The Vol.

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

Impact of Organisational Culture on

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

Introduction
Banks are not merely moneylenders but
also influential advisers and efficient
associates. They collaborate with industrialists in the elaboration and adoption
of programmes of rationalization,
which permit the conquest of national
markets and invasion of foreign markets. The whole economic structure
may collapse in the absence of banking
services.
The Indian banking system in the recent
years has undergone a major phase of
metamorphosis. There has been a paradigm shift in the concept, percept and
outlook. As a result, the banking sector
has become more complex and sophisticated. In the process of adjusting themselves to the new era of deregulation,
market economy and functional autonomy, banks became more professional,
150

as they were forced to work in an environment of stiff competition. Banks

find themselves in a market where the
buyer (customer) has more options
than ever before and the seller (bank)
has, therefore, been compelled to constantly review his package of products
and services to suit the ever-escalating
expectations of customers.
Strengthening financial systems has
been one of the central issues facing
emerging markets and developing
economies. This is because sound financial systems serve as an important channel for achieving economic growth
through the mobilization of financial
savings, putting them to productive
use and transforming various risks
* Dr.Arunachal Khosla, Assistant Professor,
University Institute of Applied Management
Sciences, Panjab University, Chandigarh.

Impact of Organisational Culture on Organisational Performance

(Beck, Levin & Loayza 1999; King &

Levin, 1993; Rajan & Zingales, 1998;
Demirg-Kunt, Asli & Maksimovic,
1998; Jayaratne & Strahan, 1996).
Many countries adopted a series of
financial sector liberalization measures
in the late 1980s and early 1990s that
included interest rate liberalization, entry
deregulations, reduction of reserve
requirements and removal of credit
allocation. In many cases, the timing of
financial sector liberalization coincided
with that of capital account liberalization. Domestic banks were given access
to cheap loans from abroad and allocated those resources to domestic production sectors.
Effectiveness, profitability, productivity,
efficiency or excellence of organisations
have always been the issues of concern
for economists, organizational theorists,
management consultants and researchers, financial analysts, management
philosophers and practitioners These
issues have served as a unifying theme
for research on management and on
organizational design. Empirical research
has, however, not contributed to the
development of a universal theory of
organisational effectiveness and measures of effectiveness in the past have
often been based on a set of subjective
measures (Lewin & Minton, 1986).
Organisational culture is the key to
organisational excellence and the function of leadership is the creation and

management of culture (Schein 1992).

In general, we find that outstandingly
successful organisations usually have
strong and unique cultures. Unsuccessful organisations have weak indifferent
sub-cultures or old sub-cultures that
become sclerosed and can actually prevent the organisations adaptation to
changed circumstances (Hofstede
1980, p. 394). Graves (1986, pp. 142143) research findings further support
this statement which showed a unanimous agreement by all the chief executives interviewed to the fact that : it is
essential, for business success, that the
culture should be strong that people
within the organisation should recognise
and if possible, adopt the values and
attitudes espoused by the leader and the
senior managers (or the key influencing people within the organisation).
Researchers have never been able to find
a successful organization with weak
corporate culture.
Organisational researchers are now
understanding the importance of corporate culture and further enhancing the
cultural life of an organization for improved performance. One study of a group
of high-performance companies in
North America indicated that paying
attention to organisational culture is an
important ingredient in organisational
success (Frost et al 1985, p. 16). Looking at the soft side of an organisation,
researchers claim that organisational
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2015, Institute of Public Enterprise

culture might be very appropriate as a

vehicle for exploring and understanding life at work, and for making it more
humane, more meaningful (Frost et al
1985, p. 21). Graves (1986) also stressed
the importance of corporate culture and
the need for research strategies and
methods that investigate the various
elements, processes and aspects of organisation culture. He stated that culture
is the one thing that distinguishes one
firm from another, gives it coherence
and self-confidence and rationalises the
lives of those who work for it. Culture
satisfies the basic needs for affiliation
and security in attempting to describe
as a unified grouping that may seem to
be random. It is life-enhancing to be
different, and safe to be similar, and
culture is the concept that provides the
means of accomplishing this compromise (p. 157).
The importance of understanding
organisational culture for managers and
consultants can be established from the
fact that it has a major impact on the
overall productivity of the organization
as well as its strategic development.
Cultural assumptions can both enable
and constrain what organisations are
able to do. Culture of an organization
evolves and grows up over a span of
time based on set values, beliefs and
artifacts. The culture thus formed may
enhance or interfere with the
organisations effectiveness.
152

A consistent message coming from

many people writing about organisational culture is that mangers need to
be aware of their groups or organisations culture because it will make a
difference. Culture has become an
important element in the managerial
equation. As applied to organisations,
it extends rationality into interpersonal
domains. The rational manager needs
to take culture into account (Smircich
1985, pp. 58-59).

