. A., Caldwell, D. F., Chatman, Jennifer A., & Doerr, B. (2014). The Promise and

Problems of Organizational Culture: CEO Personality, Culture, and Firm Performance. Group & Organization Management, 39, 595-625. doi: 10.1177/1059601114550713

Copyright itim International

The Authors

Michael Schachneritim International

Egbert Schramitim International

Bob Waisfiszitim International

About itim InternationalItim International improves the effectiveness of strategies in Organizations. Our unique research based tools and methodologies in both National and Organizational Culture help organizations to conduct management strategies in a more effective way.