Cultural Incompatibility - Case Study Example

Introduction The problem identified in the given case study relates with not managing the very different cultures of the two organizations. Whittle (2002) posited that Cultural incompatibility, in a merger is the biggest cause of failure to achieve projected performance, turnover of key executives, and dysfunctional conflicts in the merged entity. This paper will argue that, “in order to achieve the projected or potential goals from a merger between two organizations, the cultures of the two organizations have to be compatible.” Research by Weber and Camerer (2003) indicated that cultural conflict prevents proper coordination in the entity firm which ultimately leads to merger failure. Problem Identification Bower (2001) identified five different kinds of mergers: the over capacity M&A, the Geographic roll-up M&A, the product or market extension M&A, the M&A as R&D and the industry convergence M&A. According to Bower (2001) definition the merger between Southcorp and Rosemount will fall some in to third type of merger i.e. the product or market extension type. He identified major areas of concern in different types of mergers. For the product or market extension type the major concern is cultural or governmental differences. While Southcorp was an archetypical Australian wine firm linking vertically along the value chain with major focus on production and less focus on marketing, Rosemount was actually a family business, focusing on sales and marketing only and majorly outsourcing other functions. This difference of working culture can be compared with the one faced by Daimler and Chrysler, both very performing firms prior to merger but failing miserably after the merger (Weber and Camerer (2003). Arguments Culture can be defined as the set of commonly shared and important assumptions in a community”. As an organization is also a community of members i.e. employees, etc the set of commonly shared assumption held by members of the organization, can be called as organizational culture. Chatterjee et al (1992) claim that culture affects practically all aspects of the way people of a group interact with each other. There are diverse views on the relative importance of cultural integration, during or post merger, for the success of the merger. Some authors have undoubtedly favored that the cultures of the merging entities need to be integrated to achieve merger goals, while others have considered them as either partially or not important for merger success failure. Cartwright and Cooper (1993) argued that since culture is as fundamental to a company as personality to a human, the level of culture fit between the merging organizations may be directly related to the success of the merger. They cited example of Connecticut General and the Insurance Company of North America in 1982, which failed on account of poor compatibility of cultures of the two organizations. Vestring et al (2003) argued that recommended strategy towards cultural differences in a merger deal varies with the rationale for the merger. If the deal is scale driven, then it’s recommended that the acquiring company not only integrates the two cultures but also imposes its own culture on the acquired firm. While, on the other hand if the rationale behind the deal is to expand product or geographic scope, then the firms must try to integrate less. To support their argument Vestring et al (2003) offer successful examples of Sears and Lands’ end, Quaker oats acquisition of Snapple to support their claim. Liddy* (2000) offers support to Vestring (2003) by arguing that it may not always be necessary to have a high degree of cultural integration. Kozlowski*(2000) takes a very bold view, rejecting the idea of importance of cultural or softer issues in determining a merger success. According to him a merger falls apart mostly because of price, but culture is used a soft target for rationalizing the failure and hiding the true failure of line managers. Though his ideas are bold, but no considerable literature supports his views, thus we may safely ignore his proposition. But it’s not that everybody attaches the same level of importance with cultural integration decisions. Though there are authors who praise cultural issues as highly important in a merger success – failure. For example Leschly* (2000) argues that how so ever terrific the rationale behind the merger can be, it may still fail due to cultural differences. Moore* (2000) offers that cultural differences are not function of geography only, even within the same geography organizations may differ in their attitudes and way of working and thus may have different cultures. Chatterjee et al (1992) empirically relate the perception cultural incompatibility with investor’s reaction towards merger. They experimentally prove that investors generally have unfavorable view about mergers where the cultures between the top management teams are perceived to be incompatible, while on the other hand, when the cultures are perceived compatible shareholders support the merger by acting favorably. This holds clear implication that not attending to these softer issues may back fire through investors’ backlash. Siehl (1990) offers a more specific aspect of cultural incompatibility by relating cultural conflict with key employees’ tendency to depart after merger. Siehl (1990) argues that since employees get jittery about merger or acquisition and when they find that the new culture is not compatible and they are not familiar with it, they are likely to leave. Based on the above discussion and the