Cultural Diversity, Strategic Orientation and Firm Performance

Cultural Diversity, Strategic Orientation and Firm Performance

Cultural Diversity, Strategic Orientation and Firm Performance

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3.0 Cultural Diversity, Strategic Orientation and Firm Performance

The link between performance and strategic orientation is multidimensional and dependent on a number of factors such as industry characteristics, product characteristics and strategic position. Strategic orientation is a critical part in strategic management which Robbins and Coulter (2005) underscore as important as it results in higher organizational performance and helps in coordinating the various organizational units thereby enabling them to focus on goals and enable managers to examine and adapt to changes within the business environment and is part and parcel of managerial decision making process, (Racelis 2006, 70). Culture can be defined as values, beliefs and assumptions that are learned early in childhood and that distinguish people in different societies, (Kongsompong 56). Hofstede (1980; 43) gives a personalized definition of culture as a ‘collective mental programming of the people in an environment.’ Basing our study on the Hofstede’s model, the chapter analyzes the link between cultural diversity, strategic orientation and firm performance.

3.1. Relationship between Cultural Diversity and Strategic Orientation

Limited literature exists on the relationship between cultural diversity and strategic orientation; nonetheless they point to the fact that culture plays a critical role on a firm’s strategic orientation, (Robbins and Coulter 2005). Organizational culture is constituted by values, mission, vision, policies, procedures and norms while strategic orientation describes the organization’s level philosophy towards understanding and managing internal and external forces thereby increasing an organization’s competitiveness, (Venkatraman, 942). Strategic orientation is a reflection of an organization’s focus with regards to the creation of behaviors that aid in achieving superior performance and has been described variably as strategic fit, strategic thrust, strategic choice and strategic predisposition, (Venkatraman, 942). These are the guiding principles that influence both marketing and strategy is making decisions and are characterized by competitive culture besides being comparative based upon multiple dimensions. A firm’s strategic orientation is a reflection of the strategic directions that a firm implements so as to set proper groundwork for the continuous performance of business, (Kulkarni, et al 96).

A study by (Gilder 17) confirmed that similar industries in different countries or even branches of multinationals have responded differently to adverse situations such as economic crises hence performing unequally. In offering an explanation to this phenomenon, studies often focus on specific variables such as gender, ethnicity and cultural diversity, (Robbins and Coulter 2005). Focusing on cultural diversity, varied authors have come up with efficient benchmarks to understand and define how culture affects a firm’s strategic orientation therefore affecting performance. According to Gilder (17), it is risky to choose a strategic orientation without due considerations on the influences of a firm’s external and internal environment.

This is because a firm’s long term profitability is dependent on its ability to come up with innovative strategy since its strategic orientation is not only a significant indicator of its performance, but also forms the basis of improved performance in future, (Gatignon and Xuereb 79). Cultural values, beliefs and attitudes of a given population can influence the way it responds to a firm’s strategic orientation. Exemplifying the case of Asian manufacturing firms, Chow et al (1991) and Gatignon and Xuereb (79)argue that, although many Asian manufacturing firms have remained competitive as a result of producing superior quality products at lower costs, they still face unresolved challenges arising from their management controls on manufacturing process and their employee’s national culture. The link between country of origin and its effect on products in combination with culture and stereotyping have been discussed by (Carr 2).

Chow, Chan and Shields (210) document that even though majority of studies have focused on the link between organizational structure, technology, competition and organizational context variables such as uncertainty, national culture may be a critical factor that drives organizational structure hence a direct determinant of its strategic orientation. Exemplifying the case of Japan, Chow et. Al (211) and Zhou Yim, Tse, (42) affirm that it is characterized by group rather than individual orientation hence the general collective strategic orientation of Japanese organizations. The Japanese therefore emphasize on interpersonal orientation and harmony between group members, a culture that has resulted in a management style characterized by teamwork, ‘participative decision making and quality circles, (Chow et. al 211). In contrast, the individualistic culture in the United States has led to the inclusion of idiosyncratic approaches such as responsibility accounting and individual piece rate pay to a firm’s culture.

