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EJIM
16,1
Role of innovation in the
relationship between
organizational culture and
92 firm performance
A study of the banking sector in Turkey
Cevahir Uzkurt
Faculty of Economics and Administrative Sciences,
Eskisehir Osmangazi University, Eskisehir, Turkey
Rachna Kumar
School of Management, Alliant International University,
San Diego, California, USA
Halil Semih Kimzan
Faculty of Economics and Administrative Sciences,
Eskisehir Osmangazi University, Eskisehir, Turkey, and
Gözde Eminoğlu
Social Sciences Institute, Eskisehir Osmangazi University, Eskisehir, Turkey

European Journal of Innovation
Management
Vol. 16 No. 1, 2013
pp. 92-117
r Emerald Group Publishing Limited
1460-1060
DOI 10.1108/14601061311292878
Abstract
Purpose – The purpose of this paper is to examine the mediating role of innovation on the
relationship between organizational culture and firm performance.
Design/methodology/approach – Data for the study were collected through a survey from 154
branches of ten prominent banks in Turkey and responses were analyzed to assess the relationships
between organizational culture, firm performance and organizational innovation.
Findings – The findings reveal that in the banking sector, although organizational culture and
innovation have a direct and positive effect on the firm performance dimensions, organizational
culture was found to have an insignificant regression coefficient on the dimensions of firm
performance in the presence of organizational innovations.
Practical implications – These findings provide useful insights for organizations, particularly in the
banking industry, seeking to be competitive and responsive to environmental changes by successfully
introducing innovations. Conclusions emphasize that mechanisms to encourage and foster an innovative
culture in the organization are likely to facilitate the introduction, adoption and diffusion of innovations
which, in turn, is likely to result in achievement of superior firm performance.
Originality/value – Organizational culture has been studied in the literature as one of the
characteristics impacting the firm’s performance. But there is a paucity of research which models and
empirically studies the relationship between organizational culture and the firm performance.
In addition, several researchers have studied organizational innovation as a driver of firm performance
but fewer researchers have studied organizational innovations as being impacted by organizational
culture. In this study, the paper examines the relationship between organizational culture and firm
performance and the role of organizational innovation in this relationship. This research makes an
important contribution to the existing literature by empirically examining the relationship between
organizational culture, innovations and firm performance.
Keywords Organizational culture, Innovativeness, Bank sector, Turkey, Firm performance,
Innovation, Banking, Performance management
Paper type Research paper
1. Introduction Organizational
Organizations strive for improving firm performance and organizational culture culture and
has been recognized as one of the important drivers of better firm performance
(Morone, 1989; Porter, 1985; Stace and Ashton, 1990). Previous researchers have performance
emphasized the significance of organizational culture in several outcomes related to
firm performance, such as job satisfaction, productivity, and employee turnover. At the
same time, innovation has also been found to have positive impacts on the firms’ 93
performance, a nation’s economy, industrial competitiveness, and the standard of
living in the nation (Gopalakrishnan and Damanpour, 1997). Innovations are regarded
as a competitive instrument for the firms’ long-term performance and success and are
considered an important means of adapting to the needs of a changing and evolving
environment, gaining competitive advantage, and facilitating implementation for change
initiatives (Blackwell, 2006; Schein, 1992; Deshpande et al., 1993; Nonaka and Yamanouchi,
1989). Therefore, organizations devote considerable energies to understanding ways for
promoting and nurturing organizational cultures as well as the mechanisms for being
ready for developing, buying, or adapting innovations in organizations. Several
researchers have studied innovations in the context of organizational culture as an attempt
to impact the innovation abilities of the organization (Bass, 1969; Damanpour, 1992, 1996;
Gopalakrishnan and Damanpour, 1997; Rogers and Shoemaker, 1971; Rogers, 1995).
The research reported here studies innovations and organizational culture as an attempt to
understand their impact on firm performance.
Recent studies on innovation suggest that organizational innovation plays a key
role on firm performance and competitiveness (Baker and Sinkula, 2002; Damanpour,
1991; Farley et al., 2008; Jimenez-Jimenez and Sanz-Valle, 2011; Luk et al., 2008). It is
also commonly implicit in the innovation literature that organizational culture plays an
important role in impacting the innovations in the organization (Yang, 2007; Martins
and Terblanche, 2003; Tushman and O’Reilly, 1997). But there are only a few studies
which have specifically modeled and empirically researched the nature of relationship
between organizational culture, its innovations, and firm performance (Martins and
Terblanche, 2003; Deshpande et al., 1993). Therefore an examination of the relationship
between an organization’s culture, the firm’s innovations, and the firm’s performance
will provide important managerial insights into impacting the firm’s performance.
Given the paucity of literature in this area, the aim of this research is to investigate
the relationship between organizational culture and firm performance and the role
of organizational innovations in this relationship. The context for studying the
relationship between the organizational culture, firm performance, and the innovations
in the organization is of a developing economy. Several motivations prompted us in this
decision. We believe that innovation and firm performance are critical characteristics
which can contribute to a developing economy’s growth and competitiveness (Kelly
and Kumar, 2009). It is important that we understand and contribute to the progress of
developing economies as their growth and development has important advantages in
the stability and engagement of the global community in the post-industrial era. Other
studies conducted in developing economies and nations have also tried to understand
the mechanisms which strengthen their innovativeness and entrepreneurial
orientations (Kumar and Uzkurt, 2010; De Carvalho and Barbin Laurindo, 2006).

