Analysis Of Organisational Culture And Performance Business Essay

There are two main objectives of this study in the light of current research literature. First is to test empirically the organisational culture and performance relationship in banking industry, especially in Indonesia context. Second is to test empirically whether organisational culture may make a differentiation between the best and the worse performance of Indonesian banking industry.

To achieve those objectives, the specific objectives are:

To test empirically the relationship between strong organisational culture and performance (C-P) in a sample of Indonesian banks industry.

To test empirically the relationship between organisational culture gap and performance in a sample of Indonesian banks industry.

To test empirically the relationship between organisational culture and fraud (C-F) perception, in Indonesian banking context.

To test empirically whether organisational culture can differentiate between Islamic bank and conventional banks, in Indonesian banking context.

Research contributions

There are academically and empirically some expected contributions from this research. It firstly relates to provide a framework for analyzing the corporate culture in the banking Industry. Saffold (1998) points out that organizational culture and performance studies share a generic conceptual framework. This framework relates organizational culture profile with organizational performance in proportion to the strength of cultural traits. This study, however, is different from the existing framework. Besides providing good corporate culture of management practices, this study framework is also influenced by societal, industrial (specific banking industry), and specific culture of Islamic Banks (see section 2.8 literature review for more detail). This framework hopefully may help banks’ management in Indonesia to manage their corporate culture and eventually improve their performance and reduce the fraud as well.

Secondly, this research will elaborate new things relating to organizational culture and performance studies. For example it will compare the high and low performance of the banks, between Islamic bank and the rest of the banks, test the relationship between organizational culture and fraud, and use CAMEL (longitudinal) data in measuring bank performance. The existing studies such as Peters and Waterman (1982), Kotter and Heskett (1992) do comparison however based on convenience organization samples.

Thirdly, this research will also overcome methodological flaws from previous studies. These flaws such as participating organisations on the study are in small numbers and cannot be representing the entire industry; selected respondents are not representing the entire organisation cultures (convenience samples), mostly top level managerial-up (Calori and Sarnin, 1992; Kotter and Heskett, 1992; Wilderom, Glunk and Maslowski, 2001). Combining with high and low performer banks, this study, however, will use bank samples more than 75% of the banking industry (in term of assets) or more than 30% (30-40 banks) in terms of number of bank in banking industry. Simple random sampling in selecting the respondents will be used to represent culture of the entire organisations.

Fourthly, this research will elaborate the influence of organizational culture on organizational performance in Indonesian context, a non-western and emerging countries. Such studies are rare. Those organizational culture studies are usually conducted in western countries, mostly USA and Europe. This study will reveal weather organizational culture can become an indicator of banking performance so that related parties such as the banking supervisory authority may be beneficial in improving its policies on banking supervision and regulations. Since this organisational culture – performance study emphasizing banking industry is also rare, this study will also beneficial to the banking industry, especially both in Indonesia and emerging countries and world banking industry.

Plan of the study

The thesis will consist of nine chapters in total. The background, objective of the study, and plan of the study will be presented in chapter one.

Chapter two will provide the background of Indonesia and Indonesia banking industry. Overview of Indonesian banking industry will be highlighted. This overview will include history, development and current condition of the Indonesian banking industry. The structure of Indonesian banking industry consisted of five classifications of bank will also be presented. How to measure the performance (CAMEL Rating system) of each bank will also be provided.

Chapter three presents the literature review of organisational culture and performance. A critical analysis of main variables: organisational culture, organisational performance, and relationship of organisational culture-performance will be presented. This chapter will present conceptualisation (including national culture) and measurement of organisational culture. The key empirical studies of organisational culture-performance, major studies of culture involving Indonesia, and the Islamic and conventional bank studies will be presented. Limitations of existing studies and research gaps to be filled will also be identified and the position taken in the literature will be justified. Research hypotheses generated will be provided.

Chapter four presents the research design of this study. Strength and weaknesses of research philosophy will be critically presented. An appropriate research approach and strategy will be identified and justified. Operationalisation of the instrument used will be provided. Appropriate techniques to be used to test hypotheses are described and justified.

Chapter five presents the result of strong culture thesis using overall CAMEL rating as the objective of bank performance. Chapter six presents the result of culture gap thesis using overall CAMEL rating as the objective of bank performance. Chapter seven will test the relationship between organisational culture and individual perception of fraud. In chapter eight, whether organisational culture can make a differentiation between Islamic and conventional bank’s performance will be tested.

Chapter nine provides a summary of results and conclusions. This chapter will be discussed implications of the results for theory, practise, and the Central Bank Indonesia as the banking regulator and supervisor. Suggestions and interesting avenues for future research will be provided.

Research model

Based on the distillation of strong culture and culture gap thesis, a proposed model of this study is presented in figure 1. The degree and rapidity of change in the external environment in which organisations operate are enormous and constant. This environmental pressures and changes such as new regulations, new and existing competitors, information technology and communication change will lead to adaptation and successful organisations. Experiencing this learning process, organisation gradually learns and develops a better understanding to make effective and efficient responses.

