Integration and Cultural Change Processes in Mergers and Acquisitions - Dissertation Example

Imagine that there is a proposed merger between an Italian company and a British company and you have been appointed to lead a team made up of managers from both countries to examine any cultural problems linked to the proposed merger. How close would the cultural fit be and how might you seek to improve cultural understanding between the two groups of managers? With economic recession and the process of globalization, international mergers and acquisitions have become a popular form of corporate development irrespective of the post-merger success. Technological advancements and globalization in addition to consolidation and privatization in every industry and the liberalization of economies have contributed to the process of M&A across borders (Shimizu, Hitt, Vaidyanath & Pisano, 2004). While globalization has attempted to bring companies and nations closer and it is based on the concept of a single-world society. However, the beliefs, attitudes and behavior are determined by the culture prevalent in the society. Debates continue whether globalization increases or decreases cultural diversity or homogenization. This in turn impacts the outcome of cross-border mergers. Nations have diverse cultures which influence their beliefs, customs and behaviour. Hofstede emphasizes that culture is the collective programming of the mind and it is culture that distinguishes the members of one group or category of people from another (Hope & Mühlemann, 2001). Every society has its own set of beliefs and they follow a set pattern of behavior. Such practices allow them to live harmoniously and these beliefs and patterns are handed down from one generation to another. Cultures thus become deep-seated, pervasive and complex (Schein, 1992). As far as organization culture is concerned, according to Hofstede (2005), there is a definite co-relation between culture and performance, culture and economic results, culture and sustainability, culture and strategic growth, culture and recruitment, motivation and retention of human capital, including downsizing. Schein (1992) also agrees that "Organizational culture is the key to organizational excellence... and the function of leadership is the creation and management of culture…”. Schein explains that one can understand the organization through its culture. Cultures are deep seated and pervasive. If any individual or society wants to change their behaviour patterns, it would not be possible without making changes that affect culture. As differences in culture occur, differences can also be perceived in goals and expectations. The values and the course of action also changes and thereby give rise to conflicts in an organization. Thus when international mergers take place the national cultures have a profound impact on the outcome. When the cultural norms in one country differ from another, it is called as national culture distance. Hofstede’s four cultural dimensions include the power distance, uncertainty avoidance, collectivism/individualism and masculinity/femininity. In Italy there is emphasis on uncertainty avoidance, individualism and masculinity while the power distance index is high compared to Britain (Besite, 2008). While in Britain also individualism and masculinity are high, power distance and uncertainty avoidance are ranked low. This suggests the British are less rules oriented, readily accept changes and are willing to take risks. Long-term orientation in Britain is low and hence change can be achieved in Britain much faster than many other countries. They have less formal dress codes for work place while in Italy good clothes are considered as a signature of success. Italy believes in bureaucracy and decisions take considerable time but in Britain also decision making is slow. The British cannot be rushed into making a decision. In Italy even within the firm there is distinct visibility of hierarchy denoting high power distance. Being an individualistic society personal space has to be respected in Britain. These indicate that the leader would have to take into consideration the differences in culture. Even though cultural differences have been blamed for high failure rate in M&A but research suggests otherwise (Teerikangas & Very, 2006). Olie (1994) contends that the management or the leaders do not give the attention necessary for strategic fit compared to the attention that they give to integration issues. One such strategic fit is the ‘cultural fit’. The fundamental differences in cultural fit manifests itself in different forms such as in thoughts, actions and behavior of employees. Such changes in behavioural patterns lead to conflicts and there are good chances that it could affect the agreement over management issues. These cultural differences become obvious in different dress codes and behavior of the two groups of employees. In fact such differences also divide them into ingroups and outgroup. When the concept of ingroups and outgroups make an impression on their minds, it affects the psychological integration of the two groups as one cohesive group. Since the two nations have cultural diversity, the solution according to Hofstede, lies in creating a new organization through the development of a strong sub culture or common identity (Olie, 1994). Reconstruction of a new social identity will take time but if the symbols of previous identities are removed and replaced by new identification symbols, a new category can de defined in which both categories are psychologically merged. This can be done through the appointment of a leader. Charismatic leadership is needed and the person in charge of the merger should be bale to relate to