Choice of data context

Following these motivations, we obtained the referent data set for this study from the
banking industry in Turkey. First, the Turkish context provided us with a culture
EJIM which has characteristics of both Europe and Middle East due to Turkey’s regional
16,1 location. The Turkish economy has recently seen positive growth and the political
experts have begun to classify it as an emerging economy or a largely developed,
newly industrialized country (IMF, 2011). Second, the banking industry provides the
financial foundation for growth and stability in any economy and particularly in
developing economies. The recent financial crisis and credit crunch on the global scene
94 was weathered admirably by the Turkish banking sector. Turkey’s banking sector was
one of the few which saw its rating upgraded a notch in January 2010 by Moody’s, the
international credit rating agency, due to the agency’s growing confidence in the
industry’s shock-absorption capacity (Bloomberg, 2010). In addition, the global arena
in this past decade has recognized that the financial sector is among the front runners
in innovation, new product offerings, and creative financial solutions. Third, Turkey
and other Middle East nations have given special attention to innovativeness in recent
years. Turkish businesses are working hard to be globally competitive in order to play
in the same league as other developing but innovative countries such as India,
China, and Korea. The Turkish banking industry has matured and has been reported
to be engaging in financial innovations in the past decade after a restructuring in 2001
when the private and foreign banks were stabilized. So the improving dynamism of
the Turkish economy and the growing maturity of the Turkish banking industry
provide several motivations to study and understand aspects of the banking
industry in Turkey. Consequently, we conducted our research in the context of the
banking industry in Turkey and aim to interpret findings from our study for help
in designing organizational cultures and in providing innovation-related training in
Turkish organizational environments as well as in the broader context.
The first half of the paper examines the body of literature and findings on
the constructs of innovation and organizational culture. The next section sets up the
relationships and hypotheses for examining the relationship between organizational
culture, firm performance, and the role of innovation. The second half of the paper
empirically examines the proposed hypotheses with data from 154 branches of the
banking sector in Turkey.

2. Literature background
This research has utilized two main streams of literature for building our model and
hypotheses. The first stream relates to innovation and innovativeness; the second stream
relates to organizational culture. We also examine the literature and current findings in
the area of innovations and culture specifically in banking organizations. In section after
the current one, we build our research model based on literature and findings at the
intersections of innovation, organizational culture, and firm performance.

Organizational innovation and innovativeness

Previous studies have viewed innovativeness in three separate contexts: industry
innovativeness, organizational innovativeness, and an individual’s innovativeness.
In this study we focus on innovativeness at the organizational level and attempt to
understand its characteristics. In this section, we will discuss research studies and
findings in the areas of innovation definitions, typologies of innovations, and the
process of innovations.
Definitions of innovation. Most researchers use innovation and innovativeness
interchangeably based on whether the study is investigating the end result of the
innovation process or the process of innovation itself (Damanpour, 1991; Salavou, 2004;
Van de Ven and Rogers, 1988). Innovativeness can be defined as “the generation, Organizational
acceptance and implementation of innovations” (Thompson, 1965). According to culture and
Lumpkin and Dess (1996) innovativeness shows the extent to which the firm is geared
to supporting new ideas, novelty, and creative processes resulting in new and performance
innovative products, technology, or processes. Innovation at the organizational level is
defined as new product, service, ideas, technology, process, and structure and includes
their generation, acceptance, adoption, or implementation (Daft, 1978; Damanpour, 95
1991; Thompson, 1965; Zaltman et al., 1973).
Typologies of innovations. Innovations have been categorized as different typologies
in the literature and these have been helpful in studying innovation and its
determinants as well as drivers. Gopalakrishnan and Damanpour (1997) identified
three most frequent typologies for innovation as administrative vs technical, product
vs process, and radical vs incremental. Administrative innovations are directly related
to management oriented processes, and work structures or activities while technical
innovations are related to products, services, and production process technology
(Damanpour and Evan, 1984; Damanpour, 1991; Kimberly and Evanisko, 1981; Read,
2000). Product innovations involve new products or services introduced to meet
external user or market needs, while process innovations are new elements introduced
into an organization’s production or service operations. Radical innovations are defined
as practices which are discontinuous from ideas and behaviors adopted by the
organization previously and incremental innovations represent the innovations which
emerge from gradual changes in existing practices and products (Dewar and Dutton,
1986; Ettlie et al., 1984; Wilson et al., 1999). Another useful typology uses the basic
modes of innovation for classifying as the science, technology, innovation (STI) or
the doing, using, interaction (DUI) innovations ( Jensen et al., 2007). The STI mode is
mainly based on analytical knowledge while DUI innovation mode is dominated by
engineering-based knowledge ( Johnsen and Isaksen, 2009; Lorenz and Lundvall, 2006;
Coenen and Asheim, 2006; Jensen et al., 2007; Lundvall and Johnson, 1994). This model
most often involves incremental changes in products and processes based on employee
experiences and competencies acquired on the job.
Process of innovation. In addition to definition and typologies of innovations,
research in this area has studied the process of organizational innovation. In this
context, organizational innovation is viewed as a pervasive and embracing
process which includes research, development, and implementation of new ideas and
behaviors (Damanpour, 1996). Innovativeness in an organization is considered to
motivate employees to stimulate the development of new products and processes
(Zaltman et al., 1973). Conceptually, the process of innovativeness can be categorized
into three groups: technology related, behavior related, and product related. From
the technology-related aspect, innovativeness comes from a basic willingness to depart
from existing technologies and practices, the propensity of the company toward the
adoption of new technologies internally and from among those presented from
different environmental opportunities (Kimberly and Evanisko, 1981; Kitchell, 1995).
From the behavior-related perspective, innovativeness represents the propensity for
behavioral change and the extent to which an organization or unit tends to adopt
new ideas relatively earlier than any other member in the referent organization
system (Rogers, 1995). From the product-related perspective, innovativeness indicates
the capacity of the company to buy or adopt new products or the ability to generate
new ideas for products, processes, or services (Hurley and Hult, 1998; Stalk et al.,
1992; Foxall, 1984).
EJIM In sum, organizational innovativeness is a popularly studied construct although
16,1 there are some inconclusive results, such as the impact of organizational size,
and there are only a few empirical studies (Aiken and Hage, 1971, 1984; Hage, 1980;
Utterback, 1974).

