Toward a Theory of Organizational Culture and Effectiveness

This paper develops a model of organizational culture and effectiveness based on four traits of organizational cultures; involvement, consistency, adaptability, and mission. These traits are examined through two linked studies: In the first, qualitative case studies of five firms are used to identify the traits and the nature of their linkage to effectiveness; In the second, a quantitative study provides an exploratory analysis of CEO perceptions of these four traits and their relation to subjective and objective measures of effectiveness in a sample of 764 organizations. The results show support for the predictive value of the traits, and help to illustrate the complementarity of qualitative and quantitative methods for studying organizational cultures. Two of the traits, involvement and adaptability, are indicators of flexibility, openness, and responsiveness, and were strong predictors of growth. The other two traits, consistency and mission, are indieators of integration, direction, and vision, and were better predictors of profitability. Each of the four traits were also significant predictors of other effectiveness criteria such as quality, employee satisfaction, and overall performance. The results also showed that the four traits were strong predictors of subjectively-rated effectiveness criteria for the total sample of firms, but were strong predictors of objective criteria such as return-on-assets and sales growth only for larger firms. This paper suggests that culture can be studied as an integral part of the adaptation process of organizations and that specific eulture traits may be useful predictors of performance and effectiveness. The paper also illustrates how qualitative case studies and inductive theory building can be combined with quantitative comparisons and theory-testing to make progress on specific aspects of organizational culture research. {Theory Building; Culture Effectiveness) The relationship between the culture and functioning of social organizations has been a recurring theme in the social sciences for over 50 years. Sociologists, social anthropologists, and social psychologists have often presented culture and ideology as integral features of the functioning of a society (Weber 1930, Mead 1934, Radcliffe-Brown 1952). Each of these authors focused on culture as a critical aspect of the adaptation of social organizations, and viewed culture as a system of "socially transmitted behavior patterns that serve to relate human communities to their ecological settings" (Keesing 1974). This perspective has also been reflected in the work of ethnographers such as Whyte (1949) and Rohlen (1974), and by psychologists such as Schein (1985,1990) and Hofstede (Hofstede 1980, 1991; Hofstede et al. 1990). Organizational researchers have also addressed the relationship between culture and functioning (Wilkins and Ouchi 1983, Barney 1986, Barley et al. 1988, SafToId 1988, Ott 1989), but have seldom developed explicit theories of organizational culture and eflfec204 ORGANIZATION SCIENCE / Vol. 6, No. 2, March-April 1995 1047-7039/ 95/0602 / 0204/ $01.25 Copyright © 1995. Institute for Operations Research and the Management Sciences DANIEL R. DENISON AND ANEIL K. MISHRA Organizational Culture and Effectiveness tiveness or presented supporting evidence (Siehl and Martin 1990). Progress has been made in related research areas such as socialization (Van Maanen and Schein 1979, Chatman 1991), and change (Schein 1985, Kotter and Heskett 1992) but with few exceptions (e.g., O'Reilly 1989) little attention has been given to the issue of organizational culture and effectiveness. The purpose of this paper is to develop and test a model of the cultural traits that appear to characterize effective organizations. Our intention is to develop an explicit theory about culture and effectiveness that can extend the implicit, but often unelaborated themes that appear in many culture studies. This is accomplished by presenting two linked studies: The first uses qualitative studies of five organizations to develop hypotheses about four cultural traits and their linkage to effectiveness. The second study then presents a quantitative test of these four hypotheses by comparing CEO perceptions of culture with subjective and objective measures of effectiveness in 764 organizations. Studying Organizational Culture and Effectiveness The topic of culture and effectiveness is of central importance in organizational studies, but progress in the development of theory and research has been slowed by a formidable set of research problems. For example, an integrative theory must encompass a broad range of phenomena extending from core assumptions to visible artifacts, and from social structures to individual meaning. Such a theory must also address culture as a symbolic representation of past attempts at adaptation and survival as well as a set of limiting or enabling conditions for future adaptation. Several attempts at integration have been presented (Allaire and Firsirotu 1984; Ott 1989; Schein 1985, 1990) but there is still limited consensus regarding a general theory of organizational culture, and healthy skepticism about whether culture can ever be "measured" in a way that allows one organization to be compared with another. The concept of effectiveness also presents a challenging set of problems. The multidimensional nature of the concept requires that