Organizational Culture, Adaptation and Performance

Abstract

Despite the agreement that culture affects organizational performance, we don’t understand fully the mechanisms driving this relationship. Drawing from cultural evolution theory, we use a formal model to study a relatively understudied mechanism, namely, how organizational culture affects adaptation to a changing environment. Following prior literature, organizational culture is differentiated into two dimensions, namely the “beliefs” about the organization’s function in the environment (i.e., “what problems we solve and how we solve them”) and the “prosocial norms” about internal integration (i.e., “how do we come together as a unit”). Our main findings are: i) when beliefs are a more accurate representation of the organization’s true function, the timing of innovation improves (i.e., innovation focusses on periods of environmental change) leading to better adaptation to changes; concurrently, the use of tradition increases, as well as the effort in diffusing it; these two effects entail a reduction in the tradition-innovation trade-off; ii) more intense prosocial norms improve performance via increased effort in diffusing tradition (creating a “cushion” to absorb environmental shocks), but if intensity is sufficiently high, tradition’s crowding out of innovation and adaptation becomes too large, reducing performance—and thus, prosocial norms display an inverted-U relationship with performance; and iii) beliefs and prosocial norms are complements: knowing better when to innovate is more beneficial if the organization is better at sharing the innovations (and vice versa). In sum, culture can favor adaptation by improving the timing of innovation, reducing the tradition vs. innovation trade-off and serving as a buffer to shocks.