MBA 3041 ORGANIZATIONAL CHANGE AND DEVELOPMENT ASSISGNMENT

ON

Organisational Culture and Mergers & Acquisitions

BIRLA INSTITUTE OF TECHNOLOGYMESRA - 835215, RANCHINOIDA CAMPUS

Submitted BySushant MBA/4542/13Vidushi Gautam MBA/4543/13

ACKNOWLEDGEMENT

We would like to convey our gratitude towards our bank management lecturer Dr. Monika Bisht for helping us in completion of the assignment.

We would like to thank her for her sheer guidance, support and time whenever needed.

We would also like to thank our friends for supporting us in the completion of the assignment.

Last but not the least we would also like to express our Heartfelt thanks to our parents and siblings as without their support and motivation the assignment would not have been completed.

LIST OF CONTENTS

1. Organisational culture

2. Strong versus Weak cultures

3. Types of organisational cultures

4. Organisational culture model

5. Mergers & Acquisitions

6. Types of M&A

7. Impact on M&A

8. Recommendations

9. Conclusion

ORGANISATIONAL CULTURE

An organizational culture, also termed as Corporate Culture, is comprised of the patterns of shared beliefs and values that give the members of an institution meaning, and provide them with the rules for behaviour in their organization. The culture is not generally recognized within organizations, because basic assumptions and preferences guiding thought and action tend to operate at a preconscious level. Nevertheless, this preconscious level affects many areas within the organization, including, performance, cooperation, decision making, control, communication, commitment, perception and justification of behaviour. Edgar Schein (1992) gives a clear definition of the corporate culture: a pattern of shared basic assumptions that the group learned as it solved its problems of external adaptation and internal integration, that has worked well enough to be considered valid and therefore, to be taught to new members as the correct way to perceive, think, and feel in relation to those problems. Moreover, he defines the corporate culture by dividing it into three levels: At the first level of Schein's model there are the organizational attributes. This level includes the facilities, offices, furniture, visible rewards, the dress code, and how the persons apparently interact with each other and with the external members. Those elements of the culture are easily discerned but hard to understand. The second level includes the espoused values. At this level, there are the company slogans, mission and, internal and personal values that are extensively expressed within the organization. This level contains the strategies, goals and philosophies of the organization. At the third and deepest level we can find the organization's tacit assumptions and values. These are the elements of culture that are invisible and not cognitively identified between the organizational members. Additionally, these are the elements of culture that are usually taboo to discuss. Many of these unspoken rules exist without the awareness of the membership.

According to Shein, the notion of corporate culture is broadly accepted as important as a business concept or financial control and employee satisfaction. He incorporated five elements in the corporate culture: 1. The business environment - the orientation of the organizations within this environment which influence the cultural style. 2. Values - are in the centre of the corporate culture. They are build up from the key beliefs and concepts shared by the employees. 3. Heroes they are the personifications of the organization's values; they represents the role model in order to conduct the employees to the success. 4. Rites and rituals - ceremonies and rituals that reinforce the culture (sales conferences, product launches, employee birthday celebrations ...) 5. The cultural network - stories and gossip which spread information about the valued behaviour within the organization.

The corporate culture is, to some extent, influenced by the national culture & involves 5 dimensions: Power distance - how are the status differences marked between people with high power and low power? Collectivism versus individualism - is a culture focused on individuals or groups? Masculinity versus feminity - the aggressiveness is related to masculinity. It is the level to which individual are competitive and self-confident. Uncertainty avoidance - a measure of flexibility and need for rules. Short versus long term orientation past - oriented or future- oriented people; short- term profitability or long-term growth.

Strong versus Weak Cultures

Three elements determine the strength of corporate culture:1. The number of shared beliefs, values, and assumptions. The higher the number of shared assumptions, the thicker the culture. In thin cultures, there are few commonly held assumptions and values. 2. The number of employees who accept, reject, or share in the basic beliefs, values, and assumptions. If employee acceptance is high, a strong corporate culture will emerge. 3. The higher the number of shared beliefs, values and assumptions, the stronger the culture of the organization. Once a corporate culture is established, it provides employees with identity and stability, which in turn provide the corporation with commitment. On the other hand, a strong culture, with well-ordered values, beliefs, and assumptions may hinder efforts at change, especially in a merger or takeover. Much will depend on the type of merger and the compatibility between the two organizations cultures.

