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

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.