evidence & empirical support offered, we conclude that that denying of any importance of cultural issues to merger success (Kozlowski, 2000) is not well grounded. It may well be a line manger’s tendency to discount staff issues as just fancy talks and no action. The views by certain authors (Cartwright & Cooper, 1993) for the notion that cultural incompatibility thwarts a merger success, overestimate cultural issues in mergers. But a more specific and targeted discussion led by Vestring (2003) and Liddy(2000) Strikes a good balance and offers more sophisticated approach towards cultural issues and merger success. The concept of cultural mismatch even between companies from same geography offered by Nicholas Moore(2000), is a great insight for companies, as normally we tend to discuss culture and its implication only in the context of cross border mergers and acquisitions. Recommendation In their article “Human due diligence”, Harding and Rouse (2007) recommend that before merging the organizations there should be conducted “Human due diligence” to understand culture of an organization, and the role, capabilities and attitudes of its people. While Bower J(2001) recommends that an organization first clearly define its rationale for merging with or acquiring another firm. If the rationale is to gain economies of scale the merged entity should be culturally highly integrated, but if the rationale is to expand in to new products or markets the two organizations may carry their individual cultures peacefully, which are best suited for their product given markets or geographies. For example When Sears merged Lands’ end it decided to carry two separate cultures which were best suited to the nature of operations of the new entity Vestring (2003). In case of Southcorp – Rosemount, the major problem was the two different organizational cultures i.e. Southcorp was dominated by market culture while Rosemount was driven under Clan culture as a family run business. On the basis of the discussion in the above paragraph, the two firms must now analyze major components of each other’s cultures and see which components of their cultures were the reasons for the firms to choose each other. Cultural compatibility does not imply similar culture but cultures that can fit in to each other and offer synergy to both the firms. There are two options that are available to them. One, they can divide the market between two firms either geography or product wise and let both the units act peacefully according to their suitability, but enjoying cross selling and other opportunities. Another option is to find out the best of both the cultures and outline a new culture ( Donahue, 2001) with the best components of both the companies, but it must ensure that the firms’ cultures are complementary if not the same. Conclusion Both the firms had well suited culture to their product portfolio and size. But when they were merged, though the financial acquirer’s role was played by Southcorp, but it was Rosemount, which acted as cultural acquirer. The clan culture of a smaller niche market firm Rosemount was not suitable to carry the behemoth which was created by merging the two companies. The companies did not plan for cultural integration and when Rosemount’s culture aggressively started poaching on important parts of Southcorp’s culture, the key executives at the helm of the organization did not feel comfortable and departed from the organization. The more aggressive and cost cutting strategies brought in by Rosemount severed Southcorp’s relationships with key suppliers and customers, channel partners etc. Cultural differences by themselves are not bad in fact they may have the potential to spawn functional conflict and thus a lot of learning and ideas transfer between two firms. But the ways these differences are addressed determine the fate of the deal. References Cartwright, S., Cooper, C. (1993). The role of culture compatibility in successful organizational marriage. The Academy of Management Executive, 7(2) , 57-70 , Retrieved from http://www.jstor.org/stable/4165122. Chatterjee, S., Lubatkin, M., Schweiger,D., & Weber ,Y. (1992). Cultural differences and shareholder value in related mergers: Linking equity and human capital. Strategic Management Journal, 13(5), 319-334. Donahue, K. (2001). How to ruin a merger: Five people Management - Pitfalls to avoid. Harvard Business Review, 3-5. Harding, D. & Rouse, T. (2007). Human Due Diligence. Harvard Business Review,1-10. Harris, S. (1994). .Organizational Culture and Individual Sensemaking: A Schema-Based Perspective, Organization Science, 5(3), 309-321, Retrieved from http://www.jstor.org/stable/2635133. Josheph, B. (2001). Not all mergers and acquisitions are alike. Harvard Business Review, 93-101. Roberto, W., & Camerer, C. (2003). Cultural Conflict and Merger Failure: An Experimental Approach. Management Science, 49(4), 400-415, Retrieved from http://www.jstor.org/stable/4133947. Siehl, C., Smith, D., & Omura , A. (1990). Source After the Merger: Should Executives Stay or Go? The Executive, 4(1) , 50-60 , Retrieved from http://www.jstor.org/stable/4164932. Vestring,T., King, B. & Rouse, T. (2003). Should You Always Merge Cultures? Harvard Business Review, 3-4. Whittle, DD. (2002). Mergers and Acquisitions: The employee perspectives. ProQuest Information and learning. Carrey, D. (2000). Lessons from Master Acquirers: A CEO Roundtable on Making Mergers Succeed. Harvard Business Review, 146-154. * (The authors, referenced in text, were the speakers at the conference. Carrey, D. was the moderator of the conference). Read More