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Managing cross-cultural mergers – the role of management style Case Air France – KLM by Katarzyna Janik

European Tourism Management 2003/2004 Master of Arts

Bournemouth University NHTV Breda Fachhochschule Heilbronn

Katarzyna Janik

European Tourism Management 2003/2004

I hereby declare that the dissertation submitted is wholly the work of Katarzyna Janik. Any other contributors or sources have been referenced in the prescribed manner or are listed in the acknowledgements together with the nature and scope of their contribution.

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Abstract The modern business environment is characterised by the growing number of international corporations full of desire to take advantage of the global marketplace.

Many of those companies, instead of slow organic growth, choose a quicker way to expand their business – mergers and acquisitions. However, quicker not always means easier. Several research show that nearly 60 % of all mergers fail, frequently bringing companies from the top of the most successful firms’ list, to its bottom.

Researchers attrib ute a considerable amount of this failures to the impacts of cultural differences.

On 5 May 2004 Air France and KLM signed a first in the airline industry history cross-national merger agreement. The announcement of this merger evoked several sceptical opinions of culture researchers or consultants, who argue that due to cultural differences, this Franco – Dutch venture stands little chance of success.

This study investigates the influence of culture on the outcome of mergers. Since literature emphasises the role the top management plays in the success or failure of a merger; the author, based on the literature review and case study research, tries to discover what kind of management style is essential for a company to survive a cross-boarder merger and to apply the findings to Air France – KLM case.

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Acknowledgments Writing this dissertation was a very challenging process, and mainly because of the continuous time pressure a particularly strenuous period. Facing this challenge would never be possible without support of my family and friends. I would like to thank my supervisor Vincent Platenkamp for his guidance and a good word in times of doubts. I would also like to thank my parents for always believing in me. Last but not least, I would like to express my great gratitude to my fellow ETM students for their great support in the most difficult times.

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Table of contents List of tables …………………………………………………...………..7 List of Figures …………………………………………………...……...7 1. Introduction ……………………………………………………….....8 1.1 Era of consolidation ……………………………………...……...8 1.2 Mergers and culture ……………………………………………...9 1.3 Air France – KLM Case ………………………………………..11 1.4 Research Aim and Objectives ………………………………….13 1.5 Methodology …………………………………………………...15 1.6 The Structure of the Dissertation ………………………………15 2. Mergers in an international context ………………………………..17 2.1 Merger – marriage of equals? ………………………………….17 2.2 Success or failure …………………………………………...….18 2.3 Human factor ………………………………………………..…20 2.4 The role of managers ………………………………………..…21 2.5 A cultural perspective ………………………………………….22 3. The role of management style within corporate culture in the cross national context ...………………………………………………..…25 3.1 Culture and levels of culture …………………………………...25 3.1.1 Culture defined ..………………………………………....25 3.1.2 National versus organisational culture …………………...27 3.1.3 Management style and culture …………………………...29 3.1.4 National dimension of culture …………………………...30 3.2 Management theory ...………………………………………….38 3.3 Leadership style ………………………………………………..42 3.4 Towards international management …………………………....44 3.5 Managing cultural differences …………………………………46

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4. Methodology ……………………………………………………….49 4.1 Case study research method ……………………………………49 5. Case study analysis ……………………………………………...…52 5.1 Daimler – Chrysler …………………………………………..…52 5.2 The Deutsche Bank – Alex Brown Investment Bank ………….55 5.3 MeritaNordbanken ……………………………………………..57 5.4 Findings ………………………………………………………...58 5.5 Air France – KLM Case ………………………………………..60 6. Conclusions and recommendations ..……………………………….63 6.1 Conclusions …………………………………………………….63 6.2 Recommendations for further research ………………………...66 Bibliography …………………………………………………………...67

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List of Tables Table 3.1 Important Managerial Roles ……………..…………………34

List of Figures Figure 3.1 A Model of Culture .........................................................….20 Figure 3.2 The Nature of Cultural Differences ……………………….21 Figure 3.3 Basic Managerial Functions ……………………………….33 Figure 3.4 Continuum of Leadership Behaviour ……………………...36 Figure 3.5 The Iceberg Theory ………………………………………..38

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1. Introduction On 5 May 2004, the first in the aviation history consolidation of two national flag carriers took place. Air France and KLM Royal Dutch Airlines created the world’s largest airline group by turnover. The CEOs of Air France and KLM believe in the success of the merger, which they think will change the future of the airline industry.

Culture researchers, such as Geert Hofstede and consultants like Fons Trompenaars are not so optimistic about the future of this venture. They argue that this FrancoDutch cooperation may fail because of cultural differences (Damen, 2003; van Beemen, 2004). Moreover, examples from other industries, such as the case of Daimler-Chrysler, and statistics saying that nearly 50% of all mergers fail, greatly because of cultural clashes (Cartwright & Cooper, 1995; Clemente & Greenspan, 1999) raise a question about the success of the Air France – KLM merger.

1.1 Era of consolidation Air France – KLM merger is certainly a big step for the aviation industry, however it is not the first of its kind in other industries, including the broad tourism branch.

There are several examples from the tourism sector itself, of huge multinational companies which grew mainly through several mergers or acquisitions. Two Europe’s biggest tour operators, TUI and Thomas Cook or hotel chains like Accor have built their empire on amalgamation or takeover of other businesses.

The last few decades have been characterised by the growing number of cooperation between companies. A great number of this collaboration has taken form of mergers or acquisitions. Globalisation is a contributing factor (Shelton et al., 2003; Trompenaars & Woolliams, 2000) as mergers have become for companies an increasingly popular method to strengthen their position in the global marketplace (WTO, 2002, p. 1). For many companies and organisations the overwhelming competition and capacity limitations in the local markets became a reason for the global expansion, and a way to survive (Hick, 2003).

Another contributing factor is the vast cooperation of nations. Countries and their governments, such as for example United States and Canada have established free trade areas, or like in case of European Community single market with favourable

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trade regulations. Trading and working with companies in othe r countries has become easier than ever before.

Modern technology, such as internet or teleconferencing techniques enabled fast and easy communication between even two most distinct places in the world. It has also become affordable for everyone, including the smallest firms.

Travelling has also become easier and cheaper than ever before. The growing number of airlines with thousands of connections a day, the foundation of low cost airlines, no visa requirements for most of the travellers made it possible for managers, specialists or negotiators to travel to an overseas partner or company’s subsidiary.

Each of these factors contributed to the present form of international business and the growing number of inter- or even multinational companies. The emergence of international business has created a demand for managers sophisticated in global management and therefore skilled at working with people from other countries and cultures (Adler, 2002).

1.2 Mergers and culture Many of these multinational companies have grown through mergers. The most common reasons for companies to merge are to produce economy of scale (Shelton et al., 2003), increase profitability and market share (Cartwright & Cooper, 1993) and to achieve synergy or the commonly described “2 + 2 = 5” effect (Cartwright & Cooper, 1993; Shelton et al., 2003). However, mere recognition of the potential synergism does not guarantee that the merger will actually realise its potential (Cartwright & Cooper, 1993). Cartwright and Cooper compare merger to marriage, which success depends heavily on partner compatibility (1995). Next to the traditional success factors, like positive synergy between the products or services offered by the companies involved (Tompkins, 1998) or synergy at both strategic and operational levels (Cartwright & Cooper, 1995), which Cartwright and Cooper describe as “hard” issues (1995), more and more attention is paid to so called “soft” issues (ibid.) – issues related to people and culture. Factors, such as ‘wide-scale integration of people; their systems, procedures, practices and organisational culture’ (Cartwright & Cooper, 1995, p. 33), quality of stakeholder relationships

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(Cartwright & Cooper, 1993; Shelton, 2003), good communication throughout the merger (Tompkins, 1998; Appelbaum et al., 2000) and the most commonly mentioned cultural compatibility (Cartwright & Cooper, 1993, 1995; Veiga et al., 2000; Clemente & Greenspan, 1999; Shelton et al., 2003; Trompenaars & Woolliams, 2000) and ‘the ability to melt two separate corporate cultures into a coherent new one embraced by all employees’ (Tompkins, 1998) seem to be crucial to the positive outcome of the marriage . Sadly, the importance of the “soft” factors as it is recognised by academics, seems to be disregarded by the management of the merging companies. Tompkins (1998) and Cartwright and Cooper (1995) claim that 50 % of all mergers fail, and Clemente and Greenspan attribute the considerable amount of these failures to incompatibility of cultural norms (1999).

Each merger brings changes. Frequently these changes affect the corporate culture of the merging companies (Cartwright & Cooper, 1993, 1995). Organisational culture being fundamental to the organisation as personality is to the person (Cartwright & Cooper, 1995) is very difficult to change. Moreover, in case of international mergers the problem is even more complicated as managers have to bring together two different organisational culture, each of them rooted in different national culture (Veiga et al., 2000).

Mergers’ success is normally measured on the basis of managerial assessment, share price fluctuations and profit-earnings ratios (Cartwright & Cooper, 1993). The cost of culture incompatibility can be as high as 25 to 30 % of the performa nce of the acquired organisation (Cartwright & Cooper, 1993). It is also proved that culture clash can lead to ‘lower commitment and cooperation of the acquired employees’ and ‘diminished relative standing and increased turnover among acquired executives’ (Veiga et al., 2000). These lead to ‘substantial outflow of talent and expertise’ and in the process to the increased cost of recruitment and retraining, loss of valuable customer contacts, goodwill and expertise’ (Cartwright & Cooper, 1995). Therefore, culture and cultural differences can be related to as a ‘soft’ factor with ‘hard’ consequences.

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1.3 Air France – KLM Case The continuing merger mania has not missed the tourism sector. Mergers have for years now been a way to grow for international tour operators, such as TUI or Thomas Cook, or hotel chains like Accor. In the airline industry, however, the major form of cooperation so far, has taken form of an alliance. Air France – KLM merger is the first international venture of this type in the history of aviation and was hailed as the beginning of consolidation within the European airline industry (Baker, 2003).

Air France and KLM Royal Dutch Airlines are forming the world’s biggest carrier by revenues, and the third largest by passenger volumes (Baker, 2003). The Group, which annual turnover is 20 billion Euros, will employ 106,125 employees and operate 556 aircrafts between 225 destinations (Sparaco, 2004). Each of the companies will retain and operate under their own brand names from their home bases in Paris and Amsterdam. The airlines will be owned by the common parent company Air France-KLM , which is to be created in September 2004. The merger will take three years to be fully implemented. During the transitional period of three years, Air France-KLM Group will own 100 % of Air France shares, and 100 % of KLM economic rights but only 49 % of KLM voting rights. The remaining 51 % of KLM voting rights will be owned by KLM foundations and the Dutch State, in the amount of 36,3 % and 14,7 % respectively (Air France-KLM press release, 2004).

This is to safeguard the existing KLM traffic rights which are tight to designated domestically-owned carriers under bilateral government aviation agreements with other countries (The Economist, 2003, 8342). It is very probable that by the end of the transitional period European Union will have finalised its negotiations with the United States concerning the “open skies agreement”, which would abolish all such restriction (The Economist, 2003, 8344) and completely deregulate the aviation market.

The main reasons for this merger are synergies and cost savings that are to come from achieving the economy of scale, optimising the dual route systems and flight schedules, harmonising yield management and coordinating fleet management. New holding company intends also to unify the Information Technology systems, purchase spare parts for the whole Group, harmonise the technical specification, gradually share the overhaul works, as well as join operations at the airports and

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combine the carrier’s frequent flyer programmes. According to Air France CEO, Jean-Cyril Spinetta, the planned savings are supposed to reach 495 million Euros by the end of the fifth year of combined operations. (Sparaco, 2004) During the negotiations KLM won itself several assurances from the French carrier.

