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Quantifying Cultural Clash Potential in Mergers and Acquisitions

A Model

Forschungsarbeit 2010 37 Seiten

BWL - Investition und Finanzierung

Leseprobe

Table of Contents

Introduction

Chapter One - Theoretical Framework
Part One - National Culture
Part Two - Corporate Culture
Part Three - Professional Culture
Part Four - Individual Culture
Part Five - Culture of the Deal

Chapter Two - A Scoring Model
Part One - Basis of the Scoring Model: Elements and Scales
Part Two - Core of the Scoring Model: Weighing of the Elements
Part Three - Potentials and Limitations of the Model

Chapter Three - Consequences of Cultural Differences

Chapter Four - Case Study Daimler Chrysler

Conclusion

Bibliography

Appendix

Introduction

Culture is the result of past successes.

Hofstede et al. (1990)

As a consequence of accelerating globalization and market integration, most industries are going global as well. Due to decreasing transportation and communication cost, companies decentralize their departments across countries to make use of the respective locations’ (cost) advantages. Moreover, shareholders’ expectations of management to meet ambitious growth targets have caused pressure to grow also externally. Thus, companies horizontally integrate competitors to remain of competitive size in a globalized industry, to gain access to resources and knowledge or to reach a broader market. They also integrate vertically to decrease transaction cost and secure supply. Beyond these rational targets, agency problems may increase the number of transactions. Management’s remuneration is in most cases bound to meeting growth targets, even if their means may in the long run not be justified by the ends.

Altogether, these forces have led to five reported Merger and Acquisition (M&A) waves in the 20th century, each with a different focus, and each involving more cross-national activity (Maug 2009). However, a McKinsey report unveils that only few of them have been successful in terms of profits (Illustration 1, appendix), especially when compared with the expected growth that the stand-alone companies would have had. Some of the failures can certainly be explained by economically flawed reasons for the transactions. Goedhart, Koller and Wessels find that there are only five types of value-creating M&A activity, while most M&A conducted for other reasons fail (2010: 4). However, there also exist economically thoroughly reasoned M&A transactions, yet turning out to be failures. How can that happen?

This paper steps in right here. Differences in culture, though they had always existed, slowly come into the limelight of public and researchers’ attention as a reason for M&A failure. A McKinsey analysis reports that many M&A underperformances have only partially direct economic reasons, while “unsettled customers and distracted staff explaine[d] the rest” (Bekier, Bogardus, and Oldham 2001: 7). To follow up on this insight, they show in a different report that the performance of a company is to a large extent determined by the performance of corporate culture, for instance through the quality of their decision-making processes (Illustration 2, appendix by Lovallo and Sibony 2010: 5).

This paper aims at digging more deeply to give a tentative try to answer the question how we can systematically spot cultural differences that impede future successes, assuming that culture was produced by past successes. The main idea is to develop a scoring model which serves two purposes: first, it is supposed to estimate the general cultural fit of a proposed M&A, indicating how much focus the companies should put on a smooth integration process. Second, global managers shall be able to investigate which fields of culture may impede the functioning of the transaction through a related questionnaire.

Therefore, I have structured the rest of the paper as follows: Chapter One provides a thorough review of the literature on the different types of culture that affect the success of cross-border M&A activity. In Chapter Two, these insights are used to develop the scoring model. Chapter Three presents a discussion on whether cultural differences are always bad, and thus gives hints on how the results of the scoring model can be interpreted. The Fourth Chapter shows a case study of DaimlerChrysler to illustrate the previous findings and to demonstrate how the model could work.

Chapter One - Theoretical Framework

The notion “cross-border” can only be a proxy for the real dimensions of cultural differences that might occur in M&A activity (Ahammad and Glaister 2007: 3). Companies do not only cross national borders, they also cross company borders, industry borders, and maybe even individual borders under very distinct preconditions according to the type and morale of the transaction.

Structuring the dependencies between these types of cultures is not a trivial task. Researchers disagree on which type of culture is predominantly important in M&A processes, and on whether industry, corporate, and other types of cultures are subcultures of the national culture or not. To give some own judgement to this melting pot of opinions, I have tried to isolate the types and elements of culture independent of their influence on each other, and focused only on those with an effect on M&A. My reasoning behind this is the following: While many national cultural dimensions are hard to grasp and to deal with, problems on other cultural levels are easier to tackle, though the latter might be a consequence of the former.