Types of Organizational Cultures

Roger Harrison describes four main types of organizational culturePower Cultures In organizations with power cultures, power rests either with the president, the founder, or a small core group of key managers. This type of culture is most common in small organizations. Employees are motivated by feelings of loyalty towards the owner or their supervisor, these types of organizations foster a sense of tradition in both the physical and spiritual sense. Power cultures tend to have inequitable compensation systems and other benefits based on favouritism and loyalty, as well as performance. Role Cultures Role cultures are highly autocratic. There is a clear division of labour, and authority figures are clearly defined. Rules and procedures are also clearly defined, and a good employee is one who abides by them. Organizational power is defined by position and status. These organizations respond slowly to change; they are predictable and risk averse. This type of culture thrives in industries which employ mass production techniques, in automobile manufacturing, for example. Task/Achievement Cultures Task/achievement cultures emphasize accomplishment of the task; research and develop-ment is an example. The employees usually work in teams, and the emphasis is on what is achieved rather than how it is achieved. Employees are flexible, creative, and highly autonomous. Person/Support Cultures Organizations with a person/support culture have minimal structure and serve to nurture personal growth and development. They are egalitarian in principle, and decision making is conducted on a shared collective basis. This type of culture is rarely found in profit-making corporations; it is more typical of professional partnerships such as law firms.

The corporate culture significantly affects the performance of the company and is especially beneficial in the employees activity, commitment, initiative and also increases efficiency and quality. The benefits of the strong corporate culture on companys performance are expressed by: Perception and thinking of workers is in harmony; low rate of unnecessary conflicts in communication, Human behavior is automatically regulated; there is smaller need to coordinate all practices in the organization, Enables quick decision making; consensus is easier to find, People in the organization shares common goals and values; actions lead to their fulfilment, Increased motivation of individuals and groups; increased engagement, reduced the need for monitoring the workers performance.

The willingness to understand, to cooperate and to create a common and better whole is considered to be as important as the availability of material resources.The corporate culture is primarily determined by daily behaviour of management. People focus on what management do rather than on what they say. The corporate culture is deeply embedded within the organizational system. It cannot be taken out and dealt with in isolation.

Management of transforming companies usually focuses on economic indicators and do not pay enough attention on the corporate cultures integration. It is clear that the corporate culture should be regarded as one of the pillars of success. Threatening results of underestimating the impact of the corporate culture on M&A makes us wonder: How is it possible that management underestimated the corporate culture as the determinant of M&A? There can be numerous reasons. Lack of awareness of the existence of differences - managers do not understand that the corporate culture exists, Lack of understanding - although managers know that the corporate culture exists, they do not understand the issue, or they do not want to deal with it or are underestimating its threat Lack of readiness - a conscious decision not to deal with culture for such as the reasons as unattractiveness, fright of the unknown, or feeling that there is no real reason to care, Lack of competence - management wants to do it appropriate, but do not know how.

HR department should be involved in the planning of integration process from the very beginning and not only after the implementation.M&A transactions place high demands on HR management, who bears significant responsibility on the final results. According to the Nov and Schroll-Machl18 management should be focused on ensuring following factors:

Provide HR factors and company culture depth analysis,

Establish a clear integration strategy, Create conditions for active communication between all stakeholders, Ensure management concentration on the integration phase. It is necessary to thoroughly analyze the initial state of integrating companies before human resources integration planning and the corporate culture. Analysis of the corporate culture aim to precise identification of the individual factors of the corporate culture, assessing their compatibility and proposing targeted solutions and steps leading to it.

Organisational Culture Model

Schein (1985) defines the corporate culture by dividing it into three levels. His model may help to understand cultures and highlight the possible differences.