The KLM brand and logo will be protected for the five year period, with the promise not to favour French employees in building the new management team. The unions of both companies were told that no compulsory redundancies would be made, except in exceptional situations such as the repeat of the 11 September. The Dutch state has been promised that Schiphol, Amsterdam’s airport, will retain its position of an international hub for another eight years. (Baker, 2003) The new holding company Air France-KLM will be managed by a newly established joint structure – the Strategic Management Committee (SMC). The SMC will comprise four French and four Dutch members. The Dutch board members are going to be appointed by Air France shareholder general assembly and will include KLM chief executive Leo van Wijk, who will take the position of the Vice Chairman of the Group’s Board of Directors. The present Air France Chairman and CEO, Jean-Cyril Spinetta, will become the chairman of the Group’s new governing body. He will have a deciding vote on all decisions except those concerning modifications to the guarantees given to KLM, the scope of the Group activities, and the conclusion of any intra-Group agreement other than arm’s length. Apart from the SMC, each airline will have their own management board. KLM Supervisory Board will consist of nine members, four of whom during the transitional period, and five of whom after that time will be appointed by Air France. One KLM executive will sit on the AF Executive Committee. The Strategic Management Committee, the Group’s new governing body, will meet every 15 days in Paris and Amsterdam alternately. It will be responsible for defining the overall lo ng-term strategy for the whole Group, which includes network and hub coordination, budget and mid-term planning, fleet and investment strategy and alliance strategy. It will also decide on the implementation of synergies proposed by the joint working groups. Both Air France and KLM, operating as two separate airlines, will remain responsible for their own commercial and operational management on a daily basis, such as human resources, flight and ground operations or safety. They will also be responsible for the implementation of

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the recommendations made by the Strategic Management Committee. (Air FranceKLM press release, 2004) The future of the first in the airline history merger of two out of Europe’s four top flag carriers is difficult to predict. Having on the one hand the optimism of CEOs of both airlines and their concentration on cost cutting and synergies, and on the other hand statistics describing cultural conflict as one of the main reasons of the mergers’ failure, and several doubts expressed in Dutch national newspapers by Geert Hofstede and Fons Trompenaars, the two respected and world-wide known specialists in the field of culture, it is reasonable to ask if this consolidation can bring success.

There are several fields, like human resources management or communication style, where culture compatibility or incompatibility can decide on the venture’s success or failure. Particularly interesting is the management style, and the relations between the Strategic Management Committee, the common body responsible for developing long term strategy, and the two airlines which will be responsible for implementing the Committee’s ideas on the decentralised levels.

1.4 Research Aim and Objectives The issue of cultural compatibility in mergers has gained over the recent years more and more attention among the academics. Managers, although trained on several international management courses and theoretically being aware of the importance of culture, still tend to emphasise the ‘hard’ issues and disregard the ‘soft’ factors. This fact is best proven by already quoted statistics, which name cultural incompatibility as one of the main reasons of the failure of mergers. Luckily, the situation has started to change in the last few years. Merging companies more frequently use cultural consultants to guide them through this difficult process. Good examples of such corporations are Shell or Deutsche Bank.

Since 2003, when Air France and KLM informed the media about their plans of connecting the two airlines, several national Dutch newspapers and magazines published articles analysing cultural differences between the French and the Dutch and naming their possible consequences. Cultural researcher such as Hofstede or consultants like Trompenaars or Wyno ld Verwey have also many times expressed

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their doubts about the future of this cooperation; especially after in 2000, partly because of cultural clashes, KLM did not decide to cooperate with Alitalia (Geleijnse, 2000).

All these facts make the case of Air France-KLM merger a very interesting one and made the author of this work to ask a question if Air France and KLM will survive this consolidation, and if their cooperation will be successful enough to fulfil all the objectives of this merger. Of course, it is not the job of the author to make such predictions, especially that Air France-KLM is just starting their cooperation and so far, there is not enough data to make such an analysis to answer these questions.

Nevertheless, it is possible to base the research on the study of the existing literature on the topic of importance of cultural compatibility in mergers and on the investigation of similar cases in other industries.

It should be made clear that this work will not study the compatibility of KLM and Air France corporate cultures. This is due to the lack and inaccessibility of data which is confidential, and reluctance of both companies to cooperate. Instead, this paper will analyse, the influence of national culture on the outcome of mergers, and shaped by national culture dimensions management and leadership style which is just one of many elements influencing the corporate culture. It will also give, based on literature review and case study research, implications of how to deal with cultural differences and how managers should act to help their companies survive such a difficult process as merger.

The overall research aim of this paper is to find out what type of management style within a corporate culture is crucial for a multinational company, in this case Air France-KLM, to deal with cultural differences in order to survive a cross-boarder merger.

In order to answer this question, research will try to: -

analyse the influence of culture on mergers

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show the particular meaning of the management style in the outcome of mergers

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study the notion of culture, the relationship between national and corporate culture, and between culture and the management style

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explain the complexity of the managerial activities with special attention paid to cross-cultural management

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study examples of successful and troubled mergers and draw conclusion for the Air France-KLM case

1.5 Methodology The research is going to based mainly on the use of secondary data. It is going to consist of two parts. The first part will include the analysis of the existing academic literature from textbooks and academic journals, from three different fields of: international management, culture and its influence on international business, and mergers and acquisitions. The second part will contain an investigation of case studies from other industries. Additionally, the research will use factual data from Dutch national newspapers and airline industry magazines concerning the Air France-KLM case. The author will also make use of the interviews with consultants on cultural issues published in those magazines.

1.6 The Structure of the Dissertation The dissertation is going to consist of six chapters divided into two parts. The first part, embracing chapters one to three is going to include broad literature review.

This introduction is the first chapter. Its main goal is to introduce the topic to the reader and present the general situation analysis, as well as show the author’s particular interest in the subject. It also identifies the goal and objectives of this paper, and shortly explains the overall methodology and the structure of the thesis.

The second chapter will introduce the reader to the subject of mergers and acquisitions. It will explain both terms, name and describe the success factors of mergers, stressing the influence of culture, and identify potential cultural problems and solutions to them.

The third chapter will study the notion of culture. It will analyse the link between culture and management style, and present some of the elements of theory of international management.

Chapters four to six are going to constitute the second, more practical part of the study.

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Chapter four will explain the methodology of the practical part of the dissertation and shortly present the case study research methods.

The fifth chapter will investigate cultural issues in mergers based on the investigation of case studies from other industries. It will try to identify problems which occurred in other cases, and solutions used to solve them. It will also once again present the case of Air France-KLM and it will try to apply the findings of the case study research to the example of Air France-KLM merger.

The last chapter will include conclusions, as well as recommendation for further research.

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2. Mergers in an international context Mergers and acquisitions have become for many companies a way to organisational expansion. It is a perfect alternative to lasting several years organic growth and unsure business establishment in foreign countries. At the same time, it is a very demanding and complicated process, which unfortunately too often results in a failure.

2.1 Merger – marriage of equals?

By definition merger is ‘the combination of two or more entities through the direct acquisition by one of the net assets of the other, either friendly or hostile, for cash or stock’ (McEntire & Bentley, 1996, p. 155). Authors, however, express two different points of view concerning the meaning of the word merger. Some of them (Evans, 2003; Borys & Jemison, 1989; Schraeder & Self, 2003) support the view that merger is the integration of two equal companies, which when joined, create a new common parent company. The shareholders of the old companies become now the shareholders of the new integrated corporation (Evans, 2003). Evans also draws the distinction between merger and acquisition which he treats as unequal takeover (2003). The second, more numerous group of authors (Lynch & Lind, 2002; Balmer & Dinnie, 1999; Shelton et al., 2003; Cartwright & Cooper, 1993, 1995; Appelbaum et al., 2000; Weber, 1996) assumes mergers and acquisitions are synonymous, and refers to the firms’ activity in this respect using the abbreviation M&A (mergers and acquisitions). This point of view is supported by Tompkins (1998) who claims that no merger can truly be merger of equals, and by Shelton, Hall and Darling (2003, p.

316) who believe that ‘in a corporate marriage one company and its culture must inevitably emerge as dominant’. Examples from daily life also show that almost always there is an acquiring and acquired or buying and bought company.

Diane Sias, a director of post- merger management practice in McKinsey & Company, believes that whether or not merger is a marriage of equals depends on the size of the merging companies (Early, 2004). According to Sias mergers of equals usually take place between large companies, whereas small and medium- sized companies usually are acquired (ibid.)

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2.2 Success or failure In order to measure success of a merger it is essential to know why in the first place the companies have decided to collaborate. There are multiple motives for mergers.

The most commonly cited is achieving synergy (Shelton et al., 2003; Cartwright & Cooper, 1993, 1995; Appelbaum et al.; 2000, Tompkins, 1998; Lynch & Lind 2002).

Brouthers (1998) has reviewed and categorised the reasons for mergers into three groups: economic, personal, and strategic motives. Economic motives are: marketing economies of scale, increasing profitability, risk-spreading, cost reduction, technical economies of scale, differential valuation of target, defence mechanism, respond to market failures, and creating shareholder value (Brouthers et al., 1998, p.

348). The second group constitutes of personnel values, such as: increase of sales, managerial challenge, acquisition of inefficient management, and enhancing managerial prestige (ibid., p. 348). Among strategic motives Brouthers names: pursuit of market power, acquisition of a competitor, acquisition of raw materials, and creation of barriers to entry (1998, p. 348).

Sias depending on the reasons of the deal distinguishes four archetypes of mergers: skills or product expansion, roll- ups, consolidations, and transformations (Early, 2004). Expansion of products or skills takes place usually between small or medium-sized companies, and its main goal is the extension of company’s product line or international reach, acquiring new capabilities or building new platform (ibid.). Roll- ups are acquisitions of small companies by larger better established ones and their main purpose is aggregating companies in fragmented industries where no national or regional players, exist and leveraging economies of scale and scope (ibid.). The last two types are typical to large companies and usually are mergers of equals. Consolidation takes place when companies want to reduce overcapacities in a mature industry and drive cost saving opportunities (ibid.). The form of marriage where the main purpose is ‘to build new business model in converging industries’ and ‘developing vision of the future beyond existing capabilities’ is called by Sias transformation (ibid.).

Whatever the type of merger is, according to Tompkins (1998) it should be based on a positive synergy between the products or services offered by the companies.

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The success of the merger, sometimes defined as ‘the return on investment’ (BijlsmaFrankema, 2004, p. 253) is naturally measured in terms of money, for example shareholders value or achieved cost savings (Tompkins, 1998).

Unfortunately, even if the synergies are recognised, according to several research 50 to 70 % of all mergers do not achieve the expected results (Cartwright & Cooper, 1993, 1995; de Camera & Renjen, 2004; Carleton, 1997; Schreader & Self, 2003).

Why are these numbers so high? There are several success factors, both in pre- and post-merger stage, that need to be met to ensure the positive outcome of the marriage.

The first and critical issue in the pre-merger stage is the selection of the right partner (Lynch & Lind, 2002; Cartwright & Cooper, 1993; Lee Marks, 1997; BijlsmaFrankema, 2001; Hannson et al., 2001). Many companies choose their partners on the basis of availability, price, potential economies of scale or projected earnings ratios (Cartwright & Cooper, 1993). Although some authors claim that there is no clear evidence supporting the value of strategic fit in mergers (Chatterje et al., 1992), many companies, after the deal is finalised, discover that the lack of complementary organisational strategies between the partners has prevented them from achieving success (Salama et al., 2003; Huang & Kleiner, 2004; Lynch & Lind, 2002).

The second important factor is the in depth due diligence of the future partner (Lynch & Lind, 2002). Before companies make any decisions, they usually conduct very detailed financial and legal analysis (Lynch & Lind, 2002). In most cases, however, they neglect to prepare a comprehensive risk assessment (ibid.).

Excessive expectations of potential synergies that some companies have before the merger, constitute another threat (ibid.). This is especially true in case of firms which desire to acquire only one particular business of the partner, and then experience difficulties with integrating its other parts (ibid.).

Apart from pre- merger financial and legal analysis, and the thorough risk assessment it is essential to conduct a profound cultural audit (Cartwright & Cooper, 1993; Huang & Kleiner, 2004) and human resources planning (Schreader & Self, 2003).

In the post-merger phase one of the most important issues is time, and the speed of the integration process (Lynch & Lind, 2002; Huang & Kleiner, 2004). Huang and Kleiner argue that in the globally competitive and market-driven environment

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companies need to act quickly, otherwise ‘their opportunities will dissolve before they can extract the rewards’ (2004, p. 56). Lynch and Lind are of opinion that the first 100 days after closing the deal are critical, as they ‘set the tone for the integratio n process’ (2002, p. 6). Acting under time pressure managers must be able to identify the post acquisition priorities (Lynch & Lind, 2002).

Further major success factors are: the ability to integrate two different corporate cultures, which may be even more challenging in case of cross-boarder mergers, where additionally national cultural differences have to be taken into consideration (Cartwright & Cooper, 1993, 1995; Schreader & Self, 2003; Veiga et al., 2000; Shelton et al., 2003; Huang & Kleiner, 2004; Lee Marks, 1997; Calori et al., 1994; Lynch & Lind, 2002); frequently underestimated by the companies human aspect (Tompkins, 1998; Cartwright & Cooper, 1993, 1995; Appelbaum et al., 2000); and the role of managers (Cartwright & Cooper, 1995). All three of them will be discussed in detail in the following paragraphs.