effectiveness be defined by a complex of stakeholders, who may hold differing, incompatible, and changing criteria (Cameron and Whetten 1983, Lewin and Minton 1986). In recognition of these difficulties, some researchers have even called for a moratorium on empirical research on effectiveness, suggesting that inquiries be limited to single outcome studies (Goodman et al. 1983). Joining the two concepts of culture and effectiveness thus defines a research question which is important, but often problematic. The dearth of empirical research on culture and effectiveness can also be traced to the origins of culture research within organizational studies. The development of the culture perspective and the critique of the positivist approach to social science (Geertz 1973, Pettigrew 1979, Weick 1979, Martin et al. 1983, Frost et al. 1985) are closely linked. Most culture researchers advocate a phenomenological approach, emphasizing the qualitative understanding of meaning and interpretation. Several have argued that culture should not be studied as a "variable" with "outcomes" (Trice and Beyer 1984, Meek 1988, Sackmann 1991, Siehl and Martin 1990), and have thus discouraged the integration of culture research with other constructs of organization theory (including effectiveness) which are primarily discussed in terms of variables, dimensions, causes, or effects. Thus, the literature carries a message about epistemology as well as substance. The culture perspective is also intertwined With the popular literature on organizations that appeared during the 1980s (Ouchi 1981; Deal and Kennedy 1982; Peters and Waterman 1982; Kanter 1983; Kilman et al. 1985; Tichy 1987; Schein 1985, 1990). This literature, while perhaps loosly connected with the epistemological critique of positivism, was directly linked to a far more immediate concern: the rising tide of international competition. In contrast to the minor role that effectiveness has played in the scholarly literature, here the functional linkage between culture and effectiveness was a central issue. Unfortunately, the evidence presented was often no more than selective anecdotes and normative assertions regarding the value of culture. Thus, the popular literature, like the scholarly literature, has contributed little comparative evidence regarding culture and effectiveness. Several authors have attempted to integrate the functionalist and phenomenological perspectives. On a theoretical level, the crux of the issue has been the tension between the functionalist perspective emphasizing the predictable impacts of purposive, intentional forms of social organization, and a phenomenological perspective emphasizing the emergent and epiphenomenal nature of those same organizations. Gidderis (1979) and Riley (1983), for example, have argued that researchers must seek a concurrent understanding of the impact of social structure on individuals as well as the part that individuals play in creating those structures. Each organizational actor must be understood as ORGANIZATION SCIENCE / Vol. 6, No. 2, March-April 1995 205 DANIEL R. DENISON AND ANEIL K. MISHRA Organizational Culture and Effectiveness both a subject and an agent of the system at the same time (Mead 1934). To wit; Structures are both the tnedium and the outcome of interaction. They are the medium, because structures provide the rules and resources individuals must draw upon to interact meaningfully. They are its outcome, because rules and resources exist only through being applied and acknowledged in interaction—they have no reality independent of the social practices they constitute. (Riley 1983, p. 415) On an empirical level, there is also increasing attention to the integration of approaches. Jermier et al. (1991), Hofstede et al. (1990), Siehl and Martin (1988), and Denison (1990) each present empirical research that incorporates qualitative and quantitative data, and acknowledges the importance of both the functionalist and phenomenological perspectives. Other researchers have recently presented empirical culture studies which have relied upon quantitative survey data to characterize and compare organizational cultures. (Rousseau and Cooke 1988, Hofstede et al. 1990, Chatman 1991, O'Reilly et al. 1991, Jermier et al. 1991, Kotter and Heskett 1992). This research has characterized organizational cultures in terms of underlying traits and value dimensions, and has typically acknowledged that culture is being treated as a variable for a specific research purpose. These studies illustrate the range of approaches that have been taken by culture researchers. They also reflect the approach taken in this study; a combination of qualitative and quantitative methods coupled with an attempt to gain the insights of both the contextualized meaning of specific settings and the generality offered by comparison across multiple organizations. Culture and Effectiveness: Empirical Research The empirical literature on organizational culture and effectiveness can be traced back to early studies of culture and adaptation (Weber 1930, Buckley 1967), and to the work of classic organizational theorists such as Likert (1961), Burns and Stalker (1961), or Lawrence and Lorsch (1967). More recently Wilkins and Ouchi (1983) discussed the concept of a "clan" organization and explored the hypothetical conditions under which clans would be a more efficient organizational form. The evidence presented by Peters and Waterman (1982) identified