Economic Perspective on Corporate Culture

Question 1

Solutions to Coordination Problems

Answer 1

 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

Cooperation problems

Answer 2

 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 3

Coordination problems

Answer 3

 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 or communication

Question 4

How to overcome Free-Riding in Teams

Answer 4

Typically based on behavioral norms

 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

Based on design / architecture of processes and organization

 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

When does Corporate Culture generate a competitive advantage?

Answer 5

 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 6

Why can it be difficult to imitate a culture?

Answer 6

 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 7

How can culture create value?

Answer 7

1. Culture simplifies information processing
    Values and norms in a culture focus employees’ actions on a
   smaller number of activities

 Employees can make decisions faster since they have clear
guidelines of behavior

 Employees better understand their role in the company

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.

Question 8

Summary

Answer 8

 From an economic perspective corporate culture may help to fulfill
incomplete contracts

 Culture may set focal principles that give guidance and reduce
uncertainty, e.g. in coordination games, i.e. they shape individuals’
beliefs about others’ behavior

 Certain norms may reduce cooperation problems, e.g. via grim
trigger strategies in repeated settings or via peer pressure

How can culture make companies more successful?

 Better outcome in coordination games (reduction of mismatch or
pareto-superior solution)

 Higher degree of cooperation and increased efficiency