Less frequently described, nevertheless of equal importance, are factors such as: good communication throughout the merger (Tompkins, 1998), and quality of stakeholder relationships (Shelton et al., 2003; Cartwright & Cooper, 1995) which should be characterised by the mutual trust between the partners (Trompenaars & Wooliams, 2000).

Ensuring the positive outcome of the merger and achieving the expected results requires companies to plan carefully all three stages of the merger (Lynch & Lind, 2002) and make sure that all the above presented criteria are met.

2.3 Human factor ‘Merger is an important human as well as financial activity’ (Cartwright & Cooper, 1995, p. 35), and although human factor is frequently neglected by the merging companies (Huang & Kleiner, 2004) Tompkins calls it ‘the cornerstone of successful merger’ (1998, p. 1).

Mergers bring change and greatly destabilize the lives of individuals involved, causing uncertainty and anxiety (Cartwright & Cooper, 1995). Employees feel as though they have lost control over important aspect of their life, what causes concomitant stress (Appelbaum et al., 2000). Behaviourists have discovered that in

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terms of personal adjustment and concomitant stress, merger is considered to be comparable with bereavement (Cartwright & Cooper, 1995).

When a merger is first announced it causes ambiguity among personnel. Employees are afraid of the impacts of combined market share and fear to lose their jobs (Huang & Kleiner, 2004). Creating a new company out of two previously independent ones, means, at least for a part of employees, a change in structure and work processes that they will have to adapt to (Bijlsma-Frankema, 2001). Some people react to situation like this with fear and denial (Tompkins, 1998). Most people overcome difficulties and accept the change, however, those who will not be able get beyond their initial reactions will most probably leave the firm (ibid.). For the companies it is a bad news, as it may mean cost of recruitment and retraining of new employees, loss of valuable customer contacts, goodwill and expertise (Cartwright & Cooper, 1995).

Statistics show that the overall rate of personnel turnover in the first two years after the merger, amounts to 30 % (ibid.). Among executives this figure is as high as 75 % over the first three years after the merger (ibid.).

To avoid situations like this literature stresses the importance of good communication throughout the merger (Tompkins, 1998). Top management should keep employees as informed as possible and be as honest as possible (ibid.).

2.4 The role of managers The process of merger is particularly difficult and strenuous for the top management of the merging companies. Executives are involved throughout the whole process; from complicated negotiation phase, through arduous legal matters, to complex transitional period (McEntire & Bentley, 1996). According to both researchers and consultants, it is the managers that lead and guide their companies through the difficult process of merger (Schreader & Self, 2003). Lee Marks depicts managers as ‘stewards of the combined organisation’ (1997). Managing a merger is a challenging task because leadership means not only structural integration but, what by some authors is considered to be more important in the long-term perspective (Cartwright & Cooper, 1993; Shelton et al., 2003), the integration of people and cultures (Lee Marks, 1997; Schreader & Self, 2003; Veiga et al., 2000). Achieving these targets is difficult, especially in cross-national merger when managers themselves usually

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differ greatly in the way they do things. Management style and differences in the management styles of the two companies have actually been ranked by both researchers and merger consultants as one of the main issues causing the failure and preventing companies from realising the financial potential of the merger (Chatterjee et al.,1992; Very et al., 1997; Shreader & Self, 2003; Trompenaars & Wooliams, 2000; Veiga et al., 2000). Huang and Kleiner quote the results of the research conducted in 1992 by Coopers and Lybrand who found out that out of 100 failed or troubled mergers 85 % were due to differences in management styles and practices (2004). Differences in the management styles may lead to continued power struggles at the top (Cartwright & Cooper, 1995) and in the effect to confusion among the employees (McEntire & Bentley, 1996).

2.5 A cultural perspective The issue of cultural differences and cultural compatibility in mergers has gained much attention among researcher in the last 15 years (Cartwright & Cooper, 1993,1955; McEntire & Bentley, 1996; Trompenaars & Wooliams, 2000; Lynch & Lind, 2002; Veiga et al., 2000; Chatterjee et al., 1992, Weber et al., 1996; BijlsmaFrankema, 2001; Very et al., 1997). The impacts of cultural clashes on the outcome of a merger, the merging companies and their employees are several, and have been discussed earlier. Shreader and Self call culture ‘the make or break factor in the merger equation’ (2003, p. 511). Cultural differences may lead to unproductive behaviour among the employees, such as low level of commitment, trust and cooperation between the groups of employees from the two merging companies, causing loss of the company’s productivity (Bijlsma-Frankema, 2001). Loss of productivity caused by luck of trust and cooperation is particularly frequent in case of top managers (Weber et al., 1996). This is because ‘cultural clash is strongest when the contact between the opposing cultures is greatest’; and executives are the people involved in the merger from its beginning till its end (ibid., p. 1219). This is a very bad sign for companies, since motivation and commitment of the top managers has a major influence on the motivation of other employees (ibid.).

Cultural differences mainly influence employees of the merging companies, but perceived cultural distance may also influence potential foreign investors and

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shareholders who may want to avoid direct ownership because of high information costs and the difficulty in transferring management techniques and values (Weber et al., 1996). Sometimes quite an opposite happens. Cultural issues may be attractive both for the investors, who find the business models of the foreign partner a substantial advantage (ibid.), and for the managers who anticipate more opportunities for themselves by working for the partner firm, which they perceive to be highprestige worldwide leader firm and which corporate culture better addresses their expectations (Very et al., 1997). In this situation managers are willing to adopt new culture (ibid.). This way of integration is called assimilation (ibid.).

Whether cultural differences hinder or facilitate the integration process, their meaning is indisputable. Lately researcher concentrate on the corporate culture fit, underestimating the implications of national culture (Weber et al., 1996). Only some of them notice the complexity of the international mergers where not only two different organisational cultures come together, but organisational cultures which are deeply nested in national cultures (Calori et al., 1994; Very et al., 1993, Veiga et al., 2000, Trompenaars & Wooliams, 2000; Shelton et al., 2003). Common cultural differences embrace differences in communication styles, planning and decision making practices, negotiation strategies, and management or leadership styles (Shelton et al., 2003). All of them are shaped by both national and organisational cultures. According to Trompenaars and Wooliams international deals involve both corporate and national cultures (2000). Weber claims that national differences are best visible between the senior managers of the two companies, who see themselves and are perceived by others as ‘champions of the national culture they represent’ (1996, p. 1217). Taking into consideration the role managers play in the merger and post-merger integration process, it is at the top management level that national cultural differences play the most important role in the life of merging organisations.

Furthermore, Weber argues that the impacts of national cultural differences are greater than the one produced by the differences in organisational cultures and therefore, national cultures are significant factor in the mergers’ failure and in the search for successful integration (Weber et al., 1996).

Since cultures and cultural differences are so crucial to the outcome of the merger it is very important to be aware of them. That is why companies before making any

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decisions and signing any contracts should conduct an in depth cultural audit of the future partner (Lynch & Lind, 2002; Shreader & Self, 2003). As the result of cultural audit, managers can get to know the cultural distance between their and the partner company. In terms of organisational behaviour, cultural distance is defined as ‘the sum of factors creating, on the one hand, a need for knowledge, and on the other hand, barriers to the knowledge flow and hence also for other flows between the home and the target countries’ (Weber et al., 1996, p. 1216). It is important to realise that cultural distance and cultural differences do not necessarily have to mean troubles. Cultures do not have to be similar, it is enough if they are complementary (ibid.) Therefore, the major advantage of such a cultural due diligence is that it raises awareness of issues that should be managed during the integration process (Huang & Kleiner, 2004). How are the managers going to deal with those issues is of major importance for the future of merging companies.

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3. The role of management style within corporate culture in the cross-national context.

The importance of culture, both national and corporate for the outcome of an international merger has been proved in the previous chapter. The special attention was paid to the role of the top management and the meaning of different management styles rooted in different national cultures. This chapter is going to analyse the concept of culture, and stud y more deeply its connection with the management style. In order to present the complexity of the managers’ job, it is also going to introduce the reader to the basic theory of management and international management. Finally, it is going to review literature on the ways managers can deal with, so important in the merger process, cultural differences.

3.1 Culture and levels of culture.

As already mentioned international managers can encounter in their work several difficulties caused by cultural differences or culture clash. As was presented in the previous chapter the consequences for the company of such cultural unawareness can be enormous.

3.1.1 Culture defined.

Culture is defined in many different ways and the definitions embrace everything from law and religion to art (Schneider & Barsoux, 2003). According to the anthropologist Margaret Mead, who studied native rituals in Samoa, culture is “shared patterns of behaviour” (ibid., p. 21). However, as Susan Schneider and JeanLouis Barsoux cla im in their book Managing across cultures, observing behaviour is not sufficient. The important thing is the meaning of this behaviour, as ‘the same behaviour can have different meanings and different behaviours can have the same meaning’ (ibid., p. 21). Thus, they stand in favour of a definition by the anthropologists Claude Levi-Strauss and Clifford Geertz, who define culture as “systems of sheared meaning or understanding” (ibid., p. 21). This view is shared by Trompenaars in his book Riding the waves of culture, who claims that culture does

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not represent the certain behaviour but the way in which particular behaviour is interpreted (Trompenaars, 2000). One of the most known definitions of culture is that of Geert Hofstede, a Dutch researcher, author of the book Culture’s Consequences, in which he describes the results of his study of national cultures in the workplace, conducted on the IBM employees worldwide. Hofstede defines culture as ‘the collective programming of the mind which distinguishes the members of one group or category of people from another’ (Hofstede, 1997, p. 180). Behind the technical term of ‘programming of the mind’ stands, what Kroeber and Parsons described as ‘transmitted and created content and patterns of values, ideas, and other symbolic-meaningful systems as factors in the shaping of human behaviour and the artefacts produced through behaviour’ (Hofstede, 2001, p. 9). This definition refers to both the subconscious and the visible elements of culture; to values and artefacts.

Both Trompenaars and Hofstede depict culture as an onion consisting of layers (figure 3.1). The outer layer symbolises artefacts and products of culture, the visible elements, such as language, food, buildings, monuments, fashion and art, etc.

(Trompenaars, 2000). In Hofstede’s diagram these are represented by: symbols, for example words, gestures, pictures, flags, status symbols that carry meanings recognised by the group; heroes, the people who carry characteristics that are highly prised in the culture; and rituals, which are activities keeping the individual bound within the norms of the collectivity, for example ways of greeting or paying respect to others (Hofstede, 2001). The middle layer represents norms and values. Norms are what in a group is consider to be ‘right’ or ‘wrong’, and they can develop on formal level as written laws, or on the informal one as social control (Trompenaars, 2000). Values are closely related to the ideals shared by a group and determine what is ‘good’ and what is ‘bad’ (ibid.). The core of the structure is basic assumptions about existence. Basic assumptions are ‘self-evident, and they result of routine responses to the environment’ (Trompenaars, 2000, p. 24). These are things which existence is just taken for granted and people asked for a reason for them, normally are not able to answer. It is like asking the Japanese why they respect authority, or the American why people are equal. Probably they will not be able to answer, as these values are based on their basic assumptions about the world around them (Trompenaars, 2000).

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In the onion diagram basic assumptions give basis to norms and values, which consequently are foundation for products and artefacts of culture.

Figure 3.1 A model of culture

Artefacts & Products Norms & Values Basic Assumptions – implicit

– explicit

Source: Adapted from Trompenaars, 2000, p. 22

3.1.2 National versus organisational culture Trompenaars also distinguishes three levels of culture, national – a culture of a nation or a region, corporate – a culture within a specific organisation or company and professional or occupational – a culture of a certain profession, for example medicine doctors or engineers (2000). For the purpose of analysing differences in management styles, this paper is going to concentrate mainly on the first two levels of culture, national and corporate one; as the first one, influences the management style, while the second one is influenced by the management style of top executives (Weber et al., 1996).

The notion of natio nal culture has been explained in the previous paragraph. As the core of the organisational culture many authors consider ‘a system of shared values and beliefs’ that are common to the members of an organisation (Peters & Waterman, 1982; Hellriegel & Slocum, 1993; and Schein, 1999). Hofstede disagrees with that approach (1997). He argues that the core of organisational culture is not

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values, which he attributes to national culture, but ‘shared perceptions of daily practices’ (1997, p. 182). This point of view is supported by Trompenaars (2000, p.

