The Strength of Corporate Culture and the Reliability of Firm Performance
Sorensen, Jesper B., Administrative Science Quarterly
Much popular and scholarly attention has been focused on the hypothesis that strong cultures, defined as "a set of norms and values that are widely shared and strongly held throughout the organization" (O'Reilly and Chatman, 1996: 166), enhance firm performance. This hypothesis is based on the intuitively powerful idea that organizations benefit from having highly motivated employees dedicated to common goals (e.g., Peters and Waterman, 1982; Deal and Kennedy, 1982; Kotter and Heskett, 1992). In particular, the performance benefits of a strong corporate culture are thought to derive from three consequences of having widely shared and strongly held norms and values: enhanced coordination and control within the firm, improved goal alignment between the firm and its members, and increased employee effort. In support of this argument, quantitative analyses have shown that firms with strong cultures outperform firms with weak cultures (Kotter and Heskett, 1992; Gordon and DiTomaso, 1992; Burt et al., 1994).
The existing literature on the relationship between culture strength and performance focuses on the consequences of strong cultures for performance levels but has not examined how strong cultures affect performance variability, or the reliability of firm performance. This is surprising, since the arguments relating culture strength to performance draw particular attention to the benefits of having greater internal consistency in goals and behaviors. One should therefore expect strong-culture firms to exhibit less variable performance. This expectation is complicated, however, by the fact that the variability of a firm's performance depends not only on the ability to maintain consistency in internal processes but also on the firm's ability to adapt to environmental change. The relationship between culture strength and performance reliability, therefore, should depend on how strong-culture firms learn from and respond to both their own experiences and changes in their environment. Incremental adjustments to org anizational routines should be easier in strong-culture firms, because participants have an agreed upon framework for interpreting environmental feedback and a common set of routines for responding to different signals from the environment. In relatively stable environments, firms with strong corporate cultures should therefore have less variable performance than firms with weak corporate cultures, in addition to performing at a higher average level.
In more volatile environments, however, incremental adjustments to organizational routines may not be sufficient. This suggests that the variance-reducing benefits of strong cultures may attenuate as environmental volatility increases and may help explain why some strong-culture firms have encountered great difficulties in responding to changes in their environment (Carroll, 1993; Tushman and O'Reilly, 1997).
Studying the relationship between culture strength and performance variability therefore has the potential to shed light on the ability of strong-culture firms to adapt to change. Performance variability is also an important outcome in its own right, because it plays a central role in a variety of theoretical approaches to organizations. Behavioral theories of the firm suggest that risk taking by managers depends on firm performance relative to aspiration levels (Cyert and March, 1963; Bromiley, 1991); highly variable performance may increase the frequency of risk-taking behavior. Similarly, while organizations may attempt to buffer themselves from environmental variability in order to facilitate planning and decision making (Thompson, 1967) and increase organizational autonomy (Pfeffer and Salancik, 1978), this may be more difficult when performance is highly variable. 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 (Hannan and Freeman, 1984). …