Different literature presents varied channels via which cultural diversity affect firm performance, nonetheless, a number of studies assessing the influence of cultural diversity focus on how culture could affect strategic orientation of the firm thereby affecting its performance, (Schauber and Munduli, 7). Besides researches by both Schauber, (1) and Munduli, (7) confirm that national culture and management control affect the general strategic orientation since it affects employee’s attitudes towards various components in a management system. Study findings by Chatman, Polzer, Barsade and Neale (750) also confirm that, cultural diversity affect both the current path taken by an organization and plans for future development, nonetheless, they note that there are varied outcomes on whether there is ‘value in diversity’ or whether diversity is detrimental to work effectiveness.

According to Chatman, Polzer, Barsade and Neale (751), researches have shown that individuals from the same nationality, sex or racial background are likely to associate better with one another. Nonetheless, studies by Robbins and Coulter (2005) indicated that co-workers of different nationality, racial background and sex also form friendship with one another. This implies that even in demographically different population, bond formation is inevitable when it comes to problem solving. Nonetheless, coworkers who are demographically different from others are less likely to interact frequently with one another compared to those who are demographically similar, (Robbins and Coulter 2005).

In terms of the market, cultural diversity is critical to an organization’s marketing structure, (Gatignon and Xuereb 4 and Grover 87). Organizations must be able to identify, analyze and understand the needs of its customers fundamentally inscribed in their culture for them to effectively handle the given market’s technical issues such as its growth rate, possible segments, and consumer’s needs and preferences when developing its strategic orientation, (Gatignon and Xuereb 4 and Grover 87). Besides, an organization’s commercial performance often depends on its strategic orientation which is always a component of the market characteristics facing a firm which still, is directly dependent on both the internal and external cultural characteristics.

3.1.2. Hofstede’s Model and Strategic Orientation

Both Gatignon and Xuereb (4) and Grover (87) note that cultural diversity influences how different firms have adapted cultural features to their strategic orientation. Hofstede (1980, 1983, and 1993) identifies; power distance, individualism versus collectivism, masculinity versus femininity, uncertainty avoidance and long-/short-term orientation as the five dimensions of distinguishing cultures, (Hofstede 2010, 88). All the dimensions relate to the fundamental problems facing any human society hence are practical in explaining; the different motivations of people within organizations (Fey 346), the different issues that people and organizations faces in varied societies and cultures and the different ways of structuring organizations. With regards to Hofstede’s theory, firms should always select appropriate strategic orientation by choosing the best fit between various cultural aspects, their strategy, processes, behavior, structure, performance and profitability.

K’Obonyo and Dimba (6) argue that value systems of different countries have been crystallized in institutions hence cultural knowledge must be included in today’s business environment. The value systems often affect human thinking, feeling, actions and behavior within organizations in very predictable ways hence a cross cultural analysis of values would bring to light different dimensions of viewing similar problems which may need different solutions across different cultures (Hofstede, 1983, Fang 348, and K’Obonyo and Dimba 6). Hofstede contend that employees, the general population and even organization theorists are a product of a national culture since individuals are reared in families, trained in schools and ‘they absorbed the values prevailing in one particular society,’ (Hofstede 47).

Societies therefore differ with regards to the specific cultural characteristics and Hofstede’s model attempts to answer questions such as the perceptions of organizational regime, perceptions of organizational climate, values within the organizations in terms of the desired and values in terms of the desirables, (Hofstede 47). The concept of strategic orientation has been operationalized using a variety of approaches hence viewing it from the theoretical definition and operational measures of the Hofstede’s model may still be in unverifiable way,( Zhou Yim, Tse, 43). Nonetheless, focusing on the relationship between empirical observations and theoretical development of Strategic orientation as a central construct with respect to the variant dimensions will aid in developing and validating the link. A primary task in conceptualizing a construct lies in delineating its domains and also defining the fundamental principles behind a theory, (Venkatraman 944).