Organizational culture
96 Culture is a critical factor for firm’s continued operations, since it drives the
organization and its actions (Chang and Lin, 2007). In this section, we will discuss
research studies and findings in the areas of definitions of organizational culture and
typologies of organizational culture.
Definitions. Several definitions of organizational culture can be found in the
literature. The most common one is made by Lundy and Cowling (1996) and states that
organizational culture represents the type of activities naturally occurring in the
organization. Further specification of this perspective from studies in organizational
behavior, sociology, and anthropology describes organizational culture as “shared
values and beliefs which provide both insights for organizational functioning as well
as norms for behaviors” (Deshpande and Webster, 1989). Another popular description
of organizational culture is “the sum of the main assumptions which are adopted by
employees of the organization” (Martins and Terblanche, 2003). These assumptions
worked well in the organizations’ past, spread among people via human interaction
and are adopted and considered valid in the whole organization.
Organizational culture is ultimately important because it is an important driver of
critical outcomes of an organization’s functioning, such as innovation, productivity,
and financial performance. The essences of culture is that the organization’s
members can find solutions to problems about internal integration, adaptation to
environment, and coordination through shared cultural values (Blackwell, 2006;
Furnham and Gunter, 1993).
Typologies in organizational culture. Several studies in the literature have classified
organizational culture into categories (Blackwell, 2006; Martins and Terblanche, 2003;
Schein, 1992). The classification we found most useful in terms of understanding the
relationship of organizational culture with innovation is one which includes the four
categories of clan, hierarchy, adhocracy, and market (Deshpande et al., 1993; Cameron
and Freeman, 1991; Quinn, 1988). These studies have considered dominant attributes,
leadership styles, bonding, and strategic emphasis of the organization to determine the
type of culture in the organization. For example, while the dominant characteristics of a
clan culture are participation and teamwork, for a market culture the dominant
characteristics are competitiveness and goal achievement. The strategic emphasis of
an adhocracy culture is innovation while it is stability for a culture of hierarchy.
Deshpande et al. (1993) found that the culture type which has the most powerful effect
on organizational performance is a market culture and the least one is the culture of
hierarchy. It should be understood that there are several other classifications of an
organizations culture including Quinn and Spreitzer’s (1991) four cultures: group
culture, developmental culture, hierarchical culture, and rational culture; Chang and
Lin’s (2007) into four constructs: cooperativeness, innovativeness, consistency, and
effectiveness while Wallach (1993) categorized organizational culture as bureaucratic,
innovative, and supportive. Culture in this perspective could have a restrictive and a
directive impact on the strategies of organizations. In this research, we adopted an
approach of using innovative culture to examine the influence of organizational culture
on the innovation and firm performance.
Innovations and culture in banking organizations Organizational
Innovations and the banking sector. Turning our attention to the banking industry, it is culture and
worth noting that several research studies have examined innovation in the banking
sector although none have focussed on Turkish banking sector. Tipu (2011) performance
summarized studies in the area of innovation management in banks with findings in
the areas of process of innovation, factors affecting innovation, protection of
innovation, measures of innovation, and types of innovation. Johne and Harbourne 97
(1985) analyzed the organizational structure of product innovation in banks in terms of
formalization, standardization, specialization, centralization, and stratification.
According to Reidenback and Moak (1986) new product development activities are
linked to the level of performance in a retail bank. Scarbrough and Lannon (1998) found
positive leadership and structural change were pre-conditions for innovative
opportunities created by IT in banks. Haaroff (1983) focussed on new financial
service development and Shostack (1984) focussed on innovative service delivery
designs. While Cowell (1988) investigated the differences and similarities between new
product and new service development in the banking sector, Davison et al. (1989)
analyzed the nature of new service development by focussing on the use of market
research, and Scheuing and Johnson (1989) developed a normative model for new
service development in the banking and financial sector.
The drivers for success of innovations in the banking sectors have been identified
in several studies and include superiority, sociability, satisfaction, simplicity,
separability, speed of innovation, use of technology, differentiation, product fit
within organization, and internal marketing (Donnelly, 1991; Easingwood and
Storey, 1991; De Brentani, 1989). Other studies have found non-direct factors which
drive the success of innovative financial services such as corporate reputation
and market penetration (Easingwood and Percival, 1990). Organizational culture has
also been studied as a driver for innovation in banking and financial products and
services. The culture factors encouraging innovations include an innovative vision
and leadership, management style, flexible organizational structure, nurture of
idea generation, and support for innovative initiatives (Thwaites and Edgett, 1991;
Thwaites, 1992).
Culture and Turkish banking sector. The organizational culture in the banking
sector has changed over the years. While the banking industry was traditionally a tight
bureaucratic structure with high levels of standardization, centralization, and limited
flexibility in the past, today’s banking sector confronts an extremely competitive
environment which requires adaptation to rapid external changes because of
deregulation, global competition, and technical evolution (Axel and Harborne, 1985;
Liu and Chen, 2008). In parallel with the changes in the world and influenced by
impacts of globalization, organizational culture in Turkish banking sector has shifted
from bureaucratic to innovative. The banking industry is the most competitive service
industry in Turkey. This competitive environment makes banking industry necessarily
innovative, so the organizations in banking industry adopt innovations faster than
their counterparts in any other service industry in Turkey. Individual customers
constitute a large part of banking portfolios in Turkey. So many of the innovative
practices target individual customers and credit card related products are among the
most important new and innovative offerings in the banking industry. In recent times,
the global financial crisis had strong negative effects on the financial sector in many
economies and the negative effects have in fact become stronger in the last two years.
Several banks declared bankruptcy in both developed and developing economies. It is
EJIM important to note that the effects of the financial crisis on the Turkish banking sector
16,1 have been markedly less negative than its counterparts in other developing economies.
The restructuring program implemented after the 2001 crisis enabled the financial
sector in Turkey to be resilient and benefit from innovative practices built on top of
strong financial foundations.

98 3. Development of model and hypotheses

The main premise of the study is that an organization which has a culture that
promotes innovations is likely to be innovative, which, in turn, is likely to result in
achievement of superior firm performance. The model is illustrated in Figure 1.

Organizational culture and innovation

If organizational culture encourages creative solutions, problems could be defined and
solved in innovative ways (Lock and Kirkpatrick, 1995). Such organizational cultures
affect the extent to which creative solutions are encouraged, supported, and
implemented (Martins and Terblanche, 2003). Innovations can then be absorbed into
the organization more successfully (Syrett and Lammiman, 1997; Tushman and
O’Reilly, 1997). The innovation absorption capacity of an organization and its
management processes have been studied in the context of firm performance and
organization culture and has been found to be an important factor impacting success of
the organization (Tushman and O’Reilly, 1997).
Organizational culture affects innovative behavior in two ways (Martins
and Terblanche, 2003). The first happens by the socialization process of
individuals through which they learn how to act and behave. The second way in
which culture affects behavior is by basic values, beliefs, and assumptions
which reflect the organization’s structure, policy, management concept, and
procedures. These basic dimensions of organizational culture also provide an
important source for new ideas within the organization. Martins (1987, 1997) has
studied additional socio-physical dimensions which lead to an innovative
organizational culture including leadership, mission and vision, external
environment, means to achieve objectives, image of the organization, management
processes, employee needs and objectives, interpersonal relationships. Martins
and Terblanche (2003) developed a model showing that organizational culture has
an influence on the degree to which creativity and innovation take place in the
organization. In this model, the dimensions that either support or inhibit creativity
and innovation in the organizational culture are strategy, structure, support
mechanisms, behavior that encourages innovation, and communication. Following
this line of logic, we hypothesize that:

H1. Innovative organizational culture is positively associated with innovation.

