Organisational Culture and Its Influence on Innovation and Firm Performance in Nigerian Manufacturing Industry – Literature Review
The purpose of the literature review is to identify innovative culture’s most important characteristics to determine the impact of culture on performance and innovation. Organizations currently operate in an environment of changing customer demands, increased competition, uncertainty, and massive technological changes (Im, Montoya, & Workman, 2012). Given the context, innovation is a vital component for achieving sustainable competitive advantage and attaining organizational success (Naranjo-Valencia et al., 2016). The literature review begins with a discussion of the relationship between innovation and firm performance. It then proceeds to the relationship between organisational culture and innovation. The study uses Competitive Values Framework (CVF) which shows different cultural typologies and how they impact innovation. Finally, the literature review explores the impacts of organisational culture on firm performance.
Innovation and Firm Performance
Various scholars have conceptualized innovation in different ways. The current study will adopt OECD’s definition. The Organisation for Economic Co-operation and Development [OECD] (2005, p. 46) defined innovation “as the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations.” There are four different innovation classes. They include product, process, organisational, and marketing innovations (OECD, 2005). Studies have noted that innovation is an important driver of long-term organisational success (Damanpour and Gopalakrishnan, 2001). Jiménez‐Jimenez et al. (2008) argued that innovation helps organizations survive turbulent operational climates and help companies cope with high speed changes and increased complexity. Innovation assists organisations to respond effectively through improve manufacturing techniques, market opportunity exploitation and faster entry into markets (Jiménez‐Jimenez et al., 2008). Various studies have shown that innovation has a positive impact on organisational performance (De Clercq et al., 2011; Droge et al., 2008). On the other hand, some studies, such as Zhang (2011) have found conflicting evidence. Zhang (2011) found that innovation does not have a positive impact on firm performance. The study found that information system support “for product innovation alone did not improve profitability as measured by return on sales and return on assets” (Zhang, 2011, p. 118). Therefore, there is a gap in literature regarding the impacts of organizational innovation and its performance.
Organizational Culture and its Innovation
Various studies have explored the determinants of innovation, given its vital role in firm performance and success (Crossan and Apaydin, 2010). Research studies have grouped the determinants into various categories, such as environmental, organisational, and individual level factors (Naranjo-Valencia et al., 2016). Literature on the organisational level determinants focused on elements such as human resource (HR) practices, leadership, size, financial capability, organisational culture, and organisational design (Naranjo-Valencia et al., 2016). Miron et al. (2004) defined organisational culture as the beliefs, hidden assumptions, and beliefs common to organisational members. Such shared beliefs, values and assumptions are critical for mutual understanding and communication. They also impact employee behaviour through coordination and integration (Hofstede and Bond, 1988). Therefore, culture stimulate innovative employee behaviour as it could lead to innovation acceptance as a common organisational value (Naranjo-Valencia et al., 2016).
Empirical studies have shown a significant link between organisational culture and innovation (Büschgens et al., 2013; Lin et al., 2013). However, there is a dearth of empirical literature on the culture typologies which inhibit or support organisational innovation. Organisational culture research has extensively applied Cameron and Quinn’s Competitive Values Framework (CVF) model (Yu and Wu, 2009). According to CVF model, there are four key cultures, such as hierarchy, clan, market, and adhocracy (Naranjo-Valencia et al., 2016). Hierarchy culture is control oriented with a focus on internal organisation through elements such as close observance to regulations, rules, and norms. On the other hand, market culture focuses on externally oriented stability and control. Thus, market culture focuses on competitiveness, consistency, and goal achievement. Clan culture is an internally focused culture with significant emphasis on flexibility. Therefore, clan culture entail corporate employee commitment, involvement, and teamwork. Finally, adhocracy culture places emphasis on externally oriented change and flexibility. Organisations operating in dynamic contexts adopt adhocracy culture in their quest for market leadership. Important adhocracy culture values include risk-taking, entrepreneurship, and creativity.
Naranjo-Valencia et al. (2016) undertook a review of studies that have investigated the relationship between culture and innovation. Cultural values which promote firm innovation include flexibility, employee involvement, market orientation, employee involvement in decision making, and continuous learning (Naranjo-Valencia et al., 2016). Other noted values include teamwork, autonomy, risk-taking, and entrepreneurial mindset, initiative or creativity (Naranjo-Valencia et al., 2016). Creativity contributes to innovation as it leads to creative and new ideas. Thus, creative employees support the innovation and innovation process, through new ideas assessment, selection, and ideas execution. Therefore, innovative culture encouraged creativity and experimentation, and search for new ways to solve organisational problems and create value (Miron et al., 2004; Naranjo-Valencia et al., 2016).
Similar to creativity, freedom manifested through employee empowerment, decision-making involvement, and empowerment increases employee’s intrinsic motivation, thus promoting organizational creativity (Naranjo-Valencia et al., 2016). Naranjo-Valencia et al. (2016) added that risk-taking contributes to successful innovation, thus without taking any risks, an organisation may fail to achieve any innovation and success.
Various empirical studies have noted the positive relationship between risk-taking, freedom, and creativity and innovation. Therefore, flexibility-focused cultures would promote innovation (Jaskyte and Kisieliene, 2006). Theoretically, externally-focused cultures, such as market and adhocracy cultures, would foster innovation while internally-focused cultures would stifle innovation. Therefore adhocracy culture would foster greater innovation due to its external focus and flexibility, while the internally-focused hierarchy culture would stifle innovation as it focuses on greater stability and control. Customer oriented cultures would support greater innovation through development and initiation of products and services to satisfy culture needs (Im et al., 2012). On the contrary companies that adopt internally-focused outlooks would not exploit or discover novel opportunities outside the business, either beyond its operational or technical competencies.