- The first level: Artefacts and Creations: The process of cultural assessment starts when employees see the perceived differences in their cultures. This involves the employees observation of the differences on the visible artefact and tangible behavior. They see the differences in structure, offices, furnishing and how the persons apparently interact with each other and with the external members. This level includes the facilities, offices, furniture, visible rewards and the dress code. Those elements of the culture are easily discerned but hard to understand. - The second level: Espoused values: This level includes the companys slogans, mission, vision and, internal and personal values that are extensively expressed within the organization. This is considered partly visible as these values could be seen. The other part that may not be seen is described as the values that are acceptable in one organization and not in another. The main difference in value is how managers proceed with the decision-making. One organization might have a traditional and conservative business approach while the other might have quick decision makers and like to take risks.

- The third level: Basic Assumptions: these assumptions are the organization's tacit assumptions and values. These are the elements of culture that are invisible and not cognitively identified between the organizational members. Additionally, these are the elements of culture that are usually taboo to discuss. Many of these unspoken rules exist without the awareness of the membership. They are built in every day interaction in one organization but remain unknown in another. Those unconscious rules are the common roots of culture clash. MERGERS & ACQUISITIONS

The transactions of great significance, not only to the companies themselves but also to many other constituencies, such as workers, managers, competitors, communities and the economy, whereby two companies are combined to achieve certain strategic and business objectives. This general definition of M&A gives a significant overview about where these activities have real impacts.

A merger is a combination of two corporations in which only one corporation survives and the merged corporation goes out of existence. In a merger the acquiring company assumes the assets and liabilities of the merged company. In this definition, the merger is referred as an acquisition, both terms here are ambiguous. Nevertheless, this description of merger is sometimes related to the term statutory merger which differs from the subsidiary merger. This kind of business transaction combines two companies in which the target company turns into a subsidiary of the parent company.

Mergers often require the approval of both the acquiring and target firms shareholders and the acquiring firm.An acquisition is a business combination in which one of the enterprises involved, the acquirer, obtains control over the net assets and operations of another enterprise, the acquiree, in exchange for transfer of assets, incurrence of a liability or issue of equity. A uniting of interests is a combination in which the shareholders of two enterprises control over the net assets and operations of those enterprises and continue to share in the risks and benefits attaching to the combined entity. Put differently, the acquisition is the action whereby the acquiring company purchases the interests of the acquired companys shareholders and ceases to have any interest right after the acquisition. While in the merger context, both companies pool their interests which means that the shareholders of both companies have still in their portfolio interests from their company but also get interests in the other enterprise.

Types of Mergers & Acquisitions

Vertical Mergers & AcquisitionsIn a vertical merger a firm purchases one of its suppliers (a backward merger) or merges with one of its customers (a forward merger). Because an acquired firm generally falls under the acquiring firms corporate umbrella, most of the interaction between the two firms is at the corporate level. The level of complexity at the corporate level increases, as do the rules governing the acquired corporation, which faces a reduction in self-determination. This leads to the demotion of subsidiary executives to middle management, which often leads, in turn, to a higher level of executive turnover, especially if the executives of the acquired firm are treated as if they have been conquered, causing them to feel inferior and experience a loss of social standing.

Horizontal Mergers & AcquisitionsIn horizontal mergers one corporation acquires another corporation whose product or service is closely related or of the same type. An example would be the takeover of one printing firm by another. From a human resources perspective, these are the most difficult mergers to implement, since the acquiring firm already has expertise in the business operations and will act to consolidate the two firms to avoid redundancy and become more cost-effective. Downsizing and voluntary quits usually precede or immediately follow the merger. The intense interactions between the employees of both corporations may result in conflict and the compatibility of styles and values between management and staff becomes central in personnel decisions. Hence, it is of utmost importance that the acquiring firm communicate clearly the reasons for the procedures, to allow the acquired firms employees to prepare for and respond to any proposed changes. If the organizational cultures of the two companies are significantly different, productivity gains may not be realized for several years, and in the worst case, the merger may fail.

Concentric Mergers & AcquisitionsConcentric mergers occur between two firms with highly similar production or distributional technologies. A merger between a motorcycle manufacturer and an automobile manufacturer would be an example. Both kinds of corporations service transportation needs, but they are unique structurally. In concentric mergers, there is a tendency to combine some operations, especially departments focused on technology and marketing. This will result in the sharing of expertise between the two firms, which may be resisted by the employees of both firms. The best way to overcome this resistance is by obtaining the consent of the acquired firms human resources management before the merger.