Innovation Firm performance

Organizational H1 H3
-Incremental -Profitability
culture -Offering consumer -Market share
advantages -Market value
Figure 1.
Research model H2
Organizational culture and firm performance Organizational
Some studies in the literature have focussed on the relationship between organizational culture and
culture and firm performance (Ngo and Loi, 2008; Lau and Ngo, 1996; Chan et al., 2004).
Most previous studies examining relationships between organizational culture and performance
firm performance have found support for the effects of organizational culture on firm
performance (Daft, 2007; Kotter and Heskett, 1992; Denison and Mishra, 1995; Ngo and
Loi, 2008). Ngo and Loi (2008) suggested that a culture which is adaptive has a positive 99
effect on market-related performance. Chan et al. (2004) also found evidence that
organizational culture is related to firm performance.
Firm performance has been assessed by diverse outcome measures. In this research
we have utilized three measures to assess firm performance – profitability, market
share, and market value. Accordingly, we propose the hypotheses:

H2a. Innovative organizational culture is positively associated with profitability.

H2b. Innovative organizational culture is positively associated with market share.

H2c. Innovative organizational culture is positively associated with market value.

Innovation and firm performance

Finally, the link between innovativeness and firm performance has been studied by
some researchers. Innovation has been found to play a critical role in achieving
superior organizational performance and in the success of the firm (Hult et al., 2004;
Hurley and Hult, 1998; Mone et al., 1998; Pitt and Clarke, 1999). Organizations try
to impact the quantity and quality of their innovations which in turn is expected to lead
to improved firm performance.
There are several studies supporting that innovation has a positive effect on firm
performance (Artz et al., 2010; Eisingerich et al., 2009; Chen et al., 2009; Rosenbusch
et al., 2011; Damanpour and Evan, 1984). Hua and Wemmerlov (2006) found a positive
relationship between rate of new product introduction and firm performance.
Rosenbusch et al. (2011) show that innovation has a positive effect on the performance
of SMEs. Some researchers also suggest that innovative firms have higher profitability
and growth (Li and Atuahene-Gima, 2001; Price, 1996). Chen et al. (2009) suggest that
innovation orientation plays a critical role in facilitating superior firm performance in
service firms. Other researchers have also confirmed for various industry segments
that innovation is an important determinant of superior firm performance and
competitiveness (Baker and Sinkula, 2002; Damanpour, 1991; Farley et al., 2008;
Jimenez-Jimenez and Sanz-Valle, 2011; Luk et al., 2008). Thus, we propose the
following:

H3. Innovation is positively associated with firm performance.

Mediating effect of innovation

While most studies above examined the direct effect of innovation on firm
performance, some studies in the literature focussed on innovation having a mediating
role in the relationship between organizational culture and firm performance (Tseng
et al., 2008), or market orientation and firm performance (Agarwal et al., 2003). For
example Agarwal et al. (2003) found that market orientation in an organization’s
culture tends to spur innovation, which in turn, enhances performance. Tseng et al.
EJIM (2008) suggested that organizational culture influences innovation activity in a firm,
16,1 which, in turn, enhances firm performance. Accordingly, we propose that innovation
plays a mediating role on the relationship between organizational culture and firm
performance. Thus, in the light of the above reasoning, we propose the following
hypotheses:

100 H4a. Innovation mediates the relationship between innovative organizational

culture and profitability.

H4b. Innovation mediates the relationship between innovative organizational

culture and market share.

H4c. Innovation mediates the relationship between innovative organizational

culture and market value.

4. Research methodology: data and measures

Data: the context of the banking industry in Turkey
In recent years, the government agencies as well as organizations in Turkey have
realized the importance of innovations in order to compete in the global markets.
Innovativeness plays a critical role for sustaining business growth in domestic markets
as well as in gaining competitive advantage in international markets. Businesses in all
countries need to work toward domestic and global competitive advantage, and this is
especially important for a developing country such as Turkey. Turkey is considered
a developing country much like South Korea, Brazil, and Mexico and Turkish
businesses and markets have characteristics of both Europe and Middle East
consumers, because of its geographical location. Accordingly, our research has utilized
Turkey as a developing economy for a data context as an attempt to understand the
mechanisms which strengthen innovations in developing economies.
In addition, there are no studies in the literature which have examined the
dimensions of organizational culture and innovativeness in the Turkish context, and
there are only a few studies investigating the relationship between these research
variables in any other cultural context. Therefore, the results of this study could
provide some valuable findings for both academics and practitioners.