This learning process and proof organisation success will reside in organisational assumptions, beliefs and values. Based on this, organisations develop management policies, systems and control to maintain its learning success. It is expected that organisations can maintain internal coordination / integration, control and consistency of internal process. Strong shared values influence employee motivation and involvement that will lead to more costumer focus and service orientation. Thus, overall bank performance will be influenced. The first hypothesis to be tested is:

H1: There is a significant relationship between strong culture and overall bank performance, using overall CAMEL rating

The differentiation between perceived culture and preferred culture will lead to a culture gap. The culture gap reflects employees’ agreement with each other towards both organizational culture and the future of organisation. The bigger the gap is the harder it is for its organization to control key functions in coordination, integration and control. The smaller the gap is the better the organisation function in creating adaptive changes and reacting to customer needs and services. Thus, overall bank performance will be influenced. The second hypothesis to be tested is:

H2: There is a significant relationship between strong culture and overall bank performance, using overall CAMEL rating.

Strong organisation culture is that to influence individual commitment, motivation, and social control in organisation. Control systems work when those who are monitored are aware that someone is paying attention and is likely to care when things aren’t going according to the plan. In a strong culture, common agreements exist among people about what constitutes appropriate attitudes and behavior. Thus, culture has a function of social control in organisation. The third hypothesis to be tested is:

H3: There is a significant relationship between strong culture and fraud perception of individuals and organisation in the Indonesian banking context.

Islamic banks are governed by Islamic law that prohibited interest on loan and deposits. Profit-and-loss sharing (PLS) paradigm is the principle of Islamic banks. However, Islamic and conventional banks have the same nature of business as a bank and operate in the same industry. Assuming organizational culture-performance exists in conventional banks, whether it also exists in Islamic banks. Thus, organizational culture can differentiate between Islamic banks and conventional banks. The fourth hypothesis to be tested is:

H4: Organisational culture can differentiate between Islamic banks and conventional banks, in Indonesian banking context.

Environmental pressures and changes: societal and industrial culture

Figure 1 A Proposed Model

Overall bank performance (CAMEL rating)

H5: Differencing high and low performance

H5a: Islamic bank and conventional bank

Organisational assumptions, beliefs, and values (Schein, 2004)

Good corporate culture (process): Management policies, system, practices and controls specifically focus on corporate culture

H1

Organisation learning and response (Schein, 2004)

Adaptive change and flexibility

Black line = Influence

Blue line = Feedback

Source: Adapted from Kotter and Heskett (1992), Deal and Kennedy (1992), Peters and Waterman (1992), Denison (1990), O’Reilly (1989), Hammer (2004), O’Reilly and Chatman (1991), Cameron and Quinn (2006), Wilderom and Van den Berg (1998), and Gup (1991)

Individual behaviour guidance and performance

Culture gap

H3

Good corporate culture:

Values

Practices

Customers focus and service orientation

Fraud perception

H4

Coordination/integration, control, motivation, and involvement

Strong culture

H2

Cek list ada strong culture di:

Wallach 83

CAMEL Rating bank compliance ..

Rating of management is the rating of the managerial capacity of the

Bank management in conducting its business, adequacy of risk

management, and compliance of the Bank with applicable legal

provisions and commitments made to Bank Indonesia and/or other

parties.

Bank compliance is defined as the compliance of the Bank with

applicable legal provisions, including but not limited to the Legal

Lending Limit, Net Open Position, and Know Your Customer

Principles.

Schein 418 Learning and change cannot be imposed on people. Their involvement and participation is needed in diagnosing what is going on, in figuring out what to do, and in actually bringing about learning and change. The more turbulent, ambiguous, and out of control the world becomes, the more the learning process must be shared by all the members of the social unit doing the learning.

Kilmann (Schein) p.38 In summary, organizational midlife is the period when

managers have the most choice as to whether and how to manage

cultural issues and is therefore the time when they need to

be most aware of how to diagnose where the organization is and

where it is going. As organizations face increasingly turbulent

environments, flexible cultures, cultures that encourage diversity

rather than uniformity, may well be more advantageous

than strong cultures.

1 Kilmann p. 144

Culture Is Not Just an Internal Affair Stanley M. Davis

In summary, OPEC, industry economics, and government

regulation all affected the oil companies more than did their

customers and competitors; and they affected the oil companies’

cultures as well as their strategies.

1p.150

routine supervision.