Review of Related Literature

Organisational Culture
Over the last four decades many authors
and researchers have worked on the
concept of organizational culture resulting in varied definitions and approaches.
According to Robbins (1993), the concept of culture is a fairly recent phenomenon which has only been used in
the last couple of decades. Researchers
and authors have used a variety of terms,
methods and approaches to describe
the components and characteristics of
organizational culture. Some of the terms
that these researchers have used quite
frequently are organisational cultures
components, elements, dimensions,
levels and variables. Although it is said
that each firm has its own culture in
terms of scope and content, some
researchers have divided organizational
culture into various types (Kono, 1990;
Rue & Holland, 1986; Silvester &
Anderson, 1999). This typology of

Impact of Organisational Culture on Organisational Performance

organisational culture assists in understanding the ideological conflicts that

arise within firms and the deep-seated
beliefs that exist about the way in which
work should be done.

Edgar H. Schein refined the distinction

between the adaptationist and ideational views of culture by conceptualizing three levels of organizational
culture : (Schein, 1981, 1984, 1985).

Keesing (1974) described the adaptationist 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 various
conceptions of organizational culture.
The adaptationist concept of culture is
based on directly observable aspects
about the members of a community,
including socially transmitted patterns
of speech, behavior, and uses of tangible
(material) items such as tools. It is based
on behavioural patterns that help communities relate to the environment. On
the other hand, the ideationalist concept of culture is based on aspects that
are shared in the community members
minds, including their common beliefs,
values, knowledge, meanings, and ideas.

The different concepts of culture held

by the ideationalists and the adaptationists by those who focus on
behaviors and things, and those who
are more concerned with shared ideas
and meanings - explain why debates
arise about whether organizational culture consists of such things as artifacts,
behavioral norms, patterns of behavior,
and language, or of shared assumptions,
beliefs, understandings, and values.

Level l-artifacts.
Level 2-values and beliefs.
Level 3-basic underlying assumptions.

Graves (1986) referred to a study while

reviewing different approaches and
perspectives on organisational culture,
which argued that organisational culture consists of five variables :
1. Communication e.g. how receptive
are others about you and your ideas
and suggestions?
2. Motivation e.g. How much do you
look forward to coming to work
each day?
3. Decision-making e.g. to what extent
are the persons who make decisions
aware of problems at lower levels in
the company?
4. Control e.g. how much say or influence do the various levels of the
hierarchy have on what goes on in
your department?
5. Co-ordination e.g. to what extent
do persons in different departments
plan together and co-ordinate their
efforts?
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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 respond 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 organisation running. If the organisation cannot sustain itself financially, its losses
will eventually lead to its demise.
According to Gitman (1991), finance
can be defined as the art and science of
managing money. Virtually all individuals 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 and
governments.
According to Haller (1985), financial
information focuses on the measurement of economic transactions. In any
economy, irrespective of whether it is a
free market, state controlled or mixed
154

economy, economic activity is constantly 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 business 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 organisation are used to record and segregate
transactions, and are presented in the
universal language of accounting terminology. 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 relationship. Marx, De Swart and Nortj
(1999) emphasise that the medium to

Impact of Organisational Culture on Organisational Performance

long-term financial goals of both the

owners and management of an organisation 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 firms cost of capital as
low as possible. The short-term financial 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
firms 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 monetary return should be selected. Lumby
(1984) states that profit is an accounting 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 approximation of increased wealth.