Variables and measures

The questionnaire utilized in this study includes a section with demographic questions
and sections with questions on the scales used to measure the research variables of
interest in this study.
Independent variable. In the first part of the questionnaire, the innovative
organization culture scale developed by Chang and Lin (2007) was used to measure
organizational culture. Chang and Lin (2007) developed the organizational culture
scale based on prior studies (Cameron and Freeman, 1991; Quinn and Spreitzer,
1991; Denison et al., 2004; Boggs, 2004). They used four constructs to categorize the
characteristics of organizational culture as follows: cooperativeness, innovativeness,
consistency, and effectiveness. Cooperativeness emphasizes the internal and flexibility
orientations, and focusses primarily on cooperation, information sharing, trust,
empowerment, and teamwork. Innovativeness can be characterized by external and
flexibility orientations with a focus on creativity, entrepreneurship adaptability, and
dynamism. Consistency focusses on order, rules and regulations, uniformity, and efficiency.
Effectiveness emphasizes external and control orientation, with a focus on Organizational
competitiveness, goal achievement, production, effectiveness, and benefit-oriented culture and
measures. The four constructs of organization culture were operationalized using 26
items measuring organization characteristics, character of leader, organizational performance
clime, and management style.
We adopted the items for measuring the trait of innovativeness of culture in our
study. The items of the innovative organization culture scale consist of six questions 101
and a five-point Likert scale was used to rate these items from 1 ¼ strongly agree to
5 ¼ strongly disagree.
Mediator variable. The innovation scale developed by Darroch and Jardine (2002)
was used to measure innovations in the banking businesses. Darroch and Jardine’s
work was influenced by innovation scales developed in Booz, Allen and Hamilton
(1982) and in a study by Green et al. (1995). Innovations were measured as incremental
innovations, innovations offering advantages to consumers, and innovations that risk
the business. We adopted Dorrach and Jardine’ innovation scale because it combines
company- and consumer-based perspectives of innovation, while most innovation
scales in the literature are firm centered and do not take into account the impact
innovations might have on consumers. It is very important to include consumers’
perspectives when measuring innovation as the innovation does not become successful
unless accepted and adopted by the consumer. It consists of 11 items with a five-point
Likert scale used to rate these items from 1 ¼ strongly agree to 5 ¼ strongly disagree.
Dependent variable. The next part of the questionnaire included questions about
firm performance. Firm performance has been measured using several different
perspectives in the literature – financial and non-financial, business unit performance,
or organizational performance; subjective ( judgmental) and objective. We decided to
use financial measures of firm performance adopted in several studies, more
specifically by Deshpande et al. (1993), Blazevic and Lievens (2004), Avlonitis et al.
(2001), and Jaworski and Kohli (1993). We measured performance with three items –
profitability, market share, and market value – because the three measures are
commonly accepted among key performance measures in the banking industry
(Li et al., 2008). As a judgmental and self-reported score, this measure asked
respondents for their assessment of the performance item of the business relative to
major competitors, rated on five-point scale ranging from “poor” to “excellent.” An
average of these three key measures of performance was also calculated and
represented a bank’s “overall measure of performance” in our study.
Demographic variables. The last part of the questionnaire included questions about
demographic characteristics and job titles of respondents.

Data collection and sample selection

Data for the study were collected through a survey. Several branches of banks which
operate in Turkey were selected as the sample of the study. The banks are Fortis Bank,
Is Bank, Vakıfbank, Finans Bank, Ziraat Bank, Akbank, ING Bank, HSBC, Denizbank,
and Garanti Bank. Table I shows that these banks are the top 15 out of 45 Turkish
banks in terms of amount of deposits, number of personnel, and the number of
branches. They are also known as the most innovative banks in the country. Five
among these top 15 banks did not give permission to collect data. A total of 300
surveys were distributed to the branches of the banks through their headquarters and
159 of them were returned. Five of the returned surveys were eliminated due to
insufficient data and the remaining 154 surveys were analyzed for research findings.
 16,1

102
EJIM

Table I.

in data sample
Deposits and profiles
of major Turkish banks
Total deposits Total deposits Total equities Net period profit and loss
(market shares) (million TL) (million TL) (million TL) Number of branches Number of personnel

Ziraat Bank 19.9 113.441 12.273 2.733 1.373 22.487

Türkiye İs¸ Bank 14.1 80.449 16.075 2.379 1.135 23.653
Türkiye Garanti Bank 12.3 70.179 15.603 2.447 834 17.029
Akbank 11.2 63.522 16.313 2.166 897 15.133
Yapı ve Kredi Bank 8.2 46.834 9.944 1.779 862 14.402
Türkiye Vakıflar Bank 8.3 47.500 8.196 765 605 10.955
Türkiye Halk Bank 9.1 51.655 6.984 1.511 701 13.686
Finans Bank 3.9 22.060 4.250 560 486 11.062
Denizbank 2.5 14.511 3.009 353 477 8.227
TEB 1.7 9.742 1.845 177 335 5.733
ING Bank 1.7 9.403 2.079 112 329 5.828
HSBC Bank 1.6 9.376 2.630 186 335 6.511
Fortis Bank 1.0 5.649 1.984 69 294 4.776
Şekerbank 1.2 6.909 1.343 104 260 3.543
Citibank 0.7 4.058 917 64 38 2.001
Note: 1$ equals 1.52 Turkish Liras (TL)
Source: www.tbb.org.tr/tr/Banka_ve_Sektor_Bilgileri/Istatistiki_Coklu_Raporlar.aspx?Rid¼964
The distribution of returned surveys was as follows: Is Bank 23, Vakıfbank 20, Organizational
Finansbank 15, Fortis 5, Garanti Bank 21, Ziraat Bank 24, Akbank 25, Denizbank 10, culture and
ING Bank 5, HSBC 6. The data were analyzed through SPSS (17.0).
performance
5. Results
Profile of the respondents
Information about job titles, departments, and seniority of respondents are represented 103
in Table II. A considerable proportion of respondents consist of managers from
operational departments. The number of managers is high because banks have a high
number of managerial positions in their organizational structures with the aim of
improving efficiency and responsiveness of decision making. In terms of seniority, a
considerable proportion of respondents have job experiences between one and five
years.
Table III presents demographic characteristics of respondents (employees) and
it shows that the distribution of men and women is roughly equal. The mean of age is
in the 26-35 years range. Most of the respondents have a BS degree. Therefore, a large
proportion of our bank respondents were young manager employees with a BS degree.
As shown in Table IV, this demographic of BS degree is because the Turkish banking
sector hires applicants with a BS degree more than other education levels.