In summary, the culture at Lincoln is based on the strong

convictions of the company’s founders and is well developed

vertically, horizontally, and historically. It is similar in many

ways to what Sethia and Von Glinow (see Chapter Nineteen)

call an “integrative” culture. The culture is pervasive and affects

the company’s structure, compensation systems, physical facilities,

relations with customers and stockholders, and personnel

policies as well as the daily behavior of managers and employees.

p.160 Summary

Specialized corporate cultures have numerous advantages,

including strong member commitment to the values inherent in

the culture. However, such pervasive cultures are less tolerant of

divergent values, which creates potential problems with morale

and turnover. Careful recruitment and selection of members

predisposed to accept an existing or new culture should minimize

these problems. However, another disadvantage is the inability

of specialized cultures to adapt rapidly to changing environmental

conditions. The advantages of uniformity and

commitment must be balanced against the disadvantages of potential

stagnation and reduced flexibility. It appears that specialized

cultures may be better suited to environments where

fundamental changes have a low probability of occurrence because

as much effort is required to maintain specialized cultures

as is required to create them. The managements of Lincoln Electric

200

Moreover, a number of writers have begun

to develop a variety of theories of culture change that

might assist managers in their attempts to “manage” their cultures.

For example, Pettigrew (1979) suggests that since leaders

are the “creators” of culture, culture change is accompanied by

a change in leadership; thus, leadership succession is the essen-‘

tial ingredient in culture change. From a rather different perspective,

O’Toole (1979) argues that culture is imbedded in

organizational structures such as a company’s reward system or

hierarchy of authority. Therefore, to change culture the key

structures supporting a given culture must be changed. Others,

such as Ouchi (1981) and Peters and Waterman (1982), believe

that culture can be changed by developing a new set of values,

or “management philosophy,” which is then inculcated into employees.

The change process involves the development of new

company goals and ideals and the socialization of both old and

new employees to this new set of beliefs. The creation of new

symbols as a change strategy has also been discussed by Peters

(1978). He argues that leaders can change culture simply by

changing their activities, agendas, or interpersonal styles to reinforce

new behaviors. Thus, the management of symbols and

their accompanying meanings is the agent of cultural change.

Other writers, such as Silverzweig and Allen (1976), Baker

(1980), Schwartz and Davis (1981), and Sathe (1983), have also

outlined similar strategies that might be used to change organizational

cultures.

While these writers present a variety of potentially useful

approaches to managing culture change, they tend to focus immediately

on specific tactics or strategies for change rather than

first attempting to uncover the underlying processes of culture

change. Rather than present simply another strategy for managing

culture change, the purpose of this chapter is to describe the

conditions and processes under which such change takes place.

After we are able to describe the process of culture change, we

can then begin to explore meaningfully how it might be managed.

The model of culture change that will be described was

derived by examining the histories of five organizations that

have experienced significant changes in their cultures: General

270

Tn ssummary, culture is hard to change when it is deeply

held. Because of long experience, people often are unable to see

alternatives easily. Many will have developed personal stakes in

the current way of operating and thus do not want to change.

And when those who have both a long history and a personal

stake in current ways are powerful, they do not have to change,

and they can enforce their reticence on the company.

The implication of our definition of culture is that culture

is most powerful when it is least obvious; that is, when it

is taken for granted because it has worked in the past as a way

of seeing the world and operating within it. Further, unless culture

is changed at all three levels-assumptions, values, and practices-

and especially at the level of assumptions, an organization’s

culture has not really been changed.

As we consider the elements making up an “ideal culture,”

we will focus on assumptions, because these are the component

of culture most difficult to change. However, our examples

will also suggest values and practices consistent with the

assumptions of an ideal culture.

P 354

What Are Adaptive Cultures?

Even if we accept the idea that the term culture will always

be a bit vague and ill defined, unlike the more superficial

and tangible aspects of organizations, it is still important to consider

what makes a culture good or bad, adaptive or dysfunctional,

Wallach (1983, p. 32) provides a summary of what cultures

do for the organization: “There are no good or bad

cultures, per se. A culture is good-effective-if it reinforces the

mission, purposes and strategies of the organization. It can be

an asset or a liability. Strong cultural norms make an organization

efficient. Everyone know what’s important and how things

are done. To be effective, the culture must not only be efficient,

but appropriate to the needs of the business, company,

and the employees.”

Why does one organization have a very adaptive culture

while another has a culture that reflects only the past? Is one a

case of good fortune, and the other a result of bad luck? To the

contrary, it seerns that any organization can find itself with an

outdated culture if its culture is not explicitly managed.

If left alone, a culture eventually becomes dysfunctional.

Human fear, insecurity, oversensitivity, dependency, and paranoia

418

Summary

Managerial efforts to create, strengthen, or change culture

will have a high probability of success only if such efforts are

accompanied by parallel efforts to design (or redesign) the organizational

reward system for cultural compatibility. The reason

for this is that if the reward system is in harmony with the

culture, it will reinforce and invigorate the culture, but if it is

inconsistent with the culture, then it will undermine and stultify

the culture. In this chapter, a framework of four types of

cultures and their matching reward systems have been described.

Managers can use this framework to diagnose the current

situation in their organizations and create appropriate

reward system

1

1

1