5 Economic Perspective on Corporate Culture

Question 1

Solutions to Coordination Problems

Answer 1

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 Communication to reduce uncertainty or to negotiate
 Hierarchies or (organizational) authority, e.g. in the role of the supervisor
 Rules, norms (based on Corporate Culture), principles, policies

Question 2

1/N problem / free-riding problem

Answer 2

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Thus the free-riding aggravates with an increasing number of team members. This is intuitive because
 The more members there are in a team, the smaller is the share (to be precise 1/N) in the gains and losses of one single team member.
 Thus, the more team members there are, the lesser a single team member cares about increasing team profit or reducing team losses.

Question 3

How to overcome Free-Riding in Teams

Typically based on behavioral norms

Answer 3

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Repeated interaction
In a repeated game defection can be followed by punishment.
 Monitoring of individual team members
Monitoring (by supervisor) of individual team members is often prohibitively costly and also likely to decrease motivation.
 Peer pressure / mutual monitoring between team members
 Norm of cooperation

Question 4

How to overcome Free-Riding in Teams

Based on design / architecture of processes and organization

Answer 4

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• Team Size
• Competition between teams
• -> Competition between teams is often quite effective.
• Target based schemes
• -> Increase Pareto efficiency but may violate budget constraint

Question 5

Cooperation problems

Answer 5

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Typically sketched by Prisoner’s Dilemma which belongs to broader
class of social dilemma games
 Dilemma between one Nash equilibrium (individually rational) and Pareto
efficiency (collectively rational)
 Solutions, e.g. via repeated interaction, cooperative norms, peer pressure, competition between teams etc.

Question 6

Coordination problems

Answer 6

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 More than one Nash equilibrium in pure strategies
 Difficulty is matching other’s strategy to end up in one Nash equilibrium
 Problem is mainly information problem, i.e. uncertainty regarding other’s behavior must be reduced
 Solutions, e.g. via supervisor, communication or rules/principles/norms

Question 7

When does Corporate Culture generate a competitive advantage?
(Compare Besanko et al. ( 2017))

Answer 7

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 Culture must be valuable to the firm, i.e. it has to influence the value which the company creates for its customers.
 Culture has to be specific to the firm
When competitors share the same culture (e.g. the national culture of the country) it is unlikely that it leads to a competitive advantage.
 Culture must be inimitable.
Otherwise the competitive advantage cannot be stable.

Question 8

Why can it be difficult to imitate a culture?

Answer 8

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 Tacit norms, values and beliefs which cannot easily be described
are crucial to a Corporate Culture
 The complexity of a culture makes it difficult for others to imitate it but also to influence it.

Question 9

How can a culture create value?

Answer 9

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1. Culture simplifies information processing
-smaller number of activities
-clear guidelines of behavior
-specialization of efforts
2. Culture complements formal controls
-Culture controls employees’ behavior based on their attachment to the firm instead of implementing incentives and monitoring
-Employees who value “being part” of the culture will align their behavior to the goals of the company
-Lower cost of monitoring and incentive provision if many employees “identify” with the culture
3. Culture facilitates cooperation and reduces bargaining costs
-Employees in an organization work together over a longer time
frame
-As shown in repeated games models there are multiple equilibria if a game is repeatedly played over an infinite horizon.
-In a repeated prisoner’s dilemma cooperation may be achieved, but there is also an equilibrium with no cooperation.
-Corporate Culture can guide the choice of the equilibrium.

But note: A strong culture can also make a company inflexible