This brings into question the critical concept of the significance of the scope of a particular strategic orientation. While a number of authors see a particular strategic orientation as a means towards achieving the organizational objectives, others view it as an end while still others view it as encompassing goals and means, (Venkatraman 946). The choice of a strategic orientation and the general categorization of an organizational strategy such as corporate, business and functional strategies are also brought into play. Other issues of strategic orientation include; the distinction between intended and realized strategies and parts of the strategy and strategic typologies are also considered from the theoretical interpretation. Perspectives of strategic orientation differ, for example as noted by (Venkatraman 949), Buzzell, Gale and Sultan (1975) and Porter (1980) focus on product-market sector as the overall strategy concept while Friesen (1978), Mintzberg (1978) and Miles and Snow (1978) introduces a much broader perspective.

Hofstede (47) defines individualism/collectivism as ‘people looking after themselves and their immediate family only, versus people belonging to in-groups that look after them in exchange for loyalty.’ In individualistic cultures, people derive identities from self hence people are I conscious and generally motivated towards achieving self actualization, (Hofstede 2010, 87). Besides these cultures are universalistic and assume that their values are superior and valid throughout the world. Comparatively, collectivistic cultures are characterized by people who are ‘We conscious’ with an identity based on a social system and normally use indirect styles of communication, (Hofstede 2010, 88).

Masculinity/Femininity dimension is interpreted to mean the dominant values of masculinity and femininity within the society are achievement and success and caring for others and quality of life respectively, (Hofstede 2010, 88). Masculine societies therefore emphasize performance and achievement which must also be demonstrated hence the need for status brands and products such as luxury goods, (Hofstede 2010, 88). The dimension also brings to question the important issue of role differentiation in which masculine culture emphasizes a lesser role for the husband in terms of household chores.

The power distance dimension is the ‘extent, to which less powerful members of a society accept and expect that power is distributed equally,’ (Hofstede, 2010, 89). This introduces the rightful place concept characteristic of large power distance and which determine significantly influence role global brands play within society. Notably certain brands such as luxury cars, some alcoholic beverages and certain fashion items serve the purpose of making an individual’s social status distinct, (Peterson 372). The final dimension, uncertainty avoidance is defined as the extent to which individuals feel threatened by uncertainty and ambiguities hence try to avoid such situations. Cultures which have strong uncertainty avoidance tend to emphasize rules and strict formal structure of life which translates to the search for truth and a tendency to believe in experts and pre-tested ways of living, (Peterson 372). People in highly uncertain societies are less open to innovation and change compared to those in low uncertainty avoidance cultures.

Strategic Orientation and Firm Performance

Porter contends that a basic unit when coming up with a strategy it the consideration of the industry characteristics. Industry characteristics are defined by suppliers, current and potential competitors, substitutes and customers, (Vos and Vos, 70 and Pearce & Robinson 81). A number of studies that examine the link between strategic orientation and actual firm performance tend to use firms from disparate industries, (Vos and Vos, 70). To effectively map out industry characteristics, three key aspects including market turbulence, competitive intensity and technological turbulence ought to be considered. Likewise, when exploring the direct effects of industry characteristics on performance Pearce & Robinson came up with additional variables including demand uncertainty, competitive concentration and availability of substitutes as the market defining characteristics in the study of the link between strategic orientation and actual firm performance, (Pearce & Robinson 81). As an implication, it is evident that; industry characteristics may moderate the relationship between strategic orientation and firm performance. Additionally, from the generalization, it is evident that market orientation may be less significant in determining firm performance when hostility and competitive intensity are minimal and technology and customer orientations are more important than competitor orientation in markets in which demand is uncertain, (Robbins and Coulter 2005)..

Secondly firm performance is also determined by its strategic position which is a function of its business strategy and the scope which is a function of the number of products within the market, the degree of vertical integration and the general culture of its employees and the market at large, (Pearce & Robinson 81). Strategic orientation has been examined using a number of approaches including firm’s differentiation strategies, relative scope inclusive of relative market share, relative level of resources and the extent of the firm’s differentiation in terms of its product line. Studies by Pearce & Robinson (81) and Racelis (72) both yielded a positive correlation between the strategic position of a firm and market performance although some of its variables have yielded both negative and non-significant results, (Pearce & Robinson 81).