both sides. Integration can also be enhanced by setting a common set of goals and objectives. When they pursue a common goal, the members of the two groups feel a part of the larger group and the result is cohesiveness. Overlapping membership would also help in overcoming the boundaries of in-groups and out-groups. People may belong to different national groups but still share common identities and hence also owe loyalty to more than one group. The loyalties to different groups have to be overcome and it is responsibility of the leader to see that exchange programs or rotation of management groups would be helpful. To lead a team made of the two managers from both Italy and Britain, it would be essential to have a thorough understanding of the impact of the merger on two organizations and their employees, on the communication medium used by the management at each of the organizations, the sources of stress in mergers, the reasons of employee resistance and how do leaders deal with resistance. Knowing this is vital because according to Appelbaum, Lefrancois, Tonna and Shapiro (2007) lack of such information increases the probability of failures in cross-border mergers. Effective communication is the key to success and helps to deal with employee resistance to a large extent. Emotions such as fear and confusion, acceptance and excitement influence the employees as news of M&A reaches them. As a leader I would ensure timely, direct and honest information along with a realistic assessment of future obstacles and opportunities (Appelbaum et al). This is necessary to reduce the risk of rumors and misunderstandings or even wrong expectations. Culture should be used as a value-creation tool (Chanmugam, Shill & Mann, 2005). It is important to recognize and identify cultural intangibles like unwritten rules in its acquired companies. As a leader executing change management programs and achieving synergies is vital. Employee resistance is highly likely in Italy because of high uncertainty avoidance and support can bring about the expected synergies but these have not improved in the last four decades according to Larsson, Driver, Holmqvist & Sweet (2001). The leader has to view these from individual perspectives and not from the point of M&A because resistance can arise due to cultural clashes, ineffective communication and spreading of rumors. Leading two different teams towards a common goal is a daunting task because there are high chances of dis-integration of employees and there are numerous examples where downsizing, layoffs and relocations have upset career plans of employees. This would particularly affect the Italian employees as they tend to focus on a single career while the British are susceptible to change. Such disruptions can lead to demotivation and insecurity among the Italian employees which can affects productivity. The role of the leader is enhanced because the single most determinant of the corporate culture is the behaviour of the leader in charge of mergers (Bligh, 2006). The leader is responsible for shaping the beliefs, motives, commitments and predispositions. This is cultural leadership and requires establishing new traditions, communicating new cultural ideologies and values. It requires an effective role model to create an impression of success and competence. Cultural leaders recognize and understand the cultural variation and they draw on different perspectives and ways of doing things. To integrate the cultures and help them overcome the resistance, a leader has to ensure that the affected employees are involved in socialization activities such as introduction programs, training, cross visits, joining retreats and celebrations. This would help to create a joint organizational culture as long as autonomy is permitted but Italy being a high power distance society would not like autonomy. They would prefer to be given instructions rather than take their own independent decision. If the buyer restricts the autonomy then more social control mechanisms would be required such as transition teams. This could help to achieve the acculturation but if the social controls are neglected it could give rise to resistance. This would be important because as a leader, it requires managing two managers from diverse cultural backgrounds. The professional identity of the managers would differ as the Italians have the capacity to personally solve technical problems while the British demonstrated more managerial competencies (Delemestri, 2006). In Italian firms the career-path is like a chimney as it is focused on a single functional area while the British institutionalize management as a social art performed by talented individuals. This implies that they follow formal inter-functional career paths and this is the reason they need to have formal HRM departments. In Italy, the managers are discovered by their superiors and appointed based on their suggestion. Technical problem solving plays a dominant role in Italy. In Italy formal regulations tend to be weak and the trust relations tend to be institutionalized supported by local and regional cultural traditions. British are more communicative by nature and hence believe in extensive contacts with their foreign colleagues. The Italians on the other hand tend to be conservative and reserved. The Italian culture has a distinct demarcation between the employer and the employee and it is characterized by old style leadership. In Italian firms people cannot call each other by their first names and they have to maintain hierarchy. Routines and repertoires are shaped by national cultures and hence attaining sustainable competitive advantage may even be constrained by national cultures (Morosini, Shane & Singh, 1998). Firms in certain