158) who treats organisational culture as ‘the way in which a group of people [members of the organisation] solves problems and reconciles dilemmas’. Hofstede justifies his hypothesis saying that organisation is not a nation, and this two levels of culture are of different nature (1997). According to him the main difference between organisational and national cultures is the role that manifestations of culture, presented in the ‘onion’ diagram as artefacts and practices, play in each level (ibid.).

The research conducted by the Dutch Institute for Research on Intercultural Cooperation (IRIC) showed that while at the national level cultural differences reside in values, less in practices; at the organisational level, cultural differences reside mostly in practices and less in values (Hofstede, 1997). Values are acquired early in the life, from family, school, surrounding environment. Practices are learned later, when already as an adult people start working (Hofstede, 1997). This dependence is shown in figure 3.2.

Figure 3.2 The nature of cultural differences

Level

Place of socialisation

Nation

Family Values

Occupation

School Practices

Organisation

Workplace

Source: Adapted from Hofstede, 1997, p. 182

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On the diagram, halfway between nations and organisations Hofstede has placed the occupational level. It suggests that culture at the occupational level means acquisition of both values and practices (Hofstede, 1997).

An analysis of the ‘onion’ diagram indicates that basic assumptions, norms and values, which Hofstede attributes to national culture are the underlying bases for artefacts and products, in Hofstede’s understanding for practices. If to adopt this theory to figure 3.2, it is possible to conclude that values typical to national culture underpin the practices characteristic to organisational culture.

Literature describes several factors from the organisation’s internal and external environment that shape the company’s corporate culture. These are business factors such as: the dependence the organisation has on technology and the type of technology employed, the nature of the activities in the business and the character of the industry it competes in, the structure of the organisation, and its height and weight (Evans, 2003); but also human factors such as the philosophy of the organisation’s founders, the general relationship between employees and their organisation, the vertical or hierarchical system of authority defining superiors and subordinates, the general view of employees about the organisation’s destiny, purpose and goals, and their place in it, and finally the management style adopted and the types of control mechanism (Evans, 2003; Trompenaars, 2000).

3.1.3

Management style and culture

Management style plays a crucial role in the outcome of a merger (Weber et al., 1996). Frequently, differences in the management style between the top management of the merging companies are a cause of a failure (Shreader & Self, 2003). Evans recognises management style as a factor influencing the corporate culture of an organisation (2003). But some authors claim that it is the culture of an organisation that influences the management style (Schein, 1999). Executives from the partner firms have different top management cultures, different preferred ways of running their business over time, based on members’ shared history and experiences, which according to Schein are elements of organisational culture (1999). This point of view is opposed by Weber, who calls top managers ‘champions of national culture’ and attributes differences in preferred management style to national culture

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dimensions (Weber et al., 1996). Weber’s position is supported by the research of Hofstede, which have shown differences in management values and practices between nations (1997). Trompenaars argues that the choice of preferred corporate culture, and therefore the management style is determined by national culture dimensions (2000). His theory is supported by Mullins (1993). Schein’s arguments his point of view arguing that organisational culture can influence an individual in the same degree as the national culture (1999). This argument, however, is refuted by the results of the research conducted by Laurent. He conducted cross-cultural study in which he analysed values of managers in nine European countries (Mead, 1998). Laurent found out that organisational culture does not operate at as deep level as national culture, and is unlikely to modify national culture values (ibid.). The research proved also that when national and organisational cultures are in conflict, the first one is likely to override the second one (ibid.).

All these facts confirm the author’s hypothesis made in the previous paragraph, that the national culture values underpin the organisational culture practices. Therefore, the differences in the management style are going to be analysed in terms of national culture dimensions.

3.1.4 National dimensions of culture There are many theories concerning different aspects of culture and they have been broadly described in literature. There are some very basic divisions and descriptions of characteristics of culture, such as the one done by Harris and Moran, who identified ten basic characteristics of culture: sense of self and space, communication and language, dress and appearance, food and feeding habits, time and time consciousness, relationships, values and norms, beliefs and attitudes, mental process and learning, and work practices and habits (2000). Some of these characteristics, such as relationships with nature and with people or time are also described by Schein (1985), Trompenaars (2000), Adler (2002), Hofstede (1997) or Kluckholn and Strodbeck (1961). Hall (1990) and Adler (2002) analyse also space; and Hall (1990) identifies language as an important feature of culture. Schein (1985) and Kluckholn and Strodbeck (1961) stress the importance of human nature.

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In the following paragraphs some of the most interesting, from the point of view of the management theory, assumptions are going to be investigated.

Hofstede’s dimensions of culture On of the most famous and most commonly quoted theories concerning culture is the theory of Geert Hofstede. In the 70ies he conducted a study on 116,000 IBM employees in fifty different countries. In his study Hofstede researched how national cultures influence the values in a workplace. He developed an index of four dimensions of culture, in which he placed each of the studied countries ascribing them scores from 0 to 112 based on the findings of his study (Hofstede, 2001).

These dimensions are: power distance, individualism vs. collectivism, uncertainty avoidance, and masculinity vs. femininity (ibid.).

First of the Hofstede’s dimensions of culture, power distance, describes ‘the extent to which the less powerful members of institutions and organisations within a country expect and accept that power is distributed unequally’ (Hofstede, 1997, p.

28). It ‘shows how far the culture tolerates and fosters pecking orders, and how actively members try to reduce them’ (Mead, 1998, p. 36). In practice the dimension correlates to the relationships between the employers or the managers, and the employees or the subordinates. In the countries with high Power Distance Index (PDI) the subordinates depend on their boss, who makes all the decisions (Verluyten, 2000), while in the countries with low PDI managers tend not to be so autocratic or paternalistic (Hofstede, 1997); being seen as practical and systematic, they admit the need for support and often would consult their subordinates before reaching decisions (Mead, 1998). Employees also prefer consultative style of decision making (Hofstede, 1997), they have more independence and cooperate with other employees more easily (Mead, 1998). Subordinates dislike close supervision and are not afraid to express their disagreement with the superior (ibid.). In high PDI countries hierarchy is very important and organisations centralise power as much as possible in few hands; while in the countries with low PDI, relations are more personal and informal. Countries with low PDI score try to reduce the power of leaders and perceive hierarchies as convenience arrangements rather than as structure having existential justification (Mead, 1998). Hofstede claims that in countries with high

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power distance score relationships between superiors and subordinates are very often filled with emotions (Hofstede, 1997). This point of view is supported by the head of a French public research centre on international management, Philippe d’Iribarne, who discovered in his research that French hierarchical relationships (France has relatively high PDI score of 68) have strong emotional character, and that they are characterised by ‘an extreme diversity of feelings towards superiors, who can be either adored or despised with equal intensity’ (Hofstede, 1997, p. 36). He also claims that this situation was not observed in the countries with lower PDI, such as: USA (PDI 40) or the Netherlands (PDI 38) (ibid.). Low power distance countries are considered to be cultures of equal opportunities, whereas in high power distance cultures membership in a particular caste or class decides about a person’s opportunity for career development (Hellriegel & Slocum, 1993).

The second dimension distinguished by Hofstede is individualism (2001). It describes the relationship of an individual and the group they belong to (Mead, 1998). In individualist countries achievements and rights are emphasised, and competition is anticipated (ibid.). Individual decisions are valued over and above group decisions and individual rather than group working style is preferred, and is more efficient (ibid). In countries with high individualism score people also have the right to their own opinions which do not always have to be in agreement with those of the majority (ibid.). The managers aim for diversity rather than commodity and although they are loyal to the company, it is not a life- long commitment with their emotional connections with the company being rather low (ibid.). Individualism is opposed by Hofstede to collectivism. In collectivistic cultures people are rarely alone and make big distinction between their ingroup, which they feel they must protect, and the outgroup (Hofstede, 1997). In individualist cultures everyone is treated alike, while in the collectivistic societies unique circumstances are taken into consideration and preferences are given to the members of the ingroup (Hofstede, 1997). This is compared by Hofstede to what among sociologists is known as particularism and universalism (Hofstede, 1997); and what is considered by Trompenaars (2000) to be one of the basic dimensions of culture. Particularism occurs when preferential treatment of one customer or employee over others, is a natural and acceptable business practice; and universalism means that treating one’s

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friends better than other people is considered unethical (Hofstede, 1997). In the mind of collectivist cultures only natural persons and via them their friends or colleagues are trustworthy and not ‘impersonal legal entities like a company’ (ibid., p. 67). The collectivist countries value the personal relationships, which should be established first, over the task; while in the individualist countries the task should prevail over any personal relationships (ibid.). In international business the dimension of particularism and universalism may affect the management style and manager’s choice of one standardised approach or the local more particular approach (Trompenaars & Wooliams, 2000).

Uncertainty avoidance, the third dimension in Hofstede’s model, is ‘the extent to which the members of a culture feel threatened by uncertain or unknown situations’ (Hofstede, 1997, p. 113). It reflects an acceptable level of anxiety about the future, which is present in a culture (Verluyten, 2000). In cultures, in which level of uncertainty avoidance is high, people tend to be more job stressed and to pursue strategies which give them a form of certainty for the future, for example: employment stability, social benefits like insurance or possibility to save money (ibid.). There is a need for clear formal and informal rules and regulations controlling the rights and duties of employers and employees and the work process (Mead, 1998; Hofstede, 1997). Hofstede suggests that this need for rules and regulations is emotional (1997). Therefore, even ineffective rules are welcomed just to satisfy people’s emotional need for formal structure and in practice they can be bypassed, as it, for example, frequently happens in France (Hofstede, 1997). In low UAI societies rules are established only when absolutely necessary as many problems can be solved without any formal rules at all; and the existing rules are generally more respected (ibid.). In cultures where the need for uncertainty avoidance is high, managers are expected to issue clear instructions and subordinates’ initiatives are tightly controlled (Verluyten, 2000). Expert managers are preferred (ibid.). People from high uncertainty avoidance cultures are more emotionally reluctant to changes which bring the unknown future (ibid.). In countries with low uncertainty avoidance score managers tend to be of lower average age in higher level jobs, loyalty to the boss is not a great virtue and there is a preference for generalist managers (ibid.). Conflict within organisation is considered

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to be natural with compromise being an accepted way to solve it (ibid.). Managers agree to break the formal rules and bypass the hierarchy when necessary (ibid.).

Foreigners are widely accepted as managers (ibid.). Hofstede claims that managers from weak UAI countries occupy themselves more with strategic problems, while the managers from strong UAI countries deal more with operational issues (1997).

Countries where the uncertainty avoidance is low are more likely to encourage innovations as they are more tolerant towards new ideas (Hofstede, 1997). On the other hand a full-scale implementation of these ideas is more probable in the countries where the need for uncertainty avoidance is high, as these cultures have greater sense for details and punctuality (ibid.).

The fourth dimension of Hofstede’s theory is masculinity, which by Hofstede contrasts with femininity (1997). By masculinity Hofstede means the desirability of assertive behaviour, and by femininity the desirability of modest behaviour (ibid.).

In the countries with high masculinity score competition, work, and achievements have high value, while in the countries with low masculinity score people find nurturing and the quality of life and relations more important (Schneider & Barsoux, 2003). In masculine countries managers are less attracted by a service ideal and decisions made by group are more respected then the one of an individual (Mead, 1998). The masculine manager is assertive, decisive and aggressive (Hofstede, 1997). He rather makes all the decisions by himself and bases them on facts, without any consultation with his subordinates (ibid.). In feminine cultures achievement is measured in terms of human relations and not power and property; motivation is lower with little preference for competition (Mead, 1998). The feminine manager ‘is less visible, intuitive rather than decisive and accustomed to seeking consensus’ (Hofstede, 1997, p. 94). The ways of dealing with conflicts are also different in masculine and feminine cultures. The masculine societies tend to solve problems ‘by a good fight’, and the management tries, if possible, to avoid any contact with labour unions; while in the feminine societies usually quite opposite situation takes place (ibid., p. 92). Conflicts are resolved by negotiation and reaching a compromise (ibid.). Another difference is visible in the functions the meetings have in masculine and feminine cultures (ibid.). In the masculine countries meetings create for participants an opportunity to assert themselves, to show how good they are (ibid.).

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In the countries with low masculinity index, meetings serve as places to discuss problems and find common solutions (ibid.).

The theory of Hofstede has many weak points and has been criticised by several scholars. First of all, it studies cultures within the limits of national boundaries, whereas cultural territories do not always correspond with those of a country, especially in case of countries which include several socially dominant or inferior culture groups, for example Switzerland with French, German, Italian and Romansch cultures or Spain with Basque, Catalan and Castillian cultures (Mead, 1998).