Reliability, factor analysis, and mean values

Table V shows the means and standard deviations of the responses to items which
measure the dimension of innovative organizational culture and of innovations in the

n %

Position
Manager 65 42.21
Booking clerk 44 28.57
Assistant manager 13 8.44
Portfolio specialist 11 7.14
Assistant 11 7.14
Customer service executive 10 6.50
Department
Operation 63 40.91
Credits 17 11.03
Personal 16 10.39
SME 14 9.09
Marketing 13 8.44
Counter 8 5.19
Cash 5 3.25
Commercial 5 3.25
Customer relations 5 3.25
Current (checking) accounts 4 2.60
Sales clerk 4 2.60
Tenure at work
1-5 97 62.99
6-10 32 20.78 Table II.
11-15 16 10.39 Employee
16-20 9 5.84 positions at work
EJIM n %
16,1
Gender
Female 72 46.75
Male 82 53.25
Age
104 20-25 27 17.53
26-30 55 35.71
31-35 47 30.52
36-40 16 10.39
41-45 9 5.85
Education
High school 17 11.04
Table III. Associate degree 9 5.84
Demographic Bachelor’s 123 79.87
characteristics of sample Master 5 3.25

organization. It can be seen from Table V that the means are accumulated in 3.5-4
which is in the higher percentile of the innovative organizational culture scale.
Factor analysis is applied to both innovations and organizational culture scales
separately. Table VI represents the results of factor analysis and reliability coefficients
of scales. Cronbach’s a values are calculated as 0.84 and 0.85. Therefore these values
represent that the reliability values of scales are considerably higher than acceptable
limits. According to the results of reliability analysis, three items which have item-total
correlation values lower than 0.40 were eliminated. Two items of the innovations scale
were dropped (INV3 and INV9) while one item of the organizational culture scale was
eliminated (IOC4). As a cut-off loading was used 0.40. All of the factor loadings were
above 0.54 which can be assumed a high level of significance. As the measurement
items for each of the categories were factor analyzed we can say that the measures used
in this study have construct validity (Nunnally, 1978).
The results of the factor analysis revealed that innovativeness scale emerged with
two sub-factors. The general characteristics of these sub-factors were examined and
the first one is titled as “incremental innovations” and the second one is entitled as
“innovations offering consumer advantages” in accordance with the classifications in
Darroch and Jardine (2002). We thus have two factors of innovation while Dorrach and
Jardine’s scale used in this study had three factors of innovation. One of the reasons
might be that our analysis dropped two items as a result of our factor analysis and one
of these dropped items belongs to the third factor, innovation which risks the business,
in the Dorrach and Jardine’ scale. Their study also found no relationship between this
factor and performance. The correlation values of the items related to each sub-factors
were between 0.40 and 0.65 while the correlation between incremental innovation
and innovation offering consumer advantages was 0.27. These results show that
innovativeness scale has both convergent and divergent validity.
According to the factor analysis, all items in the innovative organization
culture scale loaded on just one factor and factor loadings accumulated in the
0.74-0.87 interval. The factor loadings of items are considerably high and since
the Cronbach a value is 0.84, the reliability of the scale is considered as high.
KMO values of scales are also between 0.79 and 0.91 and these values fall into
acceptable limits.
 Primary education Secondary education Higher education Master/doctorate
M F T M F T M F T M F T

Ziraat Bank 274 12 286 4.312 857 5.169 9.482 5.840 15.322 849 861 1.710
Türkiye İs¸ Bank 190 1 191 3.038 2.249 5.287 8.143 9.296 17.439 352 384 736
Garanti Bank 77 6 83 1.837 831 2.668 5.071 8.540 13.611 292 375 667
Akbank 78 0 78 1.680 448 2.128 5.257 6.898 12.155 390 382 772
Yapı ve Kredi Bank 23 3 26 1.270 1.488 2.758 3.831 7.125 10.956 289 373 662
Türkiye Vakıflar Bank 275 8 283 1.423 1.311 2.734 3.659 3.817 7.476 207 255 462
Türkiye Halk Bank 80 1 81 2.205 1.144 3.349 5.103 4.337 9.440 412 404 816
Finans Bank 19 0 19 1.582 949 2.531 2.955 5.027 7.982 250 280 530
Denizbank 155 226 381 1.833 1.883 3.716 1.798 1.987 3.785 166 179 345
TEB 22 0 22 655 279 934 1.935 2.473 4.408 196 173 369
ING Bank 27 0 27 709 281 990 1.847 2.633 4.480 154 177 331
HSBC Bank 27 3 30 760 519 1.279 1.822 3.080 4.902 134 166 300
Fortis Bank 50 8 58 757 382 1.139 1.278 2.064 3.342 123 114 237
Şekerbank 50 6 56 302 301 603 1.212 1.541 2.753 67 64 131
Citibank 4 3 7 46 45 91 705 1.014 1.719 77 107 184
Notes: M, male; F, female; T, total
Source: www.tbb.org.tr/tr/Banka_ve_Sektor_Bilgileri/Istatistiki_Coklu_Raporlar.aspx?Rid¼964
Organizational

major Turkish banks

in data sample
performance

Table IV.
culture and

105

Demographic profile for

EJIM Items Mean value* SD
16,1
Innovative organization culture
IOC1. Managers have courage to make innovation and take risk 4.00 0.78
IOC 2. Managers actively lead the staff to grow and innovate 3.93 0.91
IOC 3. Managers have vision and insights to create new
106 business opportunities 3.86 1.05
IOC 4. Employees always have to face challenges and they can
learn and grow from the challenges 4.19 0.80
IOC 5. Your company pays attentions to the uniqueness of
employees and encourages the innovation from employees 3.65 0.95
IOC 6. Your company is willing to take risks, and it is indeed an
ambitious and energetic organization 3.74 0.99
Innovations
INV1.We develop products or services that better meet the
needs of consumers than any other product or service currently
available 4.04 0.83
INV2.We often add new product or services to our existing
ranges 4.23 0.80
INV3.We have launched products or services for which this
organization lacks the technological knowledge 2.96 1.25
INV4.We often reposition existing products or services 3.92 0.80
INV5.We often change the way we make or deliver products or
services 3.56 0.93
INV6.We develop products or services that will require
consumers to substantially alter their behavior 3.76 1.04
INV7.we often improve or revise existing products or services 3.80 0.94
INV8.We have launched products or services that are the first of
their kind in the world 3.47 1.16
INV9.We have lunched products or services for which this
organization lacks the business experiences or knowledge 2.39 1.11
INV10.We develop product or services that offer greater
advantages to consumers than any other product or service
currently 3.94 0.84
INV11.We often introduce new ranges of products or services
Table V. not previously offered by this company 3.49 1.05
Mean and standard
deviation values of items Notes: *Scale: 1 ¼ “strongly disagree”; 5 ¼ “strongly agree”