cultural characteristics of successful companies and built a "theory" of excellence that has caused much debate (Carroll 1983, Van de Ven 1983, Aupperle et al. 1986). Kanter (1983), in a study of organizational change, showed how companies with progressive human resource practices outperformed those with less progressive practices. Denison (1984), using survey-based culture measures, showed that perceived involvement and participation on the part of organizational members predicted both current and future financial performance. In addition, Gordon (1985) has shown that high and low performing companies in the banking and utilities industries had different culture profiles. Kravetz (1988) amplified Kanter's earlier findings by showing that management practices fostering participation, autonomy, and creativity were closely correlated with objective indicators of organizational performance. Hansen and Wernerfelt (1989) contrasted the effects of internal organization and market position on performance. Their study showed that internal organizational factors were stronger predictors than market position and that the two predictors were largely unrelated. A French study of managerial values and practices also identified a set of cultural values and practices associated with the growth patterns of five single-business firms (Calori and Sarnin 1991). Finally, Kotter and Heskett (1992) presented an analysis of the relationship between strong cultures, adaptive cultures, and effectiveness. In addition, some theoretical development has also occurred. Barney (1986) and Camerer and Vepsalainen (1988) discussed culture from an economic perspective and defined conditions under which culture might infiuence efficiency or effectiveness. Saffold (1988) has critiqued the literature on cultural strength and normative integration, and urged the development of a more sophisticated theory of culture and performance. Gordon and DiTomaso (1992) provide further empirical support for the impact of cultural strength and value consensus on performance in a recent study of the insurance industry. This collection of empirical and conceptual studies has established a modest precedent for the comparative study of culture and effectiveness. The emerging paradigm generally relies upon the identification of a limited set of underlying values and traits (often identified through inductive analysis), which are then measured through survey responses. The culture measures are compared, in most cases, to measures of business performance, defined in financial terms. While this approach has provided a way to begin to address the underlying research question, it has several limitations. These limitations suggest a general strategy for research on culture and effectiveness that has in206 ORGANIZATION SCIENCE /Vo l . 6, No. 2, March-April 1995 DANIEL R DENISON AND ANEIL K. MISHRA Organizational Culture and Effectiveness Huenced this paper: First, building a more general theory of the cultural traits and values associated with effectiveness; and second, beginning to test the impacts that these traits have on multiple dimensions of effectiveness. Study #1 : Building a Grcanded Theory The first study begins by defining a set of five firms selected to facilitate theory building. Brief case descriptions of the firms are then presented followed by an analysis of the cultural dynamics that appear to be most closely related to effectiveness. The cases were selected based on a prior study by the first author showing a close relationship between the level of involvement and performance (Dension 1984). The focus on this single dimension of culture, however, raised a broader question: What other characteristics of organizational cultures may be related to effectiveness? What are the processes by which these traits are linked to effectiveness? What other aspects of effectiveness may be influenced by cultural traits? To address these questions, the findings of this earlier study were used to select the set of firms shown in Figure 1 for case studies. Neither the survey instrument (Taylor and Bowers 1972) nor the traits operationalized were ideal for culture research. Nonetheless, this data source was attractive because it was one of few databases that offered any possibility of comparing culture and effectiveness. The survey data were collected from 34 organizations at one point in time between 1968 and 1980 and matched with performance data for the five years following the survey date. The index scores for each organization were derived by aggregating individual responses to the organizational level. The measure of performance shown in Figure 1 is return on assets, expressed as the percentile ranking of each firm within its respective industry. The overall correlation between involvement and industry-adjusted performance for the data reported in Figure 1 is 0.42. This scatterplot of involvement and performance was used to define an "interesting" set of cases to study. Three of the cases, falling along the diagonal, appear to confirm the involvement-performance results, pointing to a high involvement-high performance organization (Medtronic), a moderate involvement-moderate performance organization (People Express), and a low involvement-low performance organization (Detroit Edison). The remaining two cases, in contrast, both seem to disconfirm the general finding: Procter & Gamble appears as a high involvement, medium perFlgure 1 Selection of Case Studies