Conglomerate Mergers & AcquisitionsA conglomerate merger involves the acquisition of an unrelated business. The acquired firm is usually one of many under the corporate umbrella of the acquiring firm and is perceived as providing profitable diversification. Since the two firms are unrelated in product or service, internal changes to the acquired firm, which will remain relatively autonomous, are likely to be minimal, and there will be few cultural consequences. Occasionally the acquiring firm will send a new team from headquarters to manage the unit, which will cause conflict among the senior executives of the acquired firm and may result in a higher quit rate among its employees and feelings of insecurity and instability. Despite these, conglomerate takeovers tend to be the most benign of all the sources of cultural change.

Cultural Compatibility

The success of a merger or acquisition depends, in part, on the cultural compatibility of the two organizations. When an organization acquires or merges with another, the contract may take one of three possible forms depending on the nature of the two cultures, the motive for and the objective and power dynamics of the combination.

The Open Marriage In an open marriage, the acquiring firm accepts the acquired firms differences in per-sonality, or organizational culture, unequivocally. The acquiring firm allows the acquired firm to operate as an autonomous business unit but usually intervenes to maintain financial control by integrating reporting systems and procedures. The strategy used by the acquirer in this type of acquisition is non-interference.

Traditional or Redesign Marriages In traditional or redesign marriages, the acquirer sees its role as being to dominate and redesign the acquired organization. These types of acquisitions implement wide-scale and radical changes in the acquired company. Their success depends on the acquiring firms ability to displace and replace the acquired firms culture. In essence, this is a win/lose situation.

The Modern or Collaborative Marriages Successful modern, or collaborative, mergers and acquisitions rely on an integration of operations in which the equality of both organizations is recognized. The essence of the collaborative marriage is shared learning. In contrast to traditional marriages, which centre around destroying and displacing one culture in favour of another, collaborative marriages seek to positively build on and integrate the two to create a best of both worlds culture. In collaborative marriages the two organizations are in a win-win situation.

AcculturationRegardless of the cultural fit, all mergers and acquisitions will involve some conflict and turbulence during a necessary process of acculturation.

The Conflict Stage While the two firms try to overcome their difficulties, each firm, depending on the merger type, the amount of contact each has with the other, and its cultural strength, will compete for resources and try to protect its turf and cultural norms.

The Adaptation Stage Conflict between the two organizations will eventually be resolved either positively or negatively. In a positive adaptation, agreement will be reached concerning operational and cultural elements [that] will be preserved and [those] which will be changed. In a negative adaptation, the conflict will be manifested as employee dissatisfaction and high turnover rates, which could result in operational under-performance.

Four Modes of Acculturation

Assimilation Assimilation is the most common method of acculturation and results in one firm, usually the acquired firm, relinquishing its culture willingly and taking on that of the acquiring firm. Thus, the acquiring firm undergoes no cultural loss or change. Generally, the acquired organization has had a weak, dysfunctional, or undesired culture. Therefore, the new culture usually dominates and there is little conflict.

Integration If the cultures are integrated, the acquired firm can maintain many of its cultural characteristics. Ideally, the merged firm retains the best cultural elements from both firms. During integration, conflict is heightened initially, as two cultures compete and negotiate but it is reduced substantially upon agreement by both parties.

Separation If the acquired firm has a strong corporate culture and wishes to function as a separate entity under the umbrella of the acquiring firm, it may refuse to adopt the culture of the acquiring firm. Substantial conflict may be engendered and implementation will be difficult.

Deculturation Deculturation is the least desirable possibility. It occurs when the culture of the acquired firm is weak, but it is unwilling to adopt the culture of the acquiring firm. A high level of conflict, confusion, and alienation is the result.Mergers and Acquisitions can be threatening for employees and produce anxiety and stress. Hunsaker and Coombs found identifiable patterns of emotional reactions experienced by employees during a merger or acquisition; they have labelled this phenomenon the merger-emotions syndrome.

