A multiple climates approach to understanding business unit effectiveness

Abstract

We propose four theoretically competing climates that are important for business-unit performance: climates for external control, internal control, internal flexibility, and external flexibility. Using a sub-sample of 620 business units from multiple companies across different industries and countries, we identified mechanisms by which climates influence business performance, accounting for different stakeholder interests. Climate for external control related directly to perceived business performance; climates for external flexibility and internal control both related to customer loyalty, which in turn predicted perceived business performance. Importantly, we show the moderating role of context whereby climate for internal flexibility was positively associated with perceived business performance, but only when market volatility was high. Drawing on the notion of ambidexterity, business units with higher effectiveness measures for all stakeholders also had high levels of all four climates, concurrently. The study supports the value for organizational effectiveness of having multiple climates that collectively accommodate an internal- and external-focus, as well as control and flexibility.