The Complexity of Corporate Culture as a Potential Source of Firm Profit Differentials

34 Pages Posted: 25 Jul 2023

See all articles by Frederik Banning

Frederik Banning

Ruhr-Universität Bochum

Jessica Reale

Ruhr University of Bochum

Michael Roos

Ruhr University of Bochum

Abstract

This paper proposes an addition to the firm-based perspective on intra-industry profitability differentials by modelling a business organisation as a complex adaptive system. The presented agent-based model introduces an endogenous similarity-based social network and employees’ reactions to dynamic management strategies informed by key company benchmarks. The value-based decision-making of employees shapes the behaviour of others through their perception of social norms from which a corporate culture emerges. These elements induce intertwined feedback mechanisms which lead to unforeseen profitability outcomes. The simulations reveal that variants of extreme adaptation of management style yield higher profitability in the long run than the more moderate alternatives. Furthermore, we observe convergence towards a dominant management strategy with low intensity in monitoring efforts as well as high monetary incentivisation of cooperative behaviour. The results suggest that measures increasing the connectedness of the workforce across all four value groups might be advisable to escape potential lock-in situation and thus raise profitability. A further positive impact on profitability can be achieved through knowledge about the distribution of personal values among a firm’s employees. Choosing appropriate and enabling management strategies, and sticking to them in the long run, can support the realisation of the inherent self-organisational capacities of the workforce, ultimately leading to higher profitability through cultural stability.

Keywords: Complex Adaptive Systems, Self-Organization, Corporate Culture, Social Networks, Agent-based modeling

Suggested Citation

Banning, Frederik and Reale, Jessica and Roos, Michael, The Complexity of Corporate Culture as a Potential Source of Firm Profit Differentials. Available at SSRN: https://ssrn.com/abstract=4508695 or http://dx.doi.org/10.2139/ssrn.4508695

Frederik Banning (Contact Author)

Ruhr-Universität Bochum ( email )

Ruhr University of Bochum
Faculty of Economics
D-44780 Bochum, DE 44780
Germany

Jessica Reale

Ruhr University of Bochum ( email )

Michael Roos

Ruhr University of Bochum ( email )

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