Comparatively Racelis (72) notes that, nearly all studies aimed at establishing the relationship between strategic orientation and organizational performances have shown meaningful and positive correlation between technological orientation, entrepreneurial orientation and financial performance. He further notes analysis of companies that have adhered to a combination of both differentiation and cost strategies have almost always show a positive effect of market orientation on profitability, (Racelis 72). Additionally, firms with higher levels of competitor orientation, better selling orientation and focus on national brands often have better performance. The studies also indicate that firms that continuously are on the lookout for new markets through innovative mechanism often perform better than those that do not, (Racelis 72).

Hofstede Model and the Corporate Culture

Although Hofstede model was originally based on the national culture, it has been modified to fit the corporate culture. Hofstede (1991) came up with six categories which were referred to as the dimensions of corporate culture. The first category was the process-oriented versus results oriented culture. While the former focused on how things are done within an organization, the later focused on the outcomes that result from the various decisions and actions within the organization, (Guisepe 6). The second category was the Employee-oriented versus job oriented culture where the former relates to workers within an organization and their roles and the later relates to tasks that need to be accomplished. The third category is the Parochial/professional culture, (Guisepe 6).

Parochial culture is a culture type where employees completely identify with the company they work for and are attached so much to the company to the extent that there is a link between their personal and professional lives. Conversely, in professional culture, employees tend to detach their lives from the company in which they work, (Guisepe 6). The fourth corporate cultural dimension is the closed-system versus open system culture. Members of an open system are receptive towards new employees while in a closed system members are secretive and quite unwelcoming to new employees, (Guisepe 6 and Richard, Barnett, Dwyer, Chadwick, 256). The fifth dimension is the Tight control/loose control culture in which the former has organization’s features being control via very formal and restrictive norms while loose control culture has minimized bureaucracy and high informality. The last category is the normative/pragmatic culture; in which the former is a culture that emphasizes strict adherence to rules while the latter is result oriented, (Guisepe 6).

3.2. Linking Hofstede’s Model to Empirical Findings

The objective of this analysis is to review the recent empirical literature and examine a possible pattern of association with Hostede’s model with the aim of providing an insight of how firms are susceptible to alter and modify their strategic orientation given specific cultural variables, (Guisepe 6). A number of researchers have investigated how culture could affect the strategic orientation and therefore firm performance. Authors like Zhou and Li (447), Rauch, Wiklund, Lumpkin, Frese, (764) among others agree that the overall firm performance is likely to be affected by cultural features. In a similar context, Richard, Barnett, Dwyer, Chadwick (256) and Chatman, Polzer, Barsade, Neale, (750) found evidence that cultural diversity plays a role in firm performance. These studies emphasize on the demographic composition within firms and tested how cultural diversity affects a given firm’s performance.

On the basis of the five dimensions, Hofstede’s model has a scale of between zero and one hundred for a total of 76 countries for each dimension hence each country has a position on the scale or the index. Despite the country scores being computed in the 1970’s recent researches have shown that the country rankings are still valid. As noted by (Hofstede 2001, 6), over 200 external comparative studies and replications of his studies have come to support his indexes. Studies by (De Mooij 2004 and 2010) indicated that the empirical data on product ownership and related behavior in relation to the power distance dimension supported Hofstede’s dimension in even a better way. Studies by De Mooij 2010 and De Mooij & Hofstede 2002 demonstrated that in masculine societies, performance and achievement were critical besides, the study incorporated data from Eurostat (2002) which showed that low masculinity in European nations explained the 52% of variance of the proportion of men who were engaged in shopping activities.

K’Obonyo, Dimba, (6) also further contend that, studies by Shackleton and Ali 1990 and Chow et al 1991 have all supported the application of the Hofstede’s cultural value dimensions because its empirical results have been replicated at national level in more than fifty countries. Chiang and Birtch (2006; 1) also note that Hofstede’s proposition of delineating national cultures into sets of measurable constructs has been widely cited. Besides it has been extensively applied to studies on cultural differences, decision making, strategy formulation, leadership styles, conflict resolution, innovation, motivation and workplace and even sales and marketing, (Chiang and Birtch, 1 and Schneider, Brief & Guzzo, 12).