The goal of the financial manager is also

to maximize the wealth of the owners
for whom the firm is being managed.
The wealth of corporate owners is measured 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 decisions
or actions, the one that will be expected
to increase share price by the greatest
percentage should be selected if the aim
is to maximize shareholder wealth
(Gitman, 1991). Many corporate strategies have a negative impact on shortterm earnings and short-term cash flow,
but offer significant potential for longterm gains. Research and development,
joint ventures and large capital expenditures are examples of these projects.
Despite the negative effects of such
investments on short-term earnings, it
has been found that the stock market
reacts favourably to announcements
that companies are undertaking these
types of projects. This indicates that
shareholders recognise and value future
cash flows and not just short-term earnings (Ehrhardt, 1994).

Organisational Culture and

Financial Performance
Studies relating organisational culture
to performance tend to differ in terms
of the performance measures that are
used across the types of organizations
that are studied. This is not unexpected,
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2015, Institute of Public Enterprise

as the performance measures generally

relate to the extent to which goals relevant to the specific organisation are
attained (Lim, 1995).
Peters and Waterman (1982) identified
36 American companies which had displayed excellent performance between
1961 and 1980. Six performance measures were used, namely compounded
asset growth, average turnover growth,
average ratio of market to book value,
average return on total capital, average
return on equity and average return on
sales. Among the eight lessons drawn
from this empirical study, at least five
have a direct link with corporate culture or the way people work in the
company. The cement of those excellent organisations was a bias for action,
closeness to the customer, autonomy
and entrepreneurship, productivity
through peoples motivation and, finally,
a strong corporate culture. Much of the
literature on organisational culture and
performance can be interpreted as suggesting that culture can have a significant positive economic value for a firm
(Barney, 1986). Certain cultures apparently enable firms to do and be things
for employees, customers, suppliers and
others that could not be done, or could
not be done as well, by firms without
those cultures (Deal & Kennedy, 1982;
Ouchi, 1981). Many of those activities have shown a positive economic
impact on organisations.
156

Objectives
The objectives of the present study are :
To study the effect of organizational
culture on :1. Net profitability
2. Operating profit
Based on the objectives, the following
hypotheses have been framed.

Hypothesis
H1 : All the eight organisational culture related dimensions have significant influence on net profitability of the bank.
H1a : Planning orientation has a significant influence on net profitability.
H1b : Innovation has a significant
influence on net profitability.
H1c : Aggressiveness/action orientation has a significant influence
on net profitability.
H1d : People orientation has a significant influence on net profitability.
H1e : Team orientation has a significant
influence on net profitability.
H1f : Communication has a significant influence on net profitability.
H1g : Results orientation has a significant influence on net profitability.

Impact of Organisational Culture on Organisational Performance

H1h : Confrontation has a significant

influence on net profitability.
H2 : All the eight organisational culture related dimensions have significant influence on the operating profit of the bank.
H2a : Planning orientation has a significant influence on operating
profit.
H2b : Innovation has a significant
influence on operating profit.
H2c : Aggressiveness/action orientation has a significant influence
on operating profit.
H2d : People orientation has a significant influence on operating profit
H2e : Team orientation has a significant influence on operating profit.

outlined. A survey was conducted after

a pilot study had identified and refined
items used in this study. The data has
been collected from employees of
different banks in the Tricity of
Chandigarh, Panchkula and Mohali.
Simple random sampling was used to
select approximately equal number of
customers from each type of bank. A
total of 350 employees from 8 banks
were approached, from whom 251 correctly completed questionnaires have
been obtained, thus yielding rate of
about 71.8 per cent.
Organisational culture was measured as
a result of cumulative experience of the
employee, using thirty-two question
items adapted to the banking industry.
In doing so, the research :

Included items that represent the

eight dimensions of corporate culture described by using the survey
of management climate (Gordon &
Cummins, 1979).

Few added items that sought to capture extra dimensions of organizational culture.

H2f : Communication has a significant influence on operating profit.

H2g : Results orientation has a significant influence on operating profit.
H2h : Confrontation has a significant
influence on operating profit.

