impact of OC on OP.pdf

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The Journal of Institute of Public Enterprise, Vol. 38, No. 1&2© 2015, Institute of Public Enterprise

150

Impact of Organisational Culture onOrganisational Performance

Arunachal Khosla*

This paper analyses the relationship between organisational culture and organizational

performance in the various banks in India. It uses correlation and step-wise regression to

estimate the relationship between organizational culture and financial performance of

banks. The paper studies the impact of various dimensions of organizational culture on the

organizational financial performance of the banks in India. It discusses the role played by

varying dimensions of organizational culture on various performance parameters of banks.

* Dr.Arunachal Khosla, Assistant Professor,University Institute of Applied Management Sciences, Panjab University, Chandigarh.

Keywords : Organisational Culture, Organisational Performance, Net Profitability,Operating Profit.

Introduction

Banks are not merely moneylenders butalso influential advisers and efficientassociates. They collaborate with indus-trialists in the elaboration and adoption

of programmes of rationalization, which permit the conquest of nationalmarkets and invasion of foreign mar-kets. The whole economic structuremay collapse in the absence of banking services.

The Indian banking system in the recentyears has undergone a major phase of

metamorphosis. There has been a para-digm shift in the concept, percept andoutlook. As a result, the banking sectorhas become more complex and sophisti-cated. In the process of adjusting them-selves to the new era of deregulation,market economy and functional auto-nomy, banks became more professional,


as they were forced to work in an envi-ronment of stiff competition. Banksfind themselves in a market where thebuyer (customer) has more optionsthan ever before and the seller (bank)

has, therefore, been compelled to con-stantly review his package of productsand services to suit the ever-escalating expectations of customers.

Strengthening financial systems hasbeen one of the central issues facing emerging markets and developing economies. This is because sound finan-

cial systems serve as an important chan-nel for achieving economic growththrough the mobilization of financialsavings, putting them to productiveuse and transforming various risks


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Impact of Organisational Culture on Organisational Performance

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(Beck, Levin & Loayza 1999; King &Levin, 1993; Rajan & Zingales, 1998;

Demirgüç-Kunt, Asli & Maksimovic,1998; Jayaratne & Strahan, 1996).Many countries adopted a series of financial sector liberalization measuresin the late 1980s and early 1990s thatincluded interest rate liberalization, entry deregulations, reduction of reserverequirements and removal of creditallocation. In many cases, the timing of financial sector liberalization coincided

with that of capital account liberaliza-tion. Domestic banks were given accessto cheap loans from abroad and allo-cated those resources to domestic pro-duction sectors.

Effectiveness, profitability, productivity,efficiency or excellence of organisations

have always been the issues of concernfor economists, organizational theorists,management consultants and research-ers, financial analysts, managementphilosophers and practitioners Theseissues have served as a unifying themefor research on management and onorganizational design. Empirical researchhas, however, not contributed to the

development of a universal theory of organisational effectiveness and mea-sures of effectiveness in the past haveoften been based on a set of subjectivemeasures (Lewin & Minton, 1986).

Organisational culture is the key toorganisational excellence and the func-tion of leadership is the creation and

management of culture (Schein 1992).‘In general, we find that outstandingly

successful organisations usually havestrong and unique cultures. Unsuccess-ful organisations have weak indifferentsub-cultures or old sub-cultures thatbecome sclerosed and can actually pre-vent the organisation’s adaptation tochanged circumstances’ (Hofstede1980, p. 394). Graves’ (1986, pp. 142-143) research findings further supportthis statement which showed a unani-mous agreement by all the chief execu-tives interviewed to the fact that : it isessential, for business success, that theculture should be strong – that people

within the organisation should recogniseand if possible, adopt the values andattitudes espoused by the leader and the

senior managers (or the key influen-cing people within the organisation).Researchers have never been able to finda successful organization with weak corporate culture.