cultures are unwilling to develop certain routines but when two firms interact with each other during and post merger, they should be willing to pool their organizational resources and knowledge. Higher degree of cultural distance can lead to higher conflicts. Certain rules and repertoires concerning innovation, entrepreneurship and decision making are relevant to performance but difficult to develop across national culture. Hence the leader would have to ensure that Italians having the technical problem solving skills and a long-term orientation are entrusted with the responsibility of innovation. Cultural fit can be best obtained if the process of integration starts much ahead of the actual merger. It should ideally start during the negotiation stage itself so that the two parties get an opportunity to examine and understand each other (Sliburyte, 2005). Sometimes the actual merger can take several years and clashes during this phase itself would make integration later very difficult. When the buying firms rely on social control it is possible to achieve acculturation (Larsson & Lubatkin, 2001). This would result in a joint organizational culture regardless of the differences in the nationalities and cultures and whatever be the expectations of the synergies. High information flow is essential for integration of the two firms as clashes do not occur just because the two cultures differ. There are four modes in which acculturation takes place that include deculturation, assimilation, separation and integration (Seo & Hill, 2005). This process has also been called the process of unfreezing and refreezing. As the terms suggest, the old culture has to be give up, the new culture adopted while the members still retain their original culture identity and finally integration takes place which involves some degree of change in both the organizations. The leader has to ensure that culture clashes do not occur due to differences in ways of doing things such as differences in communication style, planning, managerial authority, commitment, monitoring or team work. Culture clash can occur when members of one group feel threatened by members of the other group. This is more likely to happen in the case of the Italians and this could lead to low morale, absenteeism, turnover and decreased productivity. To avoid culture clashes, small teams from Italy should be called over to Britain for orientation and training. Small teams from Britain would also be sent over to Italy as a measure of exchange of ideas and thoughts. This would also provide an opportunity for both the groups to surface the differences and similarities between the two cultures. This is likely to enhance intercultural tolerance and assimilation thereby reducing the incidence of cultural clashes. Mutual trust is another factor that can lead to cultural integration according to Bijlsma-Frankema (2001). The cultural change is dependent on several other factors and it suggests that changes should be legitimized, goals and expectations should be clear. In addition proper monitoring and guidance should be undertaken. The human tendency is to resist change but with proper and timely communication if they are made to understand the need for it, they will support the change effort (Bowditch & Lewis, 1985). This again gives importance to the information and communication factor in the process of cultural fit. However, since the two nations have diverse cultures and the differences in uncertainty avoidance and power relations are distinct, it is also likely that these differences in culture can manifest itself in symbols, values, heroes and rituals (Sliburyte, 2005). Values are the deepest and the symbols are the most superficial manifestation of culture as can be seen in the onion diagram: Source: Sliburyte (2005). Values are implicit in nature and hence difficult to detect; these values also relate to the national culture. The other three manifestations are practices and observable. Symbols include gestures and words while every nation or a group of people have their own role model or hero whose ideals they follow. Rituals include activities such as the way people in an organization greet each other or pay respects. For instance, as discussed above, the British call each other by their first name which is unthinkable in Italy. Thus the process of merger should start much ahead of the formal announcement of merger taking place. This would serve to alleviate much of the tension and allow for better understanding of the two organizations. The leader has to ensure that cultural clashes do not arise in the first place instead of trying to resolve issues. A Hofstede says culture is the collective programming of the mind and hence very difficult to change over night. In fact the original cultural identity should be maintained and what is required is to accept each other’s culture and their way of doing things. This suggests that the organizational culture must be changed to a new culture or have sub cultures. It is quite likely that the Italian employees feel insecure and threatened with the high power index of the British and this requires that they be provided assurance through proper communication flow. Through charismatic leadership a common goal would need to be established which would give rise to both groups as a cohesive team. This would enhance commitment, motivation and reduce tensions. Italians prefer to take instructions and this should be replaced by encouraging them to hold responsibility for their actions. This would also serve to motivate them as their self-esteem would go up. Cultural understanding between the two groups can be enhanced through the right leadership. 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