The Merger-Emotions Syndrome Denial. At first employees react to the announced merger with denial. They say it must be just a rumour. Fear. When the merger becomes a reality, employees become fearful of the unknown. For example, workers become preoccupied with job loss. Anger. Once employees feel that they are unable to prevent the merger or acquisition from taking place, they begin to express anger towards those who are responsible. In many instances, employees feel like they have been sold out after providing the company with loyal service. Sadness. Employees begin to grieve the loss of corporate identity and reminisce about the good old days before the merger. Acceptance. Once a sufficient mourning period has elapsed, employees begin to recognize that to fight the situation would be useless, and they begin to become hopeful about their new situation. Relief. Employees begin to realize that the situation is not as inauspicious as they had envisioned and that the new employees they interact with are not as bad as they had predicted. Interest. Once people become secure with their new positions or with the organization, they begin to look for positive factors and for the benefits they can achieve through the new entity. They begin to perceive the new situation as a challenge in which they can prove to their organization their abilities and worth. Liking. Employees discover new opportunities that they had not envisioned before and begin to like their new situations. Enjoyment. Employees discover that the new situation is working out well and feel more secure and comfortable.

The merger-emotions syndrome provides management and researchers with the opportunity of pinpointing the emotional stage of the employees of an acquired corporation. Management should recognize that these emotions exist among the employees and deal with them as expeditiously as possible. At a minimum, managers should provide positive feedback to employees, emphasizing that their performance is commendable under the stressful situation brought about by the acquisition, in order to alleviate negative work-related feelings.

Impact of Corporate Culture on Mergers & Acquisitions

According to Gene Gitelson, John W. Bing, Ed.D. And Lionel Laroche, 83 % of all mergers and acquisitions failed to produce positive outcomes and half of them destroyed the value. Moreover that, according to the interviews of over 100 senior executives involved in these 700 deals over a two-year period revealed that the overwhelming cause for failure "is the people and the cultural differences". Therefore, they present the seven pitfalls that represent the critical areas of the M&A transaction that drive the deal to the success if the leader applies this agenda the first 90 days of the new organization.

Pitfall 1: Preoccupation => Strategy: Acceleration: leaders are advised to speed the integration to reduce the uncertainty and anxiety. In the case of international M&A's, he or she has to ensure that both individual and collective concerns are addressed. Indeed, studies indicate that employees and managers at all levels lose a minimum of 15% of personal effectiveness as a result of rumours, misinformation, and worry. They also indicate that teams tend to become less effective during mergers and acquisitions. Pitfall 2: List-making => Strategy: Concentration: during the first 90 days, the leader has to focus and get everyone to focus on the 20% of the goals that yield 80% of the economic value. Pitfall 3: Organizational proliferation => Strategy: Accelerate, concentrate and adapt: the leader must create quick-acting teams that include people from both side of the merged companies and set clear mission. Clear and strong leadership are essential not to break down the new organization in sub-teams. Pitfall 4: Infrequent and irrelevant communication => Strategy: Accelerate, concentrate and adapt: over communication is the key success to get the message received by the employees. As for example, a frequent communication repeated at least 7 times through multiple avenues - print, voice mail, e-mail, meetings, and video.

Pitfall 5: Triangulation (confusion in old and new goals and objectives) => Strategy: Concentrate and adapt: the leader must help people to adapt to the new goals and objectives by dispatching information which depend on peoples cultural background. Pitfall 6: The relatives => Strategy: to adapt: time is relative, the leaders started their adaptation to the new reality before those who got to know about the merger on the announcement day. They wonder about why people don't seem to "get it" and for resist to the new realities. Plus, the concept of time is also related to culture. While long-term in North America tends to mean three years, it means up to 30 years in Japan. So, the leaders have to actively handle the merger across time, space and organizations, keeping in mind the different concepts of time and space perceived by the different people involved in the merger. Pitfall 7: The guiding light: Strategy => Adapt: the first role of the leader is to implement a clear vision. However, a good leader requires different skills and attributes like charisma and positive attitude. Only a new culture can create the context for real change to happen. Changing culture means changing behavior. But one of the quickest way to effect change and create the new company is to place in all key positions those individuals who are true representatives of the new culture and who can lead effectively people on both side of the company's cultural divide.