Research Methodology
Primary data for the research was collected with the help of the self-administered questionnaire that was especially
designed to achieve the study goals as

In order to derive additional items, a

review of the relevant literature was
done. This allowed developing a preliminary concept of organizational culture.
The eight dimensions that used to
conceptualise organizational culture are :
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2015, Institute of Public Enterprise

1. Planning Orientation : This element emphasizes managing in a

planful manner and avoiding surprises.
2. Innovation : It is defined as the
extent to which individual managers are encouraged to take risks and
innovate.
3. Aggressiveness/Action Orientation : It emphasizes on getting things
done, being a pace setter rather a
follower.
4. People Orientation : It places a
strong emphasis on concern for current employees and their growth.
5. Team Orientation : This dimension refers to the extent to which
people are encouraged to cooperate
and coordinate across units.
6. Communication : This dimension
involves an openness to communicate and allowing others to be
knowledgeable and thus enhancing
the possibility of participation.
7. Results Orientation : This dimension emphasizes on holding people
accountable for clear and demanding end results.
8. Confrontation : This involves addressing issues openly instead of
burying them.
158

Five-Point Scale : In total, thirty-two

items were selected to measure organizational culture. Respondents were
asked to evaluate their bank on these
thirty-two items. All items were measured on the fivepoint Likert scale
from 1 (strongly disagree) to 5 (strongly
agree).
Performance Parameters : The information on the performance of each of
the banks was collected on the following items :
1. Net profitability
2. Operating profit
The performance of the banks under
this study was measured and the results
were taken from the annual reports of
the banks.

Results and Discussion

Investigating the Relationship between Organisational Culture and
Net Profitability
The relationship between various dimensions of organisational culture and net
profitability 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 positive association
being between net profitability and the

Impact of Organisational Culture on Organisational Performance

two out of the eight dimensions of organisational culture namely communication and confrontation were found
to be statistically significant (p<0.005).
In addition, communication had the
greatest positive effect (b=0.807,
p=6.035) on net profitability whereas
confrontation has a negative relationship (b= -1.233, p= -5.192) with net
profitability in banks.

dimension of communication (r=0.971,

p<0.05). Negative correlation existed
between net profitability and confrontation (r=-0.967, p<0.05).
In order to examine the fit of the regression model and to discover the best predictors of net profitability, step-wise regression was used with the dimensions of
organisational culture as the predictors.
Preliminary analysis revealed no violation of the assumption regarding sample
size, multicollinearity and outliers. In
terms of the relationship between the
eight organisational culture dimension
and net profitability, the adjusted
R2 = 0.727 was found to be statistically significant. As shown in Table-3,

The values of the Variance Inflation

Factor (VIF) and Tolerance Value (TV)
for the linear step-wise regression model
is presented in Table-4. As indicated in
Table-4, the values of VIF, which served
as an indicator of multicollinearity, is
1.202. These values were far below the

Table-1 : CorrelationOrganisational Culture and Net Profitability

Planning

Inno-

Orientation vation

Net Profitability

.667

.673

1)

Pearson Correlation

2)

Correlation significant at .05 level

People

Team

ness/Action Orien-

Aggressive-

Orien-

orientation

tation

tation

.506

.675

.559

Communication

.971

Results
Orientation

.629

Confrontation

-0.967

Table-2 : Regression Model Summary : Net Profitability

Model

R2

Adjusted R2

Std. Error of the

estimate

0.897

0.805

0.727

913.09712

1) Independent variable : dimensions of organisational culture.

2) Dependent variable : net profitability.
3) R2 refers to the coefficient of determination that measures the proportion of the variance in the
dependent variable that explained by the independent variables.

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Table-3 : Step-wise Regression Analysis : Net Profitability

Variable

Beta

Constant

t-value

Significance Level

-5.102

0.007

Communication

0.807

6.035

0.004

Confrontation

-1.233

-5.192

0.007

1) Beta co-efficient is the standardised regression co-efficient which allows comparison of the relatives
on the dependent variable of each independent variable.
2) t-statistics help to determine the relative importance of each variable in the model.

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

be seen that the tolerance value for each
independent variable is closer to one
that indicates there is no evidence of
multicollinearity. In other words, there
is no significant evidence of multicollinearity problem in the regression
model as presented.

Hypothesis Testing
Hence from the above results, it can be
concluded that hypothesis H1 is partially accepted and partially rejected.
Hypotheses H1f and H1h were supported and hypotheses H1a, H1b,
H1c, H1d, H1e, and H1g were rejected. It was revealed that the dimension
of communication had a significant
positive influence on net profitability

in banks and the dimension of confrontation had a significant negative influence

on net profitability in banks.
Investigating the Relationship between Organisational Culture and
Operating Profit
The relationship between various dimensions of organisational culture and operating 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 association being operating profit and communication (r=0.968, p<0.05).