Studies exploring clan and market cultures have reported different impacts on innovation. Theoretical studies have argued that clan culture could foster innovation through its focus on employee participation and teamwork (Castañeda, 2015). Therefore, team diversity would lead to different talents and skills of team members. Thus, supporting different new ideas development, incorporation of diverse information and experiences to promote innovation. However, the empirical evidence on the relationship between clan culture and innovation is divergent. Some studies have noted that clan culture’s team work and employee involvement would promote innovation (Lloréns Montes et al., 2005). On the contrary, some studies argue that team cohesion and teamwork negatively impact innovation (James et al., 1999).
Research on the relationship between market culture and firm innovation have also produced contradictory results. Market culture’s external orientation would encourage firm innovation due to the firm’s focus on meeting the customer needs (Reid and De Brentani, 2004). Therefore, the firm’s with market cultures would focus on new markets and novel ideas. Contrarily, some studies have note that market culture’s focus on its customers would be a barrier to some innovation types, such as the development of unique products outside the current scope of products or services (Naranjo-Valencia et al., 2016).
Organisational Culture and Firm Performance
The literature argues that organisational culture promotes innovation which in turn improves firm performance. Therefore, there could be an indirect impact of organisational culture on firm performance. However, some studies have noted that organisational culture directly impact firm performance since culture of the firm influences employees’ behaviour (Hofstede and Bond, 1988). Similarly, the resource-based view theoretical framework holds that organisational culture could be create sustainable competitive advantage as culture is rare, valuable, and non-imitable.
Empirical studies have explored the effects of different organisational culture typologies on firm performance. Xenikou and Simosi (2006) undertook a study of the effects of organisational culture on firm performance. Using a sample of Greek firms, the study found that market culture focused on achievement led to improved organisational performance (Xenikou and Simosi, 2006). The study found that clan culture, on the other hand, due to its human relationships orientation, did not improve firm performance. The authors concluded that norms which promote productivity, effectiveness and goal setting led to higher firm performance (Xenokou and Simosi, 2006). On the contrary, a study undertaken among firms in the US to determine the effects of stability versus adaptability as elements of culture found that companies which placed greater emphasis on adaptability recorded better performance than those who focus on stability (Gordon and DiTomaso, 1992). A study undertaken among Japanese firms, found that market culture led to better performance than adhocracy culture while hierarchy and clan cultures led to very low firm performance (Deshpande et al., 1993).
Some studies have used different culture typologies to those developed by Cameron and Quinn. Denison and Mishra (1995) developed various cultural trait types, such as consistency, mission, involvement, and adaptability. Such traits correspond to Cameron and Quinn’s cultural types. Using the new typologies of cultural traits, Denison and Mishra (1995) found that the cultural traits have a positive relationship with overall firm performance and other subjective measures such as employee satisfaction and product quality. Fey and Denison (2003) undertook a comparative study of US and Russian firms. They found that US firms linked firm effectiveness to market culture (mission) while Russian firms reported greater effectiveness when they adopt involvement and adaptability (clan and adhocracy) cultures. Similarly, a study undertaken in Hong Kong found that adhocracy (adaptability) culture was positively associated with firm performance (Chan et al., 2004).
Theoretically, the four cultural types, clan, market, adhocracy and hierarchy, would have different impacts on firm performance. First, adhocracy would be linked to greater innovation and product leadership, as it stimulates creativity, entrepreneurial mindset, risk taking and initiative. Thus, potentially create positive impact on firm performance. Calori and Sarnin (1991) empirically supported the theoretical view. In their study, firms which emphasised adaptation showed willingness to attempt novel ideas and gave priority to customer needs and satisfaction leading to organisational growth. Prior studies have found evidence of the positive relationship between adhocracy culture and firm performance (Chan et al., 2004; Fey and Denison, 2003). Studies have noted that external oriented cultures, such as market culture led to improved performance since they promote competitive and ambitious organisational goals, employees’ result focus and greater organisational success. Efficiency and achievement as organisational norms significant motivate employees thus enhancing performance through collective efficacy, self-sufficiency, and perceived competence to achieve the ambitious goals (Xenokou and Simosi, 2006). Kotrba et al. (2012) found that market could led to improvement in firm performance, especially when market results is the main measure of firm performance.
Moreover, clan culture and other cultures which enhance teamwork and cooperation led to positive impacts on firm performance (Naranjo-Valencia et al., 2016). Additionally, high involvement levels foster greater employees’ commitment and psychological ownership to the firm and its strategy (Denison and Mishra, 1995).
The existing literature shows different impacts of culture types on firm performance and innovation. However, there exist various gaps in the literature. Overall, there is a theoretical position that market culture’s external orientation would promote organisational innovation. However, its focus on stability and control would constrain innovation, due to the limited flexibility. Therefore, there is no literature indicating the relationship between innovation and market or clan cultures. As discussed in the above subsections, culture has a direct impact on performance and innovation. However, no studies have investigated the relationship between organisational culture, innovation and firm performance within the Nigerian manufacturing sector. Most existing studies have focused on Europe, North America, and some Asian countries, such as Japan and Hong Kong. Theoretical studies hold that clan, adhocracy, and market cultures have positive impact on firm performance. On the contrary, hierarchy culture negatively impact firm performance. There is also a gap in the literature as some studies indicate that employee participation and teamwork positively impact firm performance while some studies report contrary results. The current study will thus focus on the impacts of organisational culture on innovation and firm performance among Nigerian manufacturing firms. There is a dearth of research on the impacts of the different cultural typologies on firm performance and innovation among Nigerian firms or even Nigerian manufacturing firms.
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