Second, the model is based on research within only one company within a single industry, which according to Mead may be misleading because the study is limited to one small group of people, educated, generally middle class, and does not embrace people from other social groups, for example unskilled workers, public sector employees, etc. which are not represented (1998). Mead observed as well that some of the dimensions overlap. He found that some elements of being characteristic for large power distance countries have exactly the same meaning as characteristics of masculine countries, what leads to confusion about which dimension is the behaviour based on (ibid). However, the study so far has been the biggest and of this kind and is the only one that compares national cultures so much in depth. Moreover, as it embraces population that is controlled across countries, the results are comparable (Mead, 1998).

Hall’s concept of culture Another famous author of a theory about culture Ed Hall describes completely different than Hofstede’s dimensions of culture. He claims that ‘culture is communication’ (Hall & Hall, 1990, p. 3). He distinguishes three underlying structures of communication: la nguage, space and time (ibid.). Language is a mean of communication. Hall makes distinction between high and low context cultures.

By context he means ‘information that surrounds an event’, so how much does a listener know about the subject under discussion (ibid., p. 6). High context cultures ‘depend heavily on the external environment, situation, and non-verbal behaviour in creating and interpreting communication’ (Mead, 1998, p. 29); whereas in low context cultures communication is expected to be clear and direct, explicit, and the

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speaker is expected to come to the point and not to ‘beat around the bush’ (Schneider & Barsoux, 2003, p. 44). Members of low context cultures always demand precise information and detailed background information (ibid.). In low context cultures everyone should be able to understand the message and have equal access to information. In high context cultures everything depends upon the person or situation, some people might have more privileged access to information than others (Schneider & Barsoux, 2003). People in authority form high context societies are personally responsible for the actions of their subordinates (Mead, 1998).

Agreements are more likely to be spoken rather than written and signed contracts very often are not final and can be adjusted (ibid.). In low context countries authority is distributed throughout the bureaucratic system and personal responsibility is difficult to exercise (Mead, 1998). Agreements tend to be written and a signed contract is final and legally binding (ibid.). Cultural patterns are easier and faster to change in low context than in high context cultures (ibid.).

As far as space is concerned, Hall mentions territoriality and personal space.

Territoriality is physical space, especially Americans and Germans tend to establish space that they label as ‘mine’ (Hall & Hall, 1990). Hall also claims that space communicates power, for example the location of offices of the managers (ibid.). In American and German cultures, the best offices would be those in the corner, surrounded with walls, or those located on the top floor. However, in France, a manager would seat in the central position of the information network, so in the middle of the room, surrounded by subordinates (Hall & Hall, 1990). Personal space is also very important. It is an invisible bubble of air that surrounds each of us (ibid.). It is much smaller among southern Europeans than for example among northern Europeans.

The third structure of culture described by Hall is time, which can be perceived either in monochronic or polychronic way. In monochronic cultures attention is paid to doing only one thing at a time, schedules take priority above everything else, setting priorities is important, people do not like to be interrupted and emphasis is put on punctuality (Hall & Hall, 1990). In polychronic cultures time is characterised by simultaneous occurrence of many things, more emphasis is put on completing human transactions rather than on holding schedules (ibid.). Hall proves also connection

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between polychronic and high context people as well as between monochronic and low context people.

Trompenaars’ dimensions of culture Fons Trompenaars is the consultant for international and intercultural management.

Being a practitioner, in his book Riding the Waves of Culture, he gives rather practical examples than theoretical analysis of how cultural differences ‘affect the process of doing business and managing’ (Trompenaars et al., 2000, p. 1). He distinguishes seven dimensions of culture. The first two, universalism versus particularism and individualism versus communitarianism, are comparable with Hofstede’s dimension of individualism and collectivism, and have already been discussed in detail. Universalism and particularism apply to relationships and rules, and individualism and communitarianism are correspond with Hofstede’s dimension of collectivism versus individualism. Trompenaars identified also neutral versus emotional, and specific versus diffuse cultures, achieved versus ascribed status, internal versus external control, and synchronic versus sequential time (Trompenaars & Wooliams, 2000).

The third dimension of Trompenaars’ model of culture is neutral versus affective culture. It describes the degree to which person’s emotions are revealed and the role they play (Trompenaars & Wooliams, 2000). People from affective cultures will show their emotions and therefore receive emotional response (ibid.). They would express their strongly individual and rather fixed opinions in an open and often passionate way, choosing adversarial communication style (ibid.). Members of neutral cultures would control and subdue their feelings (Mead, 1998), and as a result they would be frequently accused of being ice-cold with no heart (Trompenaars & Wooliams, 2000).

Specific versus diffusive are considered by Trompenaars to be another dimension of culture. It describes the degree of involvement in relationships (ibid.). In specificoriented cultures managers would segregate out the task relationship they have with a subordinate and separate it from other dealings (ibid.). In diffuse-oriented societies, the superior-subordinate work relationship pervades all other dealings (Mead, 1998).

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All societies give certain members higher status than the others, and focus attention on such people and their activities (ibid.). Achieved status cultures ascribe status to people based on their achievements; while ascribed status cultures do it based on person’s age, class, gender, education etc. (ibid.) In achievement status countries skills and knowledge justify authority; whereas in ascribed status societies status usually is independent of task or specific function (ibid.)

Another dimension of culture according to Trompenaars is the concept of time. This notion has been previously discussed when analysing the Hall’s model.

Trompenaars, however, does not make distinction between monochronic and polychronic cultures but between sequential and synchronous cultures (2000).

Although the name is different the meaning of Hall’s and Trompenaars’ concepts is similar. Sequential time cultures treat time as a sequence of events, that means that they do one thing at the time, like in monochronic cultures; and synchronous time cultures do many things at the same time juggling them, just as in polychronic cultures (Mead, 1998).

The last dimension of Trompenaars’ model applies to relations to nature. Cultures characterised by internal control feel that they can or should control the nature and the environment around them, including their organisation (Trompenaars & Wooliams, 2000). Cultures described as external control societies go along with nature (ibid.)

Worth mentioning are also three other theories by Schein, Adler and by Kluckholn and Strodbeck. All of them distinguish similar dimensions of culture such as: relationship with nature, which is partly covered by Hofstede’s dimension of uncertainty avoidance, human activity, human nature, relationship with people, again partly brought up by Hofstede when describing individualism and collectivism and power distance, and already described by Hall time aspect.

3.2 Management Theory In order to illustrate the challenge and complexity of the managers job, and to explain what it actually is some basics of the management theory are going to be presented.

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Management has become a very fashionable discipline in the last few decades. The English term ‘management’ itself, is now used in many other languages instead of its native equivalent. Management as the field of study has also gained more and more popularity. The proof for that is a continuously increasing number of universities and other higher education institutions which offer degrees in this area.

But what exactly is it? There are as many definitions as authors writing about it.

Robbins in his book Organisational Behaviour describes managers as individuals, who oversee the activities of other people and who are responsible for attaining goals in the organisation (1998; p. 2). However, this is very general and the concept of management is much more complex than that.

So what exactly do managers do? In the 70ies a French industrialist Henri Fayol distinguished five functions that are performed by managers: planning, organising, commanding, coordinating and controlling. Today literature dealing with ‘human behaviour in organisational settings, the interface between human behaviour and the organisation, and the organisation itself’ (Moorhead & Griffin, 2004; p. 3), what is called ‘organisational behaviour’ reduces them to four: planning, organising, leading and controlling (Moorhead & Griffin, 2004; Robbins, 1998). Planning, is ‘the process of determining an organisation’s desired future position and the best means of getting there’ (Moorhead & Griffin, 2004; p. 31). It means defining goals, establishing strategy and developing plans to coordinate activities (Robbins, 1998; p.

2). The second function, organising, is ‘the process of designing jobs, grouping them into units and establishing patterns of authority between jobs and units’ (Moorhead & Griffin, 2004; p. 32). Leading means ‘motivating subordinates, directing others, selecting the most effective communication channels and resolving conflicts (Robbins, 1998; p. 2) in order to achieve the organisation’s goals (Moorhead & Griffin, 2004; p. 32). Finally, every manager is responsible for controlling, which is nothing else as monitoring and correcting the actions of the organisation and its members to keep them directed toward their goals (ibid.).

All the organisations use also four types of resources: human, financial, physical and information resources. The job of managers is to combine these resources through the four basic functions in order to efficiently and effectively achieve the goals of the organisation. (Moorhead & Griffin, 2004, p. 31) This is illustrated in figure 1.1.

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Figure 3.3 Basic Managerial Functions

Planning

Organising

Leading

Controlling

Human Resources Financial Resources Physical Resources Information Resources Effective and Efficient Attainment of Organisational Goals

Source: Adapted from Moorhead & Griffin, 2004, p. 32

While performing their functions managers also play various roles. These functions are no longer restricted to the basic managerial functions as described by Fayol (Mead, 1998) planning, organising, commanding, coordinating and controlling. The term leading present in the modern management theory has changed the idea about the role of managers. Henry Mintzberg in his work identified ten basic managerial roles and grouped them into three different categories (1973). The first category embraces three interpersonal roles of figurehead, leader and liaison, in which the manager’s task is to relate to other people. The roles of the entrepreneur, the disturbance handler, the resource allocator and the negotiator are called by Mintzberg the decision- making roles. The last set of roles are the monitor, the disseminator and the spokesperson, which are informational roles. (op. cit.) The description and examples of the mentioned above roles are presented in table 1.1

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Table 3.1 Important Managerial Roles

Role Interpersonal

Informational

Description

Example

Figurehead

Attend employee retirement ceremony

Leader

Encourage workers to increase productivity

Liaison Monitor

Coordinate activities of two committees Scan Business Week for information about competition

Disseminator

Send out memos outlining new polices

Spokesperson

Hold press conference to announce new plant Develop idea for new product and convince others of its merits

Decision-making Entrepreneur Disturbance handler

Resolve dispute

Resource allocator

Allocate budget requests

Negotiator

Settle new labour contract

Source: Adapted from Moorhead and Griffin, 2004, p. 33

Owing to developments in the management theory today managers have a handful of different solutions, such as TQM (total quality management), MBO (management by objectives) and BPR (business process reengineering), etc. to help them perform their duties and achieve the organisation’s go als. Yet, mere proficiency in modern techniques is not sufficient to achieve success in a managerial position. Managers need to possess certain interpersonal, conceptual, diagnostic and technical skills (Moorhead & Griffin, 2004). Interpersonal skills embrace the ability to communicate with, understand and motivate individuals and groups (ibid.).

Conceptual skills enable managers to think abstract in order to ‘see the big picture’ (ibid., p. 34). Technical skills are skills generally connected with the operations employed by the organisation or its productive process, and they allow managers to perform specific task within the organisation (ibid.). The last group are diagnostic

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skills, which make the managers understand cause-and-effect relationship and identify the potential solutions to the problems (ibid.).

3. 3 Leadership styles First of all it is essential to explain the relationship between the management and the leadership; between the managers and leaders. Although sometimes terms manager and leader are used synonymously, Mullins argues that they are not as leaders are not always managers (1993). Managers are people who get things done through other people within a structured organisation and with ascribed roles (ibid.). Leadership has followers and it does not necessarily take place within the structure of an organisation (ibid.). For the purpose of this work, however, leadership and management are going to be treated as synonyms because based on the merger literature, managers in the process of mergers must be leaders (Shreader & Self, 2003). Therefore, the author of this work assumes that top managers involved in the process of merger meet this condition.

There are as many ways of describing leadership style as authors writing about this subject. Terms used to describe leadership styles range from dictatorial, unitary, bureaucratic, benevolent, charismatic, consultative, participative or abdicatorial (Mullins, 1993). Increasingly popular is also the contingency theory of management, which treats situational factors as very critical to selecting the characteristics of leadership (ibid.). There are several models of contingency theory, all of them based on the assumption that there is no single style of leadership appropriate to all situations. However, based on this theory, the choice of leadership style cannot be attributed to differences in national cultures. This is due to the results of the study conducted by Hickson et al., who investigated 70 different companies in Great Britain, the US, and Canada; and discovered that culture is not a contingent factor (Mullins, 1993). And although this study has been challenged by Child and Kieser, who argue that ‘culturally derived preferences and philosophies may influence the actions of managers in a workplace’ (Mullins, 1993, p. 356) the author of this paper is going to use a typology of Mullins and a model developed by Tannenbaum and Schmidt who suggest a continuum of possible leadership behaviour available to the managers, and along which various styles of leadership may be placed (Mullins,

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1993). Laurie Mullins, the author of a book on management and organisational behaviour, classifies leadership styles under three- fold headings: the authoritarian (or autocratic) style, the democratic style, and a genuine laisezz- faire style (1993).