Table-4 : Multicollinearity Statistics : Net Profitability

Variables

Tolerance Value (TV)

Variance Inflation Factor (VIF)

Communication

0.832

1.202

Confrontation

0.832

1.202

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Impact of Organisational Culture on Organisational Performance

Table-5 : CorrelationOrganisational Culture and Operating Profit

Planning

Inno-

Orientation vation

Operating Profit

.518

.574

1)

Pearson Correlation

2)

Correlation significant at .05 level

People

Team Commu-

Results

Confron-

ness/Action Orien-

Aggressive-

Orien- nication

Orien-

tation

orientation

tation

tation

tation

.708

.586

.459

To examine the fit of the regression

model and to discover the best predictors of operating profit, step-wise regression was used with the dimensions of
organisational culture as the predictors.
Preliminary analysis revealed no violation of the assumption regarding sample
size, multicollinearity and outliers. In
terms of the relationship between the
eight organisational culture dimension

.968

.629

.500

and operating profit, the adjusted

R2 = 0.418 was found to be statistically significant. As shown in Table-7,
one out of the eight dimensions of
organisational culture namely communication, was statistically significant (p<0.005). Communication had
a significant positive influence
(b=0.708, p=0.049) on operating profit
in banks.

Table-6 : Regression Model Summary : Operating Profit

Model

R2

Adjusted R2

Std. Error of the

estimate

0.708

0.501

0.418

3312.47217

1) Independent variable : dimensions of organisational culture.

2) Dependent variable : operating profit.
3) R2 refers to the coefficient of determination that measures the proportion of the variance in the
dependent variable that explained by the independent variables.

Table-7 : Step-wise Regression Analysis : Operating Profit

Variable

Beta

Constant
Communication

0.708

t-value

Significance Level

-2.256

0.065

2.455

0.049

1) Beta co-efficient is the standardised regression co-efficient which allows comparison of the relatives
on the dependent variable of each independent variable.
2) t-statistics help to determine the relative importance of each variable in the model.

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2015, Institute of Public Enterprise

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 indicates there is no evidence of multicollinearity. 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 be
concluded that hypothesis H2 is partially accepted and partially rejected.
Only hypothesis H2f was supported
and hypotheses H2a, H2b, H2c, H2d,
H2e, H2g and H2h were rejected. It
was revealed that the dimension of
communication had a significant positive influence on operating profit in
banks.

Findings

With a view to studying the relationship between organizational culture

and net profitability and to ascertain

which aspects of organizational culture have significant impact on net

profitability, a step-wise multiple regression analysis was run. The aim was to
determine eight dimensions of organizational culture and their relative contribution in influencing net profitability.
The overall model was found to be
highly significant (R2=80.5 %), with
two dimensions making statistically
significant (p<0.05) contribution to
the model. The study indicated that
communication and confrontation
dimensions did reasonably well in
predicting net profitability. An examination of the beta-coefficient indicated that communication had the
greatest influence on net profitability. The significance of the communication means openness to communicate and allowing others to be
knowledgeable and thus enhancing
the possibility of participation. The
items that comprised the communication dimension concern complete
awareness of events happening in the
other areas of the bank; excellent system of downward communication,
effective lateral communication; and
good systems of communication.

Table-8 : Multicollinearity Statistics : Operating Profit

Variables
Communication
162

Tolerance Value (TV)

Variance Inflation Factor (VIF)

1.000

1.000

Impact of Organisational Culture on Organisational Performance

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 between

organizational culture and operating
profit and to ascertain which aspects
of organizational culture have significant impact on operating profit, a
step-wise multiple regression analysis
was run. The aim was to determine
eight dimensions of organizational
culture and their relative contribution
in influencing operating profit. The
overall model was found to be
highly significant (R2=50.1 %.),
with one dimension making statistically significant (p<0.05) contribution to the model. The study indicated that communication dimension
did reasonably well in predicting
operating profit. The significance of
the communication means openness
to communicate and allowing
others to be knowledgeable and thus
enhancing the possibility of participation. The items that comprised
the communication dimension concern complete awareness of events
happening in other areas of the
bank; excellent system of downward
communication, effective lateral
communication; and good systems
of communication. No problem of
multi-collinearity was detected.

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