Hypotheses testing
This study examined the moderating effects of innovation on the relationship between
organizational culture and firm performance. Table VII shows the means, standard
deviations, and correlations for all measured variables in the study. The results of
correlation analysis determine the degree and direction of relationships among
the research variables. The results show that there is a high level of positive
correlation between overall innovation and performance (r ¼ 0.764; po0.001), a
medium level positive correlation between organizational culture and overall
innovation (r ¼ 0.616; po0.001) and between organizational culture and firm
performance (r ¼ 0.596; po0.001). These results provide an important support for
the relationships studied in our research hypotheses.
To test the research model we employed regression analysis. Table VIII presents the
results of the regression analysis. The regression procedure specified by Baron and
Items Factor loadings Reliabilitya
Organizational
culture and
Incremental innovation performance
INV2. We often add new product or services to our existing ranges 0.854 0.85
INV1. We develop products or services that better meet the needs of
consumers than any other product or service currently available 0.836
INV4. We often reposition existing products or services 0.742 107
INV10. We develop product or services that offer greater
advantages to consumers than any other product or service
currently 0.702
Innovation offering consumer advantages
INV6. We develop products or services that will require consumers
to substantially alter their behavior 0.808 0.84
INV7. We often improve or revise existing products or services 0.792
INV11. We often introduce new ranges of products or services not
previously offered by this company 0.770
INV8. We have launched products or services that are the first of
their kind in the world 0.690
INV5. We often change the way we make or deliver products or
services 0.540
KMO: 0.793, w2: 327,511, df: 10, po0.000, % Variance: %55.452 (GDY); %11,389 (RY) INV3 and
INV9 were dropped based on the reliability analysis
Innovative organization culture
IOC2. Managers actively lead the staff to grow and innovate 0.874 0.84
IOC5. Your company pays attentions to the uniqueness of
employees and encourages the innovation from employees 0.824
IOC3. Managers have vision and insights to create new business
opportunities 0.809
IOC1. Managers have courage to make innovation and take risk 0.743
IOC6. Your company is willing to take risks, and it is indeed an
ambitious and energetic organization 0.676
KMO: 0.910, w2: 653.246, df: 36, po0.000, % Variance: 62.141 IOC4 was dropped based on the Table VI.
reliability analysis The results of factor
analysis and reliability
Note: aReliability estimates are Cronbach’s a computed from study sample analysis of the scales

Kenny (1986) is used to test for mediation effect of innovation on the relationship
between organizational culture and firm performance. This method proposed that an
explanatory variable (which is organizational culture in this study) must be related
independently to both a mediator variable (which is innovation) and dependent
variable (which is firm performance). In our regression analyses, organizational culture
was included as an independent variable while innovation was included as both
independent and mediator variable. The premise that organizational culture is related
to both innovation and firm performance is based on our analysis of the correlation
results. If the regression coefficient associated with organizational culture is
insignificant when both organizational culture and innovation are simultaneously
included as explanatory variable in a regression equation, then it is assumed that
innovation has a mediating role on the relationship between organizational culture and
firm performance. The results are reported in the Table VIII.
The results of the regression analysis (see Equation (1)); in Table VIII show that
innovative organization culture is positively and significantly related to innovation
 16,1

108
EJIM

Table VII.

correlations
deviations, and
Means, standard
Mean SD (1) (2) (3) (4) (5) (6) (7)

(1) Organizational culture (OC) 3.75 0.75 –

(2) Incremental innovation (INCIN) 4.03 0.68 0.648**
(3) Innovation offering to customer advantage (INCA) 3.50 0.76 0.558** 0.653**
(4) Overall innovation (INCIN  INCA) 3.75 0.78 0.616** 0.760** 0.898**
(5) Profitability (PF) 3.21 1.51 0.532** 0.601** 0.612** 0.673**
(6) Market share (MS) 3.24 1.41 0.480** 0.587** 0.589** 0.647** 0.673**
(7) Market value (MV) 3.48 1.44 0.496** 0.536** 0.596** 0.611** 0.477** 0.550**
(8) Overall performance (PF  MS  MV) 3.32 1.23 0.596** 0.678** 0.720** 0.764** 0.855** 0.867** 0.800**
Note: **Correlation is significant at the 0.01 level (2-tailed)
 Dependent variables (firm performance)
Mediator
Equation Regression Independent variable Market Market Overall Adjusted
no. equation variables (innovation) Profitability share value performance R2 F-value

1 INA ¼ b0 þ b1  OCB OC 0.61* 0.37 91.63*

2 PFC ¼ b0 þ b1  OC OC 0.53* 0.28 59.27*
3 PFC ¼ b0 þ b1  OC þ b2  IN OC 0.19 ns 0.47 67.53*
IN 0.56*
4 MSD ¼ b0 þ b1  OC OC 0.48* 0.22 44.85*
5 MS ¼ b0 þ b1  OC þ b2  IN OC 0.13 ns 0.42 56.00*
IN 0.57*
6 MVE ¼ b0 þ b1  OC OC 0.49* 0.24 48.97*
7 MV ¼ b0 þ b1  OC þ b2  IN OC 0.19 ns 0.39 48.95*
IN 0.49*
8 OPF ¼ b0 þ b1  OC OC 0.59* 0.31 62.28
9 OP ¼ b0 þ b1  OC þ b2  IN OC 0.21 ns 0.49 71.02
IN 0.64*
Notes: ns, Not significant; A: IN, innovation; B: OC, organizational culture; C: PF, profitability; D: MS, market share; E: MV, market value; F: OP, overall
performance; *po0.001
Organizational