Authoritarian managers alone exercise decisions making and authority for determining policy, procedures for achieving goals, work task and relationship, control of rewards or punishments (ibid.). The characteristic of this style is that focus of power is with manager (ibid.). A contradiction of the autocratic style is a democratic approach. Here, power is focused with the group as a whole and there is greater interaction with the group (ibid.). The group members have a greater say in decision making, determination of a policy or implementation of systems and procedures; the manager is more a member of a team (ibid.). The genuine laisezzfaire style lies somewhere in between the autocratic and democratic approach.

Manager is an observer who continuously passes the focus of power to members and allows them freedom of actions (ibid.). He does not interfere but he is always available if his help is required (ibid.).

The model developed by Tannenbaum and Schmidt is presented in figure 3.4.

Figure 3.4 Continuum of leadership behaviour Subordinate-centred leadership (democratic style)

Boss-centred leadership (autocratic style) Use of authority by the manger

Area of freedom for subordinates

Manager Manager makes ‘sells’ decision decision and announces it

Manager presents ideas and invites question

Manager presents tentative decision subject to change

Manager presents problem, gets suggestions, makes decision

Manager defines limits; asks group to make decision

Manager permits subordinates to function within limits defined by superior

Source: Mullins, 2003, p. 244

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According to Tannenbaum and Schmidt, leaders own values and systems identify the choice of leadership style. As has been previously shown, those values and systems are based on national culture dimensions.

3.4 Towards international management The internationalisation and globalisation of the business environment has evoked a need for international managers and for cross-cultural management ability.

Managers bring to organisation their ‘heritage’, their cultural background, which characterises and influences their activities. This cultural background influences their relationship to performed tasks, their subordinates and towards other managers and management teams.

Apart from skills identified by Moorhead and Griffin (2004), which have been presented earlier, and which are necessary for every manager, leaders operating in an multinational and cross-cultural environment should posses some additional qualities. First of all, it is important to select the right person for the position and provide them with the adequate training and support (Harris & Moran, 1999; Schneider & Barsoux, 2003). Schneider and Barsoux name nine competencies a person should possess to manage internationally (2003). According to them, the most important are interpersonal skills, such as the ability to form relationships and building trust. Unfortunately, at present candidates for international positions are mostly selected on the basis of technical expertise, employee interest in the assignment and personal flexibility (ibid). This kind of selection process chooses task-orientated rather than people-orientated managers, although both sociologists and personal directors of some big European companies stress the need for the second type of managers (ibid). The second important competency is the linguistic ability. Of course, none of the managers is able to master all the languages, however according to Schneider and Barsoux it is good to learn at least one foreign language ‘to give yourself another perspective on the world’ (2003, p. 181). Another competencies are: the motivation to live and work abroad, the ability to tolerate and cope with uncertainty, patience and respect, cultural empathy and lack of narcissism, strong sense of self which ‘allows interaction with another person or culture without fear of losing one’s own identity’, and finally the sense of humour (ibid, p. 183).

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Possessing this skills is the first and crucial factor to achieve success. However, not sufficient. Knowledge about different cultures and awareness of one’s own cultural luggage may help managers to avoid common mistakes.

One of such mistakes is putting different cultures into a hierarchy. Seeing your own culture at the top, with some others as slightly less civilised than your own lower in the ladder, and those considered primitive at the bottom. However, all cultures are equal and none is worse than the other. Moreover, ‘those cultures to seem to be the closest [to your own culture] can have the greatest perceived distance (Schneider & Barsoux, 2003, p. 11). Very often people can only notice that something in cultures other than their own is odd, not really realising the characteristics of their own culture.

Another subconscious phenomenon is ‘Self Reference Criterion’ (SRC). SRC is ‘relying on one’s own values and practices for interpretation and prediction’ (Verluyten, 2000, p. 17). This means that one assumes that things, as for example ordering a meal in a restaurant or motivating your foreign employees or subordinates, done in different cultures will be done as they would be ‘back home’. Self Reference Criterion can be best explained on the example of the iceberg theory (figure 3.5).

Figure 3.5 The Iceberg Theory

A1

M1

A2

M2

A = Artefacts M=Mentefacts

Source: Nigel and Trickey, 2003

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Mentefacts are people’s unconscious values and norms. Self Reference Criterion means using one’s own mentefacts to understand the artefacts, the behaviour and practices of members of other cultures, and leads to misunderstandings.

Having the necessary skills and being aware of one’s own culture and its potential clash with cultures of other people is the first step to managing internationally. Apart from that managers need to be familiar with techniques of dealing with or managing cultural differences.

3.5 Managing cultural differences According to research conducted by Fiat, 40 percent of managerial positions dealt with international matters (Schneider & Barsoux, 2003). Influenced by cultural differences are not only those managers, negotiators or employees who travel abroad, but also those who stay in their home company and experience contacts with foreigners when using modern communication and information technology, such as teleconferencing. If international undertaking is to succeed mutual cooperation is essential. Cooperation requires communication. To make sure that communication takes place, cultural differences which could disturb it should not only be identified, but should be dealt with. There are several strategies to do so.

Schneider and Barsoux propose three strategies of managing cultural differences; ignoring, minimising or utilising (2003).

Ignoring is ‘operating on the assumption that business is business, and that managers, engineers, or bankers are the same throughout the world’ (ibid., p. 256). Companies choosing this strategy assume that convergence in management practice and general desire for modernisation (ibid.). The second strategy is minimizing impacts of cultural differences. Companies using this strategy recognise the cultural differences but treat them as the source of potential difficulties and conflict (ibid.). Minimising cultural differences means ‘finding ways of homogenizing them, creating sameness, or isolating them and creating segregation in order to reduce potential conflict’ (ibid., p. 259). The strategy of minimising can be conducted in several ways; one of them is creating a strong corporate culture and using it to serve as a melting pot to reduce the impact of the different natio nal cultures (ibid.). This is done by either creating global universal culture, either assigning senior management from the parent

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company culture to be in charge of the local division or by maintaining strong relations between employees send abroad and careful scanning and training of foreign workers as is it done by many Japanese companies (ibid.). Another way of minimising impacts of cultural differences is cultural segregation, isolating different cultures and thus avoiding clashes (Schneider & Barsoux, 2003). This is done by giving the local company autonomy, the power to decide about the way of doing things (ibid.). The headquarter just says what has to be done and the local division has to figure out on its own how to do it. The third way of minimising the impacts of cultural differences is creating a regional headquarter which helps to improve coordination between national organisations and to mediate between local conditions and global strategic headquarters (ibid.).

The third strategy is utilising differences. Utilizing is done by introducing matrix structures. Schneider and Barsoux claim that country managers should be involved in developing global plans as well as their sphere of influence should be enlarged, what may include giving them responsibility for coordination and career opportunities beyond their local operation (ibid., p. 267). In utilising cultural differences, finding the proper balance between responsiveness to the local needs and central control managers must possess the competencies like interpersonal skills or language competency, they also must ‘realise that that the cultural difference also resides in them, and in the company’ and not only in foreigners they are to work with’ (ibid., p. 267).

Trompenaars suggest a process of dealing with cultural differences, which he has used for several years being a cultural consultant for many companies going through the process of merger. His method consists of three steps; recognition, respect, and reconciliation (Trompenaars & Woolliams, 2000). First basic stage is the recognition. It is essential to recognise that there are cultural differences, especially those at the implicit level; and to understand their importance and impact. Thus, the pre-merger cultural due diligence is so important. The second step is respect, accepting that none cultural orientations are right or wrong, they are just different from our own (ibid.). In this stage people have to learn to respect these differences and accept their right to interpret the wo rld in their own way (ibid.). The final step is

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reconciliation. It is integrating the differences, the two seemingly opposite views, our own and that of other culture’s members (ibid.).

Similar to Schneider and Barsoux approach to managing cultural differences is the one by Nancy Adler. She also identifies three strategies; parochial, which is comparable with Schneider and Barsoux’s ignoring method. Choosing a parochial strategy means choosing not to recognise the cultural diversity or its impacts on the organisation; and accepting one’s own way of doing things as the only one (Adler, 2002). The second approach, comparable with minimising, is the ethnocentric strategy. Managers recognise diversity, but only as a source of problems; and still treat their way as the best one (ibid.). The third method, similar to utilising, is the synergistic approach. Cultural differences are recognised and seen as leading to both advantages and disadvantages; managers are convinced that it is possible to create one best way taking elements from both cultures (ibid.).

Choosing the right strategy to deal with cultural differences is extremely difficult and depends on the situation and goals the company wants to achieve. One thing is certain, cultural differences do exist and managers and their companies need to be aware of them and consciously manage them.

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4. Methodology The broad literature review in the previous chapters has demonstrated that culture and cultural differences are of great significance to, and may determine the success of mergers and the merging companies. Particular attention was paid to the role that differences in the management style, which were proved to be attributed to differences in national cultures, play in the outcome of organisational marriage. To depict the complexity of managers’ job, the basic managerial functions, roles, and skills were presented. Finally, management in the international context was discussed, with special attention paid to cultural issues and the ways of dealing with cultural differences.

The literature review, being the first stage of the research process, has provided the theoretical academic background, but it has not delivered an answer to main research question of this dissertation; what type of management style within a corporate culture is crucial for a multinational company, in this case Air France-KLM, to deal with cultural differences in order to survive a cross-boarder merger. However, it revealed that the complexity of managerial roles, functions and necessary skills present in cross-boarder management makes it impossible to talk about management style purely in terms of autocratic or democratic terms. It also allowed the author to advance a hypothesis that in order to survive the cross-boarder merger, managers should be leaders in the complex process of post- merger integration standing in favour of and promoting the pre- merger due diligence, true merger of equals, honest and open communication, and that they should find and follow the method of managing cultural differences, taking advantage of the potential synergies between the cultures.

In the second stage of the research process, using the qualitative case study research method, the author will try to test this hypothesis in practice.

4.1 Case study research method The term case study is used here as the research objective. Case study research can involve either a single or multiple cases (Yin, 1993). According to Yin, case study is an empirical inquiry that ‘investigates a contemporary phenomenon within its real

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life context, when the boundaries between phenomenon and context are not clearly evident, and in which multiple sources of evidence are used’ (1993). It is a research method which can be either qualitative or quantitative, or the combination of both (Remenyi et al., 2002). Case studies can employ multiple level of analysis within a single study (Eisenhardt, 1989). According to literature multiple data collections should be used, what is called the triangulation of evidence (Eisenhardt, 1989; Woodside & Wilson, 2003). Data can come from archives, interviews, questionnaires, observation, analysis of operational data, and analysis of written documents (Woodside & Wilson, 2003; Yin, 1993). Finally, there are several goals that can be achieved through the case study use; providing description, generating theory or testing theory (Eisenhardt, 1989).

The main purpose of case study research here is to test the application of the hypothesis in international mergers. This is going to be achieved by the analysis of case studies. This research is a comparative qualitative study, where the small number of cases are studied and compared. It is going to use three case studies, analyse them, compare the findings, and try to apply those findings to Air FranceKLM case. The author is interested in qualitative data and its analysis since, in contrast to quantitative data it puts more emphasis on the question ‘why’, instead of providing numerical indexes (ibid.).

The three case stud ies selected are the merger of the German Daimler-Benz AG and the American Chrysler Corporation, the German Deutsche Bank and the American Bankers Trust, and the merger of Merita bank of Finland and Swedish Nordbanken.

The description of the cases is based on already existing articles. The cases have been selected because all of them describe cross-boarder mergers, and the influence of national cultural differences on the outcome of a merger. Each case has also different basic assumptions, such as merger of equals or acquisition, each has chosen different technique of managing cultural differences, and they constitute examples of both successful and unsuccessful mergers.

The findings of the case study research are going to be compared to the story of Air France and KLM. In case of Air France-KLM case study, it is only possible to analyse factual data available from the airlines’ web pages and from magazines such as the Economist or the Airline Business. The biggest obstacle in the research

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process is the luck of cooperation from both companies. Furthermore, since Air France-KLM have just started their joined operations there is not much data about the performance of the new Group available. Thus, so far it is only possible to give suggestions on practices which should be implemented to assure the success of the Air France-KLM merger.