RECOMMENDATIONS

Following are seven of the most important concepts that suggest the implications for an effective M&A in corporate integration:

- Metallurgy: Metallurgy describes the structures and properties of metal, the way it is extracted from the ground and is refined, and the various means of creating things from it. When describing organizations, the term refers to a system of processes and procedures that occurs in all organizations and that creates specific cultural traits around the ways people approach their work on a day-to-day basis. So, managers involved in mergers or acquisitions might not want to rush to replace these practices. - Mythology: Mythology is the group of stories, ideas, or beliefs that become a part of an organization. During the process of mergers and acquisitions (M&A) integration, managers should identify organizational myths which are represented by the stories, ideas, or beliefs that become a part of an organization. Plus, these stories are not necessarily based on facts; they usually reflect historical accounts of greatness or tragedy

- Missiology: Missiology is the process of persuading others to accept or join a belief, cause, or movement. Most organizations have a tacit process through which they will integrate the new employees or not, depending on the unspoken practices of the organization. Managers who integrate the new talent into the new merged organization have a significant advantage because they will be involved in the value creation.

- Meritocracy: A meritocratic system gives opportunities and advantages to people on the basis of their contributions and abilities rather than on the basis of their job longevity, connections, status, or other such attributes. For an effective M&A integration, it includes to address the ways in which individuals contributions are recognized and valued. Managers should take into consideration the traditions and systems for advancement and reward which are present in both organizations before the merger. These differences could have an impact on the employees, they can resist to the new organization or accept to put efforts within it.

- Modality: Modality is a treatment or strategy applied to a specific disorder or circumstance that needs improvement. Within an organization, people can develop some real treatments that represent an impressive medicine chest to overcome the dysfunctional behaviours or problems that can occur within the organization. Those specific remedies have to be identified and evaluated by the managers in order to bring value to the acquisition and integrate them into the new organization.

- Mores: Mores are customs and habitual practices, especially as they reflect moral and ethical standards that a particular group of people accept and follow. The implications for effective M&A integration include paying attention to the ways ethics is practiced in the organization: Managers should identify the mores of each organization and the ways in which they can be effectively shared across organizations. Furthermore, they should formulate strategies to equalize mores between organizations by advancing a best of approach to mores and ethics development in the new organization.

- Mettle: Mettle - the courage, spirit, or strength of character of a group within an organization or the particular mental and emotional character unique to an individual. The extent to which individuals pay attention to their own spiritual development or are encouraged by the organization to develop mettle can result in an important cultural value. Effective M&A integration suggests that managers should look closely at ways that individuals show their mettle by sharing concerns and practicing respect for others within the organization. Enhancing and supporting these behaviours is critical for the organization success.

CONCLUSION

Few would argue that corporate culture does not matter for merger success. But even widely accepted truths are sometimes shockingly lacking in substantial theoretical foundation and persuasive empirical support. Such is the case with the role of corporate culture. The overarching conclusion is that there are numerous ways to characterize and measure culture, but a common thread running through all of these seemingly disparate ways is that corporate culture can significantly influence individual and group behavior, and thus affect postmerger performance.

The impact of culture on merger performance may be quite longlasting. To the extent that the underperformance of acquiring firms is driven by cultural misalignment between the acquirer and the target, the diversification discount could very well, at least in part, be a cultural mismatch discount.

A proactive strategy for dealing with corporate culture and human resource issues is fundamental to the success of mergers and acquisitions. However, these issues are rarely considered until serious difficulties arise. Management often fails to acknowledge that culture and human resource issues can actually cause a merger to fail. Acquisition managers must recognize that the role of people in deter-mining merger and acquisition outcomes is in reality not a soft but a hard issue. Without the commitment of those who produce the goods and services, make decisions and conceive strategies, mergers and acquisitions will fail to achieve their synergizing potential as a wealth-creating strategy

Careful proactive planning by the acquiring organization to reduce the emotional fallout can ease the transition and reduce the risk of failure for an otherwise advantageous merger.