analyses with innovation

The results of regression
performance
culture and

Table VIII.
109

as mediator
EJIM (b ¼ 0.61; po0.001). This supports our H1. The results (see Equations (2), (4), (6)) in the
16,1 Table VIII reveal that all three dependent variables which are dimensions of the firm
performance are significantly and positively affected by the organizational culture
(bprofitability ¼ 0.53; bmarket share ¼ 0.48; bmarket value ¼ 0.49; po0.001). The findings
support H2a, H2b, H2c. The results (see Equation (8) in Table VIII) also show that
overall firm performance is significantly and positively affected by the organizational
110 culture (boverall performance ¼ 0.53; po0.001).
Mediating role of innovation. The regression analyses (see Equations (3), (5), (7), (9))
results show that, although there is a medium level positive correlation between
organizational culture and firm performance (see Table VII), organizational culture
does not explain the variance in firm performance dimensions (which are profitability,
market share, and market value) nor in overall performance and has an insignificant
regression coefficient on the dependent variables in the presence of innovation.
The results of the regression analyses also show that innovation explains a significant
amount of variance in the firm performance dimensions. Therefore, these findings
support the main premise of the study that innovation has a mediating role on the
relationship between organizational culture and firm performance. Hence, H4a, H4b,
and H4c are supported. We can also conclude that innovation is a full mediator in the
relationship between organizational culture and firm performance. These findings also
support H3 because the results (see also Equations (3), (5), (7)) from regression analyses
suggest that innovation has a direct and positive effect on the firm performance
dimensions (bprofitability ¼ 0.56; bmarket share ¼ 0.57; bmarket value ¼ 0.49; po0.001).

6. Discussion
Innovation has become one of the important means for firms to stay competitive and
ensure continued good performance. Organizations spend considerable time and effort
fostering an organizational culture which contributes to sustained good performance.
This research studied the relationships between organizational culture, its innovations,
and its performance. The overall premise of the model tested was that encouraging
and increasing innovations in the organization can be positively impacted by the
organization culture, which in turn would be related to good firm performance.
Our results are strictly applicable to the banking industry in the Turkish financial
services sector. However, the extensive literature review conducted in this study leads
us to expect that perhaps results will apply to the banking sector in other cultures as
well, although future research will be needed for such generalizability.

Conclusions
Our study found positive results for all the relationships hypothesized in our model.
Organizational culture as well as an organization’s innovations had a significantly
positive relationship with firm performance. There was also a significant and positive
relationship between organizational culture and organizational innovations. In addition,
very notably, our results show that organizational innovations play a mediating role in
the relationship between organizational culture and firm performance. Innovation
explained a significant amount of variance in the firm performance dimensions.
Our findings indicate that it is beneficial for organizations to nurture an
innovative organizational culture by instituting mechanisms and structures which
foster new ideas and ways of thinking and operating as this is likely to improve
firm performance. We found that innovations are encouraged by an innovative
organizational culture. Our conclusions emphasize that the introduction, adoption, and
diffusion of innovations can be facilitated in the organizations with mechanisms to Organizational
encourage and foster an innovative culture. culture and
Managerial implications performance
This study allows us to make important managerial recommendations for improving
firm performance as well as organizational innovations. Managers can harness the
positive impacts of the relationship we concluded exists between organizational 111
culture and innovations. Managers work hard to increase innovations of all types and
at various levels in their organizations. We can now say that the generation of
innovations can be impacted by fostering the right organizational culture. Results from
the survey used in our study indicate it is possible to instill an innovative
organizational culture with active encouragement and support from managers.
An innovative organizational culture is open to the risks and opportunities of
innovations and new ideas. An organization which recognizes and nurtures the
uniqueness of its employees and empowers the managers to follow their vision will
have an innovative culture. The existence of such climates and culture will motivate
and support innovation in business.
An informal review of popular writings and discussions on culture among
managers indicated some generally utilized mechanisms and actions which are
believed to encourage an innovative culture. One idea is that leaders and managers
should motivate the employees to create new ideas and reward them when necessary;
they can also establish an environment where new ideas are openly and freely shared.
Another idea deals with communication which should be open and horizontal rather
than vertical, and, cross-departmental integration in addition to within departments.
All members of the organization can participate in the innovation activities and there
should be easy ways to utilize innovation sources outside the organization through
customers, competitors, and research institutions rather than relying on only internal
sources.
Our findings provide useful insights for organizations, particularly in the banking
industry, seeking to be competitive and responsive to environmental changes by
successfully introducing innovations. The banking sector faces several environmental
and regulation changes particularly in recent years. The banking industry operates in
a very competitive environment and as a result, innovations are very useful for flexible
and just-in-time responses to competitive challenges. Traditionally, the banking
industry has been more focussed toward quantitative and technology mechanisms and
organizational culture has not been very highly prioritized. Results of this study
indicate that they will benefit from a focus on fostering an innovative, open, and risk
supporting organizational culture.
Our study utilized data from Turkey and this provided us with unique inroads into
understanding important aspects of Turkish organizational environments. Turkey has
a very dynamically changing and improving corporate climate and there is much
realization that they have to compete in the global arena for rapid growth. Perhaps due
to this, professional management and encouragement of innovations has been a top
agenda item for the government as well as the civic community in general. The
challenge here is that Turkey as a nation scored low on individualism, high on
Hofstede’s dimension of power distance, and high on his dimension of uncertainty
avoidance (Hofstede, 1991). Turkey has historically had a collective or group-oriented
business culture and decisions are often made based on what is best for the group.
As a population, those with high uncertainty avoidance score do not deal well with
EJIM uncertain situations and avoid those kinds of situation where changes, uncertainties,
16,1 and new ideas are adopted. Cultures with high power distance tend to not be open and
sharing of ideas and empowerment of employees is not the norm. Taken together, these
insights into the Turkish culture paint the Turkish business person as typically
uncomfortable with innovations, having a social distance from superiors in
hierarchical structures, and tending to think collectively. As a result, the Turkish
112 manager would find it challenging to foster innovations and mechanisms to help
would enhance business performance. Thus, mechanisms to foster and nurture
an innovative organizational culture as suggested from our study would go a long way
in helping Turkish organizations stay competitive and enhance performance.
Finally, there are limitations in our results as our study was conducted with data
from only one region, i.e. Turkey, and the data were collected from the banking sector
as a research sample. So the results can be at most generalized to Turkish banking
industry. Although our study of the literature in this area leads us to expect that our
findings are likely to be applicable to some other national contexts and other
industries, future research should test the hypothesis with data from other contexts.
In addition, further research with a larger sample size and different sectors will allow
comparing results so that the relationships could be determined more clearly. Further
research can also test the impact of other constructs such as environmental turbulence
and competitive intensity on organizational innovation.

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Further reading
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Corresponding author
Cevahir Uzkurt can be contacted at: cuzkurt@ogu.edu.tr

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