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5. Case study analysis 5.1 Daimler-Chrysler Based on Shelton et al., 2003 The merger agreement of Chrysler Corporation and Daimler-Benz AG was signed on 6 May 1998. Next day this American-German marriage was enounced to the whole world as the merger of equals. The new company is called Daimler-Chrysler AG. Thanks to the largest industrial merger at that time, Daimler-Chrysle r AG became the world’s fifth largest car producer, with $ 92 billion market value, annual turnover of $130 billion, and 421,000 employees. The basic terms of the agreement were as follows: -

Daimler-Chrysler was incorporated in Germany, with dual headquarters in Germany and Michigan,

-

Management Board was established with nine executives from each partner company having voting power on the new Group,

-

Juergen Schrempp, chairman of the Daimler Benz management board, and Robert Eaton, CEO of Chrysler Corporation were to co-chair DaimlerChrysler,

-

The stock of the merged company was to be traded worldwide under the name ‘DCX’; each share of Daimler was to be exchanged for 1.005 shares of Daimler-Chrysler stock, and each stock of Chrysler for 0.6235 shares of the new Group,

-

Daimler shareholders was to own 58 % of the new Group’s stock, and the shareholders of Chrysler the remaining 42 %,

-

No employees layoffs or plant closings were to occur as a result of the merger,

-

The new company decided not to use the Daimler-Chrysler name at any of its vehicles; current brands were to remain the same: Mercedes-Benz, Chrysler, Plymouth, Jeep, Dodge, Freightliner, Sterling, and Setra

Both CEOs were very enthusiastic about the future of the merger and predicted several financial profits; in 1998 the post- merger increase in sales was expected to

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reach 13 % with first- year cost cuts of $ 1.4 billion raising to $ 3.5 billion in annual savings within two or three years.

Daimler-Benz and Chrysler Corporation were to continue to run the ir main business operations separately, with exception of the staff functions of finance, purchasing, human resources, and information technology. Eaton and Schrempp were proud that the merger was so quickly implemented. After the first year of combined operations, according to the letter send by Eaton and Schrempp to the shareholders, the company’s revenues grew by 12 %, the operating profits raised 38 %, the net income increased 30 %, 19,000 new jobs were created, and over 4.4 million vehicles were sold. However, at the same time the conflict between the partner companies was growing. As a result several American top managers left or were fired from Chrysler. First, Dennis Pawley, Chrysler’s executive vice president for manufacturing, one of the most respected manufacturing executives in the auto industry retired at the end of 1998; in March 1999 two of Chrysler’s key senior vice presidents moved to Ford Motor Company, and one month later Daimler-Chrysler’s vice president for public affairs defected to General Motors. In September 1999, Daimler-Chrysler’s North American president was fired, and in March 2000, the company’s co-chair Robert Eaton retired one year earlier than planned, leaving Schrempp in sole control of Daimler-Chrysler. Together with many top executives Chrysler lost the reputation for creativity, efficiency and profitability. By that time, it became obvious that the merger of equals had turned into German acquisition of an American company. After Eaton had left, Schrempp started to replace Chrysler’s top executives with German managers. The first to go was James Holden, Chrysler’s second post- merger president, who was substituted by the former Mercedes-Benz executive Dieter Zetsche. Next, the position of Chrysler’s chief operating officer was filled with the German engineer Wolfgang Bernhard. Chrysler financial performance had also dropped dramatically. The company lost hundreds of millions of dollars in 2001; and the orders from dealers slowed so much that more production shutdowns were forecast by the end of 2000. Dieter Zetsche, Chrysler’s new president, announced a restructuring plan which initially predicted worker redundancies, production cutbacks, and other cost-cutting measures. However, neither before the merger, nor in the post- merger phase none of the leaders tried to

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identify the cause of the problems, and no one did pay any attention to the clashes caused by cultural differences between the Germans and the Americans. Shelton identifies several mistakes that were committed by the mangers of Daimler-Chrysler.

First of all, no cultural audit was conducted prior to the merger; the human factor seemed to be totally forgotten, neither the shareholders nor the employees were involved in the visioning process. Secondly, Americans and Germans often disregard subtle cultural differences during the pre-merger negotiation phase; those differences normally come into appearance and cause trouble during the integration process. Differences in culture between American Chrysler and German Daimler were largely responsible for this failure. The new company’s operations and management were not successfully integrated as ‘equals’ because of the different ways in which the Germans and Americans worked. Germans prefer more autocratic and top-down management style; German employees expect their managers to give them certain instructions, which they follow without questioning. Americans, on the other hand, feel comfortable challenging their managers or even giving them advice.

Therefore, Daimler-Benz’s culture stressed a more formal and structured management style, while Chrysler favoured a more relaxed, freewheeling style. In addition, two units traditionally held entirely different views on important things like pay scales and travel expenses. As a result of these differences and the German unit’s increasing dominance, performance and employees satisfaction at Chrysler was gradually diminishing. This caused the departures of Chrysler’s key executives and engineers, and the dissatisfaction of the German unit with the performance of the Chrysler division. Chrysler employees became also extremely dissatisfied with what they thought was the source of their company’s problems: Daimler’s attempts to take over the entire organisation and impose their culture on the whole firm.

The planned synergies were never achieved, instead Daimler-Benz treated Chrysler as a potential competition, as it was the case with the Java car. Java was a compact car being designed by Chrysler for the smaller European market; however all of Chrysler’s engines were to big to fit into the car. Its American designer taking advantage of the merger used the engine and suspension from the Mercedes A-series.

At the Frankfurt Auto Show the Java car gained a lot of attention and interest, however it was later shelved by Daimler-Chrysler management because it would

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compete against Mercedes A-series. However, the dominant pitfall was that the merger of Daimler-Benz and Chrysler Corporation was never truly a marriage of equals. It became obvious when the German management started to replace Chrysler’s executives with their own managers, or when Daimler-Chrysler refused to place Chrysler logo next to the Mercedes one, at the Group’s headquarters in Stuttgart. The Chrysler’s management believed blindly in the merger of equals and did not realise that they were tricked by the Daimler-Benz CEO Schrempp, who two years later in an interview for Financial Times admitted that he had trapped Chrysler calling the German acquisition a merger of equals.

According to Shelton, believing in the merger of equals has also prevented the American management from studying possible sources of cultural clashes, and German lack of integrity from taking cultural issues into consideration at all.

This led to a failure. Daimler-Chrysler AG is now worth less than Daimler-Benz was before the merger.

5.2 The Deutsche Bank – Alex Brown Investment Bank Based on Salama et al., 2003 The acquisition agreement was signed in June 1999 between Deutsche Bank (DB) and Bankers Trust (BT). The indirect reason for this cooperation was a German bank’s desire to become a global organisation; the direct one was a weak corporate finance division in the USA. Deutsche Bank in order to strengthen their position, and therefore become a truly global organisation decided to collaborate with an American bank with established position in the US market.

Bankers Trust, was an American bank, which two years before DB-BT merger took place, acquired the oldest US investment bank – Alex Brown. According to the management of Deutsche Bank, it was the people of Alex Brown and their experience that attracted DB attention to Bankers Trust.

Between the announcement and the closing of the deal, Deutsche Bank conducted a thorough due diligence of the future partner. A part of this was a cultural assessment exercise which was supposed to minimise the cultural clashes between the German and the American bank. The assessment was conducted by external consultants and

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its main objective was to uncover perceptions of each other’s group of people. It showed that DB employees were not convinced about the deal’s legitimacy, and some of them perceived Bankers Trust as a second kind of franchise that would not help DB reputation. The management interpreted it as the lack of information about the deal and as a result started to communicate the rationale for their activities to their employees. The cultural audit had also revealed the conflict between Bankers Trust and Alex Brown, which as appeared had not been properly integrated. Alex Brown employees felt that after the consolidation with Bankers Trust they lost their identity. Since Deutsche Bank was mainly attracted to Bankers Trust through Alex Brown employees, it decided to name the new company in the USA the Deutsche Bank-Alex Brown Investment Bank, which allowed them to win Alex Brown employees trust and commitment and keep the identity of the bank. Finally, the cultural audit revealed several differences in national cultures between the German and the American bank. Bankers Trust perceived Deutsche Bank as typically German institution bureaucratic, hierarchical and with slow decision making process.

Deutsche Bank executive said ‘the cultural awareness helped us to start challenging our own working values and embracing new ones’ (p. 316).

After the deal was finalised and received approval from the antitrust institutions the new Group appointed the integration team. The team consisted of key executives; the division heads, the human resources head, and the Deutsche Bank CEO. The team’s role was to make all necessary decision about the integration process, such as deciding which part of Bankers Trust fits into GCI – investment side of business, and which divisions were not to be integrated into DB business structure, and therefore people from which division should be made redundant. However, many of BT people had a much stronger position than DB people, so many of Deutsche Bank own employees were made redundant as well.

According to Deutsche Bank management, Deutsche Bank-Alex Brown Investment Bank was one of the most successful integrations in the Investment Banking industry.

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5.3 MeritaNordbanken Based on Vaara et al., 2003 MeritaNordbanken was created in 1998 from the merger of Merita bank of Finland and Swedish Nordbanken. It was the largest merger ever between any of the two countries’ companies and its main objective was to strengthen the position in order to be able to compete with other EU banks. The new Group decided to operate under their old names of Merita in Finland and Nordbanken in Sweden. The new Group was managed by the Group Executive Board. Although the Swedes owned 60 % of the Groups’ share capital, the voting rights were divided equally between the management of the two companies. Employees from the both companies did not have any negative feelings about the merger, actually they were relieved as they thought the international merger prevents them from loosing their jobs, as it probably would happen if a domestic merger was in question. Later, this view was a bit undermined among the Finns, who felt that the introduction of Swedish as an official company language was a sign of Swedish dominance in this merger. It also led to practical communication problems, because many of the Finnish employees did not speak Swedish.

Since the Finish Merita bank was earlier created out of a merger between the Union Bank of Finland and the Kansallis Banking Group, it had already had some experience in this field and recognised the importance of dealing with cultural differences between the companies. Cultural differences have also received, from national newspapers, a great deal of attention in the context of previous mergers and acquisitions between the Finish and Swedish companies. Thus, senior management at the new MeritaNordbanken, was very much concerned with the potential impacts of cultural differences, and decided to launch a programme of ‘cultural seminars’ to promote cultural understanding. Over a two year period, the company organised around 20 such seminars in which 330 managers from both companies took part.

The managers were asked to outline their personal observation of the merger partner and to list any problems or opportunities involved in the ‘culture situation’ at hand.

Before the exercise they received background information about what kind of cultural differences one might encounter in the international context. The seminar

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was supposed to help them deal with their own views and perceptions about the partner company. In order to surface employees’ deep-rooted views the seminars used an exercise with metaphors. Participants were asked to write metaphors which, in their view best described Merita, Nordbanken, and MeritaNordbanken. Metaphors helped managers to explain a concept or feeling without having to look for right words to describe them; for example senior management was compared to ‘an effective and energetic sewing machine’ but also to ‘a first-class restaurant turning into fast- food joint’ (p. 18). The metaphors were designed to help to understand how employees from two different national cultures react to one another, and give the company guidelines how to integrate them. Several differences were discovered, for example collectivism and individualism was one of the dimensions influencing the both companies’ employees. The metaphor indicated that the Swedish organisation and Swedish management style was seen as ‘participative’, in contrast to the Finnish one, which appeared to be based more on ‘individualism’, and was perceived as ‘authoritarian’ in nature. The exercise allowed not only to make the employees aware that cultural differences do exist, but they were also used by the consultants to develop a further strategy of integration and enabled the process of post-merger cultural identity building.

5.4 Findings The three stories of Daimler-Chrysler, Deutsche Bank-Alex Brown Investment Bank, and MeritaNordbanken prove that after the marriage is consumed several scenarios are possible. They also show how neglecting the human factor and concentrating only on financial aspects of the merger, as it was in case of DaimlerChrysler, can lead to a failure.

Each of the cases was different from the outset. Daimler-Chrysler announced as the merger of equals, proved to be a German hostile takeover of an American company; and the German management did not even try to deny it, neither in words nor in actions. The other German-American merger, although from the beginning known as acquisition, finally turned out to be a true merger of equals. From both examples it is possible to draw a conclusion that whatever distribution of power takes place, the

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key to the success is to treat the partner company and its employees with respect instead on choosing an autocratic approach of ‘playing according to my own rules’.

The case of Deutsche Bank- Alex Brown Investment Bank, indicates the importance of good and honest communication throughout the merger process. The company did not hide from their employees that some redundancies will be inevitable, instead it came up with a special scheme to at least partly compensate the employess the loss of their jobs.