In Chapter One, I will first introduce diverse theories on national culture. Afterwards, I will proceed with an investigation of corporate culture, followed by professional culture. A short comment on influences through individual culture, or personality, as well as the “culture of the deal” as I denominate it, will conclude this chapter.

Part One - National Culture

Definition

National culture was defined in manifold ways, but follows some common themes. Tyler delivers a classy definition by describing culture as “complex whole which includes knowledge, belief, art, morals, law, custom and any other capabilities and habits acquired by man as a member of society” (Tyler 1958: 1). The restriction of culture to capabilities and habits is not shared by other scholars. The most famous definition for national culture is Hofstede’s notion of “the collective programming of the human mind” (Hofstede 1980). Making this interpretation of culture a bit more explicit, Harris reasons that “culture is not behaviour itself, but the shared understanding that guides behaviour and is expressed in behaviour” (Harris 1968: 16) which roots culture deeply in the core of human personality.

Another view defines culture as an “organization” (of people, behaviour and emotions), being the “forms of things that people have in mind, their models for perceiving, relating and otherwise interpreting them” (Goodenough 1961: 521). This makes culture relevant for company processes: according to the previous definition, people from different nationalities might organize “things” differently. Of a service company, however, globalized clients might expect the same performance independent from the country in which they request it. The insight that the relevance of cultural differences is not equal across industries, but considerably higher for those which create value through global homogeneity of product or service delivery is intriguing.

More advanced definitions try to abstract several layers of culture. Beginning with Freud already in the 19th century, conscience is subdivided into an awareness- and a subconscious part, the latter of which is much harder to recognize. The same idea was transferred to definitions of culture, which is to a large extent correlated with the individual’s conscience. One of the closest Freud interpretations is the iceberg model as developed by Hoft which divides culture into a small conscious, and a large subconscious layer filled with values, attitudes and implicit assumptions (Hoft 1996: 44ff).

Adding to that, the famous culture researcher Hall defines culture as “whole way of life- practice”, and adds “the production and circulation of meaning” as a second layer of culture (Hall 1997: 13). He distinguishes between formal, informal and technical layers of culture. Similarly, Spradley categorizes cultural knowledge in human mind, cultural behaviour in human interaction and cultural artifacts in the objects (Spradley 1980: 5). Kluckhohn distinguishes between overt (explicit) culture and covert (implicit) culture (Kluckhohn et al. 1952). Stewart and Bennet separate subjective from objective culture. Vask and Grantham differentiate symbols from rituals and myths (Vaske and Grantham 1990: 171ff); White mentions technological, sociological and ideological elements of culture (White 1949).

All of these interpretations of culture have one theme in common: there is an “outer” layer of culture that is visible and easily tangible and a more “interior” layer that is hidden, and thus subject to interpretation. To grasp cultural differences across countries, I now define dimensions and try to quantify them on the basis of existing research.

Dimensions

I first introduce (briefly, as they are so well-known) Hofstede’s dimensions of cultural differences derived from a global work-related survey among IBM employees: Power Distance (PD), Uncertainty Avoidance (UA), Individualism (IM), Masculinity (MY) and Confucian Dynamism (CD).

PD is defined as the “extent to which a society accepts the fact that power in institutions and organizations is distributed unequally” (Hofstede 1980). The most common proxy for PD is the degree to which hierarchical structures play a role in daily and business life. UA measures the “extent to which a society feels threatened by uncertain and ambiguous situations” (Hofstede 1980). Proxies for UA could be the average national risk attitude on capital markets, or closer to the M&A topic, the complexity of control systems in a company. IM refers to the grip of the social network and the degree to which everybody is expected to make and is respected for making achievements on his own (Hofstede 1980). A proxy would be the degree to which individual initiative is recognized. MY shows to which extent the society reinforces the rather traditional idea of male assertiveness, control and power (Chakrabarti, Jayaraman, and Mukherjee 2005: 9). A proxy for that would be the number of women in top leadership positions. CD refers to the degree to which a society is future-oriented. Smaller values indicate that traditions and the past are very important, larger values reflect rather future-oriented nations. Proxies would incorporate the number of traditions in daily life, the importance of certain rituals, or the function of past heroes as ideals.

However, before applying Hofstede’s dimensions, I had to acknowledge that his work has been criticised by a number of scholars. Main criticisms encompass the limited number of dimensions, the fact that the survey has only been conducted for one company (thus mingling national with corporate culture), the lack of a robustness test for stability over time and the ignorance of within-country differences in culture (Sivakumar and Nakata, 2001). Therefore, I also had a look at several other scholars’ work.