Organisational researchers are now understanding the importance of cor-porate culture and further enhancing thecultural life of an organization for imp-

roved performance. ‘One study of a groupof high-performance companies inNorth America indicated that paying attention to organisational culture is animportant ingredient in organisationalsuccess’ (Frost et al 1985, p. 16). Look-ing at the ‘soft’ side of an organisation,researchers claim that ‘organisational


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culture might be very appropriate as a vehicle for exploring and understand-

ing life at work, and for making it morehumane, more meaningful (Frost et al1985, p. 21). Graves (1986) also stressedthe importance of corporate culture andthe need for research strategies andmethods that investigate the variouselements, processes and aspects of orga-nisation culture. He stated that cultureis ‘the one thing that distinguishes onefirm from another, gives it coherenceand self-confidence and rationalises thelives of those who work for it. Culturesatisfies the basic needs for affiliationand security in attempting to describeas a unified grouping that may seem tobe random. It is life-enhancing to bedifferent, and safe to be similar, and

culture is the concept that provides themeans of accomplishing this compro-mise’ (p. 157).

The importance of understanding organisational culture for managers andconsultants can be established from thefact that it has a major impact on theoverall productivity of the organizationas well as its strategic development.

Cultural assumptions can both enableand constrain what organisations areable to do. Culture of an organizationevolves and grows up over a span of time based on set values, beliefs andartifacts. The culture thus formed may enhance or interfere with theorganisation’s effectiveness.

‘A consistent message coming frommany people writing about organisa-

tional culture is that mangers need tobe aware of their group’s or organisa-tion’s culture because it will make a difference. Culture has become animportant element in the managerialequation. As applied to organisations,it extends rationality into interpersonaldomains. The rational manager needsto take culture into account’ (Smircich

1985, pp. 58-59).

Review of Related Literature

Organisational Culture

Over the last four decades many authorsand researchers have worked on theconcept of organizational culture result-ing in varied definitions and approaches.

According to Robbins (1993), the con-cept of culture is a fairly recent phe-nomenon which has only been used inthe last couple of decades. Researchersand authors have used a variety of terms,methods and approaches to describethe components and characteristics of organizational culture. Some of the termsthat these researchers have used quite

frequently are organisational culture’scomponents, elements, dimensions,levels and variables. Although it is saidthat each firm has its own culture interms of scope and content, someresearchers have divided organizationalculture into various types (Kono, 1990;Rue & Holland, 1986; Silvester &

Anderson, 1999). This typology of


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organisational culture assists in under-standing the ideological conflicts that

arise within firms and the deep-seatedbeliefs that exist about the way in which

work should be done.

Keesing (1974) described the adapta-tionist and the ideationalist schools of cultural anthropology that have strongly influenced current concepts of culture.They provide a starting point for creating

a typology to sort through the variousconceptions of organizational culture.The adaptationist concept of culture isbased on directly observable aspectsabout the members of a community,including socially transmitted patternsof speech, behavior, and uses of tangible(material) items such as tools. It is basedon behavioural patterns that help com-

munities relate to the environment. Onthe other hand, the ideationalist con-cept of culture is based on aspects thatare shared in the community members’minds, including their common beliefs,values, knowledge, meanings, and ideas.

The different concepts of culture heldby the ideationalists and the adapta-tionists – by those who focus onbehaviors and things, and those whoare more concerned with shared ideasand meanings - explain why debatesarise about whether organizational cul-ture consists of such things as artifacts,behavioral norms, patterns of behavior,and language, or of shared assumptions,beliefs, understandings, and values.

Edgar H. Schein refined the distinctionbetween the adaptationist and idea-

tional views of culture by conceptua-lizing three levels of organizationalculture : (Schein, 1981, 1984, 1985).

• Level l-artifacts.

• Level 2-values and beliefs.

• Level 3-basic underlying assump-tions.

Graves (1986) referred to a study whilereviewing different approaches andperspectives on organisational culture,

which argued that organisational cul-ture consists of five variables :

1. Communication e.g. how receptiveare others about you and your ideasand suggestions?

2. Motivation e.g. How much do youlook forward to coming to work each day?

3. Decision-making e.g. to what extentare the persons who make decisionsaware of problems at lower levels inthe company?

4. Control e.g. how much say or influ-ence do the various levels of thehierarchy have on what goes on inyour department?

5. Co-ordination e.g. to what extentdo persons in different departmentsplan together and co-ordinate theirefforts?


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Organisational Performance

People are obsessed with measuring performance in every field of human

endeavour (Lothian, 1987). Keeping a

large organisation vital and responsive

is becoming increasingly difficult as

competition and globalisation become

the order of the day (Peters & Waterman,

1982). Many organisations try to res-

pond by implementing new strategies

and plans, restructuring and changing their budgets accordingly. Ultimately,

if the organisation is to survive in the

long run, sound financial management

is required in order to keep the organi-

sation running. If the organisation can-

not sustain itself financially, its losses

will eventually lead to its demise.