Studies by Yaveroglu & Donthu (6), Tellis et al (8) and Venkatraman, (944)showed that people in cultures characterized by high uncertainty avoidance were less inclined to accept change and were less innovative. They also showed that cultures with low uncertainty avoidance tended to have a more active attitude to health and focused on fitness and sports whereas those with high uncertainty avoidance attitudes had a more passive attitude towards health and tended to focus on the consumption of more pure foods and drinks besides using more medication. Additional studies investigating link between culture and the Hofstede model were carried out by Richard, Barnett, Dwyer, Chadwick (256) and Chiang and Birtch (1) whose results indicated that the self hence individual behavior was imperative when interpreting the dynamics within a social context. Comparing the Japanese and the American societies, the study found that, in the latter, feeling good was linked to and associated with interpersonal situations while in the United States, the feeling was associated with interpersonal distance such as feelings of superiority, achievement and pride, (Richard, Barnett, Dwyer, Chadwick 256).

The studies also revealed that the development of self in both societies are quite different with individualistic cultures having youths who develop identities that enable them to function independently in varieties of social groups other than the family failure to which an identity crisis develops, (Chiang and Birtch, 1 and Schneider, Brief & Guzzo, 13). Comparatively, youth development in collectivistic cultures is based upon a system that encourages dependency in both group and family relationships. A study by Aaker et al. (8) on how cultures affect individual/collectivistic perception of particular brands found that, the tendency to attach personalities to particular brands was typical of individualistic culture. This was evident in the labeling of Japanese, American and Spanish brand personalities as ‘ruggedness’, ‘peacefulness’ and ‘passion’ respectively, (Aaker et al. 9).

A study by Sung & Tinkham 2005 also supported the argument since global brands could be categorized into two labels; ‘passive likeableness’ and ‘ascendancy’ from the collectivistic and individual societies. On the existence of commercial cross-cultural brand value, a study by Crocus 2004 and De Mooij 2010 and Jabri (355) found that brands in low power distance cultures and high uncertainty avoidance were generally attributed to the ‘friendly characteristic’ (Hofstede 2010, 92). Comparatively, brands from cultures with low uncertainty avoidance and low power distance were generally considered as ‘innovative’ and ‘different. These studies indicate that consumers tend to project their preferences on the global brands and generally favor brands that fit their cultural values as opposed to those that fit the values of the brand producer, (Hofstede 2010, 93).

3.2.1. Effects of Power Distance on Strategic Orientation and Firm Performance

The concept of power distance was as a result of findings of country level correlation between the decision taken by superior and their effect and perception on both superiors and colleagues, (Hofstede, 1983; 50). It was found that there was a significant distance between the hierarchy and the society’s ways and means of dealing with power relationships hence its conception. Power distance is pronounced in complex work organizations with multiple levels of power. Studies by Hofstede (1983; 50) have indicated that collective dependence reaction in which subordinates tend to move towards dependence or counter dependence tend to be characteristic of organizations with great power distances, (Hofstede, 1983; 50). More specifically, power distance is the extent to which less powerful members within an organization are able to accept and expect the distribution of power to be unequal.

Entrepreneurial orientation

Entrepreneurial orientation has been variably understood as the processes, philosophy, practices and decision making activities that lead an organizations to innovation hence is critical to a firm’s performance. Both Lumpkin et al. (1057) and Hofstede (93) underscore the importance of the entrepreneurial orientation on both the survival and performance of an organization since it directly leads to innovation which is not only a crucial factor in performance but is the means by which organizations evolve within a competitive environment. Researches by Lyon, Lumpkin & Dess, 1057 and Chiang and Birtch (1), have all found that power distance is critical when considered in the firms’ innovation process. Consideration of the aspect increases an organization’s ability to develop its strategic options more proactively, increase its autonomy, willingness to take risks, its competitive aggressiveness and its ability to innovate.