The examples of both banking institutions stress the importance of a pre- merger duediligence. Both companies conducted such a cultural audit, and both found out that there are things to be dealt with. Although the chosen strategies were different in both cases, and one more innovative than the other, each of them proved to be successful and winning. Daimler-Chrysler, on the other hand, did completely ignore the existence of cultural differences and was unable or even unwilling to identify sources of misunderstanding within the merged company. As a result it lost several important people, who before the merger took place, had had a great influence on the good performance of Chrysler. Daimler-Chrysler case demonstrates that ignoring cultural differences will not work in case of cross-boarder mergers. It also shows that even if the differences would have been recognised but treated as a potential problem, instead of being utilised it would not help the company to achieve a success. The case of MeritaNordbanken and Deutsche Bank – Alex Brown Investment Bank prove the hypothesis that in order to survive the cross-boarder merger, managers should be leaders in the complex process of post- merger integration standing in favour of, and promoting the pre- merger due diligence, true merger of equals, honest and open communication; and that they should find and follow the method of managing cultural differences, taking advantage of the potential synergies between the cultures. Moreover, both cases prove that the best way to deal with cultural differences in the cross-boarder mergers is to utilise them, just as the both banks did and to create cultural synergy taking the best of both companies.

Creating synergy from cultural differences is however, extremely difficult and requires from the top management of both companies a particular leadership style.

Certainly, the autocratic, manager-centred leadership style will not make dealing with cultural issues and people from other cultures any easier. Furthermore, as the

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manager of the Deutsche Bank noticed, being the helmsman of the new organisation managers must be able to challenge themselves, and their practices, their way of doing things, and be willing to learn in order to fit themselves into the new cultural synergy, and to be true leaders who have a wide group of followers.

5.5 Air France – KLM case The terms of Air France-KLM agreement have already been presented in the introduction to this thesis. However, to retain continuity the main facts will be summarised here. According to Sias typology of mergers, Air France – KLM is a consolidation driven by a desire to reduce overcapacities in a mature industry, such as the airline business, and take advantage of the cost saving opportunities (Early, 2004). The first goal is to be achieved by optimising the dual route systems, and the second one, by the improved deployment of passenger and cargo activity, and the combined maintenance and the Information Technology management (KLM, AF, 2004).

The merger will take three years to be fully implemented. During the transitional period of three years, Air France-KLM Group will own 100 % of Air France shares, and 100 % of KLM economic rights but only 49 % of KLM voting rights. The remaining 51 % of KLM voting rights will be owned by the KLM foundations and the Dutch State, in the amount of 36,3 % and 14,7 % respectively (Air France-KLM press release, 2004).

The common Group will be called Air France-KLM, but both airlines will continue to operate under their present separate names. The new holding Air France-KLM will be managed by the group of eight managers, four from each of the companies; they will form the body called the Strategic Management Committee, and will meet every two weeks in Paris and Amstelveen alternately (Wolkenridder, 2004). Each of the companies will also appoint the Strategic Management Committee coordinators for Air France and KLM, whose main role will be the intermediary between the airlines and the Strategic Management Committee (ibid.). A deciding vote on all decisions except those concerning modifications to the guarantees given to KLM, the scope of Group activities, and the conclusion of any intra-Group agreement other than arm’s length, belongs to Jean-Cyril Spinetta, the new Group’s CEO.

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At the first glance, it is possible to assume that power is divided equally between the French and the Dutch managers. However, the division of the CEO and vice CEO positions between Jean-Cyril Spinetta and Leo van Wijk respectively, the leaders of Air France and KLM; as well as granting the French CEO a deciding vote on most of the operational issues brings serious doubts if this merger is truly a marriage of equals.

The similarities in the terms of the merger to the one of Daimler-Chrysler, which at the time of its announcement was a paragon of a merger of equals, raises a question if Air France-KLM will have similar future to the one of Daimler –Chrysler.

On the other hand, the results of two different banking mergers show, that mergers with unequal distribution of power can also achieve success. Thus, the dominance of the French partner does not have to lead to failure, as long as Air France top management will be able to accept the Dutch company as an equal partner and treat its members with respect.

The main cultural differences between the French and the Dutch concern Hofstede’s dimensions of power distance and uncertainty avoidance. On the Hofstede’s power distance scale Netherlands is situated much lower than France (Hofstede, 1997).

Thus, power in French companies is much more centralised and subordinates are expected to be told what to do, while in the Netherlands managers prefer consultative style and the subordinates are much more independent (ibid.). French managers frequently are autocratic, whereas Dutch one tend to be more democratic (ibid.).

French companies have also a lot of supervisory personnel structured into hierarchies of people reporting to each other (ibid.), therefore the decision making process can take longer than in rather flat Dutch organisations. In France, where special attention is paid to the social class a person belongs to, inequalities among people are both expected and desired, whereas low power distance countries such as the Netherlands try to minimise any inequalities. The countries also have different position on the uncertainty avoidance scale. France is situated much higher than the Netherlands. In high uncertainty avoidance countries work processes and practices are guided by rules, which although must exist sometimes may be omitted (ibid.). In countries like the Netherlands, on the other hand, rules are established only when absolutely necessary, and normally if they do exist they are obeyed (ibid.). Uncertainty

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avoidance also poses a first potential for future synergies between the Dutch and the French companies. Managers from weak uncertainty avoidance cultures tend to deal with more strategic issues, while managers from countries with high UAI tend to deal more with operational issues. Moreover, companies from low UAI encourage innovations and are more tolerant towards new ideas but the full implementation of this ideas is more probable in high UAI societies, as they have a greater sense for details and punctuality (ibid.). This two situations would allow the low UAI Netherlands and high UAI France to complement each other. The differences in masculinity and individualism are not so visible between two nations.

So far all the pre-merger success conditions, such as an in depth due diligence and proper communication of the future changes have been fulfilled. The Group Air France-KLM has commissioned Cees de Weerd, a consultant on the issues of culture, to conduct a cultural audit and compatibility check of both companies (Wolkenridder, 2004). KLM also tries to inform their employees about the details of the merger. Already few months before the merger was finalised KLM has started to publish in their corporate magazine ‘Wolkenridder’ articles introducing Air France to KLM employees, and addressing possible cultural issues. The articles have also presented the whole Strategic Management Committee, explaining the employees who plays what role in the new Group.

So far it is not possible to say if all the activities undertaken by the Group will allow Air France and KLM to survive this merger and achieve success. So far all the critical success factors have been met. Of course the great question is how is the Air France-KLM Group going to use the results of cultural due-diligence and which strategy of managing cultural differences will it choose. Based on the experience of described earlier cases the recommendable strategy is to utilise the cultural differences and make use of the possible synergies between them. In order to do so managers must give up their autocratic style and become more open-minded.

However, analysing all the integration activities the companies have taken so far, it is possible to conclude that if this tendency continues the Air France-KLM has a chance to become another successfully implemented merger in the history of international business.

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6. Conclusions and recommendations 6.1 Conclusions The modern business environment is characterised by the growing number of international corporations full of desire to take advantage of the global marketplace.

Many companies choose to grow organically, slowly establishing their businesses in the various parts of the world; however, more and more companies choose another, quicker way to enter new markets, broadly understood cooperation with other foreign organisations. Much of this cooperation takes the form of mergers and acquisitions.

In the last three decades there have been so many mergers and acquisitions that the term merger mania has become widely used to describe this phenomenon.

Unfortunately the quicker way is not always the easiest one. This is proved by several studies which say that 50 to 70 % of all those marriages fail to achieve their objectives, frequently destroying the shareholder value, and bringing companies from the top of the most successful companies list into its bottom. Many of these downfalls are attributed to the underestimation of cultural issues and ignoring cultural differences between the merging companies. Cultural differences occur at two levels of culture. Each merged company has to integrate successfully the corporate cultures of their organisations, with the culture of the new partner company, but in case of cross-boarder mergers this task is much more complicated since each of the organisational cultures is additionally rooted in different national culture. The particular role in integrating two merging companies and their cultures is attributed to the top management of the partner companies and their leadership styles. Leadership style is deeply nested in national culture values, and the preference for a given style is based on national culture dimensions, to the degree that managers are called ‘masters of national culture’ by some authors. Differences between national cultures can be studied in several models of culture, for example Hofstede’s, Trompenaars or Hall’s dimensions. Based on national cultures dimension leadership style can have various forms from bossed-centred autocratic style to subordinate-centred democratic leadership style.

Managers’ tasks are complex in every company even in its natural environment.

This complexity becomes only greater in so challenging situations as mergers. Apart

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from their normal functions of planning, organising, leading and controlling, managers have to additionally deal with managing cultural differences between the new partner organisations. There are three common strategies to do so. Parochial approach means treating your way of doing things as the only one and ignoring the existence of any cultural differences at all. The second strategy is the ethnocentric approach, which means recognising the existence of cultural differences, but treating them as a source of potential conflicts and still believing that ‘my way, although not the only one, is certainly the best one’. The third approach, which based on the case study research, has proved to be most useful in case of cross-boarder mergers is the synergistic approach. It means utilising the existing differences, and creating synergies between them. In the case study research, this approach if followed by good and honest communication of the merger activities , proved to reduce postmerger stress among employees and prevent them from loss of their identity, which consequently leads to employees departures and together with them leakage of experience and expertise.

The process of cultural integration and utilising cultural differences is time consuming and demanding. First it is essential to recognise sources of potential cultural conflicts and learn to respect the other part’s culture. Then comes time for reconciliation. In order to be able to identify the potential sources of cultural clashes, as well as possible cultural synergies, it is crucial to conduct a cultural due-diligence of both partner companies before the merger is consumed, and prepare an adequate integration plan. The case study research showed that during the integration phase it is important to communicate honestly to the employees the details concerning the merger, and made them aware of the existing cultural differences.

The complexity of managerial roles involved in the process of a merger in the world of international business gives the term ‘management style’ the new meaning.

Managers involved in international mergers can no longer restrict their responsibilities to the four basic managerial roles of planning, leading, controlling and organising. They must be first of all true leaders worth following, who are able to learn to recognise, respect and reconcile cultural differences between the merging companies. They must pay particular attention to treating the other side as an equal partner, as the real life relationships are frequently much more important than formal

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agreements. They must remember to communicate the information about the merger to their employees openly and honestly, and to avoid hiding any painful details. The skills they possess must also exceed the normal managerial skills, since they have to learn to challenge their own procedures rooted in their national cultures and be willing to adapt them to the new situation. The role managers play in this process requires many of them to give up the autocratic style and become more sensitive to the opinions of their employees and co- managers. It requires them to learn the respect and ‘fair play’ towards the other side.

Although the tourism business has also been built greatly on mergers and acquisitions, the recently finalised merger between Air France and KLM is a first such venture in the airline industry. It is certainly also the biggest one since it involves two out of five Europe’s top flag carriers.

The division of power in this marriage is not equal, with French side being the dominant one. This caused several culture consultants to comment on the future of this venture and particularly on the future of KLM in this cooperation. Moreover, consultants do not see many synergies that could be achieved in the Franco-Dutch cooperation. They also perceive the French autocratic management style, centralised power concentration, and hierarchical and bureaucratic organisation structure as incompatible with more consultative leadership style, decentralised power distribution, and more flat structure of the Dutch organisation. (Damen, 2003; Berkhout, 2003; and van Beemen, 2004) The management of the new Air France-KLM Group seems to recognise this dangers. Therefore, the Strategic Management Committee has commissioned cultural consultants to conduct a cultural audit of both companies and propose a method of dealing with them. So far the Air France-KLM Group has met all the success criteria. However, it is much to early to talk about Air France-KLM success or failure. Nevertheless, it is possible to learn a lesson from cases of DaimlerChrysler, the Deutsche Bank – Alex Brown Investment Bank, and MeritaNordbanken.

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6.2 Recommendations for further research This work deals with issues of national culture differences. Another very interesting topic, which has lately gained a lot of attention among the academics is assessing the compatibility of the corporate cultures of the merging companies. However, the topic might be difficult to explore, since many companies, such as for example Air France and KLM hiding under the umbrella of confidentiality are unwilling to cooperate and reveal any information concerning the merger process.

Another interesting direction, which considered the Air France-KLM just starting their combined operations might be possible to study only in few years from now on, is a post- hoc analysis of the outcome of this Franco-Dutch marriage. However, whether it is going to be a post-hoc analysis of a successful or abortive case depends now on the management of Air France-KLM Group.

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