According to Gitman (1991), financecan be defined as the art and science of

managing money. Virtually all indivi-

duals and organisations earn or raise

money, and spend or invest money.

Finance is concerned with the process,

institutions, markets and instruments

involved in the transfer of money among

and between individuals, businesses andgovernments.

According to Haller (1985), financial

information focuses on the measure-

ment of economic transactions. In any

economy, irrespective of whether it is a

free market, state controlled or mixed

economy, economic activity is con-

stantly measured and the information

is used to encourage changes in the flow

of resources. In the micro-economic

setting of a business enterprise, owners

and managers maintain the financial

records. These records measure the

monetary value of resources involved

in the various transactions resulting

from their decision to use resources for

their particular products and services. As organizations implement their busi-

ness objectives, they channel resources,

skills, materials and equipment to their

activities and convert them into new

goods and services that are of value to

others. Any given activity involving

purchases and sales can be accounted for.

The accounting books of an organi-

sation are used to record and segregate

transactions, and are presented in the

universal language of accounting termi-

nology. Financial measurements of the

effects of past decisions are reflected and

future investment decisions are highly

influenced by these statements.

According to Haller (1985), lenders

and owners are the sources of business

financing. Owners may place their funds

directly into an enterprise in the form

of shareholder capital, in a corporate

form or as partners in a partnership rela-

tionship. Marx, De Swart and Nortjé

(1999) emphasise that the medium to


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long-term financial goals of both the

owners and management of an orga-

nisation should be to increase the value

of the firm, thereby increasing the

wealth of the owners. This can be

accomplished either by investing in

assets that will add value to the firm or

by keeping the firm’s cost of capital as

low as possible. The short-term finan-

cial goal, however, should be to ensure

the profitability, liquidity and solvency of the firm.

The objective of the owners of an

organisation is to generate profit and

to maximise the shareholders’ wealth.

Profitability can be defined as the ability

of the organisation to generate revenues

that will exceed total costs by using the

firm’s assets for productive purposes(Marx et al, 1999). In order to achieve

profit maximisation, the organisation

should only take those actions that are

expected to make a major contribution

to the overall profits. Thus, for each

alternative being considered, the one

expected to result in the highest mone-

tary return should be selected. Lumby (1984) states that profit is an accoun-

ting concept and, in very general terms,

represents the increased wealth of a

company that has been achieved by

management within the confines of the

accounting year. Profit is rough app-

roximation of increased wealth.

The goal of the financial manager is alsoto maximize the wealth of the owners

for whom the firm is being managed.The wealth of corporate owners is mea-sured by the share price of the stock,

which in turn is based on the timing of returns, their magnitude and their risk.

When considering alternative decisionsor actions, the one that will be expectedto increase share price by the greatestpercentage should be selected if the aimis to maximize shareholder wealth(Gitman, 1991). Many corporate strate-gies have a negative impact on short-term earnings and short-term cash flow,but offer significant potential for long-term gains. Research and development,

joint ventures and large capital expen-ditures are examples of these projects.

Despite the negative effects of suchinvestments on short-term earnings, ithas been found that the stock marketreacts favourably to announcementsthat companies are undertaking thesetypes of projects. This indicates thatshareholders recognise and value futurecash flows and not just short-term earn-ings (Ehrhardt, 1994).

Organisational Culture and

Financial Performance

Studies relating organisational cultureto performance tend to differ in termsof the performance measures that areused across the types of organizationsthat are studied. This is not unexpected,


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as the performance measures generally relate to the extent to which goals rele-

vant to the specific organisation areattained (Lim, 1995).

Peters and Waterman (1982) identified36 American companies which had dis-played excellent performance between1961 and 1980. Six performance mea-sures were used, namely compoundedasset growth, average turnover growth,

average ratio of market to book value,average return on total capital, averagereturn on equity and average return onsales. Among the eight lessons drawnfrom this empirical study, at least fivehave a direct link with corporate cul-ture or the way people work in thecompany. The cement of those excel-lent organisations was a bias for action,

closeness to the customer, autonomy and entrepreneurship, productivity through people’s motivation and, finally,a strong corporate culture. Much of theliterature on organisational culture andperformance can be interpreted as sug-gesting that culture can have a signifi-cant positive economic value for a firm(Barney, 1986). Certain cultures appa-

rently enable firms to do and be thingsfor employees, customers, suppliers andothers that could not be done, or couldnot be done as well, by firms withoutthose cultures (Deal & Kennedy, 1982;Ouchi, 1981). Many of those activi-ties have shown a positive economicimpact on organisations.