First, I remembered a model that we introduced in the Global Strategy course. Ghemawat defines a model that shall approximate the risks and costs of going abroad, by looking at economic, geographic, administrative and cultural “distances” between the home and the target country (Ghemawat 2007: 9). As I focus on culture, I just use the cultural dimension and add elements that have not yet been covered by Hofstede. Ghemawat’s cultural distances comprise language, ethnicity, religion, level of trust, importance of values, norms and dispositions, whether the country is insular and the degree of traditionalism.

While traditionalism and the importance of values are somewhat reflected in Hofstede’s dimensions, especially the degree of trust, religion and the language as cultural artefacts are not, but should be included (Chakrabarti et al. 2005: 8). On the other hand, some researchers consider religion as “country-level characteristic” which is not related to culture (Ahern et al. 2010: 2). However religion can affect business, as ongoing discussions in my home-country about whether Muslim teachers may wear a Muslim headscarf demonstrate. This is confirmed by Chakrabarti et al. who prove its importance in determining creditor rights (2005: 6). A last element that I add from his distances is the time shift between the headquarters. Though not exactly belonging to culture, yet I consider it an important potential problem in business.

Trompenaars and Hamden-Turner developed a model in which the dimensions are called “cultural dilemmas” (Trompenaars and Hamden-Turner 1997). The dilemmas are universalism, individualism, specificity, emotionality, status, hierarchy, time and space. Although universalism, hierarchy and status seem to be closely related to Hofstede’s measure of Power Distance, they are more specific. Universalism measures the degree to which a society bases on rules or relationships; hierarchy refers to the degree to which people are regarded as equal, and status to the extent to which authority is created through achievements versus through ascription. Individualism has the same meaning as in Hofstede’s dimensions. Though more specific, I do not use these elements for the model as there are no quantitative data for them available, and because they are already reflected in Hofstede’s dimensions.

Specificity describes the extent to which people segregate between relationships according to a purpose, for instance work and private life. Emotion means whether people seem rather neutral or affective in business situations, while time describes whether people tend to sense time as sequence (one job has to be done before starting another) as opposed to as synchronism. Finally, space deals with the question how much personal space is common in a certain culture, and how important the concept of ownership is. Though they lack quantification, I include the last four elements in my model, because these factors have (unlike the upper three) not yet been covered by Hofstede.

Another often cited model has been developed by Hall who distinguishes between high context (insider) and low context (outsider) cultures. Table 1 in the appendix shows an overview of the relevant characteristics. I add this element to the national culture model. An international research association has further developed the “GLOBE-score” that covers nine cultural dimensions: performance orientation, assertiveness, future orientation, humane orientation, institutional collectivism, in-group collectivism, gender egalitarianism, power distance, and uncertainty avoidance (House et al 2004). As my model already captures all of them, I just use them as a “proof of concept” for the model’s selection of elements here.

The last model which I have found has been created by a large global consulting firm (see illustration 3, appendix). It nicely integrates some parts of the above mentioned models and captures those elements which are important for company decisions. Thus, I decided to include it as one example of such a “derivative” model in the appendix.

Next, I will shed light on the concept of corporate culture, and also show its limitations.

Part Two - Corporate Culture

A variety of scholars agree to define Corporate (“Organizational” is used synonymously here) Culture as ”a general shared social understanding, resulting in commonly held assumptions and views] of the world among organizational members” (Wilkins and Ouchi 1983, Schall 1983, Rousseau 1990, Schein 1983, cited in Weber and Camerer 2003: 402). Other researchers try to isolate different layers or levels of corporate culture analogous to national culture. Clemente and Greenspan (1999) segregate structure, politics and emotions, while Schein distinguishes between subjective - shared values and beliefs - and objective corporate culture - like artefacts, office location, architecture, etc. (Schein 1985).

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Details

Seiten
37
Jahr
2010
ISBN (eBook)
9783656044154
ISBN (Buch)
9783656044390
Dateigröße
8 MB
Sprache
Englisch
Katalognummer
v181466
Institution / Hochschule
Queen's University
Note
A+
Schlagworte
quantifying cultural clash potential mergers acquisitions model

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Titel: Quantifying Cultural Clash Potential in Mergers and Acquisitions