Although very limited research exists on the direct link between entrepreneurial orientation and power distance, a number of studies have touched on how both entrepreneurial orientation and power distance affect innovation, (Lyon, Lumpkin & Dess, 1057). While entrepreneurial attitudes facilitate the study and utilization of existing and new knowledge in discovering market opportunities, cultural characteristics provided by power distance better define markets and opportunities within them. Lyon, Lumpkin & Dess, (1057) argue that firms with entrepreneurial orientation tend to depend on the skills and knowledge of their employees when developing a knowledge process hence guiding the process by which new knowledge, opportunities and ideas are harnessed and managed. Firms with entrepreneurial orientation also tend to focus their attention towards knowledge management and the power dimension analyzes the distribution of knowledge power hence we expect a positive correlation between the power distance dimension and entrepreneurial orientation, (Lyon, Lumpkin & Dess, 1057).

In societies with high power distance levels, a hierarch in existential inequality exists, superiors consider subordinates as different from themselves, power forms a basic fact of society and defines what is good and evil and power holders are always entitled to privileges, (Lyon, Lumpkin & Dess, 1057). Additionally, in these societies, powerful individuals often try to be and to look as powerful as possible, and stress is based on coercive and referent power, those considered low in the power chain are often blamed for what goes wrong, and other people are often a potential threat to the powers of the boss. Comparatively, in cultures with low power levels, employees feel that the use of power ought to be legitimate besides; powerful people are expected to try and look less powerful than they are. When things go wrong, the system is always to blame and people at both high and low power levels often feel less threatened and are therefore more prepared to trust people, (Lyon, Lumpkin & Dess, 1057).

Additionally, while in corporation among the powerless in cultures high in power distance dimension is difficult to achieve, corporation among the powerless in cultures low in power distance is easier to achieve based on a general feeling of solidarity, (Lyon, Lumpkin & Dess, 1057). Low PDI further has distinct characteristics such as hierarchy means equality of roles established for convenience rather than existential inequality. Besides, superiors are considered similar to those low in rank and there is latent harmony between the powerful and the less powerful within the organization or the society at large, (Hofstede 1983; 60).

Market Orientation

The link between market or strategic orientation and firm performance has been a subject of a number of studies most of which have predicted a positive relationship between the two, (Vos and Vos 67). This is because, market orientation has been found to provide firms with better understanding of both its environment and customers, which leads to an enhanced customer satisfaction and better performance. Other researchers also caution against being too customer focused as this can lead to inertia, (Voss and Vos 69). According to Vos and Vos (67), a number of studies such as Jaworski and Kohli 1993, Pelham and Wilson 1996 and Slater and Narver 1994 have suggested a positive relation between market orientation and; managers perceptions on the overall firm performance, financial performance and sales growth respectively. Nonetheless, a number of studies also do not support a direct positive correlation between market orientation and firm performance, for example, studies by Han, Kin and Srivastava (1998) which measured performance as a dependent variable found that market orientation was not actually related to both market share and the net income growth of the firm.

The disparity has been harmonized by Han, Kim and Srivastava (1998) who noted that, a more specific relationship which considers more variables such as distinct customer segments; competitor and product orientations can better define the relationship. Researcher by Noble, Sinha. & Kumar (27) argues that the market orientation of a firm should be guided by factors such as customer oriented behavior hence power distance is critical to developing market oriented strategies. Vos and Vos (67) contend that the link between market orientation and strategic orientation is multidimensional. Empirical researches by Kohli, Jaworski and Kumar (1993, p. 475) touches on the link between market orientation, power distance as a cultural dimension and firm performance. They note that non-profit art organizations for example which tended to adopt a product orientation that targeted high power culture audiences needed consumer oriented activity in order to maintain fiscal viability, (Cassell and Blake, 1055).

Learning Orientation

Learning orientation is a key component of strategic orientation as firms companies encourage their workers and manages to develop a clearer and deep understanding of business activities and continuously upgrade their skills so as to better understand and respond to the fast changing competitive business environment, (Kanungo, Mendonca, Yu, Deller, Stahl, and Kurshid, 203). Power distance has often been viewed as being about