Objectives

The objectives of the present study are :To study the effect of organizationalculture on :-

1. Net profitability

2. Operating profit

Based on the objectives, the following hypotheses have been framed.

Hypothesis

H1 : All the eight organisational cul-ture related dimensions have sig-nificant influence on net profita-bility of the bank.

H1a : Planning orientation has a sig-nificant influence on net profi-

tability.H1b : Innovation has a significant

influence on net profitability.

H1c : Aggressiveness/action orienta-tion has a significant influenceon net profitability.

H1d : People orientation has a signifi-

cant influence on net profitability.H1e : Team orientation has a significant

influence on net profitability.

H1f : Communication has a signifi-cant influence on net profitability.

H1g : Results orientation has a signifi-cant influence on net profitability.


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H1h : Confrontation has a significantinfluence on net profitability.

H2 : All the eight organisational cul-ture related dimensions have sig-nificant influence on the opera-ting profit of the bank.

H2a : Planning orientation has a sig-nificant influence on operating profit.

H2b : Innovation has a significantinfluence on operating profit.

H2c : Aggressiveness/action orienta-tion has a significant influenceon operating profit.

H2d : People orientation has a signifi-cant influence on operating profit

H2e : Team orientation has a signifi-cant influence on operating profit.

H2f : Communication has a signifi-cant influence on operating profit.

H2g : Results orientation has a signifi-cant influence on operating profit.

H2h : Confrontation has a significantinfluence on operating profit.

Research Methodology

Primary data for the research was collec-ted with the help of the self-adminis-tered questionnaire that was especially designed to achieve the study goals as

outlined. A survey was conducted aftera pilot study had identified and refined

items used in this study. The data hasbeen collected from employees of different banks in the Tricity of Chandigarh, Panchkula and Mohali.Simple random sampling was used toselect approximately equal number of customers from each type of bank. A total of 350 employees from 8 banks

were approached, from whom 251 cor-rectly completed questionnaires havebeen obtained, thus yielding rate of about 71.8 per cent.

Organisational culture was measured asa result of cumulative experience of theemployee, using thirty-two questionitems adapted to the banking industry.In doing so, the research :

• Included items that represent theeight dimensions of corporate cul-ture described by using the survey of management climate (Gordon &Cummins, 1979).

• Few added items that sought to cap-ture extra dimensions of organiza-tional culture.

In order to derive additional items, a review of the relevant literature wasdone. This allowed developing a preli-minary concept of organizational culture.

The eight dimensions that used toconceptualise organizational culture are :


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1. Planning Orientation : This ele-ment emphasizes managing in a

planful manner and avoiding sur-prises.

2. Innovation : It is defined as theextent to which individual mana-gers are encouraged to take risks andinnovate.

3. Aggressiveness/Action Orienta-

tion : It emphasizes on getting thingsdone, being a pace setter rather a follower.

4. People Orientation : It places a strong emphasis on concern for cur-rent employees and their growth.

5. Team Orientation : This dimen-sion refers to the extent to which

people are encouraged to cooperateand coordinate across units.

6. Communication : This dimensioninvolves an openness to communi-cate and allowing others to beknowledgeable and thus enhancing the possibility of participation.

7. Results Orientation : This dimen-sion emphasizes on holding peopleaccountable for clear and deman-ding end results.

8. Confrontation : This involves add-ressing issues openly instead of burying them.

Five-Point Scale : In total, thirty-twoitems were selected to measure organi-

zational culture. Respondents wereasked to evaluate their bank on thesethirty-two items. All items were mea-sured on the five–point Likert scalefrom 1 (strongly disagree) to 5 (strongly agree).

Performance Parameters : The infor-mation on the performance of each of

the banks was collected on the follow-ing items :

1. Net profitability

2. Operating profit

The performance of the banks underthis study was measured and the results

were taken from the annual reports of

the banks.

Results and Discussion

Investigating the Relationship bet-

ween Organisational Culture and

Net Profitability

The relationship between various dimen-sions of organisational culture and net

profitability was first investigated using Pearson correlation. Preliminary analysisrevealed that there were no violation of the assumptions of linearity and homosce-dasticity, and all associations were foundto be significant at 95 per cent level,

with the strongest positive associationbeing between net profitability and the


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dimension of communication (r=0.971,p


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cut-off value of 10. In addition, it couldbe seen that the tolerance value for eachindependent variable is closer to onethat indicates there is no evidence of multicollinearity. In other words, thereis no significant evidence of multi-collinearity problem in the regressionmodel as presented.

Hypothesis Testing

Hence from the above results, it can beconcluded that hypothesis H1 is par-tially accepted and partially rejected.Hypotheses H1f and H1h were sup-ported and hypotheses H1a, H1b,H1c, H1d, H1e, and H1g were rejec-ted. It was revealed that the dimensionof communication had a significant

positive influence on net profitability

in banks and the dimension of confron-tation had a significant negative influence

on net profitability in banks.

Investigating the Relationship bet-

ween Organisational Culture and

Operating Profit

The relationship between various dimen-

sions of organisational culture and ope-

rating profit was first investigated using

Pearson correlation. Preliminary analysis

revealed that there were no violation

of the assumptions of linearity and

homoscedasticity, and all associations

were found to be significant at 95 per

cent level, with the strongest associa-

tion being operating profit and com-

munication (r=0.968, p


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To examine the fit of the regressionmodel and to discover the best predic-

tors of operating profit, step-wise regres-sion was used with the dimensions of organisational culture as the predictors.Preliminary analysis revealed no viola-tion of the assumption regarding samplesize, multicollinearity and outliers. Interms of the relationship between theeight organisational culture dimension

and operating profit, the adjustedR 2 = 0.418 was found to be statisti-

cally significant. As shown in Table-7,one out of the eight dimensions of organisational culture namely commu-nication, was statistically signifi-cant (p


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The values of the Variance Inflation

Factor (VIF) and Tolerance Value (TV)

for the linear step-wise regression model

is presented in Table-8. As indicated in

Table-8, the values of VIF which served

as an indicator of multicollinearity was

1.000. These values were far below the

cut-off value of 10. In addition, it could

be seen that the tolerance value for the

independent variable is one that indi-

cates there is no evidence of multi-collinearity. In other-words, there is no

evidence of multicollinearity problem

in the regression model as presented.

Hypothesis Testing

Hence from the above results, it can beconcluded that hypothesis H2 is par-tially accepted and partially rejected.

Only hypothesis H2f was supportedand hypotheses H2a, H2b, H2c, H2d,H2e, H2g and H2h were rejected. It

was revealed that the dimension of communication had a significant posi-tive influence on operating profit inbanks.

Findings

• With a view to studying the relation-ship between organizational culture

and net profitability and to ascertain

which aspects of organizational cul-

ture have significant impact on net

profitability, a step-wise multiple regres-

sion analysis was run. The aim was to

determine eight dimensions of organi-

zational culture and their relative contri-

bution in influencing net profitability.

The overall model was found to be

highly significant (R 2=80.5 %), with

two dimensions making statistically

significant (p


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As far as the confrontation dimension

is concerned, it has a negative effect

on net profitability. No problem of

multi-collinearity was detected.

• To study the relationship betweenorganizational culture and operating profit and to ascertain which aspectsof organizational culture have signi-ficant impact on operating profit, a step-wise multiple regression analysis

was run. The aim was to determineeight dimensions of organizationalculture and their relative contributionin influencing operating profit. Theoverall model was found to behighly significant (R 2=50.1 %.),

with one dimension making statis-tically significant (p


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C o p y r i g h t o f J o u r n a l o f I n s t i t u t e o f P u b l i c E n t e r p r i s e i s t h e p r o p e r t y o f I n s t i t u t e o f P u b l i c

E n t e r p r i s e a n d i t s c o n t e n t m a y n o t b e c o p i e d o r e m a i l e d t o m u l t i p l e s i t e s o r p o s t e d t o a l i s t s e r v

w i t h o u t t h e c o p y r i g h t h o l d e r ' s e x p r e s s w r i t t e n p e r m i s s i o n . H o w e v e r , u s e r s m a y p r i n t ,

d o w n l o a d , o r e m a i l a r t i c l e s f o r